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Speaker 1: Let's get to our guest, Carlos Casanova, senior Asia economist

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Speaker 1: at U b P. Carlos, what's the stronger read through

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Speaker 1: or takeaway for the Asian economy and investor, the strong

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Speaker 1: US economy or the more aggressive FED? Mm hm hi,

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Speaker 1: thanks for having me on the show. UM. So we

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Speaker 1: have seen Asia as a whole UM experiencing significant outflows

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Speaker 1: UM and many central banks resorting to UM what what

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Speaker 1: is h you know pro cyclical UM rate hiking cycles,

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Speaker 1: meaning there are hiking rates even though UM you know,

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Speaker 1: employment data and and fears about economic overheating are not

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Speaker 1: as prevalent amongst US economy. So the biggest a factor,

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Speaker 1: in my opinion, it would be potentially a more hawkish

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Speaker 1: UM FED as a result of that stronger than expected

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Speaker 1: non fund payroll data last week. UM. It's the dependent

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Speaker 1: We can't exclude the possibility of another seventy five business

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Speaker 1: point rad hike. We have to see what happens with

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Speaker 1: inflation UM this weekend also next month. But overall, I

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Speaker 1: think that the main drag for the region could be

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Speaker 1: in case we don't see uh you know, any change

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Speaker 1: in stands or worse, even a more focus stands by

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Speaker 1: the FED after September twenty It's an interesting cocktail, isn't it.

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Speaker 1: Really good jobs numbers and really strong inflation. So when

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Speaker 1: you look ahead to those inflation numbers due out of

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Speaker 1: the US on Wednesday, what what's your expectation. Do you

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Speaker 1: think we're going to see it peak? So we UM

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Speaker 1: inevitably if there is a upside pressure on wages in

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Speaker 1: the US, that is going to lead to some structural

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Speaker 1: pressures on inflation longer term UM, So we do think

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Speaker 1: that inflation will peak. However, it will remain significantly above

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Speaker 1: target for the remainder of UM this year and much

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Speaker 1: of twenty three in fact, and we think that the

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Speaker 1: FED will only pivot in case we see a deterioration

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Speaker 1: in labor market conditions UM and not really pay attention

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Speaker 1: to UH to the economy, although it would be quite

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Speaker 1: strange for the fight to continue to high grate in

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Speaker 1: case we do see a decline in p m I

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Speaker 1: numbers and an increase in unemployment. But currently the congressional

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Speaker 1: mandated inflation unemployment, and so those both indicators are pointing

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Speaker 1: towards overheating in the US economy. So we do think

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Speaker 1: UM that they will have to implement additional rate hikes

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Speaker 1: UM and inflation will only start to come down in

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Speaker 1: three and will remain about target the whole the whole

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Speaker 1: of next year, effectively as a result of that outside

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Speaker 1: pressure on riches. Basically, over the past fifty years, the

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Speaker 1: FED has always gone too far every time it's raised

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Speaker 1: rates until the US economy slows and goes into recession. Essentially,

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Speaker 1: that's been the story. Why not stop a little sooner

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Speaker 1: than usual? M hm, Well, um, The issue this time

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Speaker 1: around is that if they have had a poor track

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Speaker 1: record in um managing soft landings in the past this year,

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Speaker 1: that this time around they don't even seem to be

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Speaker 1: aiming for a soft landing. So there are cost push

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Speaker 1: and demandful factors of inflation. They've admitted that they have

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Speaker 1: very little control over demand full factors of inflation, cost

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Speaker 1: put push factors of inflation. I'm sorry. Look with that

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Speaker 1: in mind, there's also some discussion that inflation is running

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Speaker 1: so hard, jobs are doing so well. There's not another

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Speaker 1: meeting until September. Are we staring down the barrel of

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Speaker 1: a possible out of schedule meeting here? Well, we certainly

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Speaker 1: can't exclude the possibility of an out of schedule meeting,

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Speaker 1: but we believe that that is unlikely at this juncture.

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Speaker 1: More likely than not, we are going to see an

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Speaker 1: outsize the rate high in September, and so the discussion

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Speaker 1: is going to center around, you know, what that means

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Speaker 1: for the US recession and whether the FED is going

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Speaker 1: to stop at that or will actually engineer a hard

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Speaker 1: landing to try to have a go at this inflation

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Speaker 1: at anchoring inflation expectations going forward. This would seem to

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Speaker 1: be a very very important CPI report on Wednesday. I

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Speaker 1: do slightly want to change directions though, and get to China.

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Speaker 1: The trade surplus pretty strong there, exports up some eighteen percent. However,

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Speaker 1: the rebound still looks kind of tenuous in China. UM,

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Speaker 1: what's the real story there? M. The real story is

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Speaker 1: that we have seen an uptick in um pent up

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Speaker 1: demand from you know, songs China's key export partners, of course,

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Speaker 1: and there are still reports of delays in export orders

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Speaker 1: as a result of those lockdown measures earlier in the year.

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Speaker 1: So we are seeing better than expected exports um weaker

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Speaker 1: imports as a result of that sluggishness in China's recovery,

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Speaker 1: but our record trade surplus for a second month. So

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Speaker 1: inevitably that means that on the external front, that trade

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Speaker 1: number might help to prop up activity a little bit,

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Speaker 1: even if we see more disappointing domestic demands. So we

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Speaker 1: are looking still at the recovery, albeit a moderate one

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Speaker 1: in the third quarter. Yeah, there's still risks around the

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Speaker 1: property sector in China as well. How do you see

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Speaker 1: they're playing out over the next few months. Well, we

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Speaker 1: expect that the property sector will be one of the

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Speaker 1: main drags on activity this year, and that is why

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Speaker 1: we have kept our below consensus GDP growth forecast of

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Speaker 1: three point seven for two UM. We don't think that

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Speaker 1: at this point in time it's going to turn into

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Speaker 1: a systemic risk. UM. The banking system remains well capitalized,

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Speaker 1: and also the proportion of mortgages that that have been

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Speaker 1: impacted by the recent mortgage of all is less than

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Speaker 1: one percent of overall the bank loans, so it is

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Speaker 1: manageable at this point in time. However, it is not

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Speaker 1: going to help with sentiments UM in an economy where

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Speaker 1: you know, domestic demand remains weak because of this zero

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Speaker 1: COVID lockdown and the impact that is having on on

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Speaker 1: Chinese households behavior. So it definitely will be a drag UM,

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Speaker 1: but it won't turn into something bigger, bigger than that.

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Speaker 1: And how about the rest of the region. We noted

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Speaker 1: earlier that both Indonesia and India have had pretty good

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Speaker 1: run in terms of equity market performance UM, way up

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Speaker 1: top toward the best performers globally. UH, is there is

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Speaker 1: there an economy in Asia that stands out right right

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Speaker 1: now for you? Well cyclically speaking, UM in terms of equities,

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Speaker 1: we think China is in a better position as they

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Speaker 1: are going to sustain a more pro growth policy even

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Speaker 1: as the rest of the region has to implement tightening UM.

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Speaker 1: Other than China and Indonesia and to a lesser extent

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Speaker 1: in Australia, although that is not reflecting equities UM countries

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Speaker 1: that are more dependent on commodity exports that benefit from

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Speaker 1: this environment of rising energy prices and they've experienced fewer

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Speaker 1: pressures on the current account front, and that is reflecting

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Speaker 1: in a narrower differential with the U S which is

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Speaker 1: of course leading to fewer outflows from those regions. So

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Speaker 1: we expect that we continue to play a role. In fact,

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Speaker 1: the differential between the US two year which is up

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Speaker 1: and two years in in Asian notes. That is the

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Speaker 1: main driver of outflows and depreciation we find, and so

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Speaker 1: until the FED announcers a pause in tapering, we will

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Speaker 1: continue to see m depreciation and outflows from the region.

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Speaker 1: But the country is that that haven't had as much

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Speaker 1: pressure so far will continue to outperformed, so India, Indonesia,

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Speaker 1: Australia and to a lesser extent, China, and that protectly

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Speaker 1: called um factor. Alright, Carlos Cass and I have a

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Speaker 1: senior economist at ub P. Thanks so much for joining

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Speaker 1: us on Bloomberg Daybreak Asia