Bloomberg Audio Studios, podcasts, radio news. Welcome to the Daybreak Asia podcast time Doug Chrisner. Financial markets are now being forced to reconsider the magnitude of FED rate cuts later in the year. This is after an unexpectedly strong US employment report. The American economy added one hundred and thirty thousand jobs in the month of January. That was double forecast, and at the same time, the unemployment rate slid to four point three percent. We got reaction from Pierre Yared.
He is a member of the White House National Economic Council.
We saw significant increases in construction over the past month, especially if you look at non residential construction. That's consistent with the President's economic policies. Because of these economic policies that are there to drive investment and factories in the economy, you saw an increase in construction jobs.
That is Pierre Yared, he is from the NEEC. For a closer look at these jobs data, I'm joined by Jeffrey Road. She is chief economist at LPL Financial. Jeffrey, thank you so much for being here. What did you make of the employment report?
Well, I think there are a couple things, so we do have something I highlighted in my notes to my clients here at LPL, so downward revision is no surprise there. I think the big surprises were a fairly strong reading. Of course, it was healthcare and social assistance construction. I think the really interesting takeaway for me is this emerging trend in hours worked. So you know, we've had this low high or low fire environment for quite some time now.
Granted one hundred and sixty thousand that's not low at all, so that's pretty strong. I don't know if this is going to be a trend that that's going to continue on the rest of the year, but it seems as if employers are more interested in increasing hours worked rather than and just outright going back to you know, one seventy five one eighty k run rate. But we we think this is we think this is indicative of the fact that firms have had a very difficult time finding qualified workers.
That was the problem.
Remember, and if I be surveys, several other surveys suggested the same thing. Beijbook highlighted this. You know, during that great reshuffling, firms couldn't find people. I think they're at this point where they say, okay, we know the economy has risk of slowing down, but we don't want to give up the people we worked really hard to try to find.
So these data seem to have forced the markets to reconsider the magnitude of FED rate cuts later in the year. How did the employment data impact your thinking in terms of FED policy.
Well, it pushes things out a little bit. I don't know if it changed too much, but it just confirmed the fact that we think.
I think the FED.
Initiates cutting and easing of policy in the second half of twenty twenty six. We think certainly with the role of strong growth out of the last half of twenty twenty five and inflation still running too high, it's that it's pushing the Fed out toward later in the year.
I don't think.
You know, perhaps maybe some people were thinking an April timeframe. Perhaps it's a little bit later, so the Fed has to continue to focus on inflation. A strong January jobs report with an unemployment downtech that certainly gives the FED a lot more time to focus on the inflation side of their mandate.
So speaking of inflation, Friday, we get the CPI data, do you think that it's we have the risk here of a hot rating, Well.
We're still running in the point three month on month run rate. We really need to see point one and point two type numbers these month and month run rates here, So I think it is going to run hot even before this non farm pay report.
I do expect this.
Latest CPI number to run on the hot side, and that's partially due to the fact that the economy is humming pretty well.
Who would have thought we had a.
Greater than four percent quarter on quarter number for Q three and Q four is looking like above two and a half percent.
One of the things that the equity market has been struggling with recently the notion of disruption being unleashed by artificial intelligence. Last week, obviously, we saw it hit many different software stocks today. In fact, real estate services companies were hit on the notion that they are vulnerable as
well to applications and tools of artificial intelligence. Do you have a sense are you beginning to develop a sense of how AI is going to impact the overall economy, maybe more so in terms of the job market.
Well, I am most concerned with those that are coming right out of college, those that don't have a long lineup of experience. There on their resumes. That's certainly going to be hurting those folks with the increased utilization of AI. Interestingly enough, I think we're still a little bit of we're still far out until we see real bonafide impacts on productivity from AI, and that's because utilization rates are still pretty low, particularly in sectors that would benefit from AI.
So think leisure and hospitality, think healthcare services, some of those sectors I just mentioned very very low utilization rates. So we're just in the very beginnings I think of of AI usage that would actually flow into productivity numbers.
Tonight in Washington, the Republican led House pass legislation to and President Trump's tariffs on Canada. This comes at a time when affordability is really the hot button political issue, and at the same time, today we learned that Trump is privately weighing whether or not to quit the US Mexico Canada trade agreement that he signed during his first term.
Talk to me about the way in which you see tariffs impacting the economy and whether or not they are indeed feeding into this problem of affordability.
Well, no doubt, tariff saraheadwind. You know, its attacks. Whether you want to admit or not right. So the fact is the economy could actually do even better if it weren't for the uncertainty around trade policy. I think one of the biggest things in my mind that is a a real negative impact from these tariffs and just the uncertainty of tariff negotiations is businesses are hesitant to make a three year five year plan, right, So you think about the capac that could be spent if businesses felt
more comfortable about the you know, the years ahead. There's just still so much uncertainty. It's hampering cap X spend.
I think we've had four straight sessions of dollar weakness. The flip side has given us a much stronger Japanese currency, But if we stay focused on the dollar its weakness. Is this something you think the administration is really angling for as a way of supporting a lot of the manufacturers in the States that rely on markets overseas. Is this a big positive, the dollar weakness that we're seeing right now.
Well, it relates to the administration. Interestingly enough, I think the administration is more focused on the ten year where yields are. I think it is fair to say that, you know, there is this notion that a week dollar would allow a little our exports to be a little bit more competitive on the global scale, and and that's
a fair point. I just would would answer back to those commons say, look, we still have global central banks holding a lot of US dollars, so they don't want to see their their portfolio value decline because they're they're dollar holdings are becoming weaker and weaker. But I do think there is there is a component of trade on this. Interestingly enough, there is there does seem to be such
a focus from the administration on the trade deficit. And I think, you know, I think, as we all know, trade is inherently of vulnerability, but there's really nothing out of the ordinary of a of a largely developed economy having a trade deficit just means we're wealthy enough to support one.
So you mentioned the ten year with a yield right now around four seventeen. It seems as though the market at the long end of the curve doesn't really show much in the way of concern as it relates to inflation. Could that change in a dramatic way? Is there the risk that the tenure could let's say, move up beyond four and a quarter percent.
Well, there certainly are some important levels to watch. I think we're in a pretty comfortable range. When you think about seeing the ten year between a four to ten to four to twenty five.
The economy can handle that.
Markets, financial markets and derivative type markets that base contracts off of that will feel comfortable. I think once you start approaching four and a half on the ten year, and of course we were talking about the risk of approaching five percent sent just you know, a few quarters ago. But I think we're in a pretty comfortable range and Marcus can handle that, and we're seeing that even play out now.
That's that's not a cause for concern.
So does this change if the FED begins to unwind its balance sheet, let's say, between now and the end of the year, in a slightly more aggressive fashion.
Well, I think, of course you're referencing Kevin worsh and the nominee that most likely will pass. You know, by the way, he's not a yes man, and he does seem to have a pretty good history in his career with crisis management, et cetera. But as it relates to the unwinding of securities, letting security, the bond security is
mature that's certainly going to tighten financial conditions. In some ways, you could say that that's okay, that at least will be a little bit of a disinflationary impact on an economy
that needs that kind of influence right now. But I think you think about how the markets are reacting to that, there's still probably a little bit of a you know, the the push pull is we try to understand what a worst lead FED might look like, so you know, maybe maybe we have a little bit more time and to try to make our best guess on how that's going to play out. In the end, though, I do think this is this needs to happen. We do need to see a balance sheet that's a little bit smaller
than where it is now. And if they do it in a very measured fashion, I think they can shrink the balance sheet without creating undo volatility.
Okay, Jeffrey, thank you so very much. We'll leave it there. Jeffrey Roach is chief economist for LPL Financial, joining from Charlotte, North Carolina here on the Daybreak as your podcast. Welcome back to the Daybreak Asia podcast. I'm Doug Krisner in Japan. The markets are back online after a holiday Wednesday today, the reading on Japanese wholesale inflation was pretty much in line with estimates. The producer price index was up last month at an annual rate of two point three percent.
For a look at markets, I'm joined by Charu Chanana. She is the chief investment strategist at Saxo Bank. Chau joins us from Singapore. Thank you for being here. The bullish momentum in Japanese equities has been undeniable. Obviously, much of this is tied to Prime Minister Takeiichi's victory in the recent snap election, and it seems as though this so called Takeiichi trade still has power. Is that the way you see.
It, very interesting election outcome that we've had in Japan, with that two thirds majority for a single party, a kind of victory that we haven't seen in a very very long time. As you talk about, you know, yeah, the Takaichi trade. Certainly a lot of focus on that going into this election, I would say, because this election
was really a test of fiscal credibility. You know, there were a lot of promises around suspension of the consumption tax, you know, the consumption tax being you know, removed if she was to get the kind of mandate that the markets were expecting, and that kind of did lead the markets to think about what that would mean, you know, in terms of fiscal credibility, given that we know that
Japan's death is really high. It's about two D two hundred plus percent of GDP, So I think with that kind of victory, although the massive, you know, majority that we've got there, I do think the Takaichi trade is
not going on as expected. Of course, on the equity side it looks quite positive because of the fiscal impulse that could come through, but the Takaichi trade also had risks of a bond sell of and the weakness in the Japanese yen, for instance, and those are not the things that have really materialized, because I think the sense here is that even though you get that fiscal impulse, this kind of a majority also increases the chance of flexibility,
of policy coherence, and potentially less surprises. So the markets actually really taking this in a positive sense. Equities are stronger, the yen is turning out to be significantly stronger as well, also a little bit helped by the weakness in the US dollar. But certainly I think overall, the clarity the strong mandate have really been a bigger positive, uh, compared to any risks of you know, fiscals on the fiscal side.
Right now, what does that do in terms of the thinking at the Bank of Japan that we know that at least the bias seemed to be to raise infrast rates again, does the BOJ have to take a break for a while.
Again, that was I think the sense going into the election that if she was going to get a strong mandate, then you have fiscal losening. Then there is potentially going to be some you know risks for the BOJ as well to continue to normalize policy because you cannot have that divergence play out in the fiscal and the monetary
policy sides. But I would say, you know, I think again, given the kind of mandagies, god, I do think there is actually room for that divergence to play out, because certainly there will also be inflation risks in the Japanese economy.
We have seen those lingering for quite some time now, and with this kind of a fiscal impulse that only gets stronger and you know, cost of living pressures will certainly be something that I think Takaiji continues to focus on so restricting the hand of Bank of Japan in that scenario does not seem to be the best option to me. So I do think we could get other normalization from the Bank of Japan even as we continue to see that fiscal impulse coming through.
Charro, I'm curious as to whether you're still finding even with the elevated levels of the nie ke, opportunities in Japanese sequities.
That's totally fair that you asked that question. We've had a strong support from say corporate governance reforms in the last two years. The weakness of the yen has supported the exporters in the economy. So certainly, I think has been a very strong story. I do think the positivity continues, it only gets better, but will also be I think later this year and going into next year, it will also be a lot about selectivity in the Japanese markets.
I think it does stop being that broad story that it has been so far, because, like we talked about, right the Japanese en, if we were to see some strengthening of the end, and we know it has a significant room to appreciate here given you know how the shot positioning is so wild, and you know the evaluation of the yen is so cheap, and if the yen is going to strengthen the rate sensitive sectors, certainly the en sensitive sectors exporters for example, start to have an
impact on that. But of course, you know, I mean if we are to get the kind of physcal impulse that looks like it's coming through at least those sectors where the subsidies really get targeted, you know, say defense or strategic keep Because there's been a lot of talk about AI and semiconductors being in focus in terms of that spending as well a lot of domestic investment themes. I think they continue to still hold up significantly better than probably those end link sectors.
So if the region is benefiting from this build out of artificial intelligence that's primarily happening in the US, is that essentially a trade on certain technology firms that have proved indispensable to the supply chain, particularly in the semiconductor industry.
I mean, actually AI has been a big team in Asia as well, and I think investors are slowly realizing that the backbone of the manufacturing backbone off AI actually sits in Asia. So uh, there has been of course, uh you know, that realization of late and investors are
trying to position accordingly. Of course, you know, I mean I think US firms still remain those innovation leaders, uh, but since you know, towards the end of last year, we have seen a lot of risks around concentration, around circularity of those US the tech firms, around the KPEX signals that we've been getting from them, and what kind of ROI could they deliver. There's been questions around that.
There's been questions around whether or not the US really has all of that infrastructure in place to kind of really meet the growing electricity, the growing power demand that this whole AI theme demands. And of course we've had, you know, because of the massive run into the U stops that has been you know, overpositioning or valuation fatigue, so to say, And investors have been questioning, is too if you do want to stay in that AI theme,
where does the story still have legs? And Asia has been a top answered I would say on those fronts. I mean, like I said, it's been the manufacturing backbone, you know, Thai answer TSMC for example, which produces advanced wafers which powers leading AI chips. That's been very much in focus. We've been getting some strong numbers from Taiwan even for January, you know, revenue growth focus. I mean,
we've gotten some really good numbers there. Korea's leaders like you know, Samsung and sk Heinex, they are they hold more than ninety percent of the global HbA market share, so again a very very critical component of that entire chip manufacturing story.
Charro, what is your assessment of the tech story on the Chinese mainland, particularly as it relates to some of these advanced semiconductors.
So there's obviously been a huge policy push in China to you know, there's been two reasons for that. I would say one, as we all know has you know, because of the export controls that they faced from the US, there was an increased need for self sufficiency on that chip side, and that's why they've given a huge amount of policy benefit to develop those chips domestically. So that's
obviously aided that sector in a big way. But we also know that, you know, on a more on a more macro front, China's economy has been facing multiple headwinds, you know, from demographics and the property sector slowed down. Uh, these are things they've been trying to reverse but have
not achieved a lot of success with so far. H So, if you look at their AI plan, they are actually starting to talk about the productivity gains from AI being really the big drivers of growth going forward, especially as these headwinds on the other sides continue. So both from a growth perspective, but also from a self sufficiency and a strategic priority perspective, China has been pushing a lot of policy support towards the tech sector, and I think
that has really played out again and again. You bring up the valuation differences that we've had between US and China's tech place, the efficiency gains that we saw with deep sea Class DA for example. I mean, the models certainly seem far more able to justify the ROI versus the cape expend you know, if you compare them to their USPR. So those are stories that have certainly been extremely helpful to the China tech side.
Okay, Charu, we'll leave it there. Thank you so much. Charu Chanana, chief investment strategist at Saxo Bank, joining from Singapore 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. 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 Chrisner, and this is Bloomberg