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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.
Apple has rolled out its new artificial intelligence platform that includes a partnership with chat GPT maker open Ai. The market was a little bit sort of underwhelmed by what they got today, and so we bring in Mark German, now Bloomberg Chief correspondent on Global Technology, to perhaps explain a little bit why the stock was down two percent. I think a lot of people said, yeah, it was fine.
It just wasn't anything too new or too surprising. But let me put this to you and you can push back hard if you want that Apple is the perfect company to consumerize AI and it will get it right.
I have to tell you, we have these conversations every couple weeks or so, and it's not often that I'm going to agree with you as much as I do. I think you summed it up perfectly on the first point. It was fine, right, Everything they rolled out was fine. Everything they rolled out was expected. Apple did exactly what they needed to do. They needed to show Wall Street, consumers and the industry that they're here too. When it comes to artificial intelligence embedded in its operating system. It
did that. It struck the deal with chat GPT to integrate a chat GPT chatbot into Shory and other parts of the new operating systems. But it didn't reveal anything new. It didn't reveal anything that hasn't been done before. It basically did it in a more of an Apple esque way, more privacy friendly, and things that it actually believes users will want to use on a day to day basis. So that's what they did here. Now in terms of consumerizing AI, I agree with you. Apple is the company
that can make AI friendly. It's so funny the slogan they're using for Apple Intelligence, which by the way, a funny name, is AI for the rest of us. It's just like with computers back in the day, Max, we're you know, computers for the rest of us when they were trying to show how the MAC is different from the PC. So this is integrated in different use cases that you might want to use. You do a voice memo, you'll get a transcription. You read an article on the web,
you'll get a summary. You'll want to create emojis on your own using artificial intelligence, it can do that too. So it's a suite of features that are all aiified, that all happens in the background on its own in a privacy and personalized way.
So what do we know about the cost of that Apple is going to have to incur as a result of the partnership with opeen ai, And then if the company is effective in monetizing that, is it going to cover the expense of moving into this area.
You know, it's so interesting they didn't get into the financial terms. I would imagine that open ai is going to revenue share with Apple on paid subscriptions that they offer through iOS. So CHATGBT will be free, no account required on iOS, but we will also be able to do is log into your paid open ai account and that costs about twenty dollars per month depending on the
type of open ai subscription you have. So I would imagine if someone signs up for that subscription on iOS and uses it through iOS eighteen or the later versions, Apple will get a slice of that. On the other hand, there's a money making opportunity for open Ai here as well, in terms of monetization on advertising and subscriptions and what else is interesting, and this didn't come up in the keynote,
is that chat GPTs on Microsoft Azure. So Microsoft is sort of a third party in this whole situation as well.
So never mind the stock price and the implications for it. But let me just ask you this point blank. Will people buy new iPhones because they want access to this? Not immediately, but when the next one comes out, when the the sixteen or whatever it is next comes out.
That's a good question. I did not see enough here. Or let me take a step back. Do you remember when Apple launched Siri in twenty eleven. I wasn't working with you guys back then, but certainly I was around. With this launch, the iPhone fours had serious sort of its premier new feature. Now Siri was a software based feature that required the new hardware. Now the iPhone fifteen, Pro and Pro Macs will be the only iPhones that can support these new Apple Intelligence features. And so what
you're going to see is sort of a test. Are people willing to buy the new hard or because of these new Apple Intelligence software and services features. My guess, unlike with Siri is now, when Siri was launched in twenty eleven, that was hugely impressive. Nobody had ever seen anything like it before. I don't believe these Apple Intelligence
features are unique enough to drive sales. But they are enough is to prevent people from leaving the Apple ecosystem, and they're enough to keep people in the Apple ecosystem and add new people. But I don't think it's necessarily going to spur upgrades. If you have an iPhone fourteen pro, I'm not sure you're going to buy an iPhone sixteen pro just because of Apple Intelligence.
So I just want to make sure that I understand what's going on here. So there is the AI that's happening locally on the device. Do I understand it correctly? When you referred to the Microsoft component, the Azure cloud computing component, that the other part of AI, the calculation at the data center, is going to be farmed out to Microsoft.
Uh, you're partially right. So there's three there's three components here. There's the on device artificial intelligence that's processed on the iPhone itself. There's the Apple Cloud artificial Intelligence. Those are for the Apple features. Those are powered on Apple's cloud using Apple chips in Apple Data centers specific to these features. And then third there's Chat GPT, which is of course
a cloud based service from open Ai. Open Ai uses Microsoft Data Centers and Microsoft Azure to power the cloud component of Chat gp So it's a trio on device, Apple Cloud, Apple Cloud.
Microsoft excellent. Mark. Thank you very much, Mark German, Bloomberg Chief correspondent on Global Technology, with me Brian Curtis and Doug Krisner taking a closer look here at what Apple rolled out today at the WWDC in Coopertino, California. Joining us in our studios is Helen je, Managing director and chief investment Officer at in F Trinity. Helen, thanks very much for coming in.
Good morning.
Some strategists are out there saying that the FED dot plots in the meeting this week could royal markets. There's another camp that thinks that that's kind of hokey, that one or two cuts is not really a big deal for the FED, but it's interesting it makes a market. Are you expecting volatility this week?
I think it's not going to be a big deal. Everybody knows that there's no rate cuts coming in June. People are expecting that Powell is going to talk a little bit more on the hawkish side and say that everything's data dependent. But you know, in effect, basically, the market's pricing in one and a half cuts this year anyway, So if the dot plot moves to that, then we're basically marking to market to some extent. The market's really
ignored the dot plot already. I mean, it has been at that like two to three cuts the entire year, but initially the market was expecting six cuts, and then now the market's expecting one and a half.
So I don't think the dot plot is what's driving things. It would be more like a marked to market than anything else.
So if the FED is not the big big risk, what is these days?
I think the big risk is a couple of things.
Right. One is, obviously geopolitical noises are still abound, and previously it was a lot of US China and US geo politics. Now we have some unexpected changes on the political side in Europe et cetera, and obviously the other conflicts in the Middle East et cetera, that we still have to keep a.
Close eye on.
I think the other thing is that from a market's perspective, I mean, people are expecting a Goldilock scenario pretty much, especially in the US, and so the index has performed relatively well this year. That's been led by a lot of AI and related names. People think that the US economy is not going to have any kind of landing.
So I think weaker US data, we've gotten to the stage of bad as bad no longer bad is good in terms of, you know, bringing on dubbish policy or if there's any kind of miss in AI expectations, and some of those large names for company specific reasons correct a significant amount that could also bring some concern into the market and bring more of all.
Yeah, so the earnings really have been very important, but we're in the quiet period.
Now.
We'll have a couple more, but then a long period of waiting. I think the macro backdrop is kind of interesting, almost extraordinary, in that you've got these very distinct camps. A group that thinks inflation is not tamed and that rates will be higher. Another camp that thinks the FED is too slow to cut in what they see is a weakening economy, and yet we're all looking at the
same data and anyway. Then there's another camp that thinks that, you know, as you said, goldilocks, this kind of relaxed kids are okay, you know, we can just continue as we are.
People kind of think one and three in combination.
I think people think that inflation is still not tame, but that everything's still great, and therefore that's still goldilocks.
Right.
Interest rates where they are, yeah, And.
I think for the second scenario that you talked about is less about whether the FED is going to rush to cut or not, because everybody knows that, you know, the FED can always cut very abruptly if they wanted to or needed to. So people are more watching the data itself to see if there's any meaningful signs of weakness. We did see some over the last couple of months,
definitely more mixed data versus firmly strong data. But I think the market still is pricing in a no landing scenario and just assumes that if there is any kind of meaningful weakness, they'll just rush to cut immediately. So they're not too worried about the policy response, but rather about whether there is indeed meaningfully weak data.
At what point does the bond market become concerned about the fiscal situation here in the US? Could that be problematic if yields in spite of the fact that inflation is on its way down, If yields spike is a result of the bond market becoming a little bit more focused on fiscal problems in the United.
States, Well, it's been on and off concern, right, and the fiscal problems are nothing new. We've certainly had numerous fiscal cliffs that didn't seem to roil the bond market as much as it should. So that is a long term concern, but it's not something that's going to near term blow up. And in fact, the expectation that Trump is going to win certainly means that the fiscal you know, discipline may not come anytime soon, and the market doesn't
seem to be too concerned about that. So I think in the near term it's still less concerned about those longer term issues like you know, loss of dollars supremacy or trust in the dollar because of fiscal instability over the medium to longer term, that that's not going to be something to drive things in the immediate future.
We had a couple of interesting corporate stories today, one ten for one split at Nvidia and the stock traded reasonably well today, and then the Apple event. It seems like in listening to some of the comments that investors were a bit underwhelmed, not bad, but just you know, not all that exciting.
Well.
I think the expectation for AI and the near term is quite high. You know. Bill Gates has this famous quote about new trend saying that things are usually overestimated in a one to two year perspective and underestimated on a ten year perspective. So expectations of AI AI have really picked up substantially, but we don't actually know whether the applications are going to come through and whether they
pick up, whether for software or for hardware. The take up is going to be as rapid as what the market is pricing in so I think that does leave some room for potential negatives prizes, and some room for possible.
Profit taking for certain parts of the supply chain.
You know, things like you know, what Nvidia makes has very high technology barriers, but a lot of other stuff like downstream and PCs and ODM, oem et cetera. Those don't have a lot of very high technology barriers. So even if the take up for the market overall is great, there could still be more competition and more price erosion
versus what people are expecting. So I think there's more room to disappoint, and that's something that we have to actually keep a close eye on because it is a kind of a signal for the entire market that the market confidence and consumer confidence is partially built on.
What might the catalyst be for that type of disappointment. Would it be in Vidia saying that revenue is beginning to slow a bit, or might it be something else.
It's not necessarily going to be from the Nvidia front. I think people are going to be looking at the downstream as well. You know, if you're shipping a lot of stuff throughout the supply chain, is all the build out for so.
The ROI just doesnt manifest.
Yeah, is the actual implementation and installation happening, and more importantly, is the downstream software and application take up happening because that's the end driver of this whole thing, right, whether people are using it day to day and whether they can derive revenue from.
It just quickly on China. Helen sneak this one in. We did have some domestic tourism spending numbers out from CCTV up pretty nicely, more than eight percent or so. Is the consumer alive and well or stunted?
The consumer is not doing as great as it has done in the past, But I think one is that it's coming off a low base.
Of expectations.
And two, I do think that there's going to be more focus on consumption in the services and tourism front. It's very similar to what we saw in the US for a couple of years, right, all that pent up demand and less on goods.
Yeah, all right, well that's one to watch, Helen. Thanks very much for coming into our studios. Helen Ju Managing director CIO at NF Trinity. Joining us now is Mary Nicola Bloomberg, m Live strategist with us in our studios in Singapore. So I know you've been a little cautious of late, Mary, So let me give you a question that's probably red meat to you. Are you concerned about complacency in markets? Is risk asleep at the wheel?
Yeah, there is a bit of that, especially when you have the FED coming up and CPI coming so there is that risk of the FED coming out and saying that we're moving to likely to be two cuts rather than one cut. It wouldn't move so aggressively in one
direction just within one meeting. But even if it moves to two cuts, there's still a likelihood that it could shift yet again if the data continues to move in that direction, and of course you have CPI data, if it shows its resilience, especially after average hourly earnings, there is still that risk for assets. But meanwhile it looks like equities continue to ignore it.
So here we are talking about two rate cuts between now and the end of the year from the Fed, perhaps third quarter, definitely in the third quarter. Where are you with the dollar's strength? I mean, does that surprise you at all? That the dollar has been holding up as well as it has been.
It's likely that the dollar strength is going to persist, And it is really about the fact that the Fed, of all the central banks, is maintaining that higher for longer. Mantra other central banks, whether it's the ECB, Bank of Canada,
they've started cutting. Yes, the ECB hasn't told us what's going to happen thereafter, But the fact is that they're moving in that direction, while the FED is standing and is being a lot more resilient and looking at where inflation is headed, and that's what's going to keep the dollar pretty resilient going forward.
So, Mary, there's several camps out there, and I'd like to get your view on which one do you believe is the most accurate assessment of what's happening. Because one camp thinks that inflation is just not tamed and it's going to be a feature for a long period of time. Another camp thinks that just the opposite is really happening, that the economy is weakening so dramatically that the FED is behind the curve and too slow in addressing it
by cutting interest rates. And then there's the soft landing camp, that sort of complacent perhaps complacent camp, where you know, we sort of like the environment here and we're slowly edging into the stock market.
I think more on the side of the fact that inflation is going to remain sticky and there is no signs that the inflation is coming off. If you look to average hourly earnings, let's say that is the projection of how prices evolve, that's not showing any signs of really coming off, and that's holding up fairly well, and if that continues, it's hard to see how the inflation trajectory hums off. But then there's also a part of
inflation where you wonder where is the chicken. It's like a chicken and egg problem where there is the resilience of rents, and the resilience of rents really does have to do with higher interest rates. So how do you buy a house when rates are so high? So you'd rather instead of taking out a really high mortgage, you would prefer to rent. So it doesn't it's hard to assess which one would. It would have FED rate cut actually ease the impact of rents on inflation.
So if you're right, if it's higher for longer, maybe there's a case to be made for a little bit of corrective behavior in the equity market. I think it was interesting today you have two key risk events on the horizon, the CPI print on Wednesday morning, and then later that same day the Fed decision. I mean, if CPI comes in on the hot side and the Feds dot plot maybe is a little more hawkish than the market is prepared for, could that destabilize things in some way.
I think.
So.
I think the fact that if you see inflation coming on the hot side, and even if the Fed comes out as two rate cuts and they say, you know, we have to still see things and how prices evolve, and we're not seeing as much progression, although we did have a really good month last month, but you will need to see at least three consecutive months of the deceleration and inflation to really convince the Fed that it's time to take action. And we're still not there yet.
So there's a lot of volatility that can come through. That was probably the main theme for us within Markets Live, is that there's going to be volatility that persists this week, especially with things like you know, the mounting risks not from CPI, from the Fed, and of course from what's happening in Europe as well.
I was listening to Mark x Andy on Bloomberg Surveillance last night before going to bed, and you know, he talks about harmonized CPI, which is actually a thing, and they strip out ohe are owner's equivalent rents and you touched on it a few moments ago. Most other jurisdictions eure up. For instance, they don't use OEI, and if you do strip it out, then apparently CPI is around two percent. It's right around the target, and it's been
there for a while. I know that that's an argument that the doves make and some people kind of slough it off a little bit. But does he have a point.
Well, it's interesting because it's however you slice and dice the data, you can make the data come to your narrative, right. So I think it's important to look at what is the FED looking at, and the FED is looking at PCE, and that's what we should be focused on. And so if the PCE is not giving us that that narrative, it's hard to look at something else and try and say, oh yeah, but if we strip this out then it
actually is okay. So there's a lot of hidden, i think, hidden issues behind looking at it in that direction, and we have to focus on PCE.
So what take a step back and give us a little bit of insight into what you believe what we've been describing means for Asia and markets in your neck of the woods.
Yeah.
I think the main thing is the fact that the dollar's going to stay higher for longer and that US treasury yields just continue to inch higher. That puts a lot of pressure on central banks in this region and on the currencies as well. So central banks in this region are not going to be looking to cut even if they're seeing progress and inflation come through, but they're not going to want to go before the FED to risk any sort of currency weakness. We've seen it with
let's say Bank in Indonesia. Bank Indonesia decided to hike even though they don't have an inflation problem, but they wanted to ensure that the currency maintains some sort of stability, and that's going to continue to be one of the key issues for central banks in this region. But also if you have yield differentials continue to be in favor of the dollar, that's going to weigh pressure on Asian currencies.
Okay, going to get you out of your comfort zone a little bit here with a kind of a tricky story. She handles it so well, she's great. So I was just reading through some Bloomberg intelligence and apparently there's an AI price war underway in China. These large language models, they're having to cut prices so much to get business that it's hurting companies like bay Do and Ali Bomba.
Is this something that is having a negative impact on equities when they don't need a negative impact, They've got enough others.
Yeah, it's interesting the price swar factor and how it plays through. But I think at the end of the day, you know, the fundamentals for a lot of these companies, especially some of the companies that the earnings that came through, a lot of them were okay, they beat expectations, a lot of them didn't do so well. But still it's about getting the retail back into the market, into the equity markets, and that's still going to take the property.
So unfortunately all stems back to property and really getting that equity market going in China.
Yeah, let's not forget that China is still in deflation. I mean, will be data very quickly, Mary, that we get this week PPI CPI for China confirm that fact that China is still in deflation very quickly.
That's probably likely.
Yes, you know, be careful what you wish for. That's it, mister Kristner, You got it all right. Well, Mary, thanks very much for joining us, So Mary Nicola, Bloomberg m Live Strategists.
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, Spotify, or anywhere else you listen and always on Bloomberg Radio, the Bloomberg Terminal, and the Bloomberg Business app.