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This is the Bloomberg Daybreak Aisia podcast. I'm Doug Prisner. 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. This is Daybreak Asia. I'm Doug Prisoner in New York, joined by my colleague Avril Hong in Singapore, and our guest is Cheryl Smith. She's economist and portfolio
manager at Trillium Asset Management. Cheryl joins us from Boston, Massachusetts. Thanks for making time to chat with us. I'm sure you've had a very very interesting week with a lot of the volatility that we have been seeing in markets.
Late in the day yesterday was struck by the fact that JP Morgan put out a note indicating that, according to its calculations, the unwinding of this yen carry trade, which really created an enormous amount of this week's volatility, has been essentially removed, has been unwound seventy five percent. Does that make you feel a little bit more comfortable at this point, Cheryl.
It feels more comfortable than knowing that there's a huge amount still to be unwound. But it is the sense that when you have a market instability, you begin to discover the trades that you didn't exactly know were there. So we I think it was something people knew that
there was a carry trade going on. People knew that it made sense because the stability between of the difference between US interest rates and Japanese interest rates had been established for quite a long time, and the exchange rates
were relatively stable. What we did not know until we saw the unwind coming was really how large that trade was, how many trades in place, and however they were so, how susceptible the traders were to any unexpected change in either the interest rate spread or in the differential four or excuse me, the direction of the exchange rate. So
the speed at which that happened was quite alarming. If we say, you should say so, I think you know, twenty five percent left to go is certainly better than looking and saying, oh my gosh, there's three times more to.
Go, Cheryl.
When we look at where the yen is seated now, it's around the one four seven level. It's nowhere near the one four one we saw intraday earlier in the week, which also tells us that the FED is a driver in a way of what we see on the pay Given what we got out of the US initial jobless claims declining by the most in nearly a year, what are you expecting out of September?
I think that we'll I still expect to see the labor market deteriorate and somewhat because while the initial claims fell by the most in quite some time, continuing claims were steady and are forty percent above where they were at their low, So we really have a substantial backlog. That continuing claims I think is a little bit more of an indicator because it includes people that have been out of work for a longer period of time. And what we're seeing is that people are finding it harder
to get jobs. Maybe not so much coming in losing jobs immediately, but that longer duration of unemployment still counts and still burns up a rising unemployment rate.
What is your sense of whether you know they're going to try and completely put the genie back in the bottle? Are we still talking about two percent on the inflation target.
They certainly have been very very steadfast that that is where they are trying to go. And a large part of inflation is expectational. People try to put that in their labor contracts, people put it in their expectations of
how are they doing? And we had an established two percent or lower inflation rate for a good ten years, and they're really the FED, I think, is trying very very hard to get that back into people's heads, to get that back into people's minds and therefore into people's behavior. So they need to keep in their mind they need to keep aiming for that two percent target, and I
think that they will continue to do it. I don't think that they think that this amount of increase in unemployment that we've seen so far is out of line. I don't think that the FED thinks that it is behind ball.
It seems like you disagree somewhat. And if that's the case, are you expecting a recession?
We are expecting a recession. We are not expecting a super deep reception recession, but we are expecting a recession. They tend to be cumulative. So when you see this increase in continuing claims those people run out of resources or their resources are strained, they spend less. That spending less really doesn't do it on its own. But as consumers spend less, businesses start cutting their discretionary spending, they cut the investment and that is what really can cause
a recession to gather hold and start really rolling. So we've seen in this earning season, we saw a lot of discussion, particularly about AI. You know, how much investment we're firms going to make an AI and were they ever going to see a payoff? Those are the kinds of questions. When shareholders start asking those questions, business people start looking at their investment plans and you know, can I take a little out here, can I take a
little out there. They may still commit to large scale commitments like investing in AI, but where else are they going to cut? So as we see those questions about returns on investment coming up, businesses get happy to sort of pull the trigger and cut investment plans, and that's what starts to snowball. So that's really my concern, Cheryl.
I take your point about, you know, things slowing down, especially when it comes to earnings and you know, AI spending. It really needs to show that it's a revenue generator.
But in terms of the recession risks, given how big the reaction the concern in the market was earlier this week, it seems more like an overreaction to me, at least, what is your sense of weather, It was just a case of, you know, perhaps bad timing, given how it coincided with tech earnings and the rotation, and then we also had concerns about tensions in the Middle East.
I think this initial rapid drop and certainly what we saw in Japan was I won't call it an overreaction, but I'll call it an immediate marketing to market, if you will, an immediate change in expectations. And I would add into the factors that you mentioned that we really did see the market certainly perceived a regime change by the Bank of Japan. Bank of Japan apparently is saying
we still thought that that was an accommodating policy. We didn't think raising the rates to twenty five basis points was that big a deal. The market certainly perceived it, and as I mentioned, you know, sort of the unwind of that carry trade being a precipitating factor. So I don't think we'll see the quite kind of that immediate volatility. Markets going down twelve percent in a day is scary to anybody. But what I think we will see is a continuation in the slowing of economic growth that we
had been seeing. The second quarter us GDP was much higher than expectations, but if we look at, you know, the year before, it's half of what the year before was. So we are seeing that slowing. It's going to sort of continue to slow.
Cheryl, always a pleasure. Thank you for making time to chat with us here on Daybreak Asia. She is Cheryl Smith, economist and portfolio manager at Trillium Asset Management. Mary Niicola she is m Live macro Strategist. She's in Singapore, and so Mary and I are going to chat a little bit now about what's happening in markets. Can we start
with this inflation data for China? Does it shock you that we I don't even know how many months it's been since kind of factory gate prices have been in deflation. This is problematic, isn't it.
Absolutely. I think we've seen that there's just a broad weakness in the domestic economy, whether you're seeing it from consumer price andes or from the producer price index. Both are suggesting that domestic demand is very, very lackluster, and of course adding to that is the weak export data that we saw, and exports were one of the big drivers of growth for China for some time, and now that that's losing steam as well, it's hard to see the China really making that five percent growth target.
You know, I know it's a very sensitive topic around the notion of overcapacity, but isn't that part of the problem where there is so much capacity that some of these producers have no choice to move inventory but to lower prices. Isn't that part of the problem.
Well, it's also a problem of domestic demand, So it's the fact that people aren't responding to these lower prices. It's a matter of there is a weakness in domestic demand, so they're forced to export as well, which is why we've seen a massive uptick in exports and things like
electric vehicles and other stuff. So it's a combination. It's really if you pin it back and draw it back to what is the underlying problem, it still comes back to the weakness and domestic demand, and that's largely because of what we're seeing in the property sector.
So where does that leave the government, particularly the central bank? Is there anything that can happen on the policy side. I know that we've seen rate cuts and rate cuts. Nothing seems to work. I know a while ago we were talking about some form of quantitative easing, but PBOC seems a little resistant. What can policy makers do?
Yeah?
I think it still comes down to what will they do on the property sector. We have to remember that so many people have their money in property in China, and now that the property sector has been in a malaise for such a long time, there is still that there is concern about where to put your money and
will this market ever come back? So it's still and we have to remember how much the market reacted to the possibility of cleaning up that excess supply, but of course it wasn't enough, and it wasn't It didn't do much to pick up sentiment because it wasn't a a big surprise or a big comprehensive plan.
What do you see when you look at the Chinese bond market right now is one example. Is there anything that is informative about kind of investors sentiment when you look at Chinese bonds?
Yeah, It's interesting because a while ago I had written something specifically talking about China bonds and the Japanification of China bonds in the sense of that yields are going to continue to go lower largely on the basis of longer term prospects of demographics, debt, deflation, and depressed confidence, and a lot of these factors haven't really changed, would suggests that yields should be still heading lower as a result.
In terms of the currency, do you have a sense, I mean, we've been holding around these levels for it seems quite some time, and we talked about the export component being very important for contained or rather continued growth in China. Do you have a sense of whether or not authorities are worried about weakness in the currency.
I think, well, we've seen a strength about a strengthen the currency with the unwind of carry trades over the last week, so China was one of the big funders
that investors were using. So we've seen that unwind come through for C and Y. But at the same time and that actually the yield differential differential narrowing with the US does provide some opportunity for the PBOC to actually move ahead on interest rate cuts because if you recall, they had been focused on the weakness and the currency and we're afraid, we're reluctant to cut rates because of the fear of capital outflows because of an overshoot in the in currency weakness.
Yeah, we can talk a little bit about the yen trade very briefly. That was pretty stunning. Do you have a sense, I mean, your sources, the people that you're talking to in the newsroom and their sources. Do we have a sense that most of this unwind has happened already?
Yeah?
The big the big story was from JP Morgan where their estimates show that seventy percent of the carry chain unwind has already happened. But potentially, you know, we're looking for yen at trading into a new range. Right, so the possibility of dollar yen going back to one sixty is very unlikely, especially with a relatively hawkish BOJ. So we could see yen stabilize around these levels, but with heightened volatility, you could still see a further unwind in the carry trade.
Eva Lee she is Head of Greater China Equities at UBS Global Wealth Management, where she is in the Chief Investment Office pleasure to have you on the show today, Eva, thanks so much. So much has been happening in global markets. I want to get into the China story momentarily, but I'm curious as to what you're hearing from clients as a result of this enormous volatility that was running through global markets in the past week. What were they saying to you?
Well, well, luckily, you know, most of my clients actually have been setting their money in the money market funds, you know, in deposits, so they're actually looking into whether when's the best timing to deploy this cash. Some of them actually have their holdings already in bonds and they're happy, you know, with the movements. If you look at the past two weeks, the investment great bonds has been doing well. So the biggest questions that I've been asked is whether
the you know, the yen unwinding it's done. I think that's the key questions. And based on our data analysis, we find that you know that if you break it down in terms of the end positioning into three buckets and the more need term buckets than winding already done. And I think this is an important signal because I'm not saying that there is not lack there won't be any volatility.
There will be.
I mean, we look at how the US markets overnight and going forward, we still have a lot of data to sort of signal where the US economy is hading. But having said that, you know, some of the markets after the corrections, like the Big Tag, the Quality Company, some of the Japanese ones, they look really attractive in terms of valuations after the correction. Yeah, I think that's that makes some you know, sort of the equity market very interesting, at least in the near term.
So even we've seen over the past week that there has been this view that China has in a safe haven. What do you think that is and also why? What do you think will be the real catalyst that brings foreign investors back, especially since we've seen a number of different policy responses but nothing has really compelled foreign investors back in. So what do you think it'll take.
I think the market really, I mean totally with you. I mean, some of the training program on home appliance is like I'm like, hey, come on, I mean, the central government is pulling out real money to support the economy. It hasn't happened often The last time they did so was two thousand and nine, I think. But having said that, I think the market really needs real data or you know, sort of real earnings improvements to sort of pull the
market in, pull the money back in. I think some I think that was select companies earnings with self surprise on up side, despite the very challenging micro they're still able to grow their earnings by teens and the share price up ten percent in one day. I think so market did respond, but they need real data. They do not no longer will listen to this dat's policy support. Yeah, I think that that's the main difference. And obviously people
have been hiding. I won't describe China as a safe haven, but I will say there are pockets of sectors actually that give you yields, and they still treating a very attractive evaluation. I think that might be paid where people hiding.
The export economy seems to be holding up remarkably well, even though taishin the last reading on the manufacturing PMI was a little soft. I understand that, but if you look at the overall economy, domestic demand is very sluggish, we get that exports are holding well. Here he is the kind of the sort of damocles that's just dangling
over the market. And that's the tariff story. When you consider geopolitics and the US, I mean, are you braced for something in a new administration where we could be potentially looking at much hard sure tariffs on on Chinese exports.
I think we all understand. I mean, the you know sort of the Republicans, you know Trump, it's more likely to be harsh on China particular and tariff side. We don't know too much about Harris at the moment, but looks like the Democratic Party would be more of a continuity of policy. They will continue on these restrictions are ivy, but they're not going to impose new additionals ones onto China. But I think you bring a very you brought a
very good point. Yes, export growth was very strong, but we cannot deny that part of it with people are making orders ahead of this potential change in tariff. So further down the road, particularly moving in twenty twenty five, these sort of teens growth in export, it's unlikely to continue.
Then it will fall back down to local consumptions, and as consumption was so weak at this stage, if in fact It tells you why the government really pull out their own money into support the economy domestic consumption, because they knew that if they do not drive this further or let it, you know, sort of life in kicking. You know that the expert growth, it's not going to be there forever, and then the economic situation will be very challenging. Moving into twenty twenty five.
If you spoke about earnings, what are your expectations for this earning season and how do you see the tech companies playing out?
Overall? Will be mixed back, Like we all know that the top line, particularly the consumption side, is very weak. I mean when we break it down into details. For those that announced results, they are saying asp down. So the only way is they able to manage volumes and cost control, then they are able to do some magic on the bottom line. So some not all the companies that manage to do that, right, So that that's one point.
Second point on the internet side, leading in the nets companies likely to do continue to surprise you on the bottom line on the cost control. They did that in first quarter and I think that will continue in the second quarter and they will confirm you more of the buy back plan, which they have done in first quarter, so we actually see that this could be uh, you know, at least make some of these stocks look more interesting after around the results season.
I'm imagining that you don't believe that we're going to get they hit the growth target this year. I think you're you're probably of the opinion that we're going to fail on that front, am I right?
Okay? They said five percent? Okay, now the broad saying it's as long as you know close to five we are good. So I don't know how you define it. Do you have a guess target or not take a shot? I think four point six four four point seven, four point eight. I think that will be the rough rough target. They were rich, all.
Right either It's always a place sure. Thanks for making time to chat with us.
Eva Lee.
She is head of Greater China Equities at UBS Global Wealth Management. She's a part of the Chief Investment Office in Hong Kong. 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.
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