Bloomberg Audio Studios, Podcasts, radio news. 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 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. Vice President Kamala Harris kicked off a critical stretch of her campaign
earlier tonight in Philadelphia. That's where she took the stage for the first time with her new running mate, Minnesota Governor Tim Walls, joining us now for a closer look at the political story behind this. Amy Dacy, executive director at American University sign Institute of a Politics and a Policy. Good of you to drop by, Ms Dacy, Thanks so much. First, let me get your reaction. I'm sure you watched it on the television. What did you think?
Yeah, this is definitely general election phase that we're in, and the enthusiasm you saw, you know in Philadelphia, I think is going to carry out. You know, in the campaign. It definitely was between you know, the speakers that were before them, but it was the first time you saw these two candidates together, and I think it was incredibly
well received. You can feel the energy in the room, and I think they're ready to go on the road and really start talking about their ticket and what they planned to do.
It was earlier in the rally that Pennsylvania Governor Josh Shapiro delivered what seemed to be a full throated endorsement of Governor Walls. Shapiro, as you know, had been in the running to join Vice President Harris on the ticket. In the end, she bypassed Shapiro for whatever reason. Although I think it's fair to say that Pennsylvania is a politically valuable state in this election. Do you have a sense of the strategy behind the scenes, why Walls and not Shapiro.
Well, I think the Vice President had a very difficult choice in front of her simply because there were so many good Democrats to pick from, and I think that's one of the things that you see that is very
different than the Republican bench out there. She had, you know, a dozen people to look at, but I think at the end of the day, some of the last names that you saw, whether it was Mark Kelly or Josh Shapiro or Tim Walls are all candidates that certainly get she you know, felt comfortable with that brought something to the ticket. I think, you know, in this situation, Tim Walls, Governor Walls, he brings a beautiful contrast to some of
her profile. He also plays well into some of the the you know, communities that the Democrats need to reach out to. This is somebody from humble beginnings, was an Army National Guard, you know, really ran and won in a very rural conservative district in Minnesota. And you know he's a former NRA member, a teacher or high school football coach. You know, these are all things that played really well. And I think all the candidates brought something, you know, to the table. But you also saw them
immediately co arrests around this take of Harris Well. So even Jos Shapiro sent out a very strong statement. He certainly gave an incredible speech at the rally. I think it's all hands on deck for the Democrats here and every single Saraga is going to be out there supporting this ticket.
You are a former advisor not only to President Barack Obama, but Senator John Kerry as well now Vice President Harris and Governor Walls are on their way to a number of key cities in states like Wisconsin, Michigan, Arizona, Nevada. If you were advising this campaign, what would you say to them?
Well, I think, you know, they've started out in an incredible way as this authentic individuals who are listening to Americans, who are saying that they won't turn back. They're putting a strong contrast, you know, with their opposition in the Trump you know, Vance ticket. I think in a good way. They're talking about their vision for America. They're not just against something therefore something I do think they're spending, you know,
and looking for. You look at the swing through the next week, all the states that they'll be you know, going to, these are ones that really matter in that electoral map. But I think the bottom line is they're setting forth their vision for America. What this looks like, you know, especially talking to people whether they are in Wisconsin or New York, or California or Arizona or Nevada. But I think their clear vision that they're putting out
is really important. And a sense of optimism. I think you saw, you know, a sense of energy and optimism that you haven't seen, you know, for a while with the Democratic ticket, So I think, you know, and if you're going to advise them, it's that keep the authenticity. Listen as well as you know, speak, make sure that you're out there and understanding people's pain. You know, not everybody feels like they've moved forward, Like what where are people at? What are the things they could do to
make their lives better? And I think they're off to a good start with that.
So we're less than two weeks away from the Democratic now national convention in Chicago. Did we pretty much hear the party platform tonight at this rally in Pennsylvania?
You know?
I mean I think that you know, everything is thought through in tactical I think starting this out in Pennsylvania is really important. I think that this move, you know, whether you knew it was going to be Shapiro or Walls or Kelly, I think Pennsylvania is going to be a battleground state no matter what. And so I think the time they're spending there, the fact they're starting the swing there, the fact that you have the governor of an important state like Pennsylvania doubling down, I think this
is all coming together as they launch. And remember this week is in lead up to a convention. They haven't even done their Democratic Convention yet, and so Democrats have an opportunity to show who the Democratic Party is, share all those faces and voices of potential, you know, vice presidential nominees set forth their platform and their vision. So everything's tactical, and I think this is all moving into the direction to head into Chicago in a very strong position.
It's hard to believe that it's been less roughly a month since President Biden stepped down, and I'm looking at some of the latest polling coming from NPR, PBS News marist Kamala Harris leading Trump fifty one forty eight. Are you surprised at the momentum? Has this been kind of a stunning development that no one could have predicted?
Well, again, as you said, you know, you look back a month ago, and it's hard to believe that we're in this situation now. So much has changed in a month. But I do think one of the things that was a huge indicator, definitely, you know, to be full disclosure, was surprising to me right out of the gate just how strong it was, you know, in the first thirty
six hours. Vice President Harris was able to coalesce the party you know, leadership around her, whether it was party chairs, whether it was leaders in the House and Senate and other governors. She also was able you know, to within mer you know, twenty four hours, have fifty six new thousand new volunteers sign up, you know, unbelievable amount of money, even as early as you know today, raising ten million dollars in the first hour after you've you know, picked
a vice presidential nominee. I think everything that came out of the gate was really strong. So I do think that will start reflecting in the polling and not as surprised to see that they've been you know, flawless and executing this they brought forward in a very strong way, you know, a process that was respectful and still kept everybody together in the party as she picked her vice presidential nominee. So you know, polls are a snapshot in time.
This is going to also if you look back a month, like look forward a month, there can be a lot of changes and a lot going on. But I do think she's her running mad a in well positioned going into the convention, and we'll even see if their opponents decide to debate them or not. There's still a lot of pieces moving forward. But I also caution and remind people that in less than sixty days people are voting
in America. You know, we've got people voting in as early as September, So we keep saying in ninety some days till the election. The election is closer than we think, so they have a small amount of time to really reach those undecided voters.
Most definitely, Amy, good of you to join us. Thanks so much. Enjoyed the conversation with Amy Dacy. She is executive director at American University sign Institute of Policy and Politics. Carlos Casanova is with us. Carlos is Senior Asia Economist at UBP. He joins us from our studios in Hong Kong. Good of you to drop by. I hope you're doing well. So I think we can agree maybe a semblance of calm in the market today, But the combination of events
seems as though it's almost like a perfect storm. We had the weak US data on jobs last week, some under performing tech results, a crowded yen carry trade that may be tied to last week's decision from the Bank of Japan. How are you making sense of this and when clients come to you, how are you describing the unfolding of these events?
Good morning, and certainly very tumultuous period for markets. I think you've missed the one factor, which is valuations in Japan. Those were averaging cyclical highs last week, although of course, following that massive correction, we are now looking at a twelve times on a four p basis, which is more in line with average levels for Japan. But we are explaining it to clients exactly in this context. We think the main trigger was this unwinding of the yen carried trade.
If you look at the commodity trade in Future Commission, about fifty percent of that has been unwound over the past few weeks. And the reason for that it was a crowded trade. And now you have a very hawkish Bank of Japan potentially eroding the profitability of that trade in the months ahead. That coincided with fears around a potential slow than in the US economy, and of course you had a perfect storm for a correction. The selling
pressure was quite in discriminate, even in Japan. You saw selling across all sectors, even one of some of the sectors that benefit from a more hawkish Bank of Japan, and so we have been telling clients that, you know, for those that were not able to, you know, lock in some profits, you know, ahead of the Bank of Japan meeting, there will be another opportunity. Because the market has been so volatile, it doesn't it looks overdone and oversold.
But you know, if you do see that rebound, you have to start looking at fundamentals and try to reposition accordingly. And in the US we're also not expecting a recession, so we think the cell of is a little bit overdone, but we are monitoring this soft landing very closely and also repositioning accordingly.
I'm well aware of the deflationary history in Japan, more than three decades worth, and I understand how that history is going to create a bit of a conservative bias within the policy making body of the Bank of Japan. Having said that, I think we have seen over the last well almost two years inflationary pressures building. The boj resisted the temptation to tighten. Is the Bank of Japan in any way complicit in maintaining a weaker currency and allowing for excessive leverage in global markets.
To some extent, you can argue that there is no way that Bank of Japan wasn't aware of these risks in the global financial system. They are the only ones that may be able to answer the question how big was this carry trade? I think no one else has the data. We all look at proxies to try to estimate the size of the carried trade. And it's also, I would say reasonable to assume that the FED and
the Bank of Japan to communicate to some extent. So in a sense, yes, I think Bank of Japan may have had pressures to deliver the hawkish pivot, perhaps before they had full visibility in terms of the data. We
can go into that later. As a result of this imbalance that was building in the global financial sector and following many many months of them essentially sort of providing the conditions for one way expectations on the Japanese end so very crowded trade and at some point they had to pull the trigger.
The other part of the story is obviously the story of dollar strength. Now we know that the inflation story in the US is very different from what it is in Japan, and the end or rather the FED has had a bias to keep things tight for some time now, So I guess if you are on the side of the boj pointing to the persistent weakness, some of the problem may stem from persistent dollar strength.
Right, correct. So going back to the point on inflation in Japan, it has been significantly higher than the two percent target, but most of that has been driven by strong dollar yen, so a lot of that is imported inflation. Where there's whole case for tightening rates has been this virtuous cycle. So you first have weak yen triggering imported inflation. As a result of that, you instigate changes in corporate behavior,
including increasing wages. For the first for the highest amount that increase was the highest than thirty years, So definitely that part of the cycles has materialized, and then down the line that should translate into stronger domestic consumption and endogenous inflation. The third part of that puzzle is what we haven't quite seen yet. Although data overnight did show real wages increasing by one point one percent for the first time since twenty twenty one, but in none of itself,
that is not sufficient to justify the hawkish pivot. So I think inflation has been high, but it's predominantly driven by US dollars strength, to your point, and so Bank of Japan really really has taken a gamble here because the preliminary data does point towards this virtual cycle sort of taking hold in the second half of the year, but they moved ahead of having visibility on that front.
So, Carlos, next week, as you know, we're going to get the quarterly GDP number for Japan, how are you assessing the overall economy.
It's a backward looking indicator, so I think it's going to disappoint Remember that the economy was in a recession in the first quarter. Consumption and capital expenditure was contractionary as a result of high inflation, squeezing purchasing power of households in Japan because all of their imports net importer, and all of the imports are more expensive. But also companies have been adjusting to higher nominal wages by reducing
the amounts that they spend on capital expenditures. So I think that trend is going to continue into the second quarter, and of course, if we see a disappointing GDP reading, that is going to be quite negative for markets. Against the backdrop of this of this, you know, concerns about global growth and BOJ being too hawkish even as the economy struggles a little bit. So I think that it will disappoint, But as I mentioned, it's a backward looking indicator, so you have to take it.
With a pinch of salt.
And the more important thing to monitor going forward is whether or not this one point one percent increase in real wages is sustainable, and then whether that is going to lead to a pickup in domestic consumption.
To what extent is Japan being held back The economy in Japan being held back by a weak China.
China is one of the largest export markets for Japan, so I think US demand picking up in the first half of this year was a factor that contributed to that outperformance for Japanese equities, especially some of the exporters. Heading into the second half, we now have a weaker consumer demand in the US, but also China very sluggish and it's proving very difficult to boost demand there. So the initial idea that as demand from the US would weekend demand from from China would pick up may not
be sustainable. So we do think that exports will be a drag in the second half, even if they are helping in the first half for Japan. And yeah, not only there's the direct export channel, but also in terms of global investor sentiment, there is a concern around a slowing global economy and China is just not going to come to the rescue this time around very quickly.
Fifteen seconds. Do we have to revise the growth target for China this year? Will they make.
It five point zero? Very unlikely? So my target is four point eight. I think they will miss target the forecast.
Carlos, It's always a pleasure. Thank you so much for joining us. Carlos Casanova, a senior Asia economist at UBP. Stephanie Jung joins us. Stephanie is the chief investment officer at Stashaway, and she joins us from our studios in Hong Kong. Good of you to drop by. I'm so interested in your market person inspective, particularly what we have seen over the last let's say, forty eight hours. How are you understanding the volatility and some of the moves that we have seen lately.
Yeah, indeed, there was a pretty crazy forty eight hours. If you look at the market's favorite gauge of fear, which is the VEX index measures the kind of nearrors our volatility for US markets. It spiked it as high as sixty five, and the last time we saw that kind of spike was back in COVID or even before that was the GFC. So a lot of like kind
of dislocation is happening in our view. It all started with then winding up the carry trade when boj actually started to hike interest rates out of kind of out of consensus, and that sparked some unwind unwinding of the carry trade of course for the end, but that also
kind of spiraled into other momentum traits. I mean, to start with, I think there has been some concerns in terms of how far, for example, the AI bubble has gone, and there's been some debates as to, okay, whether all these capecs spent on these AI names are justified by returns, and as we've seen in the second quarter results, these I mean, these returns are yet to show, right For example, I think the big tags are saying, oh, we're seeing increasing demand, but it's yet to show in numbers. So
investors were already a bit jettuary. I think at the beginning of the summer beginning of July. So that's why we saw some rotation out of these spectac names into smaller caps into kind of other cyclical assets. And I think just in terms of unwinding, a lot of CTAs or control funds have done very very significant kind of
de risking in the past few days. There could be still somewhat to sell over the next few days, but I think a lot of the volatility or the peak of autility has been has happened already in the past forty eight hours.
It sounds almost like bad timing. This confluence of fact is all happening in a span of a few sessions. But what are your thoughts on the recession risk how over own do you think they are out of the US?
Yeah, I think basically we've seen some weaker data coming out from the US in the past week. So for example, you look at the jobs data. Of course on Friday, it miss consensus by quite a wide margin, and it was kind of the lowest non found payroll numbers what we've seen in the past six months or so. However, if you kind of look underneath, there has been some temporary kind of I guess impact in terms of the
hurricane in terms of that affecting temporary workers. So in terms of kind of how significant this data point is, I think as yet to be seen. You need to kind of see the August data. Given that there's a lot of temporary workers that were on leave in July, I mean that number could come back in August, and I wouldn't be surprised if the August number actually surprises
on the upside. On the other hand, of course, if you look at the ISM numbers or kind of the survey numbers, there is some weakness right the I think the ISM was quite weak, and also the smp PMI was also quite weak, below fifty for the manufacturing sector. Now, in the past few months, we've seen a recovery in terms of the manufacturing sector in the US and also globally, but that seem to have stalled in July. I think
part of that is election related. If you look at kind of the commentary that companies are giving, they're saying that, oh, because of the uncertainty of who's going to win or what policies are going to be in place posted the US election, a lot of companies are actually holding back on their investment plans. Now, of course, I mean this then get reflected into these survey data. So I think,
again some of this is actually quite temporary. But also I think that given that we still have ninety days into election and right now the election outcome is actually quite uncertain, that is going to be an overhang on fundamentals and also on markets for the next two to three months.
But now that we have the Harris Wells ticket, do you think that changes Commala's odds to the White House? And you know, what do you make of the Trump trades?
Then yeah, I think I mean, Pamela made a very good choice in terms of her VP in kind of balancing the I guess the the the attacket voters that I mean, she's she's sort of not covering. So I think that in any case, I mean, the poor VP that he actually had in terms of the final candidates were all very very strong.
Uh.
And if you look at kind of betting markets or kind of arts of who's gonna win, I mean, right now it's sort of a fifty to fifty split. And I think this is the worst outcome for markets because I mean, for a whole year, the market has been trading kind of Trump being in a White House. And actually I don't think it was co incidental that SMP actually peaked right after the attempt at assassination of Trump.
That was when Trump, the Trump oughts actually searched his seventy five percent and the high since the sort of the election start, the election campaign started. And now fifty to fifty is not a good outcome because Marcus hate uncertainty, and right now there's a lot of uncertainty as to who's going to win on election day, but also kind
of afterwards, right what happens. I think in any case, it's going to be a very very close election result and perhaps I mean that could be some sort of contest or kind of if I mean, it was kind of a long drag on results for a few more months, and I think that is going to be quite negative for markets.
So let's get back to Japan, because obviously this carry trade was a very important deal for markets, and the unwind of that contributing to the selling and a lot of the volatility that we have been seeing. Next week we get economic growth for the Japanese economy. Give me your assessment of how well the Bank of Japan has been doing and at adjusting its policy right now. Did the BOJ wait too long to try to move toward normalization.
Yeah, I think. I mean, given that Japan has gone through a deflation for the last thirty years, I think it's prudent for the BOJ to kind of be a bit more conservative in their move. I think the problem with the recent move is perhaps more in the timing of things. So they picked the summer, I think, when liquidity is actually quite thin and a lot of people are on leave, and I guess maybe they kind of wish that they could move the currency with this kind
of thinner liquidity. Perhaps, I mean they got actually much more than what they wished for in a sense that it moved the currency in a very very valid way. And I think at the same time they stopped ETF purchases as well, and that I mean basically removed a very very strong support for the nik SO. I think a lot of these are actually quite technical in terms of the fundamentals and progress in terms of inflation for the Japanese economy. I mean, we still remain quite optimistic.
I think the data actually is still moving in the right direction. And I mean, let's remember the reason why BOJ is hiking is because I mean they are actually quite confident of the way the economy is going. So I think in terms of fundamental story, there's kind of still a lot of progress, but I mean a lot of this is technical.
How much further unwined do you think there is to go on the yen carry trade?
Yeah, so, I mean it has. It has had a huge move ONUND sixty to one forty five. I think majority of that has been unwe If you talk to micro funds, a lot of directional funds have already unwounded. So I don't think there's much more to go, but of course I think they're probably gonna be quite choppy.
Choppy indeed, Stephanie, it's always a pleasure. Thank you so much for being with us. Stephanie Leung, chief investment officer at Stashuway, joining us here on Daybreak Asia from our studios 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. 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.