Bloomberg Audio Studios, podcasts, radio news. 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 Apec 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.
Paul Dobson joins us Bloomberg Executive Editor for Asia Markets.
Paul. The Bank of Japan meeting tomorrow.
Ninety percent of BOJ watchers apparently see the risk of authorities ending the negative interest rate campaign. But we did hear from the NIKE that perhaps they would stay steady on the bond buying program. And we don't know exactly what might happen with the purchase of ETFs, but it seems like we're almost set up now for a little bit of disappointment, even though the BOJ is finally going to act.
How do you see things? What are you hearing from investors? Yeah?
Well, and I think that there would be the perfect scenario for the BOJ in for awad or if in the end it's so well telegraphed that there's no surprise in the market belly ripples at all once we finally get there. You know, I think that there's a lot of certainty now that the door is wide open for them to act this week or send an extremely clear signal that they're going to be doing some big changes
pretty soon. It feels like the equities market is relatively confident it can continue to hold its ground even without the backstop of BOJ purchases of ETFs. What market will be more interesting If the BOJ does stay, they're preventing too heavy a sell off as well than that, we you know, we'll limit the volatility of the en perhaps
as well, I suppose if you're talking about disappointment. Disappointment maybe for people who were bullish on the end thought this would be the thing that would cause a recovery.
You know.
On the flip side of that, you've got the super strong dollar and the super strong US economy. So if you're looking at it from that sort of perspective, it is quite difficult at the moment for the end to gain a great deal of ground.
Do you think that it was the wage information that we had Friday from the largest umbrella group of trade unions in Japan that kind of was created the tipping point here, or do you think that there was just a preponderance of data that was, you know, even before that wage data came, that was kind of indicating that it was time for the BOJ to move.
Yeah, the Bank of Japan was pretty explicit that it wanted to see that second year of positive wage growth. And so really the I think the numbers that we had on Friday with a clincher for that, right, they
were better than last year. They were better than perhaps some of the expectations that had been there as well, and so that really drives home the idea that inflation is starting to seep itself into the mindset of the Japanese population, that they're ready for a cycle of inflation and can therefore tolerate slightly higher interest rates as well. So it's a green light for the BOJ. They will
be super encouraged and super happy with that. Now they've just got to, you know, manage those expectations very carefully, because it's taken so long for us to get here. Once they get off the grounds, you know, can they continue to raise interest rates with confidence? So they're going to have to be very careful. How far can they
get it? Probably they would like to be able to put in a couple of hikes so that you know, there's room to cut again if the economy or the inflation ouder does start to sour again.
Well, speaking about setting expectations, we'll have John Powell speaking again, and a lot of investors will be interesting to see how the Fed adjusts its policy with the with the dot plots and such, interest rate swaps now looking at fewer than three quarter point cuts this year. At one point we thought there would be six, and so there's been a little bit of turbulence on that front. What do you think Powell will say this week? What will his tone be?
I could have just be so careful to get this at the moment. I think that we have a really good quote in one of our stories about the bond market saying the Fed is desperate to start cutting interest rates, but the data just isn't allowing it to do so at the moment, you know, and.
You can't.
Continue arguing forever the you know, the time for cutting is nigh when you're seeing these very strong inflation numbers still, So I guess power will will want to project the idea that the economy is doing well, but that at some point, with our policy being restrictive in the Fed's view, then there will be room to start cutting again. And you know, hopefully from his perspective, inflation does start to call. But on the other hand, you know, it's hard to
see is policy really restrictive at these rates. You know, it doesn't seem to be slowing slowing the economy particularly, doesn't seem to be calling inflation all that much either. So at some point they're going to be louder questions about whether, you know, the FED needs to either keep rates higher for longer or even consider moving them moving them up further again.
Paul, in the time we have left, we can talk a little bit about China because we've got the monthly activity data coming around the corner here. Particularly interesting will be retail sales and industrial output. Do you have a sense of what the data may show.
My perspective on China at the moment is just look at the yields on the longer maturity bonds. You know, they're really pricing now a lower for longer environment, a slow down in the economy. That deflationary mindset sort of really proving hard to shift, So not sure about what the individual data will show. Maybe they'll brighten a little bit. We had some better exports and stuff like that, but the longer term outlook is not you know, a V
shape rebound or anything like that. At the moment is there's still plenty of reasons to be pretty pessimistic about it.
So China stays down, the US stays up. That could be quite roiling over the next little period. Just a quick question, I mean, is it possible that we see inflation stay entrenched mainly becase because people keep their jobs and that that is pretty well entrenched now in the US.
Yeah, that's definitely. That's definitely a major factor of it. Yeah, unemployment is is still super low as well. Wage growth is fine as well, So on ongoes that cycle. I mean, it just looks great at the moment.
Yeah, absolutely, And you know, you know talking about waiting on godoh well, waiting on the lag defect.
Where is that lag defect? We're not seeing it at the moment.
Paul Dobson is with US Bloomberg, Executive editor for Asian Markets.
This is Bloomberg.
Our guest is Jeanette Garrity, managing director and chief economist at Robertson Stevens with us to take a closer look at markets. Well, we can talk about We had a guest on earlier saying that the equity risk premium was way too low at the moment and there's just too much optimism in equity markets. Of course, it has been a successful strategy over the past four or five months and investors have stuck with it, but that doesn't mean
it will continue in the future. So Jennett, I know you're an economist and you probably don't focus as much on equity markets as you do on the.
Broader macro picture. But does he have a point?
Yeah, he does have a point in this sense. I think, look, and I'm optimistic for reasons. We can discuss in a little bit about, you know, why equities are a sensible play. I think it has a lot to do with where I see the economic cycle right now. But there is a lot of optimism in the sense that people not thinking that something can still go wrong. That's the kind of optimism that makes me uncomfortable. There is an offlock
going on in this economy. There's still still stuff to play out from the Fed policies of the last year year and a half. Interest rates are still relatively high, not the full effect of that has not yet been felt, and consumers are always, you know, a question, are they going to surprise you? They could surprise us in the next couple of months. So I'm optimistic over the long term. But I think this general sense, like, hey, we've got a soft landing, there are no problems off to the races.
I think we need to be more considered about that.
So, Jeannette, where is commercial real estate on your list of potential problems?
Commercial real estate is always on a list of potential problems, you know, And what do we really mean. It's a huge market. There are so many different facets of it. There are so many different geographies too to address. I'll tell you where this really comes home to roost is really not so much just in the commercial real estate side, but on the regional banks and financial system at large.
There's no indication that this is not a manageable issue, but the fact that there's still properties that are under stress because of interest rates and possibly difficult in getting difficulties in getting refinanced, and that means stress for bankers, stress for bankers is not a happy situation. Stressful bankers are sometimes then not happy in giving loans to other people. So, you know, I think there's still more of that to come.
The blessing has been the refinancing cycle, and commercial real estate is a very long one, meaning there's a lot of different properties coming up for refinancing at different times, and so it stretches out the problem, but it also makes it more manageable.
Yeah, the question of whether or not it's manageable is big because you have Jay Powell and also Janet Yellen both coming out and saying, look, there will be issues, but there will be individual issues to those regional banks. It's not a systemic issue. Now most of us, you know, take the word of leaders like J Powell and Janet Yellen. But a lot of this, you know, has been kind of baked on or baked into the idea that we'd get we'd get lower interest rates later this year, it
would be a little easier to refinance. But now that's changing. So do we have to change our view and our confidence in the leaders?
Well, no, I think the messaging delivered by Janet Yellen and J Powell is the correct one. You can think back to times like after the Great Financial Crisis of eight and nine, and there were expectations at that time the career social real estate would be the next problem, and it really didn't unfold that way. And you know, reserve requirements are much more aggressively managed right now. The solvency of the system has been much more aggressively managed
since that time. So I think that all comes together to say, yes, you know, I think there is not I do not think that there's anything indicating that there's a systemic problem at all, but it can those losses can provide a chill, you know, when they hit, particularly it for regional banks. It can change the overall appetite for risk in a way that you don't anticipate and be a negative, not a catastrophic negative at all, but it can just certainly be a negative for various quarters
of various regions or various needs at the time. I think it's plainly addressable by the way. I do think that interest rates will fall later in the year and that will be of considerable assystem.
So domestic politics one of the risks as well. I would imagine Janeta, I can give you sixty seconds and let me just highlight a headline from a story on the Bloomberg terminal. Biden pitch on improving economy falls flat at the grocery store.
Listen, my mother used to tell me, you know so much about inflation, and then she would quote me the price of ahead of lettuce. The price of ahead of lettuce does not determine the overall level of inflation, but there are price pressures there. I think it's interesting to see how this is playing through the households, US households
and the consumer sector. But at the end of the day, if the employment growth days strong and there are all sorts of surveys that indicate people are very optimistic about the near, medium, and longer term outlook for employment, and that stays in place, particularly with some of the wage increases that we've seen, I think will be very It'll be okay.
Jennette, Thank you so much.
Jeanette Garretty, Managing director and chief Economist at Robertson Stevens. James Abonte joins us Managing director and chief investment Officer at Center Asset Management. James, last week was a big week. We had a huge spike in tenure yields and seems like the bond market now is finally coming around to the Fed's projected path on rates, interest rate swaps now reflecting a fewer than three quarter point cuts this year, and that's a long ways away from the six that
we're expecting anyway. So I'm wondering how you are embracing this change and how you see the path forward.
Well, I think the FED seems handcuffed by this persist sense of inflation. The talk of a June or even a July cut is increasing an uncertainty. And you know how that relates to, you know, other asset classes. Is that when you look now at the relationship between stocks and bonds, which can be expressed by a forecasted equity risk premium, and again to explain to people, or risk premium is just the attractiveness of stocks versus risk free treasuries.
It's at the lowest level that we've seen, even that below that preceded the global financial crisis, as low as it was back in early two thousand. And you know, even in a more rudimentary kind of valuation metric, the pe on the SMP five hundred, the equal weight to SMP is about twenty four times, so the market itself. In terms of how the ramifications of this play out to other ACID classes is that it implies either a very significant drop in interest rates or a significant acceleration
in earnings. And I don't think the up and earning an interest rates is going to happen anytime soon.
So what do you make Let's look at Nvidia. I mean, you highlight in your note some of the Magnificent seven that you've been watching, but let's talk about in video. Over the last ten weeks, this stock is up nearly eighty five percent. I think we've been up for ten straight weeks if you look at it on a weekly basis. The company will beginning on Monday, launch a developers conference.
I think it's going to take a lot of very upbeat news in order to drive this stock even further, wouldn't you agree?
I agreed to one hundred percent and Vidia. You know, we could sit here and talk about how much it's gone up, but the reality is when you look at where we are in terms of in Vidia and some of the other Magnificent seven stocks. I mean, it may sound ironic, but investors are seeking safety, and usually investors seek safety until it's obvious that the whole market's at risk.
You know, whether it's the nifty to fifty and the seventies, a boot chips like Coca Cola and g in the ninety seven to ninety eight environment, Cisco, Intel, Yahoo back in two thousand. But if you look at video in particular,
you know markets fall earnings. And when you look at the aggregate magnificent seven in video being the biggest contributor, they accounted for approximately one hundred percent of sm P five hundred operating earnings growth, which meant that the rest of the market actually had negative earnings growth in the
first quarter of twenty twenty four. So if you think that you know markets fall earnings, the reality is earnings are going to fall economic growth, and this is where there's a big disconnect because I think if you look at top down indicators, a lot of strategists looking at PMIS and leading economic indicators feel that there's a bottoming in early signs of some kind of pivoting higher on
the horizon. But when you look at kind of the negative view, you were at a critical juncture because the top down information doesn't reconcile what the bottom up, meaning that there's very little sales growth margins are rolling over from elevated levels, Asset efficiency is moving lower, which means returns on equities are one moving lower. So I think people are going to seek safety and names like Nvidia until essentially in Vidia starts to show cracks like other
high flyers have in the past. But it's very difficult to sit here and feel that there's further upside in the stock at this point in time.
Yeah, investors were somewhat distracted by the earnings. I mean, perhaps your take is accurate that they were a little too bullish on that, but that distraction is now gone because the earning season is basically over. Do you think that now it gets a little rougher here in the stock market because people will focus more on the FED and rates and inflation being sticky.
Agreed to one hundred percent. You know, I'm quite negative at this point in time. I think we have an environment where we go sideways at best, with the potential that year's you know, significant to move down in markets. And as I talked about with regard to everything price for perfection with regard to equities, you can make the
same argument with regard to corporate it. So I think speculation is rampant, right, cryptocurrencies, ETFs, zero day options, I mean global, It's a global phenomenon, right India, right, we see derivters trading in India up one hundred and fifty percent, and in fact, Indian derivdives are eighty percent of global
option contracts at this point in time. So I think when you look at you know, just like the now thirty six thousand book in late nineteen ninety nine argued that stocks are no riskier than bonds and the equity risk premium should be zero. There's a lot of academic papers that are being widely discussed that argue for one hundred percent equity allocation right now. Very interesting, you know. In fact, they say that you should lever it up your equity exposure for a young person like a home.
You know, very very very top of the market when you think about the antidotal information. But again, the fundamentals are all pointing to not a broadening out of the overall economy and the overall stock market earnings picture, but in essence, a environment where we have not had an acceleration in economic growth, a lot of policy uncertainty, margins acid efficiency all turning negative from recent highs. None of that boats well for a stock market outlook.
So Brian was mentioning a moment ago the fact that the market has now pretty much aligned itself with the FEDS thinking in terms of the forecast for interest rate cuts this year. I think the Fed was predicting in twenty four three separate twenty five basis point rate cuts. But from what I'm hearing you say, Jim, it seems like there's a risk that we could even get more rate cuts.
Yes, exactly, in response to a deterior rating environment. And I think if you look at the information from the economy, I mean, there's a lot of information that's anecdotally IRA hardship withdrawals are spiking, higher capacity utilization is deterior rating, which is a very bad thing for capital spending. Even more so when you look at the labor front, which has really been the point of strength. There's been incredible discrepancy between the house survey and the payroll survey. In fact,
we've never had such a large difference. In fact, the difference between the household and the payroll survey was, you know, one point one million in December and eight hundred thousand in January. That has only been a sign that there's been a significant aberration, and typically this divergence indicates a weakening job market, which is really what people have been holding their hat on in terms of the economy.
Remaining point, let's talk a little bit about the Bank of Japan because tomorrow is going to be a big day. What we've been saying, the latest is, at least from the NIKE, is that they will they will finish off with negative interest rates, but to keep the YCC program in place in order to tamp down the volatility a little bit. Is that where you're expecting and what might the consequences be.
Well, when you look at the other developed market areas, right, I mean, the EU and the US all have positive real rates and Japan is definitely the outlier, and we've seen that with where the end is traded. I'm not so convinced yet that the Japan is ready to ready
to abandon its negative interst rate policy. In fact, I think one of the biggest surprises that you could see going forward is a significant spike of the end through the one to fifty level, in fact, back to levels that may have been consistent with the environment back in
the late nineteen nineties. So I think that we could see a very significant shock at some point as a black Swan event occur because of such a consensus at this point in time that Japan is going to basically get itself out of this negative interest rate policy stabilize the end. I might think that the black swan event is actually a currency event that occurs in Japan where the end goes way way through one to fifty and weaken significantly very quickly.
Jim, So what you're been saying kind of in total here, if we are looking at rate cuts maybe more than three and a end that could weaken to one fifty, it's too soon to call for peak dollar.
Right, exactly right, as long as we have an environment where the FED recognizes that it needs inbound investment. I don't believe the FED is going to be in a position to move us back into negative indust rates because of the fiscal deficits which you need to be financed, as well as the inbound investment requirements to keep it doll relatively stay more strong.
All right, James, thanks very much for joining us, James Debonte. They're managing director, Chief Investment Officer, Center Asset Management.
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.