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This is the Bloomberg Daybreak Asia podcast. I'm Doug Krisner. You can join Brian Curtis and myself for the stories, making news and moving markets in the APAC region. You can subscribe to the show anywhere you get your podcast and always on Bloomberg Radio, the Bloomberg Terminal, and the Bloomberg Business App.
Joining us for a look at markets now is John Lynch, CIO at Comerica Wealth Management. John, it's kind of a conflicted bull market that we have here at the moment. I'm curious whether you see the CPI report this week or the Fed decision and its dot plots likely to change much this week.
Hey Brian, good morning. Yes, I think first off, on the CPI report, I noticed earlier the Bloomberg consensus is only calling for one tenth of one percent increase month over months, and I think that's a bit of a stretch. I think that's a little optimistic. We've seen really good
job growth, we saw a rebound in services. Auto sales are approaching sixteen million at a seasonally adjusted at annual rate, So I think that the street might be in for a disappointment on the month over month data on headline CPI to the degree core CPI comes in about three tenths, hopefully that'll be the saving grace, but I do think investors should be mindful of that month over month print. And to your point on the FOMC, I guess at the end of the March meeting, the dot plot was
for three cuts this year. As you know, FED fun futures are looking at exactly half that amount, and it'll be very interesting to see whether or not they come out with one or two.
So do you think there's a real risk then the bond market maybe sees a little bit of weakness and we have a popping yield right now. The last couple of days have seen a dramatic decline in yield, and I saw the way in which bank stocks were squeezed, particularly today. Do you think there's a risk that yields pop from here?
I do. I think. You know, we've been looking even globally, we've been in a downward trend, but we saw surprisingly strong demand for the thirty year I guess we had. I'm sorry for the tenure auction today there were thirty nine billion, I think, and we met with really strong demand. So we're right in that, you know, lower bound of the four thirty to four to seventy range that we've been trading in. We're about I guess we closed at four forty, but yeah, we could we could see a
pop you know, five to ten basis points. Should that month over month number disappoint.
Yeah, it seems like that there was quite a lot of relief today with the Treasury auction that you know that there was demand, strong demand. Why do you think there was given you know, the previous somewhat failed auctions and the fears that you know, at some point the bond vigilantes will be you know back in forth.
You use the perfect word. It was relief. It didn't seem like confidence to me at all. I think it was very very much relief given the uh, you know, the poor auctions that we saw in fives and sevens over the past couple of weeks. So I just think, you know, the bond market is really in you know, right in the mid fes. You know, we could really
frankly break either way. You know, if you if you think about all the money that's been spent post pandemic death sit spending you know, we're one point six one point seven trillion budget deficit in spite of four percent GDP. I mean, that's not a full employment type reed, So you could break upwards over the next six or twelve months on that or heaven forbid, you know, we have you know, a worse geopolitical situation which could see us
break lower. So I think, you know, again very instructive that you use the word relief because I think bond investors are kind of straddling the fence on that.
John.
I'd like to get your view on what you're seeing with respect to this artificial intelligence trade. Yesterday we had Apple unveiling this new platform called Apple Intelligence. May be a delayed response today. The stock was weak yesterday, but I think analysts kind of weighing in on the fact that maybe this creates an upgrade cycle for the latest diversion of the iPhone, and today Apple shares pop more than seven percent to a record. Are you still a buyer this AI theme?
You know, it's interesting. Apple was faced a great deal of criticism yesterday on the rollout, but I think I don't know if you want to say cooler heads prevailed or more optimistic heads prevailed today. Yeah, the A I think you know, I'm still I'm still behind it. You know, I've been asked a lot about nineteen ninety nine and when I just see you know, if you want to use the Cisco VERSUS Microsoft or currently Apple or Nvidia example,
multiples are very different. It's a different type of scenario. The growth companies driving this not only have earnings, but they have significant cash flows and they're trading at significantly better multiples than we saw some of the leaders twenty five years ago. So yeah, I'm still behind it. I like the fact that businesses are confident enough to spend, and you know, we saw durable goods orders, right, so
business spending on employees and they're spending on orders. And to the degree that you're seeing even within the tech space, semiconductors outperform software, so that that's a pretty good cyclical indication at this point in the cycle. And you can even see that on equal weight basis as well.
So I want to give you a quote, and I want to you know, sort of introduce you to the reporter's notebook for why I'm quoting this. You know, I'll get up at three o'clock in the morning for the show and sometimes wake up at about one, and you know, I just get my book and read for a while and hope to go back to sleep. So I read this line in the book that I'm reading at the moment. It's back at the beginning of the chip industry, and
I'm paraphrasing. Texas Instruments had sales of five hundred thousand dollars in nineteen fifty eight. Two years later it was twenty one million. That's sales jumping forty two times in two years. And I was thinking, hey, take that in.
Vidia, absolutely good quote, and uh yeah, it's a labor of love when we wake up at that hour, isn't it.
Well, you know, the point, the point really of the anecdote is that, you know, we're so surprised at you know, how fast AI is growing, but you know, we forget that there's been a number of these trends, you know, semiconductors in the early stages. We're just doubling in quadrupling and quintumpling and you name it, forty two times in two years. It's impressive.
Absolutely absolutely not only were they doubling, but the prices were cut in half. Right, War's law. So you know the speed with which we've seen over the last twenty five years. You know, that's why I don't think the whole Nvidia, Taiwan Semiconductor, you know, Microsoft, you name, you name the participant or the leader in this in this shift, I still think there's room to run and when it's consistently justified with quarterly sales growth, year sales growth, you know,
the margins that they're seeing. I do think it's important for investors to really think about why utilities are running and you know, we want to make sure that the electrical grid can support all these data centers that all these chips are going to populate.
Yeah, it's a good point that there are a lot of companies that are not buying AI, you know, and having to expense that they're selling into it. John, thank you for joining us. John Lynch, cio at Camerica Wealth Management. Let's bring in John Bianco now partner and investment strategists
that bond blocks to take a closer look. So there was quite a lot of turbulence in France, in particular with the route in French bonds, and I guess quite a few people are angered that Emmanuel Macrone called that snap election, with Bruno Lamier warning that France could be plunged into a debt crisis if Marine leapenn or to win the elections. I'm just curious about your thinking about whether that impacted the fairly strong bond auction we saw in the US.
It's very possible that it did affect our bond auction here, but it's also possible that, you know, sometimes bond auctions go better than other times, and today was just a day where there was strong demand for whatever reason.
Hey, Joe, and I'm hoping you brought your crystal ball with you or it's right there next to you at the desk. Give me a sense of what we're going to see tomorrow, first with the CPI and then what we're going to hear from the Fed.
Yeah, it's going to be a big day tomorrow in terms of market events, with the CPI releases and the f o MC rate decision. I think that, you know, no matter what we see in terms of the CPI release, it's not like inflation is handled. Maybe we could continue to see some progress, but we're not at the point where we think that there will be a rate cut. Obviously announced tomorrow or even the July meeting. September would be potentially the first time that we could see a
rate cut. But even then now the probability is less than fifty percent that we would see a rate cut in September, So it may not be until December of this year where we see the first rate cut.
It's a double header tomorrow that I'd buy a ticket to see for sure. In fact, we'll have to be talking a lot about it on the show. How would you like to have Jerome Pal's job trying to explain what's really going on in the jobs market looking at the huge difference between what we saw in the establishment survey versus the household survey.
Yeah, exactly. It's not an easy job that he has. But I would just say that in general, even though there can be some weaker numbers some stronger numbers, overall employment and payroll numbers are holding in at strong enough levels they're not really a real cause for concern, meaning that the Fed would have to consider cutting rates tomorrow.
So do you believe that there are still opportunities in the bond market. I mean, I'm imagining that if you think the Fed could go twenty five maybe fifty basis points before the end of the year. That just on the basis of a capital gain that you may receive, there are opportunities. Am I right on that? And if so, I mean, what part of the curve are you're playing here?
Yeah, No, we think there are a lot of opportunities in fixed income right now. We certainly see opportunities still in the credit markets in investment grade corporates, particularly triple B corporates, also high yield corporates, just because we do have this continued strong, these continued strong fundamentals for US corporations,
and that is something that we have elevated yields. So and if the majority of the return for fixed income is from coupon income, you know you're getting you could get elevated returns in credit because of the elevated coupons. In terms of how we feel about treasuries, we're still kind of sticking to our view to focus on short
to intermediate duration exposures. There it's you know, the short exposures, there's definitely I mean, you still are experiencing income in the in the low five percent range and they have lower volatility versus longer duration. US treasuries, but we also think that it's time to do some stepping out in terms of duration in order to capture not only attractive yields, but price returns that would result from potential fed actions.
I'm a little curious about your high yield choices and wondering whether or not you're at the aggressive end or at maybe the more risky end. Given you what you see in commercial real estate.
The high yield market has held up very well in terms of the fundamentals. We're still at interest coverage ratios and leverage ratios that we saw not since before the pandemic. There's been some softening, but in general we're not seeing a big way of downgrades. We're only really seeing one industry that is experiencing more distress TMT, but a number
of the other industries are doing quite well. And in terms of the rating categories, I mean, it just depends on where you want to be in the risk spectrum. If you want less a risk, then you would probably focus on double bs and they can be a great addition.
Sounds good. Thanks very much for joining us here live on the program. Join Bianco partner and investment strategist at Bond Blocks looking at China's consumer prices rising a little in May, still holding above zero. Is the fourth consecutive month that we've seen that the CPI reading of zero point three percent year on year, the survey estimate was for zero point four percent, and in terms of PPI still locked in deflation with a contraction of one point
four percent. That was a little better than the survey estimate of minus one point five percent, and quite a bit better than what we saw the prior month in April, where we were down two and a half percent. Joining us now is Vanessa Chan, head of Asian Fixed Income Investments Fidelity International. So I guess not too much of a surprise, Venessa with these inflation numbers in China, but it kind of suggests and shows that it's a long road ahead to get back to normalcy.
Yes, indeed, I think, as you mentioned, the numbers is probably a little bit better than market expected, kind of slightly fainted improvement. Quoting some of your colleagues earlier on what we're looking at is our longer term beyond China is a control stabilization. In general, we're looking at a GDP of five percent. Infation is probably likely to kind
of hoover the relatively low level. What we've seen recently is some of the policy that's been implemented, such as the kind of Outra Lung bond, which aimed to putting more momentum or investment into the longer term infrastructure projects.
Were also seeing policy related to property in terms of relaxation, and all of these is really trying to regain some of the growth momentum, particularly related to the ontore market, in order to help the kind of gradual improvement that is expected from the central government on the domestic consumption side.
As well.
Domestic consumption, I think there's a big question mark over that. What seems clear is that the economy is still very reliant on exports.
Is it not?
Yes, But I think we recognize the economy traditionally have been relying on I would say two things one well three maybe property, infrastructure, and also export. There's a very strong intention from the central government of the gradual structure change for the Chinese economy to kind of bring it back to more domestic consumption and manufacturing. So what we've seen is a kind of gradual improvement on the consumption,
particularly on the surfaces side. We also see Chinese customer looking for a good value of products, and then the saving rates continue to be still quite high as well, which allowed potential longer term growth in terms of the consumption side. The other side I think is getting more interesting is that China it's moving away from producing lower value products to more higher value products, and this will probably means that it will help it to kind of
broaden the export horizon. As you may see, they continue to be kind of building on capacity or capabilities related to green investments, evy vehicles, solar panels, batteries, and these are some of the areas that they've been striving to become stronger, both in terms of manufacturing export as well.
Vanessa, we reported a while ago that PPI in Japan was up two point four percent a year on year numbers, and that was better than the survey estmen or higher than the survey estim It could be good for corporates. I suppose in Japan month on month it was also stronger than the survey estimate up here point seven percent, and perhaps it's making a little easier on the Bank of Japan. But I'm not sure if these numbers are even strong enough to be auguing for any kind of
rate hike in the very near future. What are you expecting from the BOA.
I think you're spot on if you look at the market expectations, they do expect there's going to do two hikes before they end of the twenty twenty four but looking closer in terms of the next meeting, we probably an likely to see a hike in the new future, reason being one of the key factors that the wage growth is still actually fairly gradual, and if you look at the wage growth percentage is still in the negative, so the wage and inflation dynamics is probably haven't been
quite in line with the expectations that BOJ have laid out. If anything, it's probably for an opportunity for BOG to continue to communicate to the market and manage the market expectation and paving away for gradual normalization when it comes to rates.
Yeah.
Oh.
I think the other question here is on the persistent weakness in the end and whether there's been a conversation between the Ministry of Finance and the BOJ about doing something to reduce the level of importation of inflation into the Japanese economy because at the consumer level, I think consumers are feeling that pinch. Is that wrong headed?
I think if you think about on the macro fond, it's probably unlikely that BOJ is going to have much actions. I think the weaknesses on yen could be a consideration. But if you kind of hinges back in terms of the role of BOJ is really kind of looking at inflation other than thinking about the foreign currency. So that's probably where the kind of roles and responsibility definition would kind of win.
I would say we're also pointing towards the CPI report in the United States coming up tomorrow, that's going to be a big one. Are expecting those numbers to surprise much or to come in fairly close.
To in line I think. I think the market expectation of the general expectation is probably be coming fairly close in line with consensus. I think what is quite interesting as well is that dialing a little bit back for last week, we have a fairly interesting week where we see some weakening of the labor data, but subsequently followed by a very relatively upside surprises on the lone. Fampeiro and I think inflation will continue to be a key thing to watch when you come to the actions as well.
Vanessa, thank you for coming into our studios with us live here on the radio. Vanessa Chan, head of Asian Fixed Income Investments at Fidelity International.
This has been the Bloomberg Daybreak Asia podcast, bringing you the stories making news and moving markets in the Asia Pacific. Visit the Bloomberg Podcast channel on YouTube to get more episodes of this and other shows from Bloomberg. Subscribe to the podcast on Apple, Sdify or anywhere else you listen, and always on Bloomberg Radio, the Bloomberg Terminal, and the Bloomberg Business app