Powell Testifies, China Unveils Financial Overhaul

so called TikTok legislation. White House denies china claims of containment and suppression. US set to relax requirements on travelers from China. 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 Apple, Spotify, the Bloomberg Business App, and everywhere you get your podcasts. Good morning, I'm de Prisoner

and I'm Brian Curtiz. Here are the stories we're following today. FED share J Pal opening the door to bigger rate hikes. Here's Pal testifying to the Senate Banking Committee. The latest economic data have come in stronger than expected, which suggests that the ultimate level of interest rates is likely to be higher than previously anticipated. 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 said that the process of getting inflation back down to two percent has a long way to go and is likely to be bumpy. He also downplayed the impact of FED actions on jobs. Pal suggested that there won't be a very significant downturn in the labor market. Following his remark, some economists did up their expectations for how aggressive the

FED will be when it meets in two weeks. Bond traders boosted bets on a half point March increase and priced in a total of one hundred basis points over the next four months, though some FED watchers are still expecting the Central Bank to roll out a more incremental twenty five basis point hike at the March meeting. Well. At the same time today, we heard from the CEO

and founder of Citadel, Ken Griffin. He was saying he sees the setup right now for a recession here in the US, and he told us the FED is limited in how much it can fide inflation through higher interest rates. Although they've raised rates considerably, it's not clear how long the leg effects are for the impact, and once the impact starts to play out, how damaging that impact is. So they're an unchartered territory. It's a difficult place to be.

My you know, if I could, if I could tell one thing to the chairman, I would I would tell him to say less. Okay, So let's say that's glass half empty. Now we go to the glass half full. Goldman Sax CEO David Solomon, offering a different perspective, saying he sees meaningfully higher chances of a soft landing in the American economy, and he said that the FED seems to be doing a good job for a time of a lot of uncertainty. Well onto China. Now, the country

unveils the biggest overhaul of its bureaucracy in decades. We get the story from Bloomberg's von Man. The revamp strengthens the party's oversight of the financial system. It creates a new agency to manage data, and restructures the Ministry of Science and Technology. Xinhua says the overhaul will make its economy more self sufficient and resilient. The new Finance Agency will absorb the Banking and Insurance Watchdog and some PBOC functions.

Beijing will cut five percent of positions in the government and redeploy people in strategic areas. The drive comes as a US uses export controls and other methods to prevent China from obtaining high end technologies technologies the uscs as giving China an advantage in Hong Kong. I'm van Man Bloomberg, Daybreak Asia. The German government is said to be planning a ban on some components made by Huahwei for use in Germany's new five G wireless network. We have more

from Bloomberg Annabel Jewelers. Network operators could be ordered to remove some of Huawei's components that are already installed in the German network. A source says the band would be implemented once an assessment of overall risk is completed. Parts made by Zte might also be targeted. Berlin is said to be taking a much harder line on components for

network infrastructure, particularly for its latest mobile technology network. This comes as the US, UK and EU all become increasingly focused on security risks posed by Chinese companies in Hong Kong. I'm Annabel Druler's Bloombo Daybreak Asia. The US government has moved to block Jet Blues three point eight billion dollar acquisition of Spirit Airlines. Today, the US Justice Department filed an antitrust lawsuit in federal court. Attorney General Merritt Garland

addressed reporters earlier in Washington. We alleged that, if allowed to proceed, this merger will limit choices and drive up ticket prices for passengers across the country. And we further alleged that the impact of this merger will be particular harmful for travelers who rely on what are known as ultra low cost carriers in order to fly separately. The Department of Transportation said it fully supports the Justice Department's action. The DOT also said that it will move to block

the transfer of Spirit Airlines certificate to Jet Blue. This certification would be required for the carriers to combine their operations. Jet Blue and Spirit said they will vigorously defend their

planned deal. I'm Brian Curtis, along with Doug Krisner and Rashad Salama will be joining us shortly so Doug It's an interesting conundrum for the FED, not only what will the data tell us and how does that guide what they do, but also, I think more importantly is why the four hundred and fifty basis points of hikes that they've done so far isn't having more of an effect

to bring inflation down? And you have to say that it raises the question why doesn't the FED push back more on the Congress on the Biden administration for the fiscal contributions to inflation. I think that's a fair point. We won't know much more on the inflation story. I think it's fair to say until Friday with the employment data, and then next week, of course it's going to be

the February report on consumer prices. Those maybe kind of the determining data points as to whether or not the FED is as aggressive to go fifty basis points at the March meeting. I think it's also fair to talk about the extent to which it's not just been the FED that's been adding to this liquidity. I mean the generosity and physical spending during the pandemic and how that massively increased money supply. That's a part of the story

here that was my whole point. Yeah, it was my whole point that you know, he had the opportunity, speaking to Congress, to throw it back to them a little bit. But of course, you know, the FED, I think realizes it's kind of the punching bag on this for levels of inflation. And maybe that's the way the whole thing was designed in the first place. Hindsight twenty twenty. Right, we were in the midst of a pandemic. No one knew the extent to which they was going to require

that level of emergency support. You can argue the case now that they overdid it, both I think on the fiscal side and perhaps even on the monetary side. Yeah, and again, why four hundred and fifty bases point? I suppose you could use this as a positive too. If you were a bull, you could say, well, look, they've already done four hundred and fifty basis points. I was planning that they might do another seventy five. Maybe now it's another hundred. You know, in the larger scheme of things,

is that going to bring the whole thing down? You know? Maybe not that. Maybe Well we'll put these questions to pre amusers. She's coming up in a few moments from TD Securities. Now it's time for Global news. The US Senate is moving ahead with its so called TikTok legislation. Ed Baxter with Global News in then nine sixty newsroom in San Francisco, ed Yeah, right, Brian. Although TikTok and back to answer not mentioned in the bill, the intent

is clear. Sponsor Senator Mark Warner says it gives the president the ability to force the sale of foreign owned technologies, applications, software, e commerce platforms if they present a national security threat to the United States. Our concern is that it poses both a data collection problem and the potential for TikTok to be used as a propaganda tool for the commerce party. Now. Warner's co sponsor, Senator John Tune says China has shown

it will lie about everything. The White House has quickly endorsed the bill, the first time the administration has weighed in on legislation like this, and it also ups the Auntie against the relationship with China and Eurasia. Group President Ian Bremer on Bloomberg says relations between China and the US are progressively getting worse. So what does he say the White House wants? They want to establish a floor under the US China relationship. They want more stability increasingly,

Shiji and Ping doesn't see it that way. That's a problem. And the bigger statement from Beijing was not from the new Foreign Minister, it was from she himself on Monday, where he directly called out and criticized the United States for a containment policy. And the Chinese president never does that directly. That's unusual. I take notice. So She's statement

regarding containment, well, Bremer says, could have some merit. He says his Tech bill is part of it, in the commanding heights of the technology economy, which happens to be one of the most critical areas out there. So, I mean the Chinese, They're not just making this stuff up. I mean this is a strategic policy of the United States government. And Bremer says, bring its allies like South Korea and Japan, the US into the mixes is part

of that equation as well in China's thinking. Now, the White House has responded to the Chinese assertions of US containment. NSC spokesman John Kirby, with all due respect to the Chinese Foreign Minister, there is no change to the United States posture when it comes to the spilt of relationship and Kirby repeating the US wants competition and not confrontation. Australia's Prime Minister Anthony Albanis he says he will be using his visit to in this week to deepen business

and defense ties. Also says he hopes to discuss China's aggressiveness with Prime Minister Norrendromodi. US President Joe Biden's budget will propose hiking payroll taxes on Americans making over four hundred thousand dollars per year and allow the government new power to negotiate drug prices. He says this part of the effort to extend the solvency of key medicare programs. US is set to relax COVID testing requirements on travelers from China as soon as Friday. This decision reported from

national security and health officials. Florida Governor Rhonda Santis has introduced his annual legislation, asking including an abortion bill that would ban the procedure at six weeks. De Santis says, also focusing on school curriculum, we need to focus on reading, writing, math, all these different things. That is what unites parents and

Unites US. When you start getting into things like gender ideology, it's very divisive parents and the majority of parents in Florida, I could tell you do not want that in the schools. White House spokesmo when Koarain Jean Pierre calls his proposal shameful, their rhetoric doesn't come without consequences. Here. The stories told today in twenty twenty three in the United States of America are shameful and completely unacceptable. The Santa says a

US should be more like Florida in San Francisco. I'm Ed Baxter and this is Bloomberg Bryan Curtis along with Rashad Salama. This is Bloomberg Daybreak, Gaisia. We are both here in Hong Kong, and our guest is Priamisra, Global head of rate Strategy at TD Securities. So Pal raised expectations here for a fifty basis point hike. It's not the consensus yet, but he's he's certainly put that on the table. And also for the terminal rate to go higher.

Obviously that's a change. But then again we know that the Fed really wants to get up to a certain level that it deems as high and then see what happens. You know, when will we see the impact of the already four hundred and fifty basis points in life could be at least five hundred and fifty basis points on the economy. When does that happen? Sure, that's the trillion

dollar question. I mean, I would think, you know, academic research suggests that the lag is twelve to eighteen months, but you know, I think it's important to put it in context of where the starting point was. I actually think we should be looking at the lags for when fat funds got close to four percent. If you think inflation, you know, by the end of this year's in the

three and a half to four percent range. We really reached neutral rate only in December, so you know, I think it's too early, and I'm a little surprised that the FED wants to see the effect or expected to see the effect right away, which is why we're very concerned about hard landing here. I think, you know, it's been a few months since fat funds got to four percent. Our view is it's much later this year, the consumer savings buffer starts to come off, the lags start to

kick in, the economy slows down, fairly substantially. But the FED is looking at data right right now, you know, I think a data dependent FED should you know, also look at lags, and but I think it's it's hard to know when it's going to start to show an impact. It hasn't yet so far. And so the big question, the big macro question we've been debating, is the data strong because the lags have not kicked in, and we're very much in that camp. Or is the data is

strong because the Fed's not hiked enough. And I think, well, chep out, let's face it, the FED funds rate is well below inflation, so I think that's probably the main reason right right now, you know ex post, yes, but if I look at the next year ahead, the TIPS markets pricing in three percent inflation, now maybe you can say TIPS is underpricing it. Economists our forecast is three

and a half. So over the next year, if we think inflation is going to be three and a half, then a FAT funds rate of five and a half is very restrictive. So I think I was actually surprised at Chapel didn't spend more time talking about the duration you get to whatever that endpoint is five and a half six, stay, stay there for a while, don't cut rates until you know inflation gets closer to two percent. I think they're still trying to figure out their endpoint

and the pace. It's surprising, but Chap I was talking about a faster pace of hikes, which I think raises the odds of a hard landing. Well, if it's only neutral just a few months ago, it's going to take time. And the thing is, if we left we've got a neutrality at that level. Are you also perhaps suggesting that rates may have to increase more than what's currently being talked about. I think the market's done a lot of that pricing in, but you know, the data is very strong.

So if they do go fifty, I think then we could absolutely be looking at a terminal rate closer to six percent, because I think they can potentially hike up until July. We think it's the third and the fourth quarter that the lags start to kick in. So if the fens going fifty, we're talking six six and a half. As much as I'm worried about a hard landing, I would stay away from that front end of the treasury

market because it's going to be very data dependent. We know inflation is going to be persistent, So you know, I don't want to say that this is the highest point in that very front end. I think it's much more attractive to be in the long end. We get those impacts on the economy, particularly interest rates sensitive, we get those first, and it sort of moves along until it finally gets to company profits. And once corporate profits get seriously dented, then the companies start laying off people.

And probably that's when you get the biggest impact because right now people still have jobs and so they're still spending, right and they have savings. You know, there's still that post COVID savings that's I think buffering the impact of higher interest rates. But absolutely the labor market is very tight, and I think that's what's keeping the data strong. The FED looks at that and keeps hiking more, and I think that's creating a problem for later this year into

twenty four. Well, I suppose the question also is is you know, in trying to achieve a soft LA, can you get wage a requests to come down without actually losing jobs. I mean, that's what they would like, they'd like to see people get scared enough that they're not demanding wage hikes or else they're going to leave because

they're not that confident. That would take some of the pressure off inflation, and it would also allow the FED to kind of say, you know, we're still maintaining our other mandate, which is to keep jobs steady exactly, but you know what we're calling that immaculate disinflation. It's hard

to see how wages can come down. Now, maybe they can come down from five percent to four and a half, but you need something like three to three and a half percent wages to be consistent with two percent inflation. How do you get that level of wages without a rising the unemployment rate hasn't happened historically, so we think the only way to really get wages down would be to move the unemployment rate higher, which is going to mean, you know, job losses. I don't think it's happening in

the next few months. But closer to your end, what has been the impact as far in your view of quantitative tightening? You know, I think it's doing a lot. So that there's two impacts. One is on the reserve front. Reserves are coming down, but I think the banking sector still has enough reserves, so I don't think you see pressure on funding just yet. That's probably a next year story.

The other impact is higher interest rates. Real interest rates have been going up in that five to ten year part of the curve, which then is impacting housing another interrasensitive sectors. So I think QT quantitative tightening, is doing as much work as raising that FAT funds rate, but it's harder to quantify. I wish the FAT would talk about QT, because I think it's absolutely tightening by moving those real interest rates higher one hundred and three basis

points and change. That's the spread between twos and tens. We took out last year's high on the two year yield, and we also took it out on the three year, But that's the only part of the curve that we've actually eclipsed the rates the levels that we saw last year. Does that get come pleaded? And why is the ten

year sort of sticky here under four percent? I think the ten year is sticky because there's this fear I think is a growing fear of a hard landing with the FED that's remaining data dependent, that is not able to really figure out or have a view on the lags, the risk that they're going to overdo it, especially as they're doing a quantitative tightening. Is you highlighted they continue to raise rates to five and a half or six, the risk of hard landing is high, and I think

that constrains that long end. The other thing we've seen is significant influence into fixed income, not just foreign investors, but we've seen Japanese buying. We've seen you influence into bond mutual funds as a recession hedge. I think that's going to keep the long end anchored. In fact, I'm long hence very quickly. Is that affecting liquidity. I think it's actually liquidity is better now because there is demand for bonds, and it's it's further out the curve rather

than the front end. This is Bloomberg Gaybreak Asia, your morning brief on this story is making news from Hong Kong to Singapore and Wall Street. Book for us on your podcast feed every day on Apple, Spotify, and anywhere else you get your podcast. You can also listen live each day on Bloomberg eleven three zero in New York, Bloomberg ninety nine one in Washington, Bloomberg one oh sixty one in Boston, and Bloomberg nine sixty in San Francisco.

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