Powell Softens Tone and Silvergate Liquidates Bank

for its tech industry to boost China's military. US intelligence report says China is aid in Russia during its war effort. Australia touts new submarines. I'm at Baxter with Global News. That's all straight ahead on Bloomberg Daybreak Asia, the business news you need to start your day in just one fifteen minute podcast available on Apples, Spotify, the Bloomberg Business app and everywhere you get your podcasts. Good morning, I'm Deck Prisoner and I'm Brian Curtis. Here the stories we're

following today. Ben Chair J. Powell, softening his tone a little during a second day of congressional testimony, He said the FED hadn't made any decision on what it will do at its next meeting in March. Larger point, though, is that we're not on a preset path and that we will be guided by the incoming data any evolving outlook. No decision has been made on this, but if the totality of the data were to indicate that faster tightening is warranted, we'd be prepared to increase the pace of

rate hikes. PAL signed upcoming payroll and inflation reports as potentially key data. In the meantime, Traders up their bets on Wednesday that the FED wood hike interest rates by half a point at its next meeting. They also saw the FED taking rates to a peak of near five point seven percent this year, and that he's up from five point five percent on Monday. Well, TikTok is making a push to convince governments in Europe that the company does protect user data. We have that story from Bloomberg's

ofvon Men. TikTok is planning to build three European data center is to store information in the region locally. It'll be done with help from an independent third party that will oversee data access controls. TikTok's European data is currently stored in Singapore and the US. The new data centers will take about three years to build and will cost one point three billion dollars annually to maintain. TikTok's latest move follows an order from the European Commission to ask

its own staff to delete the app. Germany and Canada follows suit, and the Netherlands is said to be considering similar steps. In Hong Kong, I'm Ivan Mah Bloomberg Daybreak Asia, the Netherlands is preparing more restrictions on chip making gear

to China. More from Bloomberg's David and Glaze. A new proposal will reign in exports a so called immersion DUV lithography products that, in addition to restrictions that already exist for the most cutting edge lithography machines now, this means that Dutch tech firm ASML will be barred from selling some additional technology to Chinese companies. Even so, ASML said in a separate statement that the measures would not have a material effect on its outlook for twenty twenty three.

The plan comes as the US ramps up restrictions and China's access to semiconductor technology, and the US is counting on the Netherlands to help stop China from further developing its chip industry and its military in Hong Kong. I'm David Inglis bloombrig Debrick Asia. We go to Apple next. We are told the company is reshuffling management of its international businesses with a name of putting a larger focus on India. That story from Bloomberg's Charlie Pellet. It is

a sign of the nation's growing importance. The shift will mark the first time that India becomes its own sales region at Apple, which has seen demands surge in the country. One of the sources says it will give the Asian nation increased prominence inside the tech giant. Apple is making the change after its vice president in charge of India, the Middle East, Mediterranean, East, Europe and Africa recently retired.

In New York, Charlie Pellet Bloomberg Daybreak Asia. We did have Apple gaining about eight tenths of a percent in this latest session, probably not really as a result of that story and also asml Interestingly, when it traded last in Europe, it traded up about one point four percent. The Adanni family is said to have paid off all borrowings backed by Adanni Group shares investors at a meeting

in London quoted a Donnie executives for this update. In addition, sources say that the group repaid a five hundred million dollar bridge loan to banks that was due today. The London meeting was part of a global road show that included earlier stops in Hong Kong, Singapore, and Dubai. The Adonni Group has been trying to reassure investors after a scathing short seller report, and the road show may be working. US investment firm GQG Partners said it would likely increase

its stakes in Adanni firms over time. Adanni's roadshow will continue this week in the United States. Meetings will be held over four days in New York and Los Angeles. So, Doug, the bear case is pretty easily made. It's about all you hear at the moment. The bull case that's much more difficult, But it would become a little easier if

the upcoming data, the economic data was somewhat muted. Yeah, that'll begin Friday with the employment report here in the US, and then you look to next week with the inflation data that we're going to get on a Wednesday, that's the consumer price index. It's going to probably indicate to that inflation remains stubbornly high. But in terms of trend line, I think that we are beginning to see a little bit of a continuation of a softening at least in

the rate of inflation here in the US. But to your point, Brian, as long as the FED is going to continue to lean into this fight aggressively, and if the market has it right and there is an additional one hundred basis points of tightening over the next four meetings, then you're also right. The equity market has a bit of a headwind to face. Yeah, it's a little bit of head scratcher. Then you get comments like we heard from Caterpillar that they see demand pretty strong and they

don't see a recession in the United States. And if you look at Caterpillar and also John Deer, the stocks typical industrial names have traded up of thirty five to forty percent since September, although of late they've been moving a little bit more sideways. But there's a lot of conflicting signals in the marketplace. Yeah, when it comes to cat how much of this is construction, how much of

it is mining. Right, we talk a lot about the transition to cleaner energy that's going to boost consumption of metals. The mining cycle is going to be a very very critical component for Caterpillar to look at it as the need for more natural resources becomes greater. I think that a company like cat it's probably going to be a big beneficiary. Yeah, so bullcase versus bearcase, inflation versus recession. Will put these questions to James aboute coming up in

a few moments from Center Asset Management. Now it's time for Global News. China's president Hijinping is calling for its technology advancements to help boost its military might and backs to it with Global News in San Francisco in the nine sixty news from it Yeah that's right, Brian. She clearly says China needs to accelerate its bois for high tech independence to achieve advantage over its international rivals. Bloomberg.

Stephen angel In Honkong says she is telling military delegates at the NPC that ties with technology and defense will build its military standing in the world. Just about every leader has talked about this pressure that China is under and the need for a whole nation approach to become or reach technology independent, thereby strengthening the military. Meanwhile, the US is saying China will deepen its ties with Russia

despite global pressure. The Director of National Intelligence Abril Haines releasing report and appearing before a Senate intelligence today saying, despite global backlash, China will maintain its diplomatic defense he can technology cooperation with Russia. This in an effort to challenge the US. Haynes says China needs the relationship with Russia desperately. The IC assesses that China's long term economic growth will continue to decelerate because China's era of rapid

catch up growth is ending. In Structural issues such as debt, demographics, inequality, overreliance on investment, and suppressed consumption remain and at the hearing, Senator Marc o'rubio drilled down with FBI Director Christopher Ray on China and TikTok, but they use it to drive

narratives like to divide Americans against each other. For example, let's say China wants to invade Taiwan to make sure that the Americans are seeing videos arguing why Taiwan belongs to China and why the US should not intervene yes, and I would make the point on that last one, in particular, that we're not sure that we would see many of the outward signs of it happening if it was happening. And Ray confirmed to his knowledge of TikTok also had access to privacy of the American public. The

committee also sought more information about the origins of COVID. Again, Abril Haines, there's a broad consensus in the intelligence community that the outbreak is not the result of a bioweapon or genetic engineering. What there isn't a consensus on is whether or not it's a lably or natural exposure to an infected animal, Haines says a leading intelligence as it did emanate from China. Though, a treasure trove of stories coming out of the depositions and the dominion voting System's

defamation lawsuit against Fox News. Court documents, for example, focusing on Tucker Carlson have him passionately writing about Donald Trump quote, I hate him passionately this while he's loyally supporting him on the air, going on to say, I truly can't wait reference to talking about with him too for it to end. Now, these statements draw a dark contrast to what he and other host were saying on the air on Fox and White House Folks when Karine Jean Pierre

put an exclamation point on it. Today, you agree with the Fox Nation's own attorneys and executives who have repeatedly stressed in multiple courts of law that Tucker Coulson is not credible when it comes to this issue, in particular, Global News powered by more than twenty seven hundred journalists and analysts and over one hundred twenty countries. In San Francisco, I'm at Baxter and this is Bloomberg. This is Bloomberg day Break Asia. I'm Brian Curtis, along with Rashad Salama,

Doug Krisner, and Ed Baxter as well. Our guest on the show this morning is James Abatte, Managing director and Chief investment Officer at Center Asset Management. James, Doug and I were just talking about inflation versus recession, you know, which is the greater fear at the moment, and how difficult it is to really make the bulk case here other than perhaps for individual stories. Always interested in your take,

How how are you looking at markets these days? Well, I think when you're looking at top down indicators as the yoke curve being inverted on their own every maturity, pm i's other leading indicators and contraction, housing, construction weakness, and job losses. You see daily in technology and finance. It screams economy wide recession. However, you know, as a stock an, it's doing bottom up research across all sectors

of the market. You know, what we're seeing is that it's possible that you know, barring a significant demand shock, we might end up with what I consider a rolling recession that lasts much longer than the average recession, but it's quite shallow as it goes from industry to industry. I mean, for example, today today's release of the Federal Reserves Page book I highlighted that supply chain disruptions continue

to ease. Consumer spending has generally held steady. Traveling tourism was a bright spot actually and verily strong, while manufacturing was quite stable. But when you look at loan demand, client credit standard of tightening, delinquency rates edged up, the interest rates move higher, you know, from US I think the most significant complicating factor to all of this analysis

is the strength of the labor market. I mean, now the side of tech and finance companies are highly reluctant to let go of trained workers and remain understaff due to the lingering effects of the pandemic crisis. So we might just be able to avoid a recession here. So James, ultimately, you know, is the FED actually getting it right? You know, let's think about it. Assuming the FED races its target rate by fifty basis points at the March meeting coming up, and we get to a five to five and a

quarter or target range. You know, let's just point out that that may seem high, and in fact that's the most significant in terms of the slope in terms of rate races that we've seen, you know, in a generation. But when core CPI inflation still stands at five point

six percent, rates are still negative in real terms. I mean, more importantly, if you look at interest rates that are broadly used in the economy as well as valuation, most notably the ten year US treasure yield, which is now at four percent, it's still a negative two percent rate in terms of real terms. So let's talk of restrictive monetary policy stance is simply not true. I mean, until real yields, you know, go from negative to positive. I think that's where the FED is going to end up.

So you know, when you think about you know, looking at even inflation, you know for falls and coming months, when you look at forward looking measures like tips shields, they're still well below where we were for before the global financial crisis, are around one hundred and fifty basis points right now. So I've changed my thought process in

terms of the FED. I think the FED is and this is from interpretation of Powell's comments over the last year or so, is that they're going to stop and hold rates when the ten year tip rate gets to around two percent, which is essentially the real yield, meaning either inflation expectations fall down or nominal rates move higher, because you still got about one hundred basis points to go to basically get to that point where real yields on a forward looking basis or at that two two

and a half percent level, which is where they existed prior to the global financial crisis. So it's going back to the old normal. So is there an issue, do you think in terms of messaging? I think so, because what's happening now is that there's an entire generation of investors who basically know nothing other than the FED put and easy monetary policy, and in essence, as you rightly point out, we're kind of getting back to the future, which is, you know, really the way things existed in

terms of a normal rate. I think if you do want to look at, you know, a variable that does matter, it's credit spreads, and right now BAA spreads are still near historic lows, only around you know, two percent. I mean, unless you get to three percent levels, you're not even

close to considering recessionary levels. And when you look at even high yield indices, um, they're no, we're near close to the levels that we saw during the two thousand and two recession, or you know, even very elevated levels during two thousand and eight. But James, if you're right and we get this sort of long rolling recession, wouldn't

that do the trick? Wouldn't that get at inflation? In fact, it's actually not a bad scenario because it means that, you know, because people don't want to fire or companies don't want to fire their workers, they will stay employed, they will keep getting paychecks, and they will spend and even if growth slows down, it just buys you some time for ultimately higher interest rates to bring inflation down

and nobody gets that hurt. Yeah, that's that's kind of like what the market has told us, right, because the SMP five hundreds at the same level today as it was last May, so you know, the earnings collapse is not yet evident, whether it's because the FED has not constricted the economy to the same degree, but it is maxtional frustration for US investors, right because sideways versus this trap door draw down like we had in the fall two thousand and eight or some er two thousand and two,

you know, has not yet materialized. So I think we continue to kind of have this grinding, sideways type of environment unless we see an earnings recession, end doors, some type of event that causes major risk aversion. Do you

hold your nose a little in buy? I think what you want to do, And this is a good opportunity because what we have seen is correlations within the SMP five hundred fall to levels that we haven't seen in quite a while, and particularly when you look at intrastsector correlations, they're at very little levels, and healthcare, materials, consumers states so to the extent where people have gravitated towards technology

and communication services earlier this year. We've taken the opportunity to go back into those sectors, particularly staples and healthcare, to amplify positions that we think can give kind of an idiosyncratic opportunity and away from kind of broad market risk. Again. You know, you look at the the ADP employment report here is well again, this is strong too, and you know in Jolts also that was a bit of a surprise to the upsite, So you know, this goes really

further your narrative. Ultimately, Yeah, that's right, And clearly the number on Friday with a change in non farm payrolls, which is estimated to be two hundred twenty five thousand, is critically important in terms of what the Fed's decision is going to be at its upcoming March meetings, as well as the CPI numbers that we're expecting next week. So I think, you know, the one worry that I do have, and this is a real important issue, is first,

never underestimate how well run US companies are. You know, that's said labor costs and rising input costs from deglobalization are significant unknowns, and I think the major point that I wanted to point out with regard to kind of all the restructuring efforts and cost cutting that we're seeing today unlike what happened back in two thousand and nine.

And one of the reasons back then why we were kind of shouting from the rooftops to buy stocks was that people were underestimating the operating leverage to earnings of sales. Growth turned positive out of the recession, but margins were depressed.

You know. In fact, you know, margins back then for the SMP five hundred expanded over thirty percent in two thousand and ten after declining you know, twelve percent in two thousand and seven and thirty percent two thousand and eight, which led to a huge forty percent increase in EPs in two thousand and ten that drove the market higher. Today, you know, very important distinguishing issue is that margins have contracted by about ten percent from the record highs, but

they're two standard deviations from trend right now. So in other words, you know, the cost cutting we're seeing today is just simply slowing down the rate of decline and earnings and not setting the foundation for huge increase that can drive earnings higher even in a temperate sales growth environment. This is Bloomberg Daybreak Asia, your morning brief on the stories making news from Hong Kong to Singapore and Wall Street. Look for us on your podcast feed every day, on Apple, Spotify,

and anywhere else you get your podcasts. You can also listen live each day on Bloomberg eleven three zero in New York, Bloomberg ninety nine one in Washington, Bloomberg one oh six one in Boston, and Bloomberg nine sixty in San Francisco. Our flagship New York station is also available on your Amazon Alexa devices. Just say Alexa play Bloomberg eleven thirty plus. Listen coast to coast on the Bloomberg Business app, Sirius XM Channel one nineteen, the iHeartRadio app,

and on Bloomberg dot Com. I'm Ryan Curtis and I'm Doug Prisoner. Join us again tomorrow for all the news you need to start your day right here on Bloomberg Daybreak Asia