This is the Bloomberg Surveillance Podcast.
I'm Lisa A.
Brahmwoid's along with Tom Keen and Jonathan Ferrell. Join us each day for insight from the best in economics, geopolitics, finance and investment. Subscribe to Bloomberg Surveillance un demand on Apple, Spotify and anywhere you get your podcasts, and always on Bloomberg dot Com, the Bloomberg Terminal and the Bloomberg Business App.
Joining us now Jeff you Seney, market strategist at bm Y Mellon to kick off the program with us.
Jeff, great to have you with us, Sir.
Your reaction, I guess, first of all, to what we saw from the BOJ what is the new line in the sand for a Japanese ten year government bond yield?
Well, if you look at that slide that the BOJ announced, you know there's this hazy part between a point five point and a one percent, right, So I think that's a boj to telling you there is no actual line
in the sand. The strategic ambiguity, I guess you know, there's some components of that, but taking a step back, you know, if it's tidying and financial gage and in financial conditions that you're trying to achieve, then generating volatility and FX markets which Governor Rada talked about, and in fixed income markets.
Then job done.
Every BOJ meeting is probably going to be live upp ahead and that marks a change compared to the previous decade.
So Jeff, you actually believe that maybe this opens the door to taking a step towards raising interest rates next year.
I think everything is on the table. So Governor Raider himself admitted April the outlook and perhaps a bit too much on the benign side, and there's a sementy basis point increase and this year's inflation outlook hence a tweak. Now you cannot phrase or you cannot really characterize such a tweak in response to a higher inflation print or inflation forecast as an easing step, right, So I think the market can see that. But again it's about the
next step that we know. The trajectory is towards tightening and comprehensive conditions. The phrase that they're using and markets yen next three markets and in particular jgb's global fixed income will need to react accordingly.
Has the reaction in global markets we did see a sell off in sovereign developed market bonds. We also saw sell off and risk assets. Is that indicative of what could potentially happen that it will be orderly but it will be disruptive or do we not have any sense at all of what the response will be to true yield curve control abandonment given that we've just heard whispers and unclear guidance all of the above.
Really, but what we do know is you know those and figures out you mentioned earlier, So US ten years, and you're moving much more than what the JGB has done. One basis point in the US in bunds is not equivalent to one basis point in JGB ten years.
Let's make that clear.
So the more that it's going to move, then if you assume the process is going to be linear, then the stronger the reaction is going to be. Having said that, Japanese investors they've been retreating from Europe for some time now, they've been retreating from the US on a relative basis. China has been retreating as well. So looking for new purchasers, you know, for the Europe, for the Eurozone bond market,
and for the US treasury market. I think that has been going on for some time now, So in that context shouldn't generate too much volatility of Japan steps back a bit more.
Okay. So in other words, even if we do get full normalization, you could see it happen in an orderly fashion that won't necessarily present a tail risk or some sort of headwind to sovereign binds globally.
I think as long as the normalization itself from Japan from Tokyo is going to be more orderly than the answer is yes. If it's going to be sudden, stepwise changes, large discrete changes of twenty five to fifty basis points something like that, then it's a different story. So it takes two to tango.
We have to go beyond wrapping up the last twenty four hours. We've got to wrap up the last twelve months. For the last decade, we've had two anchors around the neck of the global bond market, the ECB the BOJ byan government bond yields. Seeing what's been happening in Germany for a long long time, Jeff, those anchors, those anchors are away slowly being lifted over in Japan. So I need to think about a new flaw in a global bond market when it comes to yields.
Yeah, how are you thinking about that?
Now?
Well, two things there. Firstly, you said the word yourself. It's going to be slowly lifted, right, So they'll make sure that it's not going to be volatile process, you know, as excess reserves that aspect of the central banks balance sheet and continues them to come off. They'll be monitoring that very very quickly. But the second part of it is going to be data. And here I think the emphasis is more on the ECB or anything. Imagine previous environments.
If we are general manufacturing pmis, you're on the thirty handle DCB, we'd be talking about easing, right. So now that's where the direction of travel is. So I think we have to think about, you know, who's going to stop this ban sheet online process. I think that will help to serve them as an offset. But overall, at this point look in all the central banks. I think that markets can absorb this for now.
Well, but Jeff, just to push us a little further as we look here, question whether we're seeing the end of the rate hiking cycles for both the FED and the ECB, which some people believe is the case. We're talking about the potential abandonment of yield curve control. Where are we going to head if yields do come down? What is to John's point, the floor that we hit that seems like the new normal at a time when some of the more unconventional policies are no longer in effect.
Well, if you really want a normal number, my rule of thumb is always whereas potential growth on a nominal basis. So in the US, is it on the four handle, five handle? In the Eurozone, if growth isn't close to flat your inflation target term two percent? Is it on the two in the two to three range? Japan probably slightly lower. So that's where longer term, the Wiselian rate, you know, so to speak, that really starts to come in.
But to get there, we need to get inflation back to target first, and I think that is the risk that means a lot more unwinding, more QT first. Before we can even start that discussion.
Let's get to favorite trade in FX right now, Jeff, Which one?
So you want to own a pack funders against the dollar right now? So what I mean by that your Korean ones, your tai one, dollars even women be in the short term in this respect right because now that Japan has moved the yen can strengthen a bit. Then that gives more room for Asian central banks to tighten things, or at least a shift towards a more assertive stance. Because you have China Japan put together, the youngerman be forty percent and your trade weighted basket. You can't afford
to let your currency strengthen. Now they are allowing a bit more tolerance for strength, so can you. And given in our iflow data, our custodial positioning data, these currencies are quite underheld right now.
Good risk of water to stop buying them back, Jeff. Just to be clear, that's apak versus the US dollar.
Yes, and euros and versus g ten as well.
Okay, Jeff Wander for the catch up.
As always, buddy, Jeff, you there if bin Y Mellon wrapping up the Central Bank and trilogy.
This week, we have.
With us someone who has been at the FED who might tell us about happy hour after getting good economic reas Jonathan Pingle, chief US economist at UBS, who is not at happy hour currently sitting at his office. I'm curious from your vantage point, Jonathan, how much conviction you can have in this soft landing narrative when we keep getting data print after data print showing you know, this inflation, robust growth, this feeling that maybe we will just immaculately get price stability.
Yeah, I mean this, you know, this is certainly good news, but we're still actually a long way from price stability. And I think, you know, looking at today's employment cost index data, as you know, some sort of Mike was saying, as well as the core PC deflator, you know, the year over a year change following to four point one percent puts the FED actually within striking distance two tens if there's sort of full year projection for later this year.
But even at four percent of the fed's three to nine in Q four, you're still a ways away from what you would call price stability. So everything looks looks great now, I mean, looking at you know, Mike was mentioning real spending coming in a little stronger. You know, we'd actually sort of expected the four tenths increase, and
he's right. I mean, we ended up revising up our Q three consumption estimates after retail sales as a result, so this is all good news and the economy has certainly proved resilient, but they do have this problem that they know we're making progress on inflation it looks like, but we're not actually at two yet, and there's actually a pretty big gap between now and how we're going to get there and a lot of uncertainty. But you know, at the moment, Lisa, yeah, the data looks good.
What's the bigger risk right now that we're wrong about inflation just steadily coming down and we see a reignition of some of the price increase is or that the economy slows down more dramatically, and that the strength that we've seen recently perhaps is an indicative of the longer term trend.
Well, I am pretty worried that this economy is going to slow meaningfully in the coming quarters. You know, there are a lot of positives right now, but they're also headwinds. And I still kind of agree with share Powell that there's still follow through from the monetary policy tightening. I think there's you know, there's still excess savings that's percolating through and supporting you know, and some of these forces could diminish. We also have things like student loan repayments
coming up. I mean, there's a number of headwinds and challenges that we're still going to have to face as an economy. But I think you've you've nailed the sort of risks on the head right because you know, everybody, of course would like to have a soft landing and not have job loss and have this this this continue. But the initial conditions are a little tough. And by initial conditions, I mean, you know, we're starting with a low unemployment rate, you know, even with the e c
I at one percent. I mean, I think that's going to be great news at the FED. Take a little bit of the wind out of the you know, sales of the more work to do component of the committee, but that's still you know, a little over it's you know, four percent annualized, and that kind of needs it to get it down closer to three and a half. So you get a low and employment rate, nominal wage inflation
that's still a little brisk. If the economy stays strong, you know, there is the risk that the FED might have to hike more and do more work to get the slowing that they need in the economy.
A lot of people Jonathan, have been talking about how it's been easier to get a disinflationary trend just simply on the year of your comparison numbers, at least over the past few months. What changes what areas of the inflation overview are you looking at?
Is it housing?
Is it car prices? Is it something else that could fuel some sort of strengthening in the inflation reads?
Well, I mean it's all of that. I mean, I don't think the details of the inflation data in my career have ever been as looked at as they are today because of how crucial it's.
Been for monetary policy.
But when we think about, you know, sort of what's unfolding in the various chunks of the basket, I mean, I think, you know, you know, there's people have talked about, you know, supercre and sort of these measures. I mean, I don't want to put a label on it. But when we look at some of the services components that are most linked to waged inflation, many of them also
have relatively persistent components. You know, I think we can get comfortable with the goods disinflation and we can see it and I think, you know, we're watching sort of you know oere and rents slow and the CPI data, but you know, these other services, you know, are really sort of what what what I think is worth watching for where the improvement could come or you know, what
might re accelerate because of the low unemployment rate. That's one of the reasons I think, you know, Chair Powell and his press conference, you know when went ahead and mentioned the e c I a sort of one important data point they would get between the July and September FOMC meetings.
And if you're just joining us now, we did see the e c I, the Employment cost Index come in at one percent for the second quarter. The expectation had been one point one percent. It was down from one point two percent. Personal spending coming in stronger than expected at zero point five percent, personal income coming in softer, so people making less and spending more. Michael McKee, you've been digging under the numbers.
What do you see?
Yeah, Le's look un to the hood. A couple of things that Jonathan was talking about. The ECI for wages goes down to a one percent gain from a one point two percent gain in the first quarter, and that would be considered reasonably good news. But when you look under the personal income figures, wages went up six tenths of eight percent in the month of June, and that is up from half percent. It is actually the highest
increase since January. So we have two sort of contrasting views of what wage pressures are doing at the moment. And John mentioned, as we do every time we get an inflation figure, the supercore, which is J. Powell's favorite thing, core services x housing comes in at a two tenths gain to point two two if you want to round it out to three figures, and that puts it at a four point four point one percent increase for the year, which is going to be your lowest since basically last August.
So things moving in the supercore direction take out housing out of the equation, and services for the PCE like the CPI are down, but the wage numbers still healthy, and that suggests consumers can still keep spending. The question is will the fancy that as inflationary?
Jonathan, As we talk about these numbers four point one percent down significantly from what it had been from four point six percent the previous reading, what's it enough? Are we heading back toward two percent or to the conversation we had with Richard Clarita. Are we looking at a two and a half or something somewhat above the target that the FED is just going to live with?
Well, I mean, so this is a this is probably I mean, this is a question they're going to have to answer at some point I think next year. At the moment, you know, obviously the four point one is not enough. I do think it's pretty relevant though, for sort of the meeting by meeting decisions they're going to make going forward. I mean this, I mean, at four point one percent, they're only zero point two percent points away from their full year core inflation projection already in
the June data, so they're clearly making some progress. The other thing they're making progress on is real rates. You know, this is going to widen the gap between the funds rate after the rate hike on Wednesday, to a level you know that hasn't been around since two thousand and seven, So they are. So they're they're making progress in terms of restrictiveness, not just because of the rate hikes now,
but also because they're making progress on inflation now. A year from now, you know, let's say inflation is moving down to two and a half percent. They're going to have to make a decision about how hard they push to get it back down to two point oh. I mean, I do think that monetary policy makers would like to actually get it back to two point zher for their
credibility to show that they can do it. Are they going to really work very hard to run it at you know, one point eight so that they can show that they're on both sides. I don't know that that's worth really costing a lot of people their jobs, but I do think they're gonna leave, you know, if they're struggling to get back to their target. I think they probably would leave restrictive policy in place for a while.
Jonathan Peingle of UBS, thank you so much for taking the time.
Jane Fully of Rabberbanks saying this that the BOJ tweeked YCC in quote a very cautious way. As expected, the BOJ raise this twenty twenty three inflation forecast, but there was no upward revision to course CPI in twenty four or twenty five. Therein lies the reason for continued caution from the Bank of Japan. If further progress is made in reviving domestically driven inflation. The BOJ will act again, but they are clearly in no rush. So Jane, we've
got to start with that question. Lisa has asked it a few times and Danny Berger asked it again this morning, and Jane, thanks for being with us. Is this the starting gun on timing or just sending up policy to keep things a little bit more sustainable and easier for longer.
You know, the starting gun really reminds me of that the tortoise and the hair, and I think the Bankerjapan really is the tortoise in this race. It is going to be in no rush. And this is you know, backing away from your curve control because it can be a nuisance sort of policy. It can push policymakers into corners. And we have this in December when when the Bank of Japan you know, made an adjustment to the range for the ten year yield and said it was an adjustment. Now,
clearly we can see those distortions. You know, you have the possibility where you have maybe five year years seven year eels rising above the ten year old. That's not what they want to signal, so they had to raise the parameters. And really, I think there's something about what's happened today, which is the same you know, they want to take themselves away from being pushed into a corner
by market conditions and hence the loosening. But on the other hand, you know, if you read through a lot of the rhetoric from some of the Bank of Japan policy makers, some of them are clearly seeing these signs that inflation conditions are just beginning to normalize. And I would say, perhaps, you know, the real piece of juicy news from Japan, you know this week, is that the government it looks likely to be recommending another hike in the minimum wages. That would be a four percent hike.
There was already, you know, a really big rise this year. So if that four percent goes through, that is your wheels and motion of domestically generated inflation. That's what they want to see. That's the sort of news that we really ought to be reacting to.
So Jane, that long term forecast for inflation that comes from the Bank of Japan. Should I view that as an honest view on where they think inflation will be or just a signal to the market for where they want the market to believe policy will be.
Well, the government came out with a pretty similar forecast for cour CPI. I think it was one point five percent for the next fiscal year, stripping out in some of the base effects because there have been some energy related subsidies, for instance. So again in the government of the Bank of Japan, lots of economists are on the same page here. They think inflation next year will be lower than this year, and that is why they've got to be cautious, because they've got to remember a lot
of the inflation that we are seeing. You know, people are saying, oh, you know, Bank of Japan or Japanese inflation on the headline is firmer than in the US. Maybe they should be tidy, but that is really misleading because a lot of the inflation in that particular print is imported prices. Now, imported prices are not domestically driven. That's what they want to see. It's the opposite really to Europe, to the Bank of England, to the US. They want to see this wage price spiral getting themselves
up to sustained inflation around about two percent. We're on that road, but they're not quite there yet.
Is it a coincidence, Jane that the Bank of Japan's tweak I should say comes after a real shift from both the FED and the ECB moving away from forward guidance and away from committing to further rate hikes.
Well, you know, I think the movie Been Away from Forward Guidance sort of reflects the fact that the committees within those central banks and perhaps there's bigger gaps between the doves and the hawks, because if everyone was on the same page, it's obviously easy to give forward guidance, but when you have this more diverse range of opinions, you can't really do that. And I think that's probably
true of the Bank of Japan as well. I think there is a range of opinions within the Bank of Japan if you read through some of their rhetoric, some of those policy makers are perhaps more ready to act
on policy than others. But you know, a caution has always prevailed through the Bank of Japan because of its history, because of its history with deflation and disinflation, and I think that is still here, and I think that's very evidence in the commentary this morning from the Bank of Japan governor.
It hasn't just been the Bank of Japan that's been causing some waves this week. There seems to be a feeling that both the FED and the ECB may be done with raid hikes, which calls into question whether the ECB actually will end up hiking further than the FED this year, which was the consensus heading into twenty twenty three.
What's your view on this. Do we have to rethink this that maybe both are at their peak and their rate hiking cycle over in Europe isn't going to be as long as many people thought it might be.
Yeah, you know, we're coming down on the view that they may pause in September, that there may not be any more moves from from the ECB. You know, some of the commentary from some of the officials from the UCP in the last couple of weeks, you know, it has been mixed, but there have been some comments indicating that perhaps core inflation could be pattering, because obviously that's the focus for Europe, you know, this this core inflation,
this stickiness there. But if we look at some of the economic data, for instance, He's pmis that we had for Europe at the start of the week, they were really quite worrying. If we still you know that the credit service from the UCB too this week, well that showed that that the higher interest rates are clearly impacting. So there are you know, recession is hanging above Europe. Germany of course already in recession. Recession risks are really very real and that may give the UCB course for
constraints in set timber and pause policy. So we are data dependent. We have to make up our minds on that according to the data. But there is certainly a risk that the market is going into the possibility of a pause in September whilst.
It's long the euro.
And that's really important because I think positioning here is going to be adjusted, and I think the market has has got very long the euro and anticipated with a very high hawkish ECB, and that might have been overdone.
All favorite trades. Let's wrap up Jane downside on the Euro.
What is it?
Well, you know, we've had, you know, for a while now, a three month forcus for your a dollar at one o eight, you know, a few weeks ago. I think people you know, wouldn't have agreed with that. I think now maybe people are coming round to that. The market is very long the euro, and I think it's increasingly difficult to see that situation being justified.
Jane, thank you for getting on board with the program this morning following that breaking news from the Bank of Japan appreciated. Jane Foley of Rubber Bank, responding to the latest headlines out of the BOJ Stave Chevron joined us now had a multi asset solutions at Federated Hermes. Steve wanted for to catch up with you. You mentioned the pain trade in this equity market may well be a higher equity market just walk us through as Steve.
Yeah, I mean, it's been the thesis that we started with in January when we went back overweight, which was that look even if for session risks do materialize at some point, and that's still an open question, it's not today and tomorrow doesn't look good, John. I mean, you look out if you're still in a position of tight labor markets, inflation that's sticky, a FED that at best is maybe pausing, may still be in the hike cycle. We'll see what September and November bring, but it's certainly
not anywhere near a place where they're cutting. Historically, that's not an environment where you have big equity sell offs. If you look FED pauses are really good for equity markets. Fifteen percent returns on average twenty percent max rallies drawdowns that are relatively small. And so I think that you're in this scenario. And I heard you mention in the prior segment this idea of a you know, a kind of summer window. I don't think it's a summer window.
I think this goes higher for longer. And I'm talking about equity markets right now. So we see upside through the old highs even if storm clouds do eventually you know, materialize, but we don't think it's it's soon.
So, Steve, upside where because people are willing or at least want to shift away from the tech winners. They want to think about maybe the things that are left behind, sick, the coos, banks, energy take you pick, Steve, how are you thinking about that?
Yeah? So again, if you look at both fed pauses and then even once you get into FED cuts, cyclicals tend to do better than you're kind of defensive growth names. Also, at twenty seven times multiple for the Russell one thousand value, that's hard for us to kind of just hold our nose and buy. But we're buying is everything else pretty much, So we've been overweight value, particularly cyclicals and the defensive dividend payers a little bit as a hedge. And then
our newest buying has been in small cap growth. The idea is that it edited itsel off the year before. Those names are still down twenty percent on a two year basis, and while valuations look high on an absolute basis relative to where they were two years ago, we think they're attractive. So if there's any disruption to the kind of big tech in growth names, it's going to be those smaller companies we think that emerge and we just think that offers a much better kind of upside scenario.
So it's really cyclicals, yes, a little bit of those defensive divid eendpires, but then also the small cap growth where we think there's some better opportunities.
I want to point to something that Torstenslock wrote that John was talking about earlier of Apollo, where he wrote for markets to continue to trade higher, the soft landing must be a soft landing, not a reacceleration. And he's speaking, of course about inflation. How much does your bullish call hinge on inflation not reaccelerating and continuing to go down?
Yeah, so you know in the list of things that you need to watch. I'd put that in there. You know, you've gotten the housing market at home prices have shown some signs of reacceleration. I know, we've all seen some of the labor deals that have come through. We're watching wages.
You know.
Our expectation is that you will see some reacceleration in at least a headline number in the back half of the year. That's just math lee So I mean your your toughest comps or your easiest comps coming on how you want to think about it. We're really in the first half of last year. As you get to the back half, just the base effect should take you up. So we still have a three point nine percent core
CPI forecaster this year. If it was materially higher than that, and we're talking about a FED, then that is forced into you know, much more aggressive policy action. Again that could have some disruption. But if you look, there has never been a market in the last forty years an SMP five hundred that was negative during the hike site. There was never a more except for one that was
negative during the pause cycle. And so it really is once that economic data has deteriorated and you're in a cut cycle that you start to worry about those big downsides. But it's hard to see us in that scenario in twenty three. And that's the story that if you're a soft landing person or you or you're someone who sees a kind of new bullish trend to your being overweight
equities obviously makes sense. Even if you're someone that's cautious, though the historical track record suggests that for some time, and not a very short period of time, you probably still have upside risk. You know, at least through the old highs.
When do you know it's gone steve the upside risk or the upside potential for some of the risk assets.
Yeah, I think what you watch and what we're watching are going to be spreads. You know, spreads are one. When you start to see spreads move up, I think you need to see a little bit more deterioration in initial little job as claims.
You know, you've got at least.
Get to that three hundred thousand level before you can start to really think about a material acceleration force. You know, the unemployment rate would need to kind of creep up on the back of that. The ye'll curve not just being inverted, but starting to re steep. It would be a sign, you know, if you start seeing that you'll curve get back towards zero. Historically, that's a sign that that's starting to happen. Bond yields that are falling, you
get the theme here. Those are all the things that I think the most verished folks thought would be happening already. And granted, even though we saw a first half rally, I might have expected to see more progress in that direction so far this year, but it hasn't happened, and so until it does, you've got to stick with the regime that you're in.
Stick with it, Steve, That's the message. Thank you, sir, Steve Chevron, a federated Hermes on this sweet spot in the market that he thinks can last a whole lot longer than many others do.
I've got favorite guests.
Here's one now, Jake Piloski, principal and founder of TPW Advisory. Jay's going to catch up buddy, as always. Can we start in Japan? Just briefly the latest change from the boj I know it's an equity market, Jay, you've been looking at more closely.
Did you like what you heard this morning.
Yes, I think Japan has had success. That's something that they've been fighting for forty years John right, which is to get rid of deflation, and they've done that. They now have inflation, and so we like Japan as an equity market. It's set up beautifully. The currency is super cheap on OECD purchasing power parity basis fifty percent undervalued stocks are super cheap. Right, you have stocks that sell
for less than cash. I think twenty percent of top X sells for less than the cash that's on the balance sheet.
We like Japan a lot.
We think the boj is exiting yield curve control. That's going to set off not only a potential allocation out of foreign assets, which is what japan institutions have been doing for years back into domestic assets, but also within the domestic acid allocation where the famous Missus Wantanabi, the
retail investor, has been doing nothing but buying bonds. Now bonds in Japan are going into the same bear market that US bonds and European bonds have been in for the last year and a half or so, and so that means an allocation shift to equities and so Japan is we think one of the most attractive markets in the world at this present moment looking out on a six or twelve month basis.
Jay, just to build on that, Yesterday evening, I was going through some decks, some slides from Apollo's Tossed and slock on Japanese banks and looking at net interest margins. It was shocking to see just how narrow themse net interest margins are at a Japanese bank compared to say a wels Fago, which is sort of multiple of that. Jay, would you play it through the Japanese banks and how much of a move have we already seen anticipating what we got this morning.
Yeah, the banks have moved first obviously because this rates go up, that issue that you spoke of gets helped out, as we've seen with US banks, right, you know, we've been in this extreme low rate environment.
And one of our.
Key conclusions Lisa was talking about strategic ambiguity brought me back to my National security days studying for.
A master down in DC.
But they're looking to do something different, and the opportunity is to grow the economy and to have inflation come back, and that helps the margins that helps earnings. And just as we look at in the US right high nominal growth. John, you remember we've been talking about this for ages, high nominal growth. The same thing applies in Japan, which is why you're going to have good earnings, You're going to have good bank results. And again you're not paying anything
for it less than cash. Percent of the market sells for less than the cash on the balance sheet. It's a value player's dream, it's a growth player's dream. The currency is going to appreciate, rates are going up, bonds are going to sell off, people are going to buy stocks. Really, I think it's a fantastic setup.
To be clear, it was Jeff you who coined strategic ambiguity. I was just parroting a perfect explanation of central banks this week. You say a value player's dream over in Japan. What about in Europe, which you have been overweight, Is there's still a value player's dream in an area that has disappointed in a way that the US has not.
Yeah, I mean Europe has more of a challenge on the economic front. Lisa, I think that's pretty clear. But I think again the sentiment. Look, one of the things that we've been talking about is this tremendous gap between data and surveys, you know, sentiment and the data continues to come in pretty good, and the surveys and the sentiment continues to be, for the most part, you know, pretty lousy, and data is winning out. And the same
applies in Europe. You know, we talked about banks, right, John knows this and Lisa we've talked about it over time. We've been a buyer and an owner of European financials for the last several years, and they continue to hit new highs, just hit new highs in the last couple of weeks. So we think this situation in Europe is better than it's being portrayed. But to be clear, we were bullish Europe last year. We've been bullish Japan in Asia this year. We've talked about rotation. We wrote a
piece called Rotation two months ago. That's been what's going on in the markets. We have a rolling rotation. So now looking forward, we're all about what's next.
Right.
We want to look forward because markets are moving very very fast, and so to us, what's next is we have clear skies, we have a manufacturing recovery. I think that's what's going to be the surprise in the second half of the year. Manufacturing is going to pick up as we restock the inventory drawdowns that have taken place. You're just talking about that on the oil side. One
reason why we're bullish energy is exactly that thesis. And so we think the big opportunity right now for the next six to twelve eighteen months is an emerging market equities and commodities, both of which are at fifteen to twenty year lows relative to the US equity market as an example, So lots of upside in those two segments.
Do you need stimulus out of China to make that work?
Chack, No, We think China is again.
China is another, you know, the poster child for a negative sentiment.
Just ridiculous about how negative people are about an.
Economy that's a massive, second biggest economy the world, is growing at five percent, double the United States. It's growing at five percent, John with you know, pretty much an assurance and they're making ship right. They're welcoming back the tech companies because they need them.
So the whole issue around China tech is over.
And one of the things we've talked about in the last couple of weeks, take some profits in US big tech reallocate back into China tech things like k Web, etc. We think emerging markets are going to lead the next cycle in central banks, which is rape cutting. Right We're at the end of the rate hiking cycle in the West and the US and Europe, maybe just beginning in Japan, fair enough, but emerging markets are going to lead the rate cutting cycle, and we think markets like Brazil are
very attractive. We like China, We like Brazil in particular. Within emerging markets right now, we like Japan. And then within the commodity space, we like energy, we like industrials, we like precious metals. Commodities we think are really the next thing, and they're breaking out again.
Within the last two weeks. WTI has broken.
Out, Goldman Sachs Commodity index has broken out, and that's telling you that we're not going to have a recession. So bonds priced out recession first by getting rid of the rate cut for next year, oh sorry for this year. Second half of this year. Ben stocks with the move into cyclicals and now commodities are pricing out recessions. So you're not going to have a breakout in commodities in a recession, right, those two things don't go together.
Jay, this would have been easy. If we just started the interview by saying, what done you like? This would have lasted thirty seconds. Jay, it's going to hear from you. We've got to let you go dot welcome back.
Let me tell you, Yeah, I don't like you. We get luck dwork.
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