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This is the Bloomberg Daybreak Asia podcast. I'm Brian Curtis along with Doug Krisner. Join us each day for the stories making news and moving markets in the Asia Pacific. You can subscribe to the show anywhere you get your podcasts and always on Bloomberg Radio, the Bloomberg Terminal, and the Bloomberg Business App.
Let's get to our guest, Alex wolf is with us, a head of Asia Investment strategy at JP Morgan Private Bank, and Alex joins us from our studios in Hong Kong. Good of you to make time to chat with us. I hope you're doing well. We're talking a lot about the interest rate environment here and what is being described as the Powell pivot now as the result of what we heard at Jackson Hole. Do you think this is a major inflection point for markets?
It seems so. It does look like how they assess the balance of risks have shifted. Where you go back to the summer. Just before the summer, the risk was really moving too soon, the risk of inflation reigniting if they cut too much too soon, whereas now after the labor market data and some signs of weakness. It's really the risk of waiting too long and how they balance that has shifted over the course of the year, but it does appear that they are balancing waiting too long
as a more significant risk. So we could see as we expect, three cuts for this of this year and then a few more into next year, but there's still a very open question mark as to how much, because they do have quite a bit of room to cut to bring rates to neutral. So it is an inflection point. Markets are already pricing a lot of it in, though so not necessarily from a purely from a markets perspective, but inflection point for what we're going to see in terms of the interest rate environment.
You know, it's very interesting because we heard before the power speech, we heard from the Governor of the Bank of Japan, Kazuo Auweita, and he was saying last Friday, the BOJ is likely going to continue raising interest rates. Is that going to happen between now and the end of the year. I'd heard earlier that maybe the BOJ, given the turbulence that we had and a lot of market volatility, particular in the foreign exchange, that maybe the
boj would wait until March. Do you think it will happen sooner?
So their speech, that the most recent speech, has shifted the view a bit because when they were looking at the market volatility after the most recent hike, then they gave indication they would not. Now as markets calm down, data comes through strong, they're given an indication that they could.
We think it will be very, very dependent on what we're seeing, both in terms of you know, you say central banks are data dependent in many ways, a BODA is market dependent what happens from a market volatility perspective, but also what happens in terms of a US growth perspective. If US growth stays okay, we see the soft land and continue, the backdrop of Japanese markets stays or volatility comes down, then yes they absolutely could because the macro
backdrop p byab points to another cut. But I think those two factors will really be the determining factors whether or not they go before the end of this year or they wait until next year.
So if we look at the currencies in and of themselves, I'm thinking the path forward for the dollar against the end is weaker and the end is on course. I would think to appreciate. Is that a good way of thinking about it?
I think not necessarily, because the end has already appreciated quite a bit, and you already see a lot of cuts Fed cuts in the price, so to speak. So I think you would have to see the FED surprising on the dubbish side for the dollar to really depreciate against the end, given how much move we've already we've already seen. So it does look like the current path of the current path of a consensus path around rates is someone in the price on the currency perspective, because
the move has been fairly substantial. But yeah, if the Fed does a surprise on the other side, then yes we will see dollard appreciation, likely against the end.
So later today in China will have the numbers on industrial profits. Give me your view of what's happening there. I mean, it seems as though the economy has just been mired in stagnation. We know about the troubles with the property market, to the resistance on the part of the government to do more to stimulate. Is there an end in sight?
Depends how much time you have for us. I think you're suffering from a shortage of demand broad weak demand, both from a business capex perspective, business investment as well as household demand perspective, and on the policy side, have not done enough to really stimulate demand. That's really the
crux of the problem. And it doesn't appear that we are facing an inflection point in the near future either, because policy has not been aggressive enough and it's continuing to focus on the supply side versus the demand side, which is continuing to exacerbate some of those imbalances and further push prices down in deflationary territory. So it really stems from that weakness of overall demand, and they're not yet doing enough to fix that.
It seems like the other problem is just this dependence on the export economy. And you know, with talk now in the States about maybe revisiting the tariff issue, is there a problem for China if let's imagine that Trump administration gets another term and we're dealing with more tariffs on the way. I mean, is that potentially a major event for China and something that would hold back the export part of the economy.
You know, I think the short answer is yes, but it depends on whether you see a broadening out versus just trade tensions with the US, because you're right, it has been a surprise to see China really go back to mid two thousand type economy that is more dependent on exports, and certainly it has been a very long time.
And if you see many countries start to push back, raise trade restrictions, raised tariffs, somewhat close off their markets to Chinese exports, then that will have an impact because China has been at least from a growth perspective, you have seen net exports and how that feeds through into manufacturing and other aspects of the economy that has been
a key driver. And so pushback that's more broad from a number of economies could then feed through and kind of hurt that at that growth engine right now that that that China is relying on. So it'll be key to see what are the countries step come through with their own trade restructures.
One of the things that came became very clear after the pandemic is that many manufacturers were overly concentrated in China and they began to diversify away from the mainland very quickly. Here, Alex, is that a trend that's going to gather steam here?
I don't think it's going to gather steam. I think it's continuing apace. China is a manufacturing powerhouse that most companies have to use and have to rely on, but many want to diversify with with kind of that China plus one or a few other locations just from a supply chain resiliency perspective. So I don't think it's going to gather steam. It has been a trend, it will continue to be a trend, but I don't think it's necessarily accelerating.
Good conversation. Thanks for dropping by Alex Wilflare. He is head of Asian Investment Strategy at JP Morgan Private Bank. Joining from our studios in Hong Kong here on a daybreak asion, let's bring in our guests. Sarah Mallick is with us, the CIO of Neuven, who joins us on the line from San Francisco. Good of you to make time to chat with us, Sarah, I hope you're doing well. Let's talk first about the FED, because I think it's top of mind for many folks, particularly after what we
heard from Chair Jay Powell last week. Seems like rate cuts are on the horizon. Do you think This is going to be a pretty slow and steady process.
Hi, and yeah, thanks for having me. It's great to be here. We did get proof of the Powell pivot on Friday at Jackson Hole, which is the good news. I think the market's question is exactly what you just said. We're moving now from when are we getting ratecuts to how many rate cuts are we getting. I think the market's maybe overly optimistic in the short term about the number of rate cuts we're going to get because the
economy is not on the cusp of a recession. Inflation is now trending towards two percent, which is the fed's target. So I think we start slowly twenty five basis points in September. Then the Fed may take a little bit of a wait and see and do another twenty five at the end of the year, and then we'll see what happens with the economy and what happens with inflation, because let's not forget at the beginning of twenty twenty four inflation was actually reaccelerating.
Again, that's a good point. Let's talk a little bit about megacap tech the Magnificent seven, using the Bloomberg gauge as a kind of a metric here was down today broadly at around nine tens of one percent. We do have the results from Nvidia after the bell on Wednesday. What are you expecting to hear from Nvidia?
Yeah, I think in Nvidia the important thing is going to be any commentary about the adoption of AI. I think what people want to want to know is when is artificial intelligence going to show up in terms of increasing revenues and productivity for companies. You know, in Nvidia already rebounding almost around twenty percent since the August lows, so the stock has you know, quite a bit of optimism in it already, and so I think people are
cautious going into the number. But if you look at prior quarters for Nvidia, they've tended to bet and raise and put up very strong numbers. So I certainly wouldn't count out a strong quarter from them. I think it will be. But the question is what's in the stock price and how much higher can it go from here, since it's already rebounded quite a bit in the last few weeks.
So you're in San Francisco, obviously you're very close to Silicon Valley, but within the city there are a lot of AI startups. What's your sense of what's happening right now? Where are we in this phase of adopting this new technology.
I think we're in a bit of a consolidation phase. So if you look at these new technologies when they come out, first of all, at the beginning, there's a lot of excitement around something.
It's new.
Companies are very excited about it. I think we've already gone through a lot of that phase. You see a lot of the companies that dominate in the space performing very well. Then there's a bit of a consolidation phase where investors start to think about, Okay, how is this actually going to get adopted into clients business models, how
is it going to be used? I think artificial intelligence over time will show a big push improvement in productivity and revenue growth for companies, but it's going to take a while, and that's the phase that we're in now.
A bit of a weight and see. But when you look at the companies that have invested heavily in this space for many years, like Microsoft and also in Vidia, that sort of wins because it's in the center of everything and every company that uses AI, those are going to be clear winners over time, it's just a matter of what price do you want to own them, and the quarter to quarter maybe volatile over time.
So if you look at the rivalry between the US and China, particularly where technology is concerned, is the US so far out in front that there's nothing to worry about or are you of the view that maybe we should be looking over our shoulder when I say we folks in the United States that are really invested in this technology and probably be a little bit more concerned about what China is trying to do to catch up.
Well, I certainly wouldn't bet against US technology. I think the US does have a strong lead in that sector. But always in any sector that's growing quickly, where things are changing very rapidly, you always need to be looking over your shoulder and most importantly thinking about what's in front of you. And so you know, for any US companies, any new technology, at any time, you know there's going
to be startups. There's going to be different areas of the world that could come up with ideas that leapfrog where we are today. So I think, you know, it's important the US has shown a dominance in technology in AI. You know in digital technology for a number of years now, and that's why growth stocks have tended to outform on an annual basis for most of the prior decade plus.
But we definitely still need to keep an eye on the rest of the world and what's happening in those areas you Our view in general is that emerging markets look attractive here. Their valuations are attractive, they have strong earnings growth expectations going forward, and global portfolio managers have tended to be under allocated to emerging markets. But the areas that we favor are Indonesia, Brazil, and in international development,
we like Japan and India. I think China still has some issues that it needs to work through.
One of the things that I think is going on in terms of the advancements that China had hoped to make in terms of technology the export controls that were imposed on the part of the Biden administration where high quality semiconductors were concerned. We've got an election in November. Is there a policy change that you would like to see from either the Trump administration should there be one, or the Harris administration, should there be one.
I think definitely tariffs have had a heightened impact on China and its growth rate. And also post the pandemic, where many countries, including the US, have moved to onshore and near shoring of manufacturing and supply change so that we can rely more more positively on our supply change. So those are two trends that I think also help the United States in general. You know, I think generally, you know, in terms of regulations and policies going forward,
it's a bit of a wait and see. But I think most importantly is they should be set in place so that we can advance as quickly as possible in terms of technology in a safe way so that you know, it can help productivity for companies, consumers, help companies grow their revenues, and you know, we can stay ahead because if the US isn't doing it, or China isn't doing it, build be another region of the world that is doing it.
So we need to make sure that, you know, technology is advancing on a global basis as quickly as it can in a way that's safe for people to use.
So if we can agree that there is weakness in the Chinese economy, I'm curious is to the bullish case that you're making for Japan because I believe that China is Japan's largest trading partner. Now things may be improving for corporate Japan. One of the things that had been kind of a good tailwind was the weaker end, but that seems to have turned around just a bit. Give me your case for putting money to work in Japan right now.
Sure, So japan currency volatility has definitely had an impact of factors for Japan that we like, or companies that are domestically oriented, that are oriented that are more protected from export issues from currency issues. Sectors like financials five X are very strong there. Return on equity is strong, so a company like Orrex which has a fifty billion yen buy back in place and strong first quarter results. And then we also like companies that are paying dividends
that provide income to investors. So construction companies which aren't exposed to a lot of oversea product overseas projects are attractive to us, like Shimizu and Tayse. So I think, Japan, do you want to say in the companies that are less exposed to external factors outside of the country.
We had an announcement today from Apple very quickly is this a company that do you want to take another look at if you are not already invested in Apple.
So we have been owners of Apple for quite a long time. If you look at Apple from a seasonal point of view, the seasonal positive trade for them tends to be made to September, leading up to that iPhone launch that you mentioned that's coming out in a couple of weeks. So seasonally, I think Apple is a stock that is at the tail end of when it tends to do well. But it's also a bit under owned and a bit more stable than some of the other
mag seven. So I think that Apple is still a company that investors want to keep within their portfolios as they implement more artificial intelligence into their phones.
Sarah, good stuff. Thank you so much for being with us. Sarah Mallick from Neuvene, joining us here on a day break Asia. This is Bloomberg. Our guest is Laurence saidel Baker, economist at ITR Economics, joining us from Manchester, New Hampshire. Lauren, thanks for being with us. Let's begin with the Fed, shall we. What did you think of what we heard from Powell last Friday?
Yes, Friday's comments from share Powell. We're a stunning a burst of clarity from a FED chair who does not usually like to give the market that much clarity. So I think he has all but cemented rate cuts to come in September. I firmly believe we're in that twenty five basis point camp. So the market likely to be a little bit disappointed. I think many market participants were looking for a bit more out of the gate, but twenty five basis points in September, we'll start that rate cutting cycle.
So if you had to evaluate the Fed's performance throughout this period where they've struggle to normalize in an environment where inflation has been stubborn, I mean, transitory is one term that got thrown around quite a bit, and then that proved not to be the case. We saw something a little bit more durable. Now inflation seems to be no longer at a boil. Are you critical of the way that the FED executed You know, the Fed.
Was doing the best they could in what was really an unprecedented scenario. On Friday, Chair Palell, he actually made jokes about how everyone thought inflation would be transitory. He called us all sailors on the good ship transitory I believe was the uh, well, what passes for a joke in central banker speak at least, And so the FED certainly does have one eye on the history books and how this time will be remembered. But we have to remember we did not know what we were up against
with COVID. So many of these inflationary impacts, they were the pandemic echoes, they were the supply chain hurdles. But many of them have also just been stubborn due to the fact that our labor market is tight. It's tight for demographic issues, it's not tight for really the types of things that the FED has control over. So I
think they're doing what they can. Again, they can't control demographics, and at some point that is what's going to control the labor market, I firmly believe in twenty twenty five and beyond.
So how do you evaluate the labor market right now? We had the adjustment from BLS last week, we'll get non farm payrolls a week from this Friday. Are you seeing a deterioration in the labor market to the extent to which we should be looking for much weaker growth or are things kind of holding up fairly well.
So I really want to separate direction from the level or the magnitude. So yes, we are seeing deterioration in the labor market. That said, this deterioration is coming from just an incredibly tight starting point. So we're seeing some loosening, but we are still tight by any historical standard. If you compare any of these measures back to their trailing five or ten year average, just certainly to their long
term averages, this is still a tight market. We still do not have one unemployed worker for each available job opening. Now we're a far cry from the two job openings to one available worker ratio that we saw at the worst of this time, but not back to that one to one ratio. So the labor market will be tight by twenty twenty five when growth picks back up again. We're already seeing some of these green shoots, already seeing those kind of leading indicators come into play, so there
will be more demand for these workers. And again we don't have some new glut of workers coming on the scene. We have the Baby boomers finally retiring, finally aging out. We don't have another huge generation Gen Z. They're aging into labor force participation now. They're actually a smaller generation
than the millennials were. So until we see businesses really invest in automation really replacing the need for these workers, this will be a challenge going forward and something that we will have to balance our first of all behavior as businesses, but also just our understanding of what is a balanced labor market.
You'll have to forgive me. When I'm listening to the points that you're making, my reaction is that you're in the soft landing camp. Is that true?
I think it's too soon to take a victory laugh, But you know, it's if this is a recession and it's not a GDP recession. Very clearly we are seeing manufacturing activity contract very mildly. The industrial economy, i'll call it flat. That's largely plateaued for about a year now. It was really since last August that we saw flatness in the industrial sector. So it depends where you're sitting
as to how you feel this cycle. But if your sector is contractionary, this is probably the most mild contraction in anyone's recent memory. So soft landing, borderline plateau with a slight downward bias is maybe what I call the industrial sector right now. Anytime I throw around the term recession, everyone jumps right back to two thousand and eight. This is no two thousand and eight.
Can we talk a little bit about politics without getting political? From what you've heard, from what you've heard from both president former President Trump and Vice President Harris, is there enough policy here for you to kind of develop a model of what each administration may mean for the economy.
The good news when it comes to red or blue sitting in the White House is that historically there just is not a consistent and compelling correlation to which political party the economy prefers. So I, as an economist, I'm a data driven individual. I cannot sit here and in good faith say that one party would be better one party would be worse. Without that statistically significant correlation. Now we will see specific items like tariffs, for example, those
get very political. So we could see individual asset prices, commodity prices certainly respond to one political party or another. But I'm not worried about say GDP growth, or the labor market or inflation, and any of those high level trends. Really they're just too big. The driving factors, those fundamentals are just too large. They don't turn on a dime for any one election, or let me put it this way, for any one person, even if that person is sitting in the Oval office.
So if there's a change in immigration policy or a policy that is put forward that would challenge a lot of the immigrant population that is a part of the US labor force, how does that enter into your thinking when we're talking about the tightness of the labor market.
So at the margin, immigration could have some impacts, but it won't be a wholesale change. Today we would have to roughly quadruple legal immigration to even come close to filling all of those vacant jobs that we again just don't have the people for. So I don't see immigration as really the solution to our problem by increasing it. Again, any crackdowns potentially would just really depend on the magnitude.
Obviously certain sectors would be hit much worse, But for better or for worse, I don't see that as the one item that could materially sway the labor market.
When you look at what's going on in the global economy, the weakness in China, for example, I mean, is that, in your view, a significant drag on what's happening in the rest of the world.
So China's growth has been keeping a lot of especially Asia, but certainly global, say the global industrial economy mildly positive, as the US and Europe have been just slightly negative. So China's growth right now this is nothing like the growth they've posted in recent years, in recent decades, this is a new normal. I mean that economy has gone from emerging too while largely emerged at this point. Now, that said, the long term trend has been one of reonshoring.
We've heard about foreign direct investment really swaying from Asia back toward especially the United States, but North America more generally. So this is a longer term trend. The pandemic certainly accelerated that trend, but I'm not looking to China's slow down as say a risk to exports or any of
those North American trends. Again, that level of re on shoring, of near shoring, friendshoring, whatever buzzword you want to use these days, that is the predominant trend, and that's what's really going to impact our manufacturing and industrial sector going forward.
Good conversation, Lauren, Thank you so much for making time to chat with us. Laurence sidel Baker economist at ITR Economics, joining from Manchester, New Hampshire.
This is 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.