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This is the Bloomberg Daybreak Aisia podcast. I'm Doug Prisner. You can join Brian Curtis and myself for the stories, making news and moving markets in the APAC 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.
Joining us now in our studios in Hong Kong is Stephanielum who is CIO at Stashaway. For a closer look at markets, perhaps you can get to China in a moment. Let's take a quick look at what we see coming out of the United States. Very strong growth. The economy seems to be really firing on all cylinders here and it's causing a little bit of concern about those who are watching inflation carefully. Stephanie, do you think inflation is still coming down or should we worry about a reversal?
Yeah, I think if you look at the latest kind of growth data, particularly in the jobs market, the US has been surprisingly strong to a lot of people. And just think back about three four months ago at the beginning of the year, the market is actually looking for the FED to start cutting interest rates in March by
about five six times by the end of this year. Now, of course, those expectations have been dial back, and right now, I mean the market is looking at kind of the second half of the year for the first rate cut, and perhaps I mean some participants anticipate even later. The FED itself has signaled that they will do three rate cuts. Now the market is closer to what the FIL's expecting. However, we do see some risks that inflation could be kind
of staying higher for longer. And this is something that we've flagged out in I guess since the past twelve months, in the sense that if you look at the labor market, the US labor market, there's reason why it's so strong. If you look at COVID, COVID actually took away a lot of jobs, a lot of people actually left their workforce.
I mean those people actually never came back. So if you look at what the structural shortage of the US labor market, the US is still short of one million labor workers compared to pre COVID, and it takes time for these jobs to be filled or for these people to kind of move jobs, etc. So it's a structural problem that we see and this playing app So.
Is this reacceleration of growth as you're describing it in the United States? Is that unique to the US. Are we seeing growth reaccelerate in other parts.
Of the world.
Yeah.
Indeed, the job's tightness is not just particular for the US. We're seeing the same phenomenon in other developed markets, for example the UK or other European countries. However, if you look at the manufacturing cycle, the global manufacturing cycle has actually been in a downturn for the last eighteen months.
Even that we're seeing signs of bottoming out. So when you look at the manufacturing sector, which has been relatively we compared to the service sector, the man of factoring sector is rebounding, and we see it in the latest PMI data, not just from the US, from a global perspective. And also, I think if you look at China data, China data seems to be bottoming as well. Right if you look at CPI that has turned past it for the first time in the last sort of like twelve
to eighteen months. If you look at the China PMI that has also surpassed expectations. Now atbove fifty again, So.
This has very wide implications for risk assets. I would think in the sense that you know, we have discounted a lot in the gains that we've seen in the US market AI and perhaps you know the FED cutting interest rates. I'm not sure we've really discounted you know, concerted global growth reigniting here.
Yeah, And I mean this is not where funds are position If you look at like where the crowded possessions are, I mean those are off in technology AI kind of acceectors that are not as leverage to the global cycle. And I think what you've seen in the past two weeks or so in the price action of a lot of commodities, a lot of cyclicals, is that there's been a very very fast catch up to this kind of
imbalanced in terms of positioning. Now, of course, from a market perspective, from a risk asset perspective, we think that this kind of high for longer environment may not be necessarily bad for equities per se, because companies actually do pretty well in this kind of inflationary growth environment that we identify. However, the leadership is going to be a bit more spread out, not just focused on the AI companies not just focus on Magnificent seven, but it's spreading
out to cyclicals. So we think there's still i mean opportunity for its ketchup to go give it a low positioning.
What about the Japanese equity market. We've got the nie k today up about four hundred points. We broke about forty grand last week. We're very close to that now six hundred points shy of that level. Is there still opportunity in Japan? Do you think? Yeah?
I think from a short term perspective, I mean, things are a bit overbought, and there's kind of concern about the yeah and potentially getting intervention from the boj However, if you look at a longer time frame, we're actually structurally a lot more possile in Japan compared to other Asia Pacific kind of economies, because there are signs that Japan is finally getting of deflation, and deflation has been kind of the worry about central bank, the worry of Japan for the last thirty years.
So if you look at Nikki.
Itself, for example, it has just surpassed the high that it made in the early eighties. So this deflationary kind of end of deflationary era is going to play out over the next few years. So I think if there's a correction in Japan, it would be a good time for investors to accumulate, if they're not exposed already.
So there are a lot of aspects of the current environment that look very positive, particularly for investing in risk assets. You have inflation arguably coming down in the US, and you have wages that are at four point one percent higher than inflation, protecting workers there to a certain degree. And yet the Fed funds rate is well above that rate at five and a half percent or so. But that worries some people when things look too good, you know, it makes you nervous. Should we be nervous?
Yes, I am. I'm actually I think if we think about where which as a classes we're worried about, we're actually worry about government bonds duration. Given that the narrative of high for longer may be here to stay with us for the next few years. I think bonds actually have less become less attractive in this environment.
And you're seeing it in.
Sort of the breakout of goal as well. So gold actually had a breakout in March and a lot of people wondering, I mean, why is goal breaking out. There's no kind of snic the news, there's no actually large buying actions. I think what the market is sniffing out is that in March we had a very very strong US data coming out, which surprised everybody. However, the FED is still sticking to is a rate cut of three times this year. So the fat is telling you that,
I mean, they're willing to sustain. They're willing to kind of stomach higher inflation in the future compared to what they've done in the past. And I think that's what the goal market is telling us, is that in this kind of high inflation environment, bond investors should be thinking about I mean goal instead or other kind of commodities instead. So I think that is the reason.
Last question. You know, we had a US based investor visiting Hong Kong last week and when I asked her, one of the things that was most surprising, she said that most people in Hong Kong feel as though Donald Trump would be elected president. I mean, if that's the case, what does a Trump presidency do to your thesis on putting money to work.
Yeah, I think we put out a piece looking at kind of like, what are the policy implications of buy the versus Trump. I think, of course, right now is still way too early. We've still got a few months ago. However, I think one of the things that we're looking at is sort of the historical precedence of this, and we think that actually the correct situation still favors Biden.
So we'll see, I mean a few months later.
All right, Stephanie, thank you very much for joining us. I'm sure we'll have you in our studios a few times between now and then. Stephanie lynge cio.
At Stashaway.
Joining us now for some discussion of markets is Nancy Davis, founder and portfolio manager at Quadratic Capital Management. Well, we had that strong jobs month of job creation during the last month, Nancy, and I wonder whether or not, since this may not sit so well with the Fed, whether we'll see a lot more hawkish commentary coming from the Fed.
Well, you know this payroll report, it was the fourth consecutive upside surprise, and now most of the job gains were in healthcare and government. But you know, definitely the market expectations for the rate cuts have fallen dramatically in twenty twenty four, We're now pricing about two and a half rate cuts, as you can see on your Bloomberg terminal, and that's a lot less than where we started the year at about six cuts. But there is still room
if the job's data continues to be so hot. I guess we'll see what the CPI print brings this week.
In the US, we.
Were talking a moment ago about the oil price. I mean, we have a brent just under ninety one bucks at the moment. There's a lot of talk on the straight about the possibility of a resurgence and commodity driven inflation. Are you concerned about that at all and how that may force the Fed to really do nothing in terms of changing policy.
You know, it's definitely a concern.
There's so many all so climate as well as other things going on around the world, whether it's the droughts or even the bridge that just broke down, that's really going to probably be driving the price of oil specifically. But if you look at the commodities index, a lot of the rally is actually cocoa like chocolate. So I think the index overall for the commodities market is a little kind of distorted because of that huge spike in cocoa. But I definitely think the FED is keeping an eye
on that because you know, it's tricky. The battle for inflation has kind of been declared a victory, and they're easing now or saying they're going to be easing. I think it's a question of whether easing is appropriate or whether whether inflation is going to be more sticky.
Nancy, would you not say, though, that inflation still appears to be on a downward trajectory, we may see higher energy prices. This is one of the reasons the FED kind of separates that when it looks at core, but then you also have shelter that is expected to be coming down, and shelter is such a huge part of the CPI thirty odd percent or so. Isn't it likely that we'll still see it. It's just that we won't see it happen as fast as we had thought or hoped. Well.
I think you bring up a great point because CPI is just an index, right, the consumer price index. It's like any other index out there. It's probably not the only way to measure inflation. It's even an index that the FED sort of discounts, right. They use survey data more or the PCE, and CPI is also the year of a year change. So I think the tricky thing is CPI has been coming down and people expect Shelter
to really drive sort of the downward trajectory. But I think if you look at average Americans and their real life cost a living, it's not really come down, like things are quite still expensive. Of lots of things are feeling quite inflationary in the day to day wives. So you have CPI saying one thing, and then it's also so sorted from the as you point out the rent component, which is about a third.
So earning season kicks off Friday, we get the big banks, JP Morgan Wells City Group. I mean, how do you think earning season is going to shape up this year for the first quarter.
Well, it's tricky with the banks because the US yield curve is still massively inverted. So what that means is long dated yields in the US are lower than short dated yields, and that's really tricky for a bank. Also, trading volumes haven't been tremendous. Everything is sort of going up this year, right, twenty twenty four has been sort
of the everything is amazing. Everything is rallying. I think the one thing that is falling is inflation expectations, but besides that, everything else is up, So it's it's definitely a tricky time for earnings. And I i'm you know, I'm I think the yield curve being so inverted in the US is also a pain point for the banks.
I know that the appearance is that everything goes up and the indexes have but individual stocks, I mean, plenty are getting really punished. I mean, you just look at a company like Lululemon, came out with its earnings, wasn't really all that bad, didn't give a strong forecast, and was slammed. So I mean, I don't think that's a good thing or a bad thing, but I do think it makes for an interesting time for you know, stock.
Picking, definitely. I mean, the market is quite complacent right now. If you think back to twenty twenty two, when everything was going down, the you know, sentiment was really terrible. Right now, it's kind of opposite day where everybody is very soft landing. Everything's fine, the Fed's going to cut Inflation's not a problem. Everyone is super complacent that things are going to be okay. And I think that's the time that investors should really prick up and be worried.
Right when everyone gets very complacent, that's kind of when surprises can happen.
Are you more exposed to the US right now than you are to markets offshore?
So I manage two fixed income funds that are both treasury funds, So for my my portfolio management is very focused on the US. But that's by perspectus. So, but I do think there are a lot of great opportunities out there in emerging markets, in fixing everyone in fixed income and even equities, you know, going talking about complacency, you know, there are certain markets that everyone hates, you know,
like it's I guess being a contrarian. I think it's always interesting to look at the things that are out of favor or the things that people don't expect.
Where do you see some of the best value in local currency em fixed in.
Well, everyone's really excited about Japan right now. They've just changed their yield curve control ended that it's a new kind of regime, a new governor, and so I think a lot of people are looking at Japan to say, hey, are we going to have a new you know, kind of a new era to get out of this this decade long deflation and have more interesting markets. But Japan has always been the widow maker with people trying to
play for higher yields. So it's also, you know, it's so you know, betting that bonds jgb's sell off has really been a really really tricky and bad thing to play.
So to play to your strength. I mean, if you're focused on US treasuries, let's talk about the shorter end of the curve. Here is the two year of screaming by at four seventy five.
I don't think so the you know, it's really I
think two year yields probably will be going low. But I think if you're going to look at the front end, you know, if you pull up your Bloomberg terminal and you tape p X one, that's the code to look at the t bill market, and you can see you can buy a one year, one month te bill and get paid five point three percent, right, So why you know, I feel like, if you're going to stay in the short end, don't really make a bet about whether the Fed how many times they're going to cut, because that's
what you're getting.
Whereas I think.
The long end of the curve. You know you're not. That's a negative term premium, so you're really not getting paid to take that risk.
All right, Nancy, thanks very much for joining us. Nancy Davis, founder and portfolio manager at Quadratic Capital Management.
Let's get to our guests. Stephen Schoenfeld is with us. Stephen is the CEO at market Vector's Indexes. He joins us from here in New York City. Good of you to stop by. I want to begin by what appears to be, if you look at the jobs data, a reacceleration of the American economy, and I think it's fair to say a real risk that interest rates may need to remain elevated for much longer than the market had been predicting, or at least the FED had been guiding.
On.
Last week, we heard from Neil Keshgard, the head of the Minneapolis FED, saying, maybe we don't get any rate cuts this year. Are you prepared for that possibility?
Well, certainly the economy keeps on humming. It seems quite impervious to a slowdown, and the FED speak toward the end of last week, after Chairman Powell was a little bit more hawkish, but there's no clear signs yet that the voting, when it happens again, will will choose to postpone. But even if it does, we've now entered April, and to me, if the US equity markets are going to keep moving higher, it's a little bit less about interest rates.
It's more about earnings, and we're going to start to see earnings this week, and so we're going to need earnings. Growth expectations are around three to three and a half percent for the S and P five hundred as a whole. If companies deliver, it could actually further insulate the market from let's call it non loosening fears, right or a longer pace before we see some interest rate cuts.
I think if you just use good old common sense, with the economy this strong, and the fact that the recent earnings were already pretty strong, you could get some blowout stock gains in this next earning season because some of these companies, particularly the in the AI related space, are perhaps bound to have some very strong numbers'll just and that'll just you know, spike up the denominator and bring the pees down, and you know, and investors will
be seduced by that. That's a kind of prediction from a journalist. As journalists covering this stuff, we're all sort of Monday morning strategists, as it were.
Well, certainly in big tech, in financials, in the areas that have been leading and are the biggest weights in the main market cap indexes, you are going to need some blowout earnings to to make these valuations reasonable. I think where we might see the real surprises could be in energy materials, the sectors that have not been in favor and yet fundamentals are supporting them. It's hard to do technical analysis on radio, but if you look at the SMP energy sector, it actually made all time highs
last week and seems poised to go higher. So I do think they'll be earning surprises. We've been generally surprised on the upside on all the other economic statistics. The question we still will see, and which will make April interesting, is where those positive earnings are going to be surprising the market.
Well assume for the moment that some of that has already been discounted. I mean, witness the advance that we had in stocks Friday. I'm wondering whether or not it's the forecast part of the story that's even more important.
Yeah. I mean, look, I think analysts have been adjusting their estimates coming in. We've seen x post reduction of estimates for you former high flyers like Tesla, and I think you know, people are getting a little less excited about another one of the Magnificent seven Apple, but there's still plenty of room. I would be very surprised if in Nvidia doesn't surprise again on the upside, which seems hard to believe given how consistently it's been doing it.
But they're right there in the center of the AI story.
And just for fun, let me take the opposite side of a point you made a few moments ago about about the rotation may may benefit even more. I would say that there's a chance that rotation takes a pause here because the earnings could be so strong for those AI related companies and it's not just AI, but it's it's also you know, the momentum place like Eli, Lilly and Novo nor Disc and those those types of companies just not just AI, but the money may flow back
into them and put rotation on hold. Can you count that?
Yeah, I mean, the whole notion of rotation and rotation tends to happen in a healthy and bullish market, is that the high paying sectors take a pause. They don't always fall. Pharma definitely can still go further, but you get new leadership. And it wouldn't be in Congress for there to be positive earnings on the momentum on the companies that led the market in the fourth quarter, but still have the areas that have been out of favor,
like materials and energy continuing to go up. And I certainly expect that it's hard to ignore what we saw with energy prices and with the main oil and gas companies, as well as what we're beginning to see, in my opinion, in precious metal minors.
Yeah, no doubt about that, with gold and an all time high. Stephen, thank you so much for making time to chat with us. Stephen Schoenfeld as the CEO of Market Vector Indexes. 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.
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