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Welcome to the Bloomberg Daybreak Asia podcast. I'm Doug Chrisner. Talks between the US and China will continue as the two sides work to extend a tear off truce. It's set to expire August twelfth. Speaking after meetings in Stockholm earlier, US Treasury Secretary Scott Besson confirmed that President Trump will ultimately make the final decision.
I noticed as the earlier question said that the Chinese Deputy minister did say that we had agreed on a pause. We have nothing is agreed until we speak with President Trump.
We'll have more on the tariff story in a moment when we hear from Paul Donovan. He is the chief economist at UBS Global Wealth Management. But we begin here in the States, where the equity market drifted lower ahead of tomorrow's decision from the Fed. Join me now is Mark Heppenstall. He is president and the CIO at Pen Mutual Asset Management. Mark is on the line from just outside Philadelphia. Thank you so much for making time to
chat with me. Is it too much to say that the Fed is not going to cut rights this month? Even though President Trump has been arguing for that for a while now.
Hey Doug, Well, first off, great to be with you again. Thanks for having me on the program. So I think, you know, if a rate cut were happening tomorrow, then I think that it would have already been spread through the rumor mail coming out of the Federal Reserve. That just seems to be the way they operate. They have never really surprised markets under Powell's leadership, so I think it's likely to be more of a discussion around September.
I do think it is interesting that, you know, we've had certain members of the FOMC lobbying for a rate cut this month. But I will say, in some ways, I'm not so sure this isn't being orchestrated by Chair Pow sort of this dissension, because it's going to be a lot easier for when the time comes to cut interest rates to say that he's listening to fellow FMC members as opposed to being caving in to some of the pressure from President Trump.
The price action today was a little interesting. It seemed as though money was shifting out of the equity market and into the bond market a bit, yields lower across the curve, and I'm wondering whether or not there may have been a little bit of short covering going on at the bond market in front of the Fed's decision. What do you think, Well, I.
Do think that is part of it. Yeah, I mean the seven year auction came in, you know, stronger than a lot of folks were expecting. So you know, the market was starting to rally in the bond market to start the day, and then when the seven year auction came out strong, we really started to see people grab
for bond. So I do think in some ways people are likely to be neutral tomorrow because again, even though I don't think we're going to get at a rate move, I do think there could be a lot of volatility around the press conference. And as you mentioned earlier, we have a lot of important earnings this week. We have GDP, we have the employment report. So again it isn't surprising to me that people would want to square positions in light of all of the news that's happening.
How are you making sense of the day's economic news. We had word that consumer confidence was up in the month of July. Job openings were down, yes, although they're hovering at a level right now that implies a stable labor market. How are you viewing the macro these days?
Well, I guess if you had to pick one word, it probably would be stable. You know, we've seen a moderation in some of the strong growth numbers that we witnessed last year. You know, the first quarter negative print on GDP I think was somewhat of an anomaly driven by trade imbalances. So again, this GDP report will give us a much better sense of what's happening with the consumer, because it was you know, the consumer was weak in
the first quarter. So it'll be interesting to see what type of a rebound we see here in the GDP report tomorrow. But again with labor market, it's relatively strong, and with you know, the unemployment rate pretty much close to indicating full employment picture at this point, I think it's you know, again, consumer spending is likely to not fall off a cliff, and so I would go back to that word stable.
Okay, So we also get the Fed's preferred measure of inflation this week, core PCE. How are you feeling about inflation in spite of the fact that people have been saying for a while now that with these tariffs and some of these new trade deals, inflation is likely to tick up. The market doesn't seem to be too concerned about that right now.
No, it is interesting, and I will say we're seeing a lot of mixed signals. If you look at the ten year break even inflation on you know, looking at tips versus anomenal bonds, it's implying two point four percent. So certainly that's not sort of a runaway high type of number, but it is above the Fed's two percent target, and it has been trending higher more recently, so that's something to be watchful for. Oil prices have been well behaved.
You mentioned they are up strongly day, but you know, I do think with oil being well behaved and a lot of these you know, sort of severe terror shifting into sort of moderate trade deals with still some you know, high tariffs, but again, I don't think it's enough at this point to really cause the spike in inflation that a lot of analysts were expecting after Liberation Day.
Are you still finding opportunity in the bond market these days, even though yields have come in pretty substantially as of late. And I'm wondering if that's the case. If there is opportunity, where on the curve are you finding it?
You know, I will say we've seen you know, I would say a normalization of the yield curve, and I will say for fixed income managers, having some one of a positive slope to the yeld curve that allows the passive of time to basically improve the performance for fixed income assets, I think is a benefit. So we you know, we're still forecasting a moderate steepening of the yield curves, so sort of in that five to ten years zip code, I will say, corporate credit spreads are you know, basically
very close to the post financial crisis tights today. That's both an investment great and high yield. So we're finding better opportunities in securitize credit, including residential mortgage backed securities.
What are you most concerned about right now?
Well, I do think the debt and deficits, which is you know, one of the reasons that we've seen the steepening of the yield curve, and you know, we've seen the thirty year treasury tests the five percent level so many times recently. I do worry that it could be ready to break through the next time that we test the five percent level. So again I think it's going to be pressure at the long end of the yield curve.
And basically, you know, you discount financial assets at risk free rates across the yield curve, and so to the extent that should long term interest rates rise, that should be a headwind for other financial assets. So again that's something we're watching for. It'll be interesting to see what the sort of the breakdown is of the debt issuance. Tomorrow, I think the Treasury is going to announce how much short versus long term debt they're going to be issuing.
Are you tempted to look offshore for fixed income opportunities?
Well, I will say our focus is primarily in US fixed income markets. So you know, we have a little bit of form bond exposure, a little bit of emerging market exposure. But again I will say the opportunity set for US fixed income in light of you know, close to a four and a half percent tenure treasure yield is so much better than it was four or five years ago. So again we're taking advantage of absolute yields, which we think are attractive for a lot of spread assets.
Okay, so for talking the US, how much exposure do you have right now to the muni market.
Well, we do tax wimmunis, and I will say, you know, we've had as much as let's say, ten to fifteen percent of our portfolio and tax communis. However, tax community issuance has really fallen off a cliff, and that's partly because the exempt market has been so strong. So again that's been an area where we're seeing a declining percentage within the portfolio. But you know, there still are sort of diamonds and they're rough you can find in attractive opportunities.
But again, as sort of a broad asset class, it's a little bit tough to find opportunities there.
Okay, Mark, we'll leave it there, Thank you so very much. Mark Heppenstall, Presidency IO at Pen Mutual Asset Management. Joining from just outside Philadelphia here on the Daybreak Asia podcast. Welcome back to the Daybreak Asia Podcast. I'm dig Chrisner. So the earning season moves into high gear in the States tomorrow when we'll get the numbers from Meta, Microsoft
and Qualcom after the closing bell. But it seems as though neither earnings nor even the Fed's decision are enough to take the market's attention away from tariffs and issues on trade. On Tuesday, the IMF said the global economy will keep weakening and it remains vulnerable to trade shocks, and that's despite the fact that we're seeing some signs of resilience when it comes to those US tariffs. We got reaction from Paul Donovan. He is the chief economist
at UBS Global Wealth Management. Paul spoke with Bloomberg TV host Sherry On and Heidi Stroud Watts on the Asia trade.
Has the brasilience in the data surprised you or is it just a result of sort of front loading before it all hits in the coming months.
It's not a surprise.
The impatience of people to see the tariffs and the numbers, I think is actually a little surprising.
It takes time. So there's two things here.
Firstly, any goods that were already on board ship heading off to the United States on the ninth of April, they're not subject to tariff. So that means some of the stuff that's being unloaded from Asia in late May and June that's still not subject to tariff. And then when you get from the port to the shopping basket of the consumer. You've got another three months on average, so you're not expecting to see the full effects of
these tariffs showing up. The consumer isn't paying the tax until June the very earliest, and frankly, with the April that's probably not going to be fully visible until September. And with the August taxes that Trump's putting on consumers, they're not going to be paid until probably January of next year. So it's a staggered effect. But in the details of the data, we are seeing this start to come through.
And it sounds like it could be sort of a holiday season hit that we're seeing as well. But what about the stickiness and the longevity of tariffs? Is that something been the longer term concerns you more well.
So this is the great unknown. It's the unknown for economists, it's the unknown for the FED. It's not the first round effects. The first round effects are nice and simple to calculate. Basically, this is going to add about one and a half percentage points to US inflation. That's effectively the sales tax that the tariffs are likely to represent.
The question is the second round effects do we see us manufacturers raising their prices because they're facing less price competition from foreign competitors.
Do we see US.
Retailers going into profit led in flom and using this tariff story as a as a convenient cover to sneak in a bit more profit margin and a bit higher prices. And the more you get those second round effects, the longer the negative impact of the trade taxes is going to weigh on the US consumer.
Does it mean that it makes sense for the Federal Reserve to be cutting rates now in order to pre empt that impact?
Well, this is a great problem. You know.
I'm not somebody who has a great deal of support for for Chair Pale, I have to say, but nevertheless, I do have quite a bit of sympathy for him at the moment because he's in a really difficult position that we don't know how big the second round effects
are going to be in total. We don't even know actually how big the directive effects of the tariffs are going to be, because firstly, we don't know what all of the trade taxes are going to be, and secondly, we don't know if they're going to survive the court reviews, and you know, there may will be some dialing back
of these taxes as the courts reject them. So it's a lot of uncertainty there, and the wait and see approach is basically I think saying, well, look, if the economy is going to slow down, and it almost certainly is going to weaken significantly as we go into the second half, really should we be cutting rates now or should we wait to see how bad the damage is going to be?
And that's the great uncertainty.
So the FED is in weight and see mode, I think justifiably at the moment, I think they'll cut probably one percent over the course of the next twelve months. But when they start that process that's quite uncertain. Do they cut in September or do they kick it into the fourth quarter? That's uncertain because the data is uncertain, The tariffs are uncertain, you know. Uncertainty is the hallmark of the current administration in the States.
And the job data is one that we're really watching closely that the FED is referring to when it comes to also economic fragility. Right, what are you seeing in the labor market?
So fragile is exactly the right word I think there, because what's going on is the labor market is clearly experiencing some stress because in this climate of uncertainty, companies are refusing to hire.
They're not firing workers.
If you've got a job, your job is probably safe, but they're not keen to go out and take on new labor because you know.
Who knows what the next twelve months is going to bring.
And so as a result, we're not seeing, you know, job vacancies be particularly strong. We're not seeing that recruitment. Now that's negative, but it's not disastrous. It's negative because obviously the labor market is weakening. If you're somebody leaving university, you're going to struggle to find work. On the other hand, twenty one year olds aren't that important as consumers.
You know.
It's the middle aged people like me who are actually the bigger consumers overall. So you know, it's what I'm doing, you know, not what my twenty one year old niece is doing that is actually going to matter to economic performance. Well, no, fortunately we haven't gone down that route. But the TikTok shop does get more of her income than it should. But yeah, that's the pattern that we're going to be looking for. So the FED is going to be very
very focused on the labor market. Unfortunately, the labor market data is not very good quality, and that's where one of the risks of policy era comes in, not because Powell is more incompetent than normal, but because the data gives a misleading signal and is corrected in revision.
That's where the real risk lies.
I think, speaking of Labuobos, how are you viewing US China at the moment? I mean, is this sort of the instinct is to kick the gun down the road for another ninety days because this is obviously the hardest decision of the hardest tariff negotiation to have.
I think that is very much the case, and so I think there will be an inclination to extend and to try and push this further out. And one of the things about the China trade, of course, is that the China trade is likely to be quite.
Visible to US consumers.
They're going to notice when the trade tax comes in on China's products because these are things that they do buy a bit more frequently, or they're obsessing about. They're smaller items. It's not steel so much. Steel is not something you don't go out and buy any good of steel on a Saturday morning, do you. But you might go out and think, oh I need a new toast store, I need a new cattle, or I need a labuba. Nobody needs a labooboo. But you know that sort of thing.
You're going out to spend on a frequent basis, you notice the price increases a bit more.
There.
That's Paul Donovan, chief economist at UBS Global Wealth Management, speaking with Bloomberg's Sherry On and Heidi Stroud Watts right 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 Prisoner and this is Bloomberg