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Speaker 1: Let's get to our guest. It's Chien Wong, Managing Director,

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Speaker 1: Asia Pacific, Chief economist at Vanguard. Chien Wong, thanks very

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Speaker 1: much for being with us. For the bond market to

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Speaker 1: be all in on recession, we probably would have been

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Speaker 1: more likely to see an eighteen basis point drop in

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Speaker 1: the tenure yield rather than gain. But I think most

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Speaker 1: people seem to feel now that we're a lot closer

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Speaker 1: to recession, both in the US and globally than we

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Speaker 1: were in weeks past. Your thoughts in your analysis on

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Speaker 1: whether or not the global economy is headed for recession,

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Speaker 1: Good morning, Thank you for the question. UM. I think

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Speaker 1: at this moment, you know, especially given um the lag

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Speaker 1: in the money free policy transmission right, there is indeed

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Speaker 1: a risk for the fat over tighten and as a result,

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Speaker 1: a recession will be um, you know, coming in two

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Speaker 1: thousand twenties three or two thousand twenty four. Um. But

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Speaker 1: I think when you think about the other side of

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Speaker 1: the risk is that the fat does not move up

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Speaker 1: actively and we could end up in nineteen seventy like

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Speaker 1: stars relation scenario, and in that case said will eventually

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Speaker 1: have to gain back the control and inflation with higher price,

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Speaker 1: which means even deeper recession, right, So you know, compared

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Speaker 1: to that, I think probably it's more appropriate for the

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Speaker 1: fact to or on the more aggressive side of action

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Speaker 1: at this moment, right. So, I don't think recession is

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Speaker 1: a question. The question is how bad the recession would be.

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Speaker 1: And it's just interesting how quickly the outlook has changed,

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Speaker 1: just within the last couple of months, when we were

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Speaker 1: looking at a tenure year trying to reach two and

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Speaker 1: a half percent, and now thirty basis points within four percent.

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Speaker 1: What does all of this mean in terms of the

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Speaker 1: the gloomy outlook there? Well, I think you know, the

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Speaker 1: market is clearly pricing in writing chances of uh, you know, recession, right.

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Speaker 1: So you know, this is a pretty consistent with our

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Speaker 1: review that we think, you know, a recession is probably

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Speaker 1: not wanted, but really needed at this moment to down inflation.

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Speaker 1: You know, fat cannot do much with supply shocks and

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Speaker 1: writing on food costs, right, so they have to depress

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Speaker 1: the demand um down um. Now, I think as long

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Speaker 1: as inflation expectation is anchored, right, especially, I think you

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Speaker 1: know said actually trying to restore the credibility by moving more,

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Speaker 1: you know, laying out a very aggressive path um you know,

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Speaker 1: down the road that actually could help keep inflation expectation

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Speaker 1: well anchored, and that could result in a minor recession

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Speaker 1: in two thousand twenties three. We call that a job

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Speaker 1: food recession, which means unemployee rate should be able to

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Speaker 1: stay below five percent. So we have a lot of

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Speaker 1: negative inputs really from the macro turbulent currencies for one thing,

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Speaker 1: and these soaring bond yields and and soaring bond yields

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Speaker 1: they can't be good for various countries bond markets either.

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Speaker 1: But now in addition to that, we probably will see

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Speaker 1: earnings get revised lower because you know, people will be

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Speaker 1: looking at slower growth globally, and in fact the company

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Speaker 1: is probably uh, they will have to revise down their

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Speaker 1: their earnings. So does this make it one of the

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Speaker 1: toughest environments for risk assets that you've seen in some

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Speaker 1: period of time? Well, I certainly say, um, you know,

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Speaker 1: this is not a very friendly environment for risky assets, right, So, um,

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Speaker 1: you know, on one hand, we do feel that the

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Speaker 1: bond market seems to have priced in a lot of

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Speaker 1: the tightening um that's uh, you know expected down the road.

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Speaker 1: But I think then equity market probably still takes some

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Speaker 1: time to price in a recession that's coming, right, So

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Speaker 1: the earning scroll so far still looks quite optimistic, so

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Speaker 1: there's some room for that to be you know, revised down. UM.

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Speaker 1: But at the same time, even on the valuation side,

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Speaker 1: we don't think the valuation has come to what we

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Speaker 1: think is a fair value, even after the shop decline

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Speaker 1: so far this year. You know, in our fair value

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Speaker 1: model we see the SMP five hundred valuations still about

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Speaker 1: about about the fair value our estimated. So that is

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Speaker 1: on both side, earnings and valuation side, you probably will

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Speaker 1: express some subside. Chan Wang is empty and Asia Pacific

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Speaker 1: chief economist at Vanguard on the line for US from

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Speaker 1: San Francisco and talk the China story, speaking of borders

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Speaker 1: being open or closed. We're looking ahead to the latest

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Speaker 1: snapshot of the economy with the p MS next week.

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Speaker 1: We had Goldman Sex downgrade their twenty three forecast this week.

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Speaker 1: How do you see that China picture in terms of

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Speaker 1: the COVID zero policy still stifling growth? Well, I think

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Speaker 1: if you think about the third quarter recovery, ray has

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Speaker 1: been rather luck booster um and UM even though August

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Speaker 1: data have surprised somewhat on the upside um, but new

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Speaker 1: lockdowns actually has script up in September UM, which would

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Speaker 1: have put the dampen the consumption and service. So we

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Speaker 1: are actually you know, if you watch the pm I

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Speaker 1: data next week and then probably will always see the

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Speaker 1: momentum start to weaken again in September UM. I think

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Speaker 1: going into post quarter and two thousand twenties three, really

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Speaker 1: the outlook highly depends on the involvement of the zero

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Speaker 1: COVID policy, right, so you know, I think there could

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Speaker 1: be some moodest relaxation after the National Party Congress um,

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Speaker 1: but any meanerful relaxation is unlikely until say the People's

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Speaker 1: Congress next much. You know, China still the elderly vaccination

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Speaker 1: rate is low. Um, the natural you know, immunities through

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Speaker 1: infection is low. And also there's still uh you know,

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Speaker 1: the insufficient resource of medical um, you know, healthcare system. Right.

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Speaker 1: So I just feel that this will be somehow persistently

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Speaker 1: you know, wing on the growth outlook. So among those

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Speaker 1: three areas that are impeding the Chinese economy, the zero

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Speaker 1: COVID policy, the property crisis and and just global inputs,

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Speaker 1: which one is having the most delectarious or negative effect

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Speaker 1: on the Chinese economy. Well, I would say, you know,

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Speaker 1: I would still say probably it's a zero COVID UM.

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Speaker 1: I think the problem is that the housing defending housing

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Speaker 1: crisis to a certain extent, you know, can be controlled, um,

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Speaker 1: you know, by the government to come. The impact can

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Speaker 1: be contained from the downside, right, so they may not

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Speaker 1: be able to engineer a strong rebounded in the housing market,

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Speaker 1: but the dunkside can be cutients when the government relaxed, um,

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Speaker 1: you know, the UH, relax a lot of the regulations. UH.

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Speaker 1: The synchronized global downton will certainly way on the export

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Speaker 1: sector well. But on the other hand, I think the

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Speaker 1: zero COVID policy is really the wild cat there. It

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Speaker 1: can bring UM a lot of the offside to the

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Speaker 1: growths next year, right once you relax, you know, get

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Speaker 1: rid of the zero policy, consumption service, you think about

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Speaker 1: all the pand up demand UM. But on the other hand,

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Speaker 1: it could actually continue to persistently depress UM the economy.

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Speaker 1: On the other hand, if they do not relax it.

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Speaker 1: Let's talk about Japan the intervention. There are economics teams

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Speaker 1: saying it's a temporary fix at best. We know that

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Speaker 1: a weekend can actually be good for the Japanese economy.

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Speaker 1: But how are you viewing all these big moves that

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Speaker 1: we're seeing in in currencies. I think eventually you think

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Speaker 1: about the Japan am Alway intervention, I think they will

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Speaker 1: certainly helps without some speculation in the near term, um.

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Speaker 1: But the problem is this is unilateral intervention, right, and

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Speaker 1: also it's not really well coordinated with the central Bank,

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Speaker 1: So you know, this kind of intervention euroity is costly

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Speaker 1: in that ineffective and also unlikely to sustain. Right, Eventually,

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Speaker 1: I think the young weakness is supported by fundamental right

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Speaker 1: the rising Yew differential record treat deficit uh and you

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Speaker 1: know Kurda song has actually remained dolish and insists there

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Speaker 1: is no change meded in the next two or three years.

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Speaker 1: So given that, UM, I just don't think the intervention

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Speaker 1: is going to be having like sustained effect. At least

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Speaker 1: the intervention tells us that having a week urrency is

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Speaker 1: not really a plus, and I guess we see that

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Speaker 1: with China as well. Are they in a similar situation.

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Speaker 1: They're just trying to stem the rapidity of the decline

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Speaker 1: of the currency, not really push it up. You're right.

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Speaker 1: I think both of them are trying to cushion that,

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Speaker 1: you know, downside, right, so they don't nobody want to

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Speaker 1: disorderly and large, um, you know, currency depreciation especially, so

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Speaker 1: I think, you know, to a certain extent, when you

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Speaker 1: think about Japan and China, both of them are trying

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Speaker 1: to manage the expectation right to avoid this really self

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Speaker 1: reinforcing expectation for currency depreciation. I think the critical difference

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Speaker 1: is between Japan China is that China has China tightened

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Speaker 1: capple control. M. Yeah, we're gonna have to leave it there.

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Speaker 1: Chang Wang Empty and Asia Pacific chief economist at Van

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Speaker 1: god