Good morning, and welcome to the Bloomberg Daybreak Asia podcast. I'm Doug Prisner. Here are the stories we're following today. Joining us now is Mary Nicole or she is Bloomberg and live strategist joining us from Singapore. It's always a pleasure to speak with you. I know that you write a lot for the blog, and I'm curious as to what's top of mind for you today. What are you kind of trying to feature here, what is the market wrestling with and what are you discovering as you take a closer look.
Yeah, there's a few headwinds really that's shaping how we're looking at markets. So obviously there's the repricing of the FED because we've seen an improvement in the US data. But then there's also these other confluence of factors, including the US elections, where people are on pause here in Asia trying to figure out how does this affect Asian markets, what are the implications of let's say, a higher fiscal
deficit or the occasions of potential tariffs. And then, of course you still have the fundamental backdrop, so you still have to focus on the labor market report, which is coming next week. You have a busy earning season, So there's a whole number of things stacking up that's not
giving Asian markets a chance to really breathe. And then, of course you still have China that's hanging in the wings, where we're still waiting for the NPC Standing Committee and some of their decisions and how that will affect the next phase of the implementation of the stimulus that they had are originally planned.
So what are people saying about the stimulus that we are aware of so far, the programs that have been announced, and I know in many cases the actual program itself has not been implemented. We're waiting for that. But do people really, the people that you speak with, do they believe that this is going to have a fundamental shift in psychology where the investment community, where the retail community is concerned, hubers are concerned. Is it going to move the needle at all?
Yeah, it really comes down to what they're going to do on the property market, right, especially on the retail side. For the remember how involved the retail sector in China is in their own equity markets, and they've lost a lot of money on their property. So if they haven't seen that recovery come through, or if they haven't seen anything come through on the property market, that's still going
to weigh on sentiment. And then of course for foreign investors, you're still thinking about, Okay, how are they managing the property sector, how are they going to boost consumer demand? And then on top of that, it's what's going to
happen between US China relations. So and then of course you have this report that came out this morning about China stimulus being insufficient from the IMF in terms of improving and curbing you know, deflationary risks, and that's quite and they're saying that what they've set out is not enough.
It's interesting. I can't tell you the number of conversations that I've had on this topic where the question that comes into my mind is can China basically fall into the same trap that Japan fell into for three decades? And that's a real debate. Some people say no way, China is a very different economy, but many people say yes, the analog is sufficient and China is running the risk of remaining in deflation for a substantial period of time.
Yeah, the similarities are really hard to ignore. At the end of the day, between what Japan experienced in the eighties and nineties versus what we're seeing with Japan today, and a lot of it has to do with we can't forget they had high debt, deflation and then of course depressed consumer confidence. That's what Japan had during their time.
That's what we're seeing now with China. So it's hard not to draw the similarities unless you see really aggressive stimulus coming through from China, which really we haven't seen yet to delay some of these concerns and to ignore the potential Japanification of China.
Let's stay with Japan for a moment, because this yen has been dramatically weakened in the last several days. I think earlier today we traded on the week side of one point fifty two against the dollar. I know we have a BOJ meeting around the corner. I haven't heard of anyone that's expecting a move from the Bank of Japan. So we are looking for a period of time when you got weakness in the end and maybe intervention on the part of the Ministry of Finance. Is that what we're looking at.
Yeah, for now, we're seeing a lot of verbal intervention coming through right just a little bit of jaw boning to talk down to ensure that the end doesn't go two week but it's only it can only help for such a period of time, right, it has its limits. I think what the what the main thing is for Japan. Obviously the key one of the biggest factors that's really impacted the end has been the repricing of the fet that's been first and foremost. The second impact has been
coming from the concerns about politics. If LDP doesn't have a clear mandate, then you just leave a vacuum in terms of what the BOJ is going to do in terms of how are they going to move ahead with policy if there's increased political volatility, and I think that's also weighing on sentiment of the en and of course you're seeing just higher volatility with the end.
But there's also an inflation story that's been happening in China, and this is something that the BOJ has been waiting for years to occur. It's happened. It's been happening now for two years it seems like where inflation has been above that two percent target. What do we know about the inflation story in Japan right now? Particularly if you look at a currency that's going to continue to allow for the importation of inflation into the Japanese economy.
Yeah.
Actually, it's really interesting. If you chart let's say, Japan CPI versus versus the yen, it's this perfect relationship, obviously indicating that you know, the much of what has been driving inflation has been the yen weakness. And then you've had some of the numbers coming out today for October CPI on for the Tokyo CPI numbers, they were still above two percent, but they are creeping up in terms of being higher than a little bit higher than expectations.
So if and people are feeling the pain on the ground, so if they don't do something, you could see inflation really getting out of control. And that puts a real conundrum for the BOJ because if you, let's say, have political potential political instability or weak government versus higher inflation, how do you manage that balance?
So no change in BOJ policy next week, but this week?
No?
Okay?
So is it fair to say that we do get maybe some action either in December or January? Is that what the market is telling us?
Market's telling us a little bit later, Oh, they're still not believing that they're looking for any sort of changes from the boj So if we look at let's say, what the market is pricing, they're not looking for really any moves. Let's say, you know, another fifteen basis point move until January for let's say, for looking for a fifteen basis point move, Okay, until January. So there's still some time where the market is. And even boj Uada said, you know times on our side only recently, so there's
still something. But I think in terms of what if the if the pressure from the currency and the currency weakness becomes too much, they may be forced to act sooner rather than later.
Yeah, it's been remarkable to see how quickly the end got here to around one fifty two against the dollar. Mary, thank you so much for being with us. It's always a pleasure. Bloomberg's Mary Nicola m Live Strategists, joining us from Singapore here on the Daybreak Asia podcast. Joining us now is Gene Goldman. He is the chief investment officer at Satara Financial Group. Joining us from Los Angeles. Gene,
thanks for making time to chat. Let's begin with the FED because lately the market has been kind of debating the degree to which the FED is going to potentially scale back its pace of rate cuts. Where are you in this debate right now?
When the FED came out with fifty basis points in September, I was shocked. I mean I didn't think they should do that. Think about this, you know, you know, the employee picture was not as bad as the FED had believed. You know, yes, the unemployment rate had picked up a bit, but that was due to labor force participation. Jobs claims are still pretty low. Payroll report looks pretty good, The
entire economy is not that bad. Retail sales, the Economic Surprise Index GDP, I can rattle off tons and tons of data that says that the economy is better than expected. What worries me is that the FED is stimulating an economy that does not need to be stimulated. And what happened to the Feds focused on data dependency?
Right? Where'd that go? So? I do think the Fed will need a lower.
Rates still because we're still pretty restrictive at two and a quarter over over inflation.
But they've got to slow it down.
I suspect maybe a quarter in November and a quarter in December, but that fifty in September was ridiculous.
So if the market has to recalibrate the idea that the Fed is going to be accommodative, I mean to say that maybe it was, as you said, overly aggressive in estimating rate cuts. Is that a risk for the equity space?
It is definitely a risk, and the bond market is screaming it's a risk. Look at the ten year treasure yield, for example, right before the Fed cut rates was at three sixty two. Today I'm looking at my Bloomberg it's at four to nineteen. That's a big surge in about a month. That is a scary searche in just ten year yields. And you see what happened. You know, mortgage rates, as we all know, are tied to the ten year treasure yield. Mortgage rates move higher, closer to seven percent,
slowed down mortgage applications. You add this with rising geopolitical risks, election uncertainty. Third quarter earnings are okay, and then you add on a little bit of you'll sprinkle in a little evaluations and concentration. We have ourselves a setup for a big volatile period coming up.
So what industry groups are most vulnerable right now in your estimation.
Clearly the high valuation and the high concentration industry group. So clearly technology communications services, the big ones, commune, consumer discretionary. I think those areas are right for a pullback. I think the areas, on the other hand, that look pretty attractive. You really defensive growth areas like healthcare. Healthcare is one of our favorite sectors. I think it's defensive growth does well under a divided government, and neither Harris nor Trump
are proposing any major healthcare reform. Also value sectors. Small cap looks pretty good. We see whenever the Fed cuts rates, market breath tends to widen, and you see, for example, equal weight SMP is outperforming market cap SMP over the last few months. Great, great news. So we would look at value small cap, defensive growth and a great area. I think it's pretty attractive as financials. Yield curve steepening
looks pretty good for financials. Banks are going to make more money in this type of environment.
Are you seeing opportunities offshore right now? Europe seems to have the inflation story under control. Maybe some rate cuts are in store, and that may be a way of revitalizing growth on the continent, and we've been talking a lot about the stimulus programs being unleashed by Beijing and perhaps a growth spurt that may occur in China. I'm curious as to whether or not you're exposed offshore right now and to what extent.
Yeah, so we're neutral in both areas, both emerging markets and international relative to our benchmarks. You know, both areas are pretty good from a diversification standwent. You do want some exposure. We're not ready yet to jump full both feed in yet, just because we want to see see a weaker dollar. A week your dollar will benefit both investing in both areas. We don't see the weaker dollar yet. The dollar has weaken a little bit, but we want to see more boom and that weakness of the dollar
and to get that. Once we get that, that will help us drive our investment outside.
In the US.
I think China, China, you know, has a pretty good surge in the markets really on monetary policy, but we need to see more in fiscal policy. And you think about China, China has this big overhang. You know, the lingering one child policy is really hampered their consumer spending. And China is trying to transform, as we know, from
a manufacturing to a consumer. They're trying monetary stimulus, but fiscal stimulus is not there yet, so we're not ready yet to jump in emerging markets really full of board.
Yet we're getting very close to the US presidential election. How do you feel about this as a factor in determining the direction of the market going forward.
That's a great question. First of all, you know the old story.
Listen during an election year, if you like, the last twenty election years, the stock market has been positive in eighteen in the last twenty years. We don't see that being a difference. We do think that the stock market
tends to ignore the election. But what that said, though, historically, what you've seen is that usually the first two months going into an election, you know, there's a lot of volatility stocks on average, followed by about sixty basis points, But the key period from election day to inauguration, on average, stock market returns about one and a half percent. So we do see some solace in the fact that whoever wins the election is that at least we find out
who wins the election. That's actually pretty good news. And you're seeing a lot of companies out there who have come out and said, you know what, we are going to delay projects, We're going to delay hiring, we're going to delay whatever it is because we are unsure of who's going to win. But the good news is that whoever wins, we're likely going to see a dividing government. So really, at the end of the day, I hate to stay this, but nothing gets done. Markets, you're gonna
like that. So I think near term volatility. But the end of the day, just like we've been saying, you know, with the recent pullbacks, any pullback will be a buying opportunity because again, nothing will get done and lots of cash on the sideline waiting to get in at.
A better valuation.
Boy, I'm glad you mentioned that point because I was reading an article on Bloomberg today. A stampede of cash has been flowing at the US money market funds in the last week. I think something a little over forty billion dollars moving into money market funds. What will it take for that money to come off the sidelines and be put to work in either the equity market or in the bond market.
Yeah, so we look at so there's six trillion of money market assets on the sideline. But we also look at money market assets and cash and savings and bank accounts because we do think there's some high correlation there, and that's twenty four trillion dollars what we think will happen if we have a pullback, if we have better valuations, just like we saw in the almost correction in July, just like we saw in the correction in October of last year, that money is waiting to come in for
a better valuation. We do expect some of the money will move in as prices come back in line to long term expectations. You know, right now we have high valuations. The pe ratio on the SMP is what twenty two times Ford earnings, high expectations, high concentration. All this is kind of a mix for volatility and markets. Money is
weighing in the sideline to move in slowly. On the fixed income side, you know, I think the good news is that if you look at bond fund inflows this year, there's only been one week that's been in an outflow, so there's still a lot of demand for bonds. I just think right now there's a lot of people waiting on the sideline, worry about duration risk. So what we're telling our clients today good news. You know, bonds offer
an attractive yield relative to inflation over inflation. But at the same time, though, we do think yields will come down eventually, especially as a FEDS are saying, you know, raize cut rates. I think you look at less next year. You're two years the you know, the ending rate for the FED is a two point nine to three percent, maybe a little bit higher. But regardless, long term rates are coming down. But we'll see what happens.
Yeah, there's still a debate over where the terminal rate is. Do you have a sense of that.
If you look at the let's say the FED, let's believe the FED, the fest is two point nine to three. I do think it's going to be a little bit higher than that because let's just say that we have more government spending.
Let's say that. You know, you look at for example, the.
Government the end of this fiscal year, you know, we're at at one point eight trillion dollars, third highest deficit on record over twenty twenty and twenty twenty one, third highest year. Nine hundred and fifty of that billion dollars of that was for treasury payments. We do see a lot of treasury payments coming in. We do see a lot of debt a love yield coming into the market. But again it comes a point when you're thinking it yield over over inflation. So there's some pretty attractive areas.
So what we've been telling our clients is it's okay to be you know, strong and durational, you know interest rate sensitivity, but it comes to point you need to ratchet that down a little bit, especially if the yield curve steepens and there some attractive opportunities on the shorter end of the yell curve.
Gene will leave it there. Thanks so much for taking time to be on the Daybreak Asia podcast. Jeane Goldman, chief investment Officer at Satara Financial Group, joining us from Los Angeles. This is Bloomberg day Break Asia, your morning brief on the stories making news from Hong Kong to Singapore and Wall Street. Look for us on your podcast feed every day, on Apple, Spotify, and anywhere else you get your podcast. Our flagship New York station is also
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