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Welcome to the Daybreak Asia podcast. I'm Krisner. There's no trading today in Japan. Markets are closed for National Foundation Day and as a result, there will be no trading in US treasuries until the London session. In the Japanese equity market on Tuesday, we had the Nike closing at a record high. Shares in Soft Bank led the way with a gain of ten percent ahead of its earnings. Stateside, we did have the report on retail sales and the
reading was unexpectedly flat for the month of December. Economists had expected an increase by four tenths of one percent, so the shortfall means the estimate on fourth quarter GDP will be reduced. It also reinforces the case that perhaps the Fed can be a little more aggressive in cutting interest rates this year. For a closer look at markets, I'm joined by Bloomberg Strategy just David Finnerty. David joins
from our studios in Singapore. Thank you for being here and I want to play to one of your strengths and talk about the currency market. The Bloomberg Dollar Spot Index has been down now for three straight sessions, during New York trading, and in that time it's lost around one percent. Is the story on the weaker dollar really driving the narrative when you look at overall price action.
In FX markets, Yes, I think it's basically dollar versus yeah, the rest of the world basically in terms of currencies. The general sentiment talking to a little traders and contacts that I have is that people generally would like to sell the dollar. They need the excuse to do that. They're getting some but you get these pullbacks because the US data comes out a bit mixed. You saw US retail sales over night was weak, but you go back to the IM data at the beginning of the month
that was strong. So obviously everyone's looking at what the payroll data is today, particularly unemployment rate is that is tends to be what the Fed focuses on. If you did see an uptick in that, then I think the market go yes, finally we got another green knight to sell the dollar and buy other currencies, and they're tending to buy. If they're shorting the dollar, they're tending to go for the Euro or the Aussie dollar tend to
be the two popular ones at the moment. But everything generally does well, but those tend to be the too popular trade.
So, as I mentioned, we did have that record high for the Japanese equity market on Tuesday. A lot of this bullishness seems to be directly correlated to the so called taki ichi trade expectations here that we're going to see a lot more in a way of fiscal spending, perhaps a cut in the sales tax on certain food items. You would think with talk around fiscal stimulus that the Japanese currency would weaken, but that doesn't seem to have
been the case. So if you look at the yen strength, David, does that really revolve around the dollar weakness story?
Yeah, well, I would still remember dolly in still trading one fifty four, so historically still at the weaker end of its range, shall we say, with like one sixty basically being the bottom of it. Some of it really have won, it's just this end of intervention fears that you have. Some of it is a weeker dollar. But you know when it was up around one fifty seven just the start of the week, you know the market was the Finance Miniso in Japan came out and did say,
look you now we are watching currency markets. Was again was we don't want that one sided spectation against the end. So that's a strength and the end pushed dolly and lower. But even as you said, some of it Nan has been the dollar side. What's interesting is talking to some traders yesterday when dolly en was around one fifty five ahead of the US retail sales data, I was like, you know what sort of the positioning on this? Where are we? And they go, look, realistically, the long dollar
en longs have been sort of been squaring up. It hasn't shifted to a dollar in short position yet. They said, this is some of that, but not a lot. I think everyone really is looking this payroll but to get out the way to give Glay the greater clarity in terms of whether dollar headed and therefore sy Dollien will go with that.
The other story here that's kind of remarkable to me is the strength that we've been seeing in the Chinese currency, both offshore and onshore. Is that again really about dollar weakness.
I think that's a bit of two things. I mean, obviously, the PBOC with the fixed scenes has continually sort of indicated that it's quite happy for it to slowly appreciate, and I emphasize the slowly appreciate. The Federal Reserve came out recently. Also, the Treasury did in its semi annual country report and did say, okay, they think the EU one was well undervalued. So obviously they're giving signs to China, let your currency appreciate. China seems to be willing to
let it appreciate to some degree. I mean, we have six nineties, you know, a lot of people saying that maybe six eighty six seventy versus dollar per year end. That certainly the path at the moment of least resistance. Again, things can always change with geopolitics, which could disrupt the carts. But the moment, the trend higher PBOC doesn't seem to be fighting that. So the market, which is long yan so short dotty one, is quite happy with this, quite high at the moment.
So you mentioned that week reading on retail sales. It caused money markets to price slightly higher odds for three Fed rate cuts this year. Two have already fully been priced in, And I'm wondering whether or not you're comfortable with the idea that we could see as many as three or is that maybe a little bit too much enthusiasm.
I think, look at the moment, the market loves rate cuts, so you give it a chance to price inerrate cut will happily do it. So I think realistically, you're not going to get the rate cut before Kevin Wah, the new governor, takes over, So then you're looking for basically second half of the year. I think, you know, so there's a lot of data that can still come out ahead of that, So is too feasible? You go, definitely, you're not going to write off three, but I wouldn
at the moment say more than three. But you know, the market's going two to three. Giving the amount of data it could still come out which could move that probability, You go, well, you know, it's sort of fair. You know, I don't think we're going extreme yet, but we're in that two to three camp and I think we'll stay there. I think the market's be very reluctant to go under two. We need some really really strong day to do that.
But I think if we're going above three, then you really need some really weak data, particularly the employment unemployment rate, to optic.
Yeah, we'll get that US jobs data on Wednesday, today's FED speaks seemed to me to be a little hawkish. We heard from the head of the Cleveland FED, Beth Hammock, and she was saying that interest rates could be on hold for an extended period while the FED evaluates incoming data. And the head of the Dallas FED, Laurie Logan, was saying it would take material weakness in the labor market for her to support more RAID cuts. I'm curious to
get your take on this messaging. Obviously, we're going to get a new FED chairman soon, and perhaps a tilt in the FED bias will change to becoming a little more dubbish when Kevin Warsh is seated, if in fact that does happen and he is confirmed by the Senate.
Yeah, if I'm honest, I don't. I think what all that rhetoric illustrates how split the Federal Reserve is, and I don't think that will change unless the hawks we saved, unless they only become dubbish, and if they got data to back that up. So at the moment, I mean that UFED chair Powe's dealing with the split, and I think Kevin, what should be no different. I mean, all you're doing is you're changing one person. Yes, that person has a strong influence over the policymakers, but at the end of
the they make their own decisions. You look at a dot plot, it's always been very split, so there are sort of two camps, and I think that will remain cleinly for foreseeable future. I said, for those hawks become doves, I think they'll go, not that they won't, but they go. I needed more evidence than they're presently seeing, is what they're saying, and I think it's fair at the moment.
Okay, David, we'll leave it their good stuff as always, Thank you so much. David finnerity Bloomberg's strategist, joining from Singapore here on the Daybreak Asia podcast. Welcome back to the Daybreak Asia Podcast. I'm Doug Krisner. We moved to China next and the latest readings on inflation. Consumer prices were up last month less than expected. We had CPI rising at an annual rate of two tenths of one percent. However, producer prices dropped at an annual rate of one point
four percent. We got reaction from Robin Sching. Robin is the chief Chine economist at Morgan Stanley he spoke with Bloomberg TV host David Engliss and minman Low.
There is no signs of decisive reflation. If you look at the CPI over the last three four months, they edged up largely due to go the price and the vegetables. If you stripe that out, Yeah, anything in the course of its remained the very week due to y in sufficient domestic demand. PPI improved a little bit, but I think it's just mechanical. If you look at the PPI is due to commodity price. It's all contributed by global factors.
It's not a demand let turn in China because we see no path through from this upstream commodity price to downstream or consumer goods. So there is no decisive reflation yet in China.
I'm wondering when you talk about PPI. Actually, if you pull out and look at the longer term, it's steadily been improving since maybe middle of last year, and some economist think we could see positive PPI somewhere maybe middle of this year. Do you think that's possible.
Well, if you think about the big picture, China need to refleate. They need to do three steps. Step one, don't add a new capacity in these oversupplied sectors. They started to do that anti evolution step two cutting access capacity, they haven't done much. There is very limited progress on that front due to job concerns or debt concerns. Finally, post consumption, particularly boosting it in a sustainable way, not just to catch for clong subsidy, but try to provide
a better upgraded social safety net to unlock consumption. That part is also quite weak, right. So that's why I don't see sustained reflation here. And the PPI improvement you mentioned that I mentioned it is mechanical because global factors like dollar debate or global AI data center demand, that's helping the upstream price going up, but we don't see it's passing through to any of the downstream or consumer price in China that showed is largely important due to
external factors. It's not a China net reflation.
So the lack of okay, let's just call it the demand pull inflationary pressures, that's really what matters, right, and that's really what keeps things sustainable. That's the backdrop I'll bring into other stories. Recently, there's the conversations from VAT and the stronger currency. Both of those things are counter inflation if well the other one actually, if you add inflation, it's not perhaps the best time.
To do that.
Where do you think those two stories fit into the inflation picture.
Well, the VAT debate is an interesting story. Your colleagues did a great coverage on that that day when they moved on the telecom VIAT, you know, from six per century to nine percent. A lot of investors were concerned this could become a broad based at hikes, not just the left pocket the right pocket in a sooe dominated the telecom business, but also maybe reaching out going after private firms in Internet platforms, e commerce, gaming on at hikes.
We don't think they will do that because it's counterproductive, it's bad for reflation, is hurting confidence, and it's inconsistent with the macro consistency review work. But investors are concerned due to legitimate reasons. We think in the upcoming National People of Congress in March, they may set the physical deficit ratio at the same level of last year. So if the economy is in definition, you actually need more
proactive fiscal powers expanding fiscal deficit. B it the headline deficit or the broad augmented deficit if you keep it stable because government revenue is going to underperform during deflation. Revenue as a percentage of GDP may decline and the deficit keep stable. That means suspending power to support the economy, support consumption or being limited. Right, So investors have a point. Maybe the government need to collect more revenue by hiking
some tax rates, but that's counterproductive during deflation. So that's why I think if they keep a modest stable deficity ratio is probably not decisive reflation efforts. But I do think if first half growth on the delivered, they may you a top up in this physical package by second half of this year in the order of maybe zero point five percentage of GDP, you know, less than one trallmain be targeting consumption or housing support.
To your point about fiscal policies, right, I think so far all the signs this year showed that the government is pulling back significantly in terms of consumption subsidies. Last year is three hundred billion uion this year is sixty over a billion UI in and you mentioned the social safety net as well. What do you think is holding the government back from decisively pumping in more.
Fiscal policies here, I think old habits die hard.
Right.
They try to be restrained on how much debt they want to raise, how much deficit they want to expand, partially due to the concerns if you do too much debt expansion it's bad for the future, but also how you spend the debt. China was used to the supply centric business model, spending it on instructor capects or manufacturing upgrade. But we know in some areas it's already oversupplied instructure
or industrial capacity. So they have to shift the pattern of the spending mix from investing in physical goods to investing in human capital like social welfare. But these are all multi year journey of reform. I don't expect it. They can do a big band reform this year. It may be the start of the next five year plan emphasizing the upgrading of a social safety net, but it
will take some time. So to your question, physical policy is still restraint because they are still a lot of old habits, and old habits die hard.
Some of the old let's call it old habits. To barrier the concept you just raised, there is an exercise in setting GDP and growth targets right, and we've heard from many provinces recently over their individual targets for twenty twenty six. How do those targets form you over what the aggregate economic growth target is going to be at the NPC and what they'll tell us.
Then, Yeah, we closely monitor how the local MPC from each province or cities are tracking on gp target. Most of them trimmed the target, so on average they lowered the target of last years five point five percent to twenty six five percent around five percent, so that probably
should national target will also be around five percent. I don't think it's a downgrade, it's more like becoming more practical if they can tolerate slightly slower growth instead of doing all in for CAPAX to reach that five percent
or above growth target. These tolerance of slightly slower growth is actually good for quality rebalancing efforts because if they need to shift the spending from supply side to consumer welfare, that will take time and the new term that may mean you have to tolerate a lower GDP target because it's always easier to anchor growth with instructure capacks, while it may take longer harder to change people's behavior on consumption, So I do take it. You know, ten out of
these top fifteen provinces lower the GDP target. That's probably a good sign they are becoming more practical.
We have seen with the dollar slide, right, the UN has been pushing towards six point nine, and there has been expectation that this momentum would continue throughout the year. But at the same time this would worsen't deflation, right, So how much do you think the PBOC would allow the UN to continue strengthening.
If you ask ten economists on the forecast of mean ME today, I think ten out of ten will be bullished. I am not one of them. The reason is Chinese in deflation and a stronger currency in a sustainable session is counterproductive for reflation. It could make the PPI deflation even worse, squeezing profit margins for firms, so it's against the reflation goal. Of course. Now people are looking at your term the mean B has been strengthening. That's not
a German B story. That's largely a dollar story. Just to look at your screen, dollar index is continue to weakening and that's a dollar beta story. It's not a German B alpha story. In fact, the PBOC probably prefer by you know, maintaining the German b against its basket at a stable level. The safety's basket will largely parked at that around one hundred nine. Uh, that's the stability they are looking for. When dollar is strengthening, the mean
be will weakened against the dollar. When dollar is weakening, just like now, Dollarman b will strengthen. But it's not a Reman b alpha story because they know that when they have domestic definition problem, if you have a sustainable briefly an appreciation of the currency is actually making PPI deflation worth making profit margins of corporate worth. So I don't think they are looking for a stronger sustainable appreciation of the rep.
Do you think that's going to be the story of twenty twenty six? That the economy is not bad enough to merit short term stimulus, stick to the structural story, but not good enough that it's not going to fuel this earnings rally, that most equity strategists are now trying to sustain rebound in the equity market well aly lost economy.
I think the theme for twenty six will be similar to twenty five. Oka micropositive macro challenging, so it's a slow burn in China. Cigradio long term reflation process. Macro is still challenging, particularly these macro sensitive effectors housing consumption. But micro you can see a lot of positives on tech, AI, supply chain, bow tech, advestor manufacturing. So this is definitely the area investors I met have been re engaging with China.
It's more on these micro positives, but on macro people are still Cassius.
That was Robin Shing. He is the chief China economist at Morgan Stanley, speaking there to Bloomberg's David Igliss and minman Low, bringing you their conversation here on the Daybreak Asia Podcast. Thanks for listening to today's episode of the Bloomberg Daybreak Asia Edition podcast. Each weekday, we look at the story shaping markets, finance, and geopolitics in the Asia Pacific. You can find us on Apple, Spotify, the Bloomberg Podcast
YouTube channel, or anywhere else you listen. Join us again tomorrow for insight on the market moves from Hong Kong to Singapore and Australia. I'm Doug Prisoner and this is Bloomberg