Bloomberg Audio Studios, podcasts, radio news. Welcome to the Daybreak Asia podcast. I'm Doug Christner, and today we begin with the FED. On Wednesday, members of the FOMC voted unanimously to leave interest rates unchanged. Now that move was widely expected. The raid on FED funds held steady in a range of three and a half to three and three quarters percent. Now officials also signaled their next move maybe to raise interest rates, not cut them, given the outlook for higher inflation.
Here is FED Share Kevin Walsh at his first post meeting news conference.
Persistently high prices our burden for the American people, but the recent past need not be prologed. I am pleased to report that members of the FOMC are unambiguous and unanimous. This committee will deliver price stability.
Fed Share Kevin Worsh. There for a closer look, I'm joined by Jeffrey Roche. He is the chief economist at LPL Financial. Jeffrey, thank you so much for being with us. It seems to me this tone was maybe a little more hawkish that the market was expecting. So can you put that in context? Given the fact that this was Worsh's first meeting. I'm wondering whether he was trying to buy a little bit of credibility perhaps with the bond market. Is that possible, Well, I.
Think, you know, there was a lot of pressure on Worsh. There was a lot of chatter that he was going to be a puppet to the president. Obviously he was picked by the President and confirmed then by the Senate, but it was all in the context of being a dovish leader the FED. I think Worsh did the right thing today that he came out with a big bark. Maybe the bark's going to be worse than the bite. I'm not sure. Time will tell, but he was terse kurt straight to the point. I think he did what
had to be done. That the bigger concern is runaway inflation. It's not necessarily something where we're thinking about the brinks of recession. So I think he balanced it quite well.
There have been a lot of questions, perhaps some concerns even about the degree to which the FED is going to alter its communication style with markets, and Warsh said today that the FED has dropped forward guidance. Is that a problem in your opinion.
Well, it's a little bit of a misnomer because we certainly got plenty of forward guidance from the Summary of economic projections. So what was a little bit surprising, and this certainly was making a statement, was the very short statement released earlier thirty minutes before the chair started his press conference, roughly one hundred and thirty words or so. The previous statement was roughly triple that. So he certainly
is going straight to the point. But I don't know what's going to happen with the summary acond of projections. He did hint at saying that he was not participating in the forecast this time around, but there were plenty of committee members that did participate with those dot plots, So in some ways, the markets did get plenty of
forward guidance. We did get an updated dot plot. We did get more information that several of these governors and district presidents are more so inclined now to indeed hike hence the uptick and expectations from futures markets. So we're still a little bit in the dark because we don't know how much change worsh will enact after these task forces come with their recommendations.
Well, I'm glad you bring up that fact. Because as a part of his opening remarks, worsh did announce the creation of multiple task forces I think five areas, and the aim here is to change the way that the FED operates. If you were advising the FED, I hate to put you in a tough position, but I'm going to anyway, how could the FED improve the way that
it operates? Are there things that are a little antiquated right now that need to be addressed to improve the functioning not only of the regulatory regime, but the transmission mechanism and the way in which kind of markets respond to what the FED is trying to achieve.
Well, I would say unambiguously, I was pretty excited to hear that one of the five task forces will be about data collection and the updating on data. I think that is a very fair point for the chair to call that out on the press conference, that there are
things either the methodology or the survey calculations. There are a number of ways that we legitimately could update and bring into the current times and fix some of the antiquated data that we rely on as private sector economists, no doubt public sector FED officials as well, so very happy with some of these task force setups could be on net markets for investors on net This could actually
be a very good thing. Now. The hard part, of course, is in the interim, waiting and somewhat being a little bit in the fog as we sit here today.
Most definitely, particularly where the effects of the war with Iran are concerned and higher energy prices. But money markets right now, you talked about the market response in terms of futures, money markets are fully pricing in a quarter point FED hike by October, maybe another one by March. I think that's been fully priced in as well. Does the market seem right now to be a little too optimistic about the degree to which the Fed might titan.
Well, I don't think the market has it right. We've seen this before, where market futures markets respond to the press conference, whether it's warsh Er, whether it's Powell or Bernaki or yelling green Span. Even so, I think markets
are a little bit ahead of themselves. And the reason why I say that is because we know from the statement from the chair's own mouth during the press conference that a lot of these inflationary pressures are supply driven, and we know that those things can reverse quite quickly. And when that does, you'll have a very very different inflation dynamic.
What is your sense of the inflation problem right now? I don't want to use the term transitory. I'm sure it was thrown around a lot today by commentators looking at the Fed's decision. Do you think this is a temporary thing that we are going to experience as a result of the war with Iran or are we at risk for higher prices to remain embedded in the economy for the foreseeable future.
Well, I do think that there is some time stamp on the energy related inflation we're seeing clearly connected to the Middle East crisis. One thing that I don't know, and I'm a little bit nervous about, is the embedded inflation pressures from households that have a lot of cash. There are plenty of households. When you look at household net worth relative to disposable personal income that is at
a very very high ratio. And so from the demand side of the equation, we still see a lot of households spending on a number of durable goods, certainly non durables. Starting to see a little bit of slow down in terms of travel plans and services, in that regard, but there is a strong demand for several sectors in the economy that are demand driven that will stick around a lot longer than the components that are supply driven.
The President has made trade policy a cornerstone of his administration's economic plan, and one of the things that we saw today as a result of the price action in the bond market a much much stronger dollar. I think the Bloomberg Dollar Spot index was up about seven tens to one percent today. If the dollar does remain at these levels, is that problematic for US trade?
Well, certainly, we've seen a pretty strong and solid relationship between dollar performance and import prices, So in some ways the biggest risk to strong dollars probably emerging markets, not necessarily domestically inside the United States. I think what this tells me, though, is whenever there's this move toward dollar assets, when there's periods of uncertainty, in some ways, it embeds in my mind the view that the dollar is still
this safe haven asset. In some ways, you can argue from that that you still have a little bit of benefit and the exorbitant privilege, as it were, for US markets because of.
That, all right, Jeffrey we'll leave it there. Good stuff, Thank you so very much. Jeffrey Roachi is the chief economist at LPL Financial. Joining us here on the Daybreak Asia podcast. Welcome back to the Daybreak Asia Podcast. I'm Doug Chrisner. Equity markets across the APAC region are reacting to the FED signaling it may need to raise interest rates further to contain inflation. Now, US money markets have fully priced in a quarter pl point FED hike by
October and another hike by March of next year. However, Home and Lee, the senior macro strategist at Lombard Oda, says the FED will hold great steady until the end of the year. Homan spoke about his outlook with Bloomberg TV host April Home.
So you think no change till the end of the year.
Well, that's still our base case, even though this meeting proved to be a little more hawkish than what we expected. So there is a bit of a growing challenge to our scenario. At the end of the day, label market has been fairly solid, and that capital markets have been quite buoyant in terms of the activities and sentiment, and inflation still remains about targets, so it makes sense why they're removing the dubbish language from the statement and the communication.
But you know, the backdrop before the meeting was that of disruptions in the strait of homos and energy market instability that's now fading from the view. So it's in entirely puzzle that a few months from now the assessment of some of these median dots suggesting great hike could
actually change. So for these reasons, we still think it makes sense for the fact to be a little more patient and look through this core inflation spike that could prove temporary and simply stand on the sidelines until the
end of the year. But we have the acknowledge given the message, especially the repeated emphasis and price stability from a chairman Wash, a chair Wash and his initiative to maybe change the communication framework, maybe there's a degree of caution that's required as we go forward.
So what we're seeing in markets today, specifically on the bond market reaction, do you think that's appropriate? Should we be expecting more volatility there?
We think our assessment is that the current bond market pricing is a little bit excessive at the global level level and also potentially for the US treasury market. And if you have a hockey central bank that increases the chance of price stability in the medium term, there's actually not a bad news for bond market in the medium term. So we think the current rate pricing in the bond market more or less reflect what's achievable from many of
these major central banks. Actually, some bond marketers are so slightly excessive pricing for that. So there we already see some opportunities. We're not uh uh, you know, keen on increasing the duration risks significantly, but we do see opportunities in places like Europe and Asia, Australia for instance, where you know, the rate hikes recently could actually provide a better trajectory for bond market participants in the future.
In Japan, do we just do you clear that?
Well, Japan is a slightly trickier story to be frank So Boja delivered that rate hike and we currently assume for the base case semi annual rate hikes, so the next move will likely occur in December. But you know, the intervention from the Finance ministry and the bank. You know, of course, great high by the Bank of Japana guidance for additional hike have not delivered the stability for the end yet, so that's a bit of concern. And we also have to wait for the fiscal policy signals from
the cabinet regarding their medium term strategy. So these developments need to be digestif by the market participants before we can be more aggressive. So when it comes to Japanese yel curve, we're slightly more neutral as opposed to European and Australian curves.
A wonderful equity though as long as yen remains roughly stable, it's a positive enough backdrop to a lot further gains. I mean, you look at how things are firing in the early goings today, it looks like, you know, investors are still banking on that memory up cycle chip surge.
Well, first of all, if you look at the fundamentals of the Japanese economy, it's still pretty solid despite the shocks that it has gone through due to the situation
in the Strait of Homus. As you said, it's an economy that's prime to respond very positively the global capac cycle, and this is a cycle that will get additional support from the regulation of the risk in the strait of Homus because countries around the world they'll try to boost their infrastructure even further in reaction to this, and Japan is perfectly positioned for that. And of course there are AI plays, the pixel shovels place, you know, nan memory
and the ceramic capacitors. All these producers are still in Japan, so they also benefit. So that's the fundamental picture in our view, which I suppose.
To help career as well as the same.
Fundamentals exactly exactly, so when it comes to the central bank policy in Asia Pacific region, we're in a pretty
interesting place in my view. So for Japan, for the corporates, the stable yen around this level still promises potential further upgrading earnings growth for the Japanese companies, But for the other Asia Pacific companies, especially in North Asia, there's an additional tailwind now from the regulational risk in Homus, and that's the reason why we still remain constructive for this segment of Asia Pacific region for career.
Also even as an em you know, even if we see a bit of hikes, they can still sort of overcome that given how we're seeing these tail winds from their memory up cycle, So we.
Still subscribe to the view that memory remains a key bottleneck in the overall AI development. So that's still positive for the country. And we continue to see volent is upgrade in the earnings outlook for Korea, not just this year but also next year, so that's positive. Now regarding the external developments, clearly the resolution risk and homos because Korea is a heavy net import or energy from elsewhere,
it's going to be a certainly a tailwind. And finally, when it comes to monitoring policy, we do expect now some raid hikes down the road, but for the corporate we think that's a manageable event because we don't think that the OKAY will be very aggressively hawkish on monitoring policy.
I have to ask you on China though, because we got some signals from the PBOC yesterday, do you think this is a central bank that's kind of moving towards what a DM regime would look like, something more like what is major peers are doing.
So this is part of the medium transition that we have seen for quite some time now, you know, moving from the deposit rate to the market based rate a few years ago, and then changing the framework again in twenty twenty four, so it's actually a continuation of a trend from our perspective, So the PBOC is quite keen. It seems to move to a market price, a price based in a monetary policy regime. And now they're moving the benchmark from seven day to one day, just like
the other developed market peers. However, they still seem pretty keen on keeping the control and capital accounts and targeting currency. Those are the fundamental constraints and moving fully to a price based monetary policy. And for that reason, despite these efforts, we think the near time implications are quite limited for the Chinese market.
That was Home and League senior macro strategist at Lombard Odia speaking with Bloomberg TV host Avril Hong, 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 Chrisner, and this is Bloomberg