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Welcome to the Bloomberg Daybreak Asia podcast. I'm Doug Krisner. Here in the States, producer prices unexpectedly fell in August month on month for the first time in four months. Meantime, in China, the latest reading on factory gate inflation shows persistent deflationary pressures, while Chinese consumer inflation slipped to a six month low. And in a moment, we'll bring you an exclusive conversation with Sergio Ormonti, the CEO of UBS.
But we begin here in the States, where treasury yields dropped right across the curve and much of the equity market extended record highs. Joining me now is Eric Fine. He is portfolio manager also head of Active em Debt at Vanek. He joins us from here in New York City. Eric, thank you so much for making time. Give me your sense of how you feel about the inflationary story right now.
I know there are a couple of threads here, and as a part of that, the tariff story obviously, but give me your overall sense of where we are directionally in terms of inflation.
I think we don't know yet. And one of the big concerns is that paraffs are still working their way through the system at the same point that the FED is arguably getting more of its certainly in the last week. That's what the market is pricing. We have about seventy basis points of cuts priced into your end roughly today. So the inflation story is very uncertain, but the market is somewhat trying to see through it, and so you could see a scenario in a few quarters where stagslation
resumes as a concern for the US. Now, inflation in China's a very different story. Well, it's deflation, as you noted, and that is very bullish for the Chinese currency. That's an important thing to keep in mind. Bearished for the dollar a relative to China, and that's a key dynamic. That means that even though inflation may be an important issue for the develop markets like the US, it is almost the opposite for ems and EM currencies. That's why
they've done so well this year. They've had very high real rates and they're just waiting for the FED to cut. So if the FED cuts, they do well. Fed doesn't cut, we know they've already done well. It's a sort of simplistic way of putting it. Tariffs s fit into this in an important way. Most important, I hope your listeners know that negotiators are not going to reveal whether there's a currency chapter in the discussions. Namely, you know what
they're talking about in terms of currency. But I hope it's also obvious that if a country devalues right after a trade agreement, they're three steps backward. And further note that, so you know your currency can't be devalued to but super super simple after a tariff negotiation and look at your balance of payments accounts. Most of these countries, especially Nasan and em have high positive net international investment positions with the US. They own more of US if I'm
speaking as the US, than we of them. That means they're up to their nexts in dollars. And what do you do if you're up to your next in dollars and you know dollars are going to go down? You reshore those dollars to your shores or to other non non US shores. There are many other variables, but I think inflation tariffs are definitely feeding into an uncertain narrative.
But I wanted to emphasize that the dollar down means a lot of other currencies up, and that gives them a lot of flexibility, and it certainly underlies and supports their currencies.
So the dollar story is definitely correlated with the expectations for FED policy easing and maybe as many as three rate cuts this year. Certainly that's the takeaway after this PPI number. Earlier in the week, obviously, we had the downward revision in employment growth over the last twelve months from the end of March. I think nine hundred thousand roughly overstated. So the market now seems to be of the opinion that we're going to get some aggressive FED
easing given labor market weakness and perhaps contained inflation. Do you think the market's thinking is a little misguided here and is the Fed in particular in a very very difficult situation.
I think in terms of the real thing many our listeners might care about, which is what could the ten year or thirty year yield? Do? I think it could rally a lot, but that's mostly due to positioning for a couple quarters. Now, the steepening trade that you know, long ends long end rates higher, front ends lower relative to each other has been consensus trade and if that's unwinding, and I said, my concerns come in a couple quarters, So if that's unwinding, that could go for a good
period of time. PPI today certainly gives a green light today,
we'll have to wait CPI for the final green light. Also, the inflation downtrend is going to be very much affected by the Oeer calculation that the FED uses owner's equivalent rent and that's you know, somewhat sticky in terms of its direction, namely weaker, and so a rally in rates, maybe even another fifty basis points is entirely possible, but I think it's going to be mainly due to positioning this consensus deep innerview that's been on because on your
issue of you know, inflation's already sort of been pushed aside as a risk and employment growth there's great uncertainty still, certainly in terms of sequencing. I already mentioned that terriff implications may still becoming. What if the Fed's already cut by then and employment growth is extremely complicated because there's there's a new methodology or new you know, a new huh head of the Data Provision Agency, which if you're sitting in Singapore, right, you don't really care, you don't
have a domestic political opinion. But that's not a not something normally you want to see in a country you invest in. Maybe you know, I'm not getting into whether it's warranted or not, but there's great uncertainty over the employment situation itself because of migration. There's great uncertainty on how much self deportation is happening, and so that's going to take, you know, a couple of quarters to work itself out, which is why I defer to the technicals.
Everyone is positioned in a steepener. So the pain trade is that that unwindes and that's a rates rally. But I want to emphasize it's not because of UH that in a few quarters that'll seem warranted.
On that I think is still very uncertainly am i'ment ago. You mentioned stagflation. Talk to me a little bit about the risk that you see right now of a stagflationary type environment.
I think it should be standard. It should be your central case for the highly indebted developed markets where most investors unfortunately have their bond exposure. The only real solutions available to high indebtedness are default or inflation. I don't think default is really a scenario. Forms of it might be, but which leaves you with inflation. Now, the inflation dynamic when it unfolds. And I say this as someone who's been doing looking at countries for thirty years and a
lot of them have defaulted and they recovered. And you know, I'm speaking from that experience. But it's saying that inflation solves the problem is essentially a way of saying that the dynamic moves completely to the political and social level. Just look at the US election. The last US election was very much about inflation. Was it too fiscally stimulated?
Was the Trump campaign's argument. Or and look at the New York campaign, the New York City campaign on the left, you're getting arguments that are very focused on cost of living.
Right.
So inflation is front and center in politics. And the way, unfortunately it works, its way it works its way out is over many years in which consumers and investors need to figure out what is the nominal and what is
the real That becomes the most important variable. So I'm sorry I don't have a like a simple black and white, you know, headline answer, but stagflation I think should be central case, especially if the dollar continues to weaken, and especially if the FED is actually or viewed as I'm having its independence undermined, and in an extreme scenario of YCC scenarios are contemplated, you know, that would underline the
whole phenomenon. But the interesting thing and the point you know I mentioned, you know on your initial question, well, is that there are winners from this dollar down means something up. And it's not just gold, it's c and why for example, a C and Y is going to be extremely stable, it's going to be like watching paint dry.
But other emerging markets with high real interest rates and cheap currencies that export commodities, that have decades of proof on their orthodoxy on inflation, we already know how the market will react to that. Even you know, even so far this year they've all rallied, not all, but you know, basically and UH and so if the FED cuts, it's going to be a big support for those currencies. And I think that's the better way, the better expression of
this view. It's it's been. The better way to invest in bonds in general is through the more orthodox fiscal UH and monetary policies that characterize many of the emergent so called emerging markets.
All right, Eric, good stuff, Thank you so much. We'll leave you there with Eric Fine, portfolio manager also head of Active em Debt at Venneck here in New York City on the Daybreak Asia podcast. Welcome back to the Debreak Asia podcast. I'm Doug Chrisner and has promised some of our exclusive conversation with the CEO of UBS, Sergio Ermati. He says the impact of global tariffs on the American economy,
as well as FED policy both remain unclear. You know, it was last month when Bloomberg reported the Swiss Economy Minister sought input from UBS as the Swiss government scrambled to get and improved US trade deal. Now the Trump administration has imposed levies of thirty nine percent on Swiss exports to the US. That is the highest tariff rate for any developed nation. Ermadi is in Hong Kong for the annual UBS Disruptive Technology Summit. It begins later today.
Here he is speaking exclusively with Bloomberg's David in Glace in our Hong Kong bureaus.
Good morning, and it's very nice to see you in the region.
What are you looking forward to this.
Entire event about disruptive technologies? How is the bank looking to get involved here?
Now?
It was great to be back in Hong Kong with all the executive board and the Board of Directors for a full week of sessions, and now we are also hosting our eleventh event here on disruptive technology and gathering one thousand clients and really at the pivotal moment for the sector.
I think that we always.
Saw a lot of innovations, particularly coming out of age, but now the acceleration is huge around AI, around robotics, and so we're looking forward to engage with clients.
Right And I think you and I were just talking before we started here that you know, people tend to overestimate in the short term how quickly things can but I think in this case things are rather moving fairly quickly as far as this technology. Because how is your team looking at opportunities for the bank here, internal or external?
Yeah, is fair to say that also this time, probably there is an exaggeration of the estimation, but is going faster than what we saw in the past. But I'm pretty convinced that we are still underestimating the impact that we have over the long term. I think that for us is all about really preparing for the future. The biggest focus we have right now is how to make our processes more efficient on the backhand, but also how can we help our client advisors serving their clients in
a more effective and efficient way. Our analyst to be more responsive to market changes. And you know, one point is very important. Technology will help humans being better and in banking we will continue to see the emotional part, the eq part of the equation playing also a very important role.
The bank has been around through many cycles. I want to get your sense of this current macro environment. I mean, we went into this year with some expectations around how the macro environment would change, and then we had this flurry of tarists and this back and forth and now questions around how much the FED can in fact lower interest rates.
What's your sense of the.
Global economy and where do you think we will be in six months time?
Are we going to be better offerers off? Well?
Look, you know the issues that I don't think we have seen really the true impact of tariffs playing out in the economies. Of course, when you look at Asia and China and particularly it's fairly robust, you know, five percent, you know, comfortably about five percent GDP is quite quite a strong.
Momentum.
And of course also China may be impacted by high tariffs, but on the current assumptions around forty percent consumer Also that the waiting of tariffs in.
For exporter has changed.
You know, in twenty seventeen was probably around twenty percent of the exports we're going to the US.
Now we are closer to fourteen percent.
Of course, when you look at machinery, autos and technology there is between forty and eighty percent. But you know, what's going on, for example in this region, diversification.
It's a very important topic.
So you see Asian becoming much more, you know, developing more into a diversified play. The same is going on for you know, in Europe. The true issue on tariffs will be seen on.
Consumers. In the US.
We will need to see exactly if there is an inflationary aspect of tariffs and.
Is that still unclear at this point?
I think it's unclear because you know, a lot of in anticipation of tarists, lots of people have been exporting and anticipating and you know, the exports or imports from the rest of the world in the US, so the kind of targists we see right now which is seven eight times higher than what we add at the beginning of the years. I mean, if you look at Europe at fifteen percent and you know it's seven times higher
than what it was. The dollar also depreciating ten percent as a big effect on the economy, so it's going to be challenging for Europe. In the US, we still believe that growth will be there, but the inflation questions and how it plays out into the central bank policy remains open.
Well, when you speak to your big corporate clients, do you get a sense that people are more conservative still in terms of their assumptions, their cap expending, and just their broad expectations of how things will play out.
Well, I think that there is still a level of uncertainty. Although if you look at the war, it seems to be divided into two pms, the more traditional let's call it economy and the one that is AI technology driven. There there is a clear boom and h and prospect for growth. We see it here in Hong Kong with the booming IPO market. You know this is something that we saw in the best times. But in general there
is a constructive momentum. But the jury is out because the complexity is not only the economics, is also the very complex geopolitical environment is you know, is keeping all of us very focused on making sure that we are not becoming complacent.
Well, speaking of this booming IPO market, it's something we haven't seen in years. That's put a diary at least our team as well, feels extremely busy.
Every day.
There seems to be a deal of fundraising, a stock rights offering, what have you almost on a daily basis. Are you satisfied with how your deals teams has come up to the task of this this booming in activity world.
Absolutely, I mean it's extraordinary to see. I mean, if this is tenfold, seven seven, eight times higher volumes that we had at this point in time last year, I'm very happy. You know, we are one of the leaders with more than ten percent market share, you know, and you know, very happy to see that momentum. But it's quite impressive to see how the mood has changed compared
to a year ago. And so it's which which shows the flexibility and the agility of the economy in this region to respond and react to market changes and the driving force of innovation that stays behind it.
Right, and there's this renewed, let's put it, a healthy competition coming from some of your Chinese peers in the industry. Do you get a sense that the competition now is a bit it's a bit more fierce and how are you prepared to respond to all? How is UBS prepared to respond?
It?
Is this this new regime?
Well, I don't remember in my career times which competition was in fierce And look, you know, I think that it is good to see that. Also Chinese securities firms and banks are broadening up their capabilities. We see us as a complimentary player in that sense. So we are helping international investors that wants to invest in China and in Asia and also the other way around.
And this is very complimentary with the rest of the industry and the competitive landscape.
That is UBS CEO Sergio or Madi speaking with Bloomberg's David and Glaze 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 and tomorrow for insight on the market moves from Hong Kong to
Singapore and Australia. I'm Doug Prisoner and this is Bloomberg