Bloomberg Audio Studios, Podcasts, radio news. This is the Bloomberg Daybreak Asia podcast. I'm Doug Krisner. 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.
Well, we've gotten a few surprises in terms of economic data out of both the China and Japan over the past couple of months. For instance, we had to pick up in Japan's exports. We also had to pick up in Chinese exports. Joining us now for some discussion about what we're doing is Chen Wong, chief Asia Pacific Economists at the Vanguard Group with us live here on the program.
So we looked at those export numbers from China and we decided that maybe we shouldn't read too much in At least Bloomberg Economics was saying that some c factors at play there, and a few a few other reasons to think that way. What about your take on the latest with the Chinese economy.
Well, I think the exports actually has been did a very key growth driver for China you know, over the you know, past several months, right, you know. So one thing, I definitely think there is a you know pickup in terms of a global a global consumer demands, right you know, or capital spending. You know, this is actually reflected not just in China's export number, but also general export oriented you know, Asian economies.
Right.
On the other hand, I also feel like there is a push for China right to you know, export is exacts a capacity right China's industry policy made in China twenty twenty five, they made so much investment and production pickup, but domestic demand is really weak, so they have to rely more on the exports that right to, you know, to absorb those excess capacity. So I think that's where
the exports is pretty strong, especially in volume terms. I think it's growing like ten to fifteen percent in volume terms about this year, even though the extra price actually is you know, deep in deflation. I don't think this is sustainable. There is no like unlimited demand for China products. Right. And also there's going to be three tensions you know
down the road. US already impost tariff and then you know, Europeans joined in suits and you know, we see that Turkey is also imposing tariff on China's CV as well, So I think this is not something that's going to sustain down the road.
What about the deflation story. We'll get inflation data for China in the week ahead. Factory gate inflation is expected to do slow to one and a half percent. That would be the smallest drop in prices since February twenty twenty three. But it's deflation nonetheless. Is your sense that we're beginning to find the bottom right now? Or is there risk that this deflationary trend turns into doo a deflationary trap?
Right?
I think it's an interesting story about China's you know, inflation with deflation story. Right. So when you look at China's growth, you know, at this moment when they have such a big investment boom, production boom, right, it immediately lived up is demand for you know, capital goods, commodity,
especially industry metals. So on that front is actually inflationary, right, That's why China's commodity impults actually has been holding up in spite of the property down tern But on the other other hand, when you have so much production capacity and domestic demand is pretty weak, then you know, this kind of supply pressure is generating you know, a significant deflationary pressure as well. Right, So I think the is
somewhat mixed. But you know, overall, if you look at the CPI, you know you would have say, yes, you know, the hat my CPI is probably likely to you know who were around, you know, zero positive. But if you look at the whole goods CPI, it's still likely to be in the deflation of territory.
Well, in China, the policy is basically directed at the state sector.
More than the consumer sector.
I mean, that's been what we've been seeing, and it sort of raises a question about whether dungshall pings to get rich is glorious still holds in China because the policies don't. I mean, I think it's probably cynical to say that Chijinping doesn't want people to get rich.
He wants the state owned enterprises to get rich. But you know, that's some of the things that you hear from people.
Well, I think over the past several years you do see a shift right in terms of China's policy priority, right in terms of their goals. So instead of saying, oh, you know, we allow some people to get rich. First. Now you do see more emphasis on you know, like so called common prosperity, right, you know, you just want to make you know, like there's more emphasis on income equality,
national security, you know, many other things. Right, So I definitely see there is a shift in terms of the policy goes, you know, instead of the growth rate itself, but also on growth quality. So I do see that's changing.
And also I think on the other hand, from a technical perspective, right, when the government want to support the overall growth picture, then you know, pusting up investment is actually much faster, much more effective than you you know, trying to stimulate up the consumption when consumers are lacking the confidence when they get the money, they would rather just say rather than spend.
Yeah, that's particularly true where you young people are concerned. I would imagine when you're dealing with an unemployment rate that is so high in China.
Indeed, I think, you know, we see this new unemployment new use unemployment rate number, right, fifteen percent, still high. But even you know, I think we shouldn't just focus on one indicator to gauge the overall labor market condition. I think in China what is more concerning for the
young generation, it's actually the declining labor force participation participation rate. Right, So when you see that they are not confident about the future, about the labor market or you know, job prospect, then they become discouraged and they stay home prepared for civil servant exam or graduate program exam. Right, So they literally just drop out from the labor market. So I mean that just show you the sentiment in the labor market is pretty weak.
So miss Wong, do you think that the government should and could do more more on messaging to build up hope in the Chinese dream?
Yeah, I mean, I think the key here is really when you look at the economy right and look at the labor market. I think ultimately the most important thing is still about overall economic growth. Right, So when you have a stronger economic economy, then obviously that's gonna you know, create more jobs and bring more hope and income to consumers. Right, So in that way, you can actually build a positive
self fulfilling cycle. But then you know, going back to say what they can really do, Number one, I think they can really they need to be more aggressive, right in terms of the government intervention in the economy to engineer a decisive turning point. And second, I think the private sector bring the animal spirit back. Private sector is really the key.
Yeah, that would be great, great to see for sure, and thank you so much for joining us Chian Wong, chief Asia specific economist at Vanguard Group with us. So a very interesting picture, and we have James Abate, Managing director and chief investment Officer at Center Asset Management to help.
Us clear up the picture a little bit.
James, thanks very much. So a sort of big reaction to the jobs report in the treasury market, not so much in the stock market. And I mentioned in our in our papers review just a few moments ago that Bloomberg Intelligence says rates, while important, are not actually factoring in as much as artificial intelligence is.
Your thoughts on the overall environment, Well, let's.
Just look at the employment report. As you mentioned, two hundred and seventy two thousand jobs were added, which was way above expectations. I think more importantly to the FED was the fact that wages were up four point one percent from a year ago, and in reaction to that, we saw the ten year yield move up to four point four percent, and in essence, what this did is, obviously the FED is meeting this week, there's no cut on the table for this month. July's cut is off
the table. In terms of what the market is pricing in September is now fifty to fifty in November seems to be the only indicative cut. Obviously, the only wildcard
we have is the CPI released this Wednesday. But I think you know, one of the key points that you pointed out as well was the fact that it's very difficult to reconcile the Payrolls report to the Employment Household Survey, which indicated that yes, the unemployment rate rose to four percent and the participation rate fell to sixty two point
five percent. So you know, the household survey showed four hundred and eight thousand jobs lost, which is seven hundred thousand jobs difference to the Establishment survey.
What does that do in terms of the way you're approaching markets right now? If you look at the bond market, I mean, clearly it's kind of a very hawkish tone in terms of the implication for FED policy. Maybe we're lucky we get two rate cuts this year, but that big spike and yield definitely sending a message but what does it do you do your strategy? How are you approaching markets?
Now?
Yeah, I think you know, we've got We went into the year under the assumption that the FED was not going to cut rates unless it was in reaction to some type of financial or geopolitical crises. And we stick by that, and you know, we survey, you know, all
the companies that we invest in and look at. I think one of the key things for US is looking at the consumer, because the manufacturing sector remains in slight contraction or even stall speed if you want to call it that no recession, but vulnerable to some type of demand shock. And you could even argue on a positive side that the cyclical economy's bottom but not yet entered
into an upturn. But more importantly, the consumer, which dominates the US economy, we're starting to see, you know, stress, and particularly when you're looking at a lot of value seeking behavior in lower and middle income consumers at this
point in time. Deutsche Bank had their Global Consumer Conference this week and you know, Spice Company McCormick used the term that I'm going to continue to use, which said financial anxiety in the last couple of months has really spiked in the United States, and it's something that they're paying a lot of attention to. And that was a consistent theme that we saw with all the companies that are consumer facing.
I'm curious what do they mean by financial anxiety? Is do they mean just general economic people feeling comfortable about, you know, their job and their money and that sort of thing. Where do they mean actually tied to markets and to for instance, their returns.
You know, when you look at antidotal information, right you
see IRA hardship withdrawal spiking higher. When you look at adjustable rate mortgages, they're resetting now because many buyers who use the justle rate mortgages and bought in twenty twenty one or on that three year maturity schedule of resetting what the rate is I think across the board what you're starting to see, whether it's particularly in the lower and middle income consumer some degree where the rise in interest rates has created like this frog boiling in a
pot of water, and it's just starting now to get to a temperature with the consumers starting to feel that anxiety that we touched upon.
So if you're right, I mean we're going to get the I think University of Michigan sentiment figures at the end of this week. Say you're right, James, and the FED is going to begin factoring that into its decision making. They want to see a soft lending I would imagine, is inflation at a point that is within the comfort zone where the FED could justify cutting interest rates right now, not yet.
I think they could only justify a rate cut with inflation elevated above their two percent target. If you saw let's say, another regional bank issue, a real estate issue that manifested itself in the banking sector. Everything at the end of the day always makes us way into the financial services sector in terms of stress. So I think the FED can only use that justification to actually cut rates in the face of north of two percent inflation.
I mentioned Bloomberg Intelligence. I got to go back to this because this is slightly different angle. They actually referred to AI as kind of driving things, but they said it's clearly now well extended and almost hinting that it was overvalued. And so a lot of people seeing what Nvidia has done, they're clearly worried about this. But you know, if you kind of refer back to nineteen ninety nine, we did get a warning from Cisco, but it still took a while and we haven't had a warning yet
from Nvidia. Are you comfortable, at least if you're playing tech to carry on until you get a warning.
Well, having been in one of the very few people who are still managing money today and managing money back in the nineties, not only managing US equities, but also I was head of global sector funds, including running three different technology funds at that point in time. You know, for now in Vidia has a monopoly on semiconductor chips
that's needed for the computational power for AI. I think what contrasts today versus back in the late nineteen nineties is that all the presentations I recall anyway that you know, we're industrial in their nature, they stress return on investment. You looked at enterprise resource planning ERP systems like SAP Oracle. You know, all the presentations back then were justifying what the return on investment would be for companies who undertook this.
I think Silicon Valley feels like it's in this fake
it till you make it. You know, mantra that's still in place, and you know, one of the key things for us that when we talked about AI in our insight piece Spring and Summer, is that we wanted to really try to understand what the efficacy of these investments being made today and what are we going to start to see chief financial officers you know, exert more and more influence on budgeting in a way from you know, this field of dreams, build it and they will come
kind of mindset. And that's the thing that we're really focused in on in terms of, you know, looking at AI systems that are using proprietary data versus open source and trying to understand at what point will people you know, genuinely start to look at this and say, hey, where what is the return on investment that we're getting from
all this money that we're plowing out. And unfortunately for other tech companies like Salesforce and Accenture, the consulting guys, AI is hoovering up all the IT budgets for almost every company out there, and it's it's causing a lot of segmental stress within the technology sector.
Yeah, for sure, I mean software in particular, are a lot of those companies are down quite significantly twenty five percent.
Even so it's.
It's you say, it's hoovering up a lot of business. James, thanks for joining us again. James Abote, Managing Director, Chief investment Officer, Center Asset Management. Joining us now on the program is Redmond Wong, chief China strategist at Saxo, with us to take a closer look at well China in particular. So Redmond, thank you for being with us. We know that China is relying on exports and manufacturing and sales
abroad to offset some of the weak consumer spending. So far it seems to be working to a small degree. Is this the right policy in your view?
Hi, fans by doctor and I think, yeah, expot seems just have been, uh you know, doing pretty all relative well with us to pick up in the domestic consumption. So yes, I thank you. This continue to be one of the we had the government we'd like to push. Of course, there's some pushback from the outside on all those allegations of access capacity and so on. But I think, but one major thing I need to pinpoin is, uh
the reconfiguration of the training pattern. I mean, you have been seeing the growth example in May you see the growth export growth in China and the seventh poor and six percent year on year growth. Actually half of it is actually of growth growth is actually accounted for by the growth to export to Arzian country and in some of the Yeah, I think that's the one key things they change power of training, Parlor and and and the and and and the pattern of trade.
Redmond.
I think we can agree that domestic demand in China remains weak. Is there a policy prescription that the government can use to try to revitalize domestic demand? Do you think other than lowering interest rates?
I think they have tried CLI many front and many policies, like for example in the octose and the EV and so on, and uh they just you know, roll out in late April under one in the training uh subsidies and so on. But and also they also encouraging a lot of those guys a household home, opliances purchased in
the in the rural area and all those things. But I think the key thing for China, I think pretty much is really bringing back the confidence of the product sector and also the household expectation of the future income and the stability. So I think a lot depends on uh more stability especcively on the expectation of the regulatory frameword war than on any individual policy or or any uh so, I think I think we have I mean, I know, I mean, we cannot really hope on any
one of those is a meeting. But but but it's still the July Panety section is still carrying something orton uh sec low and I think the market should pay attention to it well than just on individual policies.
Redmond, if you look at artificial intelligence, it has really juiced up the US economy more so than Europe and more so than Asia. If China were looking for some sort of killer app or something to get the animal spirits going. This kind of rides on the back of Doug's question about policy. But is there something out there that might get people excited to start spending again, and if so, what would it be.
I think it's once again, it's really having from the household. It's really on the outlook on employment and also on income, and so that is I think the key questions really for employment and income, what then any subsidies or and the policy just for the sake of a boosting consumption. So I think I think you know it's in China. The close you make it always had those cut traffic
lights of things. I mean, it's the good thing, but there's has been the case for for for for years, and uh, when the economy doing not that well, they we elect we lack a lot of baculatory film world and give some green light even to the part sector or as you mentioned, to the technology sector and so on. So that probably can help as well.
One of the criticisms UH levied against China and its current situation on the part of both the US and Europe has been this issue of overcapacity. How how serious a problem is over capacity in China and what will it take to kind of bring things into balance To the extent that the US and Europe are not outraged by what China is trying to.
Do, I think really really need to look at the whole things. Is more in the context of dis cover global de risking, resawing.
The soring.
You know, it's it's basically is what we call is a geo economic I mataation trend that has been going on since over the last few years. So and so yeah, I mean I think China that's certainly because it's in industrial policies. I mean, it's one of the focus has been over the last few years the industrial policy there definitely,
of course there might be some misallocation resources. You build up capacities in a way that may not be the uh, you know, it's what the economy wand needs, but at the same time you may also lacking something in other sectors. So I would call it's more like a misallocation resources
more than really access capacity. And so but going back to your question external and one, I think this pushback would be actually will continue because that's not just in the US, but in Europe is actually elevated to not just on economic consideration, but it's actually on the national security and consideration. So that's why it's the duo economic trend. It's not just an economic trend.
Well, something that would be safe on the national security front would just be domestic travel. Could domestic travel get things moving a little bit? And if so, how do we play that in the markets?
Uh?
I mean it's when people have more inc I mean it's a domestic trophic Defini is a positive and it's but at the same type, I think the boss fundamental is still on income and also on expectation. Uh. Then you know, just as you know, one or two order cover consumption. I mean, but back to the basic I mean, the growth uh for economy by the end of the day is the capitol accummindation and also more production and not just consumption.
All right, Redmond, thanks so much for joining us here live on the program. Redmond Wong, chief China Strategistic saxone joining us now to define this complicated picture that we have mentioned is Brian Krai as president of Sharp Investment.
Brian, thank you very much for joining.
Is so big reaction in the treasury market to the jobs report, with yields popping in the mid teens, not so much in the equity arena stocks taking it kind of in stride.
Why the difference, Yeah.
I mean, I think you know, US stock investors are still really focused on AI and earnings, and his growth has come in pretty well, whereas obviously, as you said, rates have ticked up a bit, although if you look historically, you know, a ten year round four and a half percent, that's actually, you know, still historically very low compared to the average over the last fifty sixty years.
You mentioned the AI trade there in Vidia will begin trading on Monday on that split adjusted basis. So when the company reported quarterly earnings, they announced that ten for one split. Are you still enthusiastic? Maybe you never were. I'm going to just go out on a limb here. Are you still enthusiastic on the AI trade in anything related to it?
I mean, AI is going to be a very interesting technology, but from an investor perspective, obviously these stocks are very expensive. You mentioned Apple will have an important day on Monday for them. We're looking at Oracle coming out next week, and we think that's a cheaper way to play AI. It's roughly in line with the S and P multiple, but you're really seeing their growth accelerate as they're also taking advantage of AA growth in their services.
I can tell from your notes though, that you're sort of you're sort of feeling like nineteen ninety nine ish a little bit here, and that we're kind of getting to that moment. The one thing I would I would counter that argument with is that we did get a warning a Cisco warned in December of nineteen ninety nine, and the stock continue to go up until March. We haven't had a warning from Nvidia yet. Do you think it's at least safe to wait until we get some warning from one of the big practitioners.
You know, for sure, it's likely that fundamentals on the AI trade, particularly names like in Video, are going to post very strong earnings for a while. I would point out, for in Video holders that twenty four percent of the revenue are coming from two companies, one of which is Microsoft, and Microsoft and others are aggressively looking for alternatives. So it's really hard to say when you know the fever
will break in terms of the AH trade. I mean your kind of implication as well, maybe investors can wait until they get a warning, and that may or may not work. But you know, if you look at sort of what we're looking at more is the average stock, and if you look at the average stock over time, and that is the average TK, the SP five hundred, typically you've gotten out performance. But last year and this year you've seen the S and P, which is a
market cab weight of really outperforming the average stock. So we think there's better opportunities outside some of those big AI leaders that everyone's talking about right now.
So Brian mentioned that very strong employment report and the push higher in yield across the curve in the Friday session where are you right now in terms of the FED cutting interest rates and how important is that in driving this market higher.
Well, this is kind of a two part question. In terms of the Fed, we actually believe rates are going to stay higher for longer. It's going to take a little while to sort of break the fever pitch. You've gotten mixed reports, but generally speaking, things having come off as fast as the Fed would like, so we think
rates will probably stay higher for longer. The reality is, if you look at rates, as I mentioned earlier, four and a half percent on the tenure is not actually very high in historical context, and so we think rates will be higher for longer. In terms of stocks, we actually think higher rates longer term will be good for value. If you look at historically when rates are above four percent,
value tends to out reform growth. So we actually think that even though there's a big AI trade going on, longer term investors should be thinking about value stocks, which have been sort of left for dead the last ten years.
You know, a few economists have kind of waded into sort of controversial areas by saying that high interest rate's actually good for the economy. A lot of people that never got any yield on any of their savings for such a long time, going back to two thousand and seven or so, are finally getting some and it's helping with spending. I'm curious about your take on it. I don't want to sound glib and saying deep buy that, but I mean, is there some sense in that?
Yeah?
No, I think there is. There's an interesting book that came out just recently called The Price of Time that goes into historical rates over the last three thousand years, and I think if you really look at the data, there is definitely some argument to be made that lower rates just in some ways sort of distort the economy, and ultimately higher rates will be good for savers, will
be good for certain types of businesses. It might actually help to make sure that people are making good capital investments as opposed to just speculating when you can basically get money for free. So I would say that that's a very plausible type of argument that some economists are making.
So what's the house view over at Sharf on markets offshore?
Right?
Now?
Move away from the United States and let me know what you're thinking, particularly as it relates to Asia.
Yeah, I mean offshore markets are very interesting in that they traded a much lower multiple than the US, so that you've got to valuation support there. The problem has been earning's growth, and then you've also had situations like China where the government has really turned sort of unfriendly for investors. So it's been really not a good place to be the last several years. However, we do think there's some opportunities in the rest of the world. We
own a number of stocks outside of the US. One that I would note in particular is Samsung. It's the largest tech company, one of the largest tech companies in the world by revenue. That's really a stealth way to play AI because of their memory and you know, if you look at demand for AI servers is supposed to grow thirty to thirty five percent a year. That's definitely going to help samsung semi connector division. And yet it's trading just over book value around eleven twelve times earnings.
So you know, if this was a US company would probably be trading it, you know, three times where it is today. So we think that's an opportunity investors big advantage of.
We did have a dollar pop in addition to yields and that that's a little worrisome for some markets out here.
Hong Kong almost certainly will trade lower.
Today because of the exchange link. So it's important to look at the data that we got and see what's real.
You had the establishment.
Survey with that big number two in seventy two thousand, but the household survey has had unemployment rising up to four percent.
Which one is right.
Well, time will tell they're probably both somewhat right. But you know, we think that economy is still reasonably strong. But you know, from our companies that we're listening to, it seems like there is a little bit of a slowdown starting to prop late up. That doesn't mean necessarily if I'll be able to cut rates in the short term though, but you know, eventually the economy will roll over and you'll get a cut and rates. I would say probably later in the year.
Yeah.
Yeah.
Bloomberg Economics looked at the data and came away and said, we still think the US labor market is cooling, so it is interesting. Thank you Brian for joining us. Brian Krawez, President of Sharp Investment.
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.