Good morning.
I'm Doug Prisner and I'm Brian Curtis. Here are the stories we're following today. Three FED officials saying that higher interest rates will be needed to curb price Pressures's Cleveland FED President Lorettemester in.
Order to ensure that inflation is on a sustainable timely path back to two percent. My view is that the fund rate will need to move up somewhat further from its current level and then hold there for a while as we accumulate more information on how the economy is evolving.
In the meantime, FED Vice Chairman of Supervision Michael Barr said there is a bit of work to do to achieve restrictive rates. Also, San Francisco FED President Mary Daly said that a couple more rate hikes are appropriate this year, and she thinks future moves by the Fed will depend on incoming data.
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Atlanta FED President Raphael Bostik, as has been the case of late, was the outlier. He argued today that officials can be patient and see how prior increases play out in slowing the economy. FMC meets next on July twenty fifth and twenty six.
Well at the same time today we have the major banks in the US facing one of the biggest regulatory overhauls since the financial crisis. Today we heard from the FED Vice Chair of Supervision. He is Michael Barr, and he laid out recommendations for the nation's biggest lenders. He said higher capital requirements should apply to banks and bank holding companies with more than one hundred billion dollars in assets, and Bar went on to say he also wants to change the way banks assess risk.
The proposal would require banks to use a standardized approach for hard to model risk, which is appropriate in light of the weaknesses that were exposed in the two thousand and eight financial crisis, when many firms did not have acceptable models for their risks.
That is Michael Barr, he is the FED Vice Chair for Supervision. He went on to say the fed's annual stress tests should be reconfigured to better capture dangers that firms can be facing. All of the changes stem from a month's long review to align US rules with a out of international standards known as Basel three.
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Bar went on to say the changes will only take effect if they are proposed and approved by the FED, the FDIC, and the Office of the Comptroller of the Currency.
To Corporate News, Berkshire Hathaway Energy has agreed to buy Dominion Energy stake in a Maryland LNG export project for three point three billion dollars. We get more from Bloomberg's Charlie Pellett.
Berkshire says the deal will boost the company's limited partnership ownership of the terminal to seventy five percent, while a unit of Brookfield Infrastructure Partners holds the remaining twenty five percent. Berkshire first took a stake in the plant, with an annual export capacity of five point two five million tons in twenty twenty. The deal will give Berkshire control of one of just seven operational US facilities, the connect Sport LNG, at a time when the fuel has assumed an increased
economic and geopo polytical significance in New York. Charlie Pellett Bloomberg Daybreak Asia.
Well, some of the big tech companies are drawing protest as they try to shape a new US trade deal with countries in the Indo Pacific. We have more from Bloomberg's Juan Wong In Hong Kong.
Tech companies including Alphabet and IBM will take part in a fourth round of trade talks in Busan, South Korea, this week, their giving input on the drafting of the Indo Pacific Economic Framework. Activists are worried the companies will use the agreement as a backdoor to heading off domestic
regulation and the enforcement of antitrust laws. Corporations have often helped guide trade discussions in the past, but activists say the big tech companies have gone too far in trying to get car fouts, and in some cases have held closed door meetings for negotiators. In Hong Kong, Joan Wong, Bloomberg Day Briga Asia.
China is stepping up support for its ailing property market. Bloomberg's Bunnyao has the story from Hong Kong.
In China, regulators have stepped up pressure on financial institutions to east terms for property companies. They're encouraging negotiations to extend relief measures through next year. China's real estate crisis is struggling to recover. Home sales resumed declines in June after a brief rebound earlier this year, and that's adding pressure to dead layden developers. The regulators said the relief measures are aimed at ensuring the delivery of homes that
are under construction in Hong Kong. I'm Bonnie al Bloomberg, day Break Asia.
I'm Brian Curtis along with Doug Christner and Doug, you know, there's a big difference between using a sledgehammer to crush inflation and trying hard to thread the needle for a soft landing. Now, the pause that we're in now sort of leans on the ladder. But I wonder whether or not we're about ready to see I mean, given the audio that we just heard from some Fed policy makers, we're about ready to switch with the FED moving to the former and getting much more aggressive. And what does
that mean for markets? What does that mean for jobs?
Very strange as you heard from Mary Daily, and she basically reflected what was or captured what was reflected in the dot plot from the last meeting, another fifty basis points of tightening. But look the price action in the bond market today with the yields dropping. And I noted earlier that the New York Fed's measure of inflation expectations going out one year was down to a rate of three point eighty three percent. So directionally things are moving lower.
We'll see how much confirmation we get on Wednesday with the CPI print. But you're right, it's kind of very confounding what the FED is saying and how markets are reacting.
And isn't it so interesting that we still have this inflation issue with the US and now we're dealing with deflation issues in China. It's completely the opposite story, And so can we find some parallels? Well, if you think about this, Chinese policymakers, they stuck too long with COVID zero and they put in motion a deflationary force on the economy that even though they switched down, it's been
what seven months, and they can't turn it around. So once you get this kind of direction going, it's very, very difficult to make wholesale changes to the direction of an economy as complex and big and you know, multifaceted as you see with the US or Chinese economy. So I don't know, it seems like the Chinese economy is now sliding into deflation and they're struggling to try to turn things around.
Boy they are. Indeed, I think nine straight months for factory gate deflation on the mainland, and I want to touch very quickly on the Berkshire Hathway deal that we unpacked a moment ago, buying the stake in this Maryland liquefied natural gas project. It's known as Cove Point LNG and it's fully contracted on a long term basis to two Japanese companies, Tokyo Gas and Sumi Toomol Corporation. So that's consistent with the bet that Warren Buffett has been making on Japan.
Yeah, absolutely strong bet on Japan. And you wonder whether or not ultimately, you know, China will enter the picture on something like this too. Now we need to get into the details and the capabilities, and because a lot of these export terminals, you know that they have some limitations. But it is a very interesting story. It's time for
Global News. Turkey has agreed to have its parliament vote on Sweden's membership bid for NATO at back to with Global News in the nine to sixty news room in San Francisco, ed.
Yeah, major turnaround today, Brian source to say Turkey received assurances on some key demands, including Stockholm's approach to supporters of Kurdish separatists operating in its territory. Now NATO Secretary General Jahan Stoltenberg says, an issue important to all allies.
It's important that we stand together in the fight against tourism, but at the same time it's also important dot we address the legitimate security concerns of all allies that don't want to see Sweden as a member of the Alliance as soon as possible.
Now, as I said, there's a turnaround today for Turkey. Earlier in the day, President recept high Up Airedwan was demanding Turkey be given assurances that it would be considered for EU membership. Well, sources say it got those assurances and the process would be sped up, as well the reports that it got US assurances of F sixteen sales. The White House has issued a statement saying President Biden is standing by to work with air Dewan and enhancing
defense and deterrence in the Euro Atlantic area. So with a major feat already accomplished now for NATO, Bloomberg's Margaret Collins on Balance of Power says, for Ukraine.
Certainly, the overhang of this meeting is, you know, as the NATO discussions keep going on, is like where do we go from here with this now very long conflict between and war between Russia and the Ukraine, and where do leaders go and how much longer are they ready to support this?
As well? The Hill is reporting that presidents of Biden and Zelenski will meet on the sidelines of NATO as well during the meetings, pomp and ceremony at Windsor Castle today as US President Joe Biden meets with King Charles. Yeah, Biden taking part in what's being called a climate engagement with King Charles on his visit to Windsor, Climate Envoy John Kerry says, the message is very clear when scientists.
Are telling us that they are terrified by what they're seeing, and when we hear most same scientists telling us that we are in uncharted territory.
Now, Kerry says, a commitment to figure out how to attack and invest in the fighting climate change. And then a meeting for Biden with UK Prime Minister Rishu Sunak as they prepare for the NATO summit. This is soun a.
We head from here to NATO and Vilnius.
Well, we stand as two of the firmest.
Allies in that alliance, and I know want to do everything we can to strengthen your Atlantic security.
Yeah, Sunak says continue also working on their bilateral agreement on North Atlantic security. China has issued an unusual warning to its citizens traveling to the US. It says beware of rap meant by American law enforcement. Quote Chinese nationals who travel to the US should be more vigilant and beware of falling into US snares and arrest entrapment. China regularly reminds its citizens of gun and racial violence in
the US, but now rarely arbitrary detention. And from Vermont to North Carolina cruise making sure that people are safe from the torrential rain that hit the area over the weekend. Kathy Hokel, the governor, saying it's a one in a thousand year cycle and the horrific heat that has plagued the US Southwest forecast to last at least into the weekend. Global news power by more than twenty seven hundred journalists
and analysts in over one hundred twenty countries. In San Francisco, I'm Ed Baxter, and this is Bloomberg.
I'm Brian Curtis along with Doug Chrisner. Our guest is Brian frank Cio at Frank Funds to take a look at the markets, Brian. As Doug mentioned, with yields moving lower this morning, is that the market expressing a little bit of fear that the Fed may go too far and thus you bring sort of recession more clearly into the picture.
Oh hi, Brian, thanks for having me. Yes, I agree with that statement absolutely. I think any sustained move lowers just one day in rates here could definitely show that the market is much more worried about economic activity, a lack of growth, and the Fed perhaps is definitely going too far.
It's going to be very interesting to take a look at these earnings reports in the coming week. The big banks begin on Friday, so it's JP Morgan, City Group, Wells. Bloomberg's Gina Martin Adams was saying today there's earnings risk here, particularly among the financials where top line growth may weeken. How do you feel about the banks these days?
I would one hundred percent agree with that.
Yeah.
If you look at the Dallas Fed Banking Condition survey that came out just a few weeks ago, it just showed across the board tightening in credit. Not only are the banks reluctant to increase the support live loans, but the actual demand for credit is going down as well, so the interest rates are definitely biting here, and that that's really going to make for a tough situation on earnings for banks.
I guess it puts a lot of focus on the forecasts that we get from companies during earnings, and obviously with the banks, it's difficult for them to see exactly, you know, what will happen going forward. But with other companies, do you think the picture might be clearer?
I think just you know, even looking at Apple, it's training at thirty times earnings and earnings are actually down, so it's not so much what they're going to report and what the expectations are, which you know, certainly we have to look at it's already what's priced in. You know, these valuations are extremely high, especially on the megacap tech stocks. So I find it very difficult to believe that, you know, the market is kind of the it's kind of price
for perfection here. I really think if there's any kind of weakness up ahead, any kind of forward guidance that's lower here, there's definitely a lot of thin air underneath. Because we've come so far, you know, it's been probably the best first half of the Nasdaq in its history. It's that's usually an environment you would see when the economy is growing really well, in credit is increasing. But I think the equities are certainly looking at a different market than bonds are looking at.
So when you're talking about inequity trade, I'm sorry to interrupt, Brian. So when you talk about inequity trade, is the move just to become defensive across the board.
I'm certainly there. In our mid cap fund, the Frank Value Fund, we've gotten mostly out of cyclicals and we're much more in defensives and that served us well. In twenty twenty two, the fund was actually up and we're one of the only two percent of funds that's actually up last year and up this year. So defenses are defensive. Stocks are still paying you. We're finding lots of good
dividend yields. We're finding these defensive stocks are being shareholder friendly, so they're buying back shares, and because their valuations are lower, they're able to buy back a material amount of shares. Unlike a big tech company, say that's you know, rallied fifty percent this year. It's just a lot more expensive for those guys. So it's odd with seemingly consensus expectations showing a recession in the second half, you would think
defensive stocks would be more expensive than the market. But we're able to fill out a portfolio with defensives that are cheaper than the market. So it doesn't make a lot of sense. But you get to hang on and get those dividends and share repurchases and wait for perhaps sentiment to change on equities.
So you like utilities obviously, what about consumer staples? Some of those are even more expensive than utilities, with pees up there in the twenty eight, twenty nine to thirty range, which if you think about it, for a consumer staple like a proper and gamble or Coca Cola, these types of companies, is pretty high.
Oh yeah, certainly. I really don't think this is the mar to blanket by, you know, an ETF and utilities or consumer staples, both of them, like you said, are over twenty times earnings, and traditionally, if we end up in a bad bear market because of a recession, those valuations that come down, so you really have to stock pick there. I prefer more of the middle of the market, kind of the midcaps, you're finding some of these that are ignored. Perhaps they're entering into the indices and the
ets and getting some flows that way. But you can definitely find low double sorry like price earnings ratio is in like the ten to twelve range in some of these MidCap utilities and consumer staples. And you can also find things that are recession proof there as well, you know, companies that do well in a recession or able to resist declining consumer spending.
So when you survey global markets, Brian, what are you seeing? I mean, we talked earlier about the difficulties of facing the Chinese economy. Right now we know what the situation in Europe seems to be. Japan's seems to be enjoying a bright moment here in terms of equity market price action. Yes, we're all from three decade highs just a bit, but there seems to be a lot of positivity in terms of momentum, and clearly the economy seems to be forming
a little bit better. Are you apt to put any money to work offshore?
Yes, we've actually we had a great run in One of the frank value funds holding is Coca Cola FEMSA, which is the largest coke distributor in the world, and their markets are primarily Mexico and Brazil, and kind of following that company down the rabbit hole, Brazilian assets have just been wiped out, you know, because of all the political fears going on there. But we were able to actually find another company we haven't disclosed yet in Brazil.
So there's a good chunk of the fund that's invested in Brazil because the valuations are just so bombed out. But if you look at the global picture, and I think that's what Buffet is seeing in Japan, the companies that are able to provide resources to Japan, specifically being Brazil, a big producer there, are actually in a great position because we're not building enough commodity supply even for the Green Revolution. A lot of that stuff runs on copper
and steel. So Brazil, I think, is in a great spot because the expectations are so low there, but they're still in a phenomenal position with their riches and their resources.
Just briefly, probably the last question, could could you see earnings actually kind of troth in this next quarter or so, and you know, if you start to see improvement there, then the valuations don't look so high. Could that ensue?
Well, anything could happen. That's why you don't make a market call. That's why we try and stay fully invested most of the time. But I just think the expectations, even if we do get some surprises on the upside on earnings, I think the expectations are there for surprises. We saw on Nvidia beat expectations by fifty percent. That's always one of the largest beats I ever saw last quarter, so I think the analysts are starting to catch up and everybody's kind of excited. So I'm much more in
the camp of disappointment. But of course we could always surprise on the upside. A lot of this stuff is lagging. Earnings are quoted in nominal terms, so we still have some inflation. So definitely anything could happen. But the expectations to me seem pretty high.
This is Bloomberg Daybreak Asia, your morning brief on the story's making news from Hong Kong to Singapore and Wall Street.
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