US Data Pushes Back Fed Cut Bets; Euro In Focus After EU Vote | Bloomberg: The China Show 6/10/2024

It is 9 a.m. here in Hong Kong, in Beijing, and in Shanghai, 10 a.m.. If you're watching us out of Tokyo, good morning and hope you're all well. You're watching the china, Sean David Ingles and Yvonne Man. Our top stories this morning, the euro currency and bonds falling as far right parties are winning big and European parliament elections. Macron calls for a snap elections in France. Asia trades cautiously with Hong Kong and mainland China closed for a holiday. You have decisions, of course, this week from the Fed and also the BOJ are set to dominate trading, of course, the next few days at Apple's Worldwide Developers Conference, set to start today with some big announcements on its air strategy. All right. It is relatively quiet. We talk about these markets like Hong Kong, China, Taiwan, Australia, all closed for holidays here today. So you're seeing pretty much volumes are quite light here. But we're watching very closely what goes on when it comes to not just these 0 hours as we talk about the setbacks that we saw, not just in France, but also Germany. That certainly is why we're watching the likes of stoxx 50. Futures were lower here this morning, but futures are pretty much flat here. But certainly you're seeing that weakness in the currency here today. It really kind of adding more vigor to this dollar trade after that strong jobs report that we saw on Friday. Right. I think we were four standard deviations higher than estimates in terms of the amount of job gains that we saw. So that's certainly a role. The Treasury market, we're seeing yields ticking higher of about 15 basis points for your two year yield. We settle around 488 here this morning, but we're still talking about a U.S. tenure that's around 444. So certainly there's a lot of concerns here as market pricing now shifting to a first rate cut back to December. Now maybe we're back to just one cut this year and we move away from jobs now to that inflation print in the U.S. later on this week. So in terms of the event risk as plenty, right? We talk about the Fed. So the BOJ, keep in mind BOJ, that yen is back to around those intervention levels at one 56.57 this morning. We're also watching very closely what goes on with the dollar. Right. We saw one of the biggest boosts since mid-January out of that jobs report. This is what your euro peers are doing here right now. So you're seeing continued weakness across the board when it comes to the euro here in the Asia session. So we talk about, you know, France and really Macron going the extreme sort of move on, announcing these snap elections now. And then you also have the worst ever result for the Social Democrats, for Germany and Olaf Schulz. So certainly both of those were a bit of a shock for the market here today. You watch how that goes with euro dollar at 107 levels, 169 for Euro yen right now. And we talk about those shut markets. Certainly there's a lot of questions of what happens. It's Dragon Ball Festival here in Hong Kong as well as in China and Taiwan. Futures are looking like this year right now. We'll see how those these all play out. But certainly we talk about this is a week of major, major, I guess you could say landmines. Dave, China right now watching your offshore rate. We're out one seventh 26 levels right now. Yeah, which wouldn't bode well because we have lost some decent momentum in recent weeks here as a percentage of Chinese equity market. So maybe the slower you move, maybe the less damage. Of course, if we do head into some of these headwinds, as everyone is pointing out, as Evan was also reminding everyone as well. So you there is just a lack of volume, liquidity at this point in time. You have major markets across the region. One should be up and running at this point, too, of course, should be coming online these hours in mainland China, Hong Kong and Taiwan to shut. And Australia is also shut for a holiday. So in terms of volumes, equity market volumes were about 25% lighter than usual, which compared to what we are used to seeing for this time of the session. Now, everyone also talked about the jobs numbers coming through on a two year yield. We're still about 15 basis points higher than the moment before that report came out. And, you know, a couple of standard deviations above forecast. A couple of things right here. The dot plot coming out this week, what will that change? What will that show as far as the changing in the Fed expectations there? Bloomberg Economics thinks it's still going to telegraph to cuts for the year, but moved from 3 to 2. Right. That's going to be a key gauge here. And I think Anna Wong and her team are saying this is probably one the most pivotal settings are going to see this month as well. To really give us a little bit more clarity on what the rate cut timetable is going to look like here. But it's interesting, right? When they talked about the nuances and this labor market report, basically you have an upsurge of job gains. But then again, that unemployment rate also went up to 4%. So they're thinking there's actually under the hood, maybe what's closer to reality is what you're seeing with that 4% unemployment rate right now. Yeah, the false number and what's going on, really, and they think it's a better representation of the underlying weakness in the economy, which is the unemployment rate at 4%, which I guess takes us into. How far behind do you think the Fed might be as far as a rate cutting conversation is concerned? I think right after the jobs numbers came out and we were talking about Citi last week, which was passed and still holding on to July, I think they've now ditched that. And Jp morgan and Jp morgan did push it back towards September, surrendering really finally after that. First, you take a look at what it comes to. Of course, we talk about the Treasury market. Certainly you're still seeing not that much movement, but really for 88, are we getting closer to 5% for that US two year yield? That's the key question here now. And of course, what's going on in Europe and really the volatility there. Far right parties have made significant gains in European parliamentary elections and dealing blows to the governments in France and Germany. Now French President Emmanuel Macron's calling for a snap legislative ballot in a bid to stop the rise of rival Marine Le Pen. Bloomberg's Stephen Carroll has more from Brussels. Far right parties were expected to do well in these European elections, but their performance delivered a number of bombshells. In France, Emmanuel Macron has called snap legislative elections for the end of this month. After his party came a distant second behind the far right party of Marine Le Pen in Germany, Chancellor Olaf Schulz, his party had their worst score ever in a European Parliament election facing off at the far right after there was better news for other European leaders, Italy's Giorgia Meloni's party performed well, increasing their score and confirming her control of power in that country. More broadly, the centrist alliance of parties that brought Ursula von der Leyen to the European Commission presidency five years ago did return with a majority capable of re-electing her to that position. She says she'll be reaching out to her partners in the coming days to build that alliance. The European leaders, who will put her forward as a candidacy for President of the European Commission, will meet to discuss that in a week from now. In Brussels, Stephen Carroll. Bloomberg News. And let's bring in Mark Cranfield, editor and live team in Singapore for us this morning. Mark, good morning and thanks for joining us. Well, dark and early, pretty much the I mean, the tone coming out of markets, post the results out of Europe negative, if you could put it that way. I mean, bond futures weaker, the currency down against virtually all of its peers and the equity futures are trading up. And I'm wondering whether or not this is simply a knee jerk reaction or this is something you think that permeates throughout the course of the session. It's all about Macron calling this early parliamentary vote. Traders are responding to something unexpected. The performance of the of the far right wouldn't have been a huge shock to investors. It just so happens I've just been in Europe for the past two weeks and if you on the ground there, you would have a sense pretty much that the those kind of parties were going to do very well. There's a lot of discontent with people, with politicians in Europe. So investors would have been bracing any way for results to go that way. What they were not prepared for was for French President Macron to tackle this early election, and that is what their response is today. It throws in a whole level of uncertainty which nobody was ready for, especially for the bond market. So something that traders haven't had to consider for a very long time is this break between the French and Germany. Ten year yields is something which in the past has been a big disruption for European assets. It's been extremely quiet, understandably, because markets have been pretty well controlled and everyone's been looking at the Fed suddenly for the next couple of weeks. In addition to all those things you said earlier in the program about the Fed, the Bank of Japan, US CPI report, now people suddenly have to worry about the French-German spread blowing up because if that starts to widen quickly and the early signs off in the futures market, it's not going to be a good day for European bonds, then certainly all European risk assets are up in the air and people will have to respond in a very defensive posture. That is not what they were expecting on Monday morning. And Mark, you flag in particular, this this this trough on old futures of 123 spot 66. Why is that level important? Well, again, because people had a slightly complacent attitude towards the French monarchy is the second most important market in Europe after all. And they've been thinking, Oh, everything's trading nicely. Nothing too much to worry about. And then suddenly, wham, President Macron does this. And bond traders are very much on the defensive. So you had a lot of people who would have been sitting on positions probably thinking, oh, nothing too much to worry about. Now suddenly they have to think, well, if they break through those kind of levels, momentum players could come in, leverage players could come in. It all could turn very ugly very quickly. Mark, maybe tell us, you know, how how interesting is this week going to be? I mean, the fact that we talk about all these macro risks out there, whether it's the Fed, you have two inflation reports came out of the U.S. you had the BOJ this week as well. What's going to be the most top of mind for you? All of the above. But I think if there's a bit of a wild card, it could come from the Bank of Japan. I mean, everyone's talking about the Bank of Japan increasing rate slightly in July. But why not do it now? Why not get ahead of it? The yen really needs it. The Japanese yen is severely weak. The results from their recent intervention really are not very effective at all. So the whole Japanese authorities, they must be thinking to themselves, really, it's time that the Bank of Japan stepped up and became a bit more aggressive. So why not? People are expecting them to reduce bond purchases, but why not do their small interest rate hike now rather than wait until July if they really want to give the yen a push? It would be better for them to surprise the market and actually increase interest rates this week. When you surprise positively or negative, you will get a market reaction. So the thing for the Bank of Japan to do would be to raise this week. All right, Mark, We'll see if we get any of those fireworks. Mark Grenville there and West Rogers joining us out of Singapore to kick off the week for us still ahead. Chicago Investment Management says the Chinese economy has bottomed with better days ahead in the coming quarters. The CIO Rahul Chadha, explains. Shortly. They also just launching a new fund as well. Stay with us. You're watching the China Show. This is a really strong report, stronger than what people were expecting going in. This jobs report is not recessionary. It is thought landing. It does close the door on a July rate cut. I think the Fed would still like to get a cut or two done, but there's no way they can cut or signal a cut in July with this data. I still think September you target is doing that. The reason we think the Fed is going to be able to cut in September and December is because we think that inflation is going to proceed with moderation, at least as it pertains to equities. I think the Fed pushing out when they're cutting is good. It's good news. There are no spare tires in this economy. So if you get it wrong and you weaken too quickly, it's going to be a very difficult mistake to correct. Our Bloomberg TV guest reacting to that strong U.S. jobs report. And let's bring in our next guest, Royal China. Their founder and CEO, Shakira Investment Management, he joins us now. First of all, what about the funds that you just launched? Are you about to launch? Pretty soon. Congratulations on that as well. But just given what we've seen with the strong jobs report, the market continues to, I guess, doubt the fact that we're going to see rate cuts this year. I mean, overall, you know, what is how are you looking at overall sentiment across this market now? So if you look at US markets has been a mixed bag. Again, Q1 data was soft, Q1 GDP was about 1.3%. If you look at last couple of quarters, data has been revised downwards. So this job report was a fairly strong report. But if you see for the last 6 to 9 months, bulk of the job has been health care government. Some of the reopening, the opening trades, etcetera. So our sense is somewhere these higher rates are going to work their way through the economy in terms of slowing down the economy. And look at the high consumer debt, look at the auto delinquencies, all those things that are high. What's doing well for us is this big spending, which is some of this is tech related spending. Some of this is this idea related domestic manufacturing most. Okay, So what does this tell you about the preferences of this, you know, the broader investor base as it pertains to the equity market? You mentioned tech for one has held up quite well. Do we assume that rates come down and how does that affect, if at all, affect this long tech trade? I mean, I think Hassan says there will be at least one rate cut for the year because if you look at the real rates in the US, the real rates are still too high. I mean, inflation should be around a half a century later on and a half to 3%. So at those levels and they should slow down the economy and I sense is look in July is definitely to up but somewhere in Q4 you should see it happening from a valuation perspective or a multiple meeting. I think it's more of a bigger narrative of what's happening in it. And this new arms race which is going on where each and every corporate wants to be on top of this so that they stay relevant for the next decade. Yeah, it's interesting, right? We had the strong jobs report. We certainly saw the reaction in bonds, but stocks really kind of shrug. It shrugged it off. Right. And I think a lot has to do with this whole A.I. trade that you mentioned. If that's not going to be enough, what could actually shake off this bullish momentum in equities now? So I think what what changed this offer is this realization that maybe behind the curve that you have economic data which gets revised downwards and Fed is unable to guarantee right now there is this implicit faith in markets that there's a faint book. Fed is going to come sooner than later or made out of more quickly. Should there be a need to cut rates? But should markets get this realization that Fed is constrained in its ability to cut rates? I think that's where we can see some sell offs. Now, Rahul, you're launching to spy on us, on your launching to your launching your funds into a strategy. Correct me if I'm wrong. It's two right. mid-July one is broader M and one is in India, which I guess we can talk about given the the shake up post elections and markets. But let's talk to us about you're in New York. I think you were recently in Hong Kong. I think I caught a glimpse of you at one of the conferences here. How would you describe appetite for M Equities at this point in time, given where we are in China and given where the US market is is. Yeah. So if I look at one strategies, the Asia strategy and the other is that India started out clearly we believe that two things are kind of a warming and improving for the Asian region. A first and foremost is China. And like you were also there at the one of these conferences which were there. And the sense one is getting from ground is that, look, the policymakers are seized of the situation, which is very different from what it was two years back. And they want to restore the animal spirits in the economy. They want to get the business confidence back. And if you look at the numbers which are coming through, look, the revenue growth is a struggle, but clearly there is a strong focus on profitability. The competition has eased between the incumbent players and the new kind of upstarts because the VC funding is not there. So you can see decent set of numbers and as property market stabilizes, as hold, these corporates start writing down. Trading, which is visible in the Chinese consumption should also ease and that's all it's a lot more open. So it's going to be a long, drawn out recovery out of that. That's why we like hny pushing out is that respect of investors is a there's a strong storied career. So benefits like that one from this experience we believe that there's a strong cycle coming in the PC and the smartphone upgrade as these features are included. The Koreans are totally enamored by what's happened to Japan because of this value up. And though it may take its own sweet time, but they're keen to follow. So if you add these markets and then what's happened to India in terms of the ability of our government, I think there's a decent story for Asia going into 1025. How. I mean, you mentioned India. I mean, I'm just wondering, is it still the same sort of dynamics after this post election setback for Modi? You know, does it change his agenda or his mandate in any way for you to actually shift your exposure? So I hope to gain some of the market participants have kind of said I'm a bit too exuberant. And to be fair, that that happened because of these exit polls, because of what happened in the last six months as Modi's party won the state elections. But look, in then democracy coming back from the for the third government and the term, there's always an anti-incumbency factor. The middle and the lower middle class have got badly impacted because of inflation, which was a squeeze on their incomes. So that was something which was there. So I think what what what they achieved and I won't be too disappointed with that a decent number 244 BJP alone and the allies they have I can think of economies, big economies like India, like an oil tanker. It takes a while to change that direction. I think the momentum in the economy is very strong. If you look at the business confidence, that's very high. You see capacity build out. Speaking started governments keen to roll out this infrastructure. The BLR schemes to attracting manufacturing have been hurting. So I think this will give a good pullback and some noise. And certainly gold mines, we were just seeing this market going completely ballistic. So I think some a bit of a mixed emotions would give for long term investors like us an opportunity to increase exposure to the market. And, you know, I assume. No. So I'm sure that you've already looked at the prospects, which is why you're arranging an India fund. But is it not daunting for you to to try and compete with a market that, you know, like India, for example, you know, a simple index ETF would do a, you know, well enough job for most investors out. And I'm wondering how you're thinking about outperforming the benchmark at this point in time. I think that's a great question, said David. And the reason we started as a crowd was our belief in the fact that active management still has room to grow when everybody at all the mainstream asset managers are going the ETF split. If you look at the funds we've been managing in the past, the previous annual outperformance for India Fund was close to 5% for the last decade, and I think India has that opportunity. And why we say that is, look, with the nominal GDP growing at 12, 13% in four or five years, you're almost increasing the GDP by 50%. There are new consumer cohorts being developed that are new industry segments. We do it up a lot of multi-bagger as a look up. So India's where US was in the seventies eighties and we saw that amount of kind of wealth being generated. So clearly for a bottom up investor was got a good regional perspective being in Hong Kong boots on the ground in Mumbai and I would global perspective in New York. I strongly believe that we can generate alpha. Rahul. All the best on the new Endeavour Royal Charter. They're CIO at Chicago Investment Management. Joining us there out of New York. Right. Just ahead, we should be previewing the trading day ahead, but of course, a couple of markets are shut here in the region. So we'll I guess we'll get you more news in a moment here. Plenty more ahead. You're watching the China show. Happy Monday morning. Weakness across some of your features, a reminder that mainland China, Taiwan, Hong Kong and Australia cash markets are shut. And also in case you're carriers, the Celtics are up three points against the Mavs at halftime. More on all of that in a moment. It's a quiet day, so allow us to some liberty here to check on more relevant news at this point. You should still watch us. We're still here. Yeah. We'll give you an update anyway. So airless actions to tell you about NIO shares as the shares ready to do by a founder Securities empty are also cut to underperform at Jefferies ever latest call when it comes to some of these Hong Kong property developers as well May to this is obviously that crypto proxy we look at here in Hong Kong as well read it a new by and watch out with a price target about 430 here right now across these markets equity markets are mostly weaker with the exception of the Japanese currency for a 10th of 1% on the Nikkei to the upside, the rest are either trading sideways, if not lower. The dollar strength continues into the region right now. It might have to do with the fact that you are getting weakness, though, across the euro against all of its peers. More those in a moment. Happy Monday. This is Bloomberg. Welcome back to watching the China show. It doesn't feel much like really a monday here. If you take a look at what's going on, the Hong Kong China-Taiwan closed for Dragon Boat holiday, but also Australian markets are closed. So some of these major markets are shut here this morning. Futures are pretty much still slightly lower, but really, Asia is pretty slow going here right now. Obviously, though, this week, though, is going to be jam packed. Dave. Yeah, on risk. So you have a couple of central bankers. Okay. A couple. I'm underscoring the importance here. So you have the Fed coming out and then you have the DOJ hours before the Fed. Of course you have the inflation print out of the US. We should also mention inflation out of China is also due out this week. So is sort of your key landmarks there. We'll get to some of some of the things to watch and the big things to watch as far as tech is concerned, too. Apple and of course, more on that in a moment. The story we're talking about, though, early this Monday is what we're seeing over in Europe. And as you can see, stoxx 50 futures 4/10 of 1% to the downside. You're getting some weakness already coming through in both futures and also odd futures. Bottom of your screens. Mark cranfield, flip the boards, please. He was pointing out from our live team that traders are reacting not so much to this move right as far as the political spectrum is concerned, but the elections coming through being called out of France. Right. So weakness across the euro complex, if you will. So this is just against your, you know, your big G10 peers. You spread this across your entire IMF X complex. You are getting a lot of weakness coming through in the year again tonight as well. You have major markets shut. So there is a liquidity illiquidity issue as well, perhaps exacerbating some of these moves. In fact, just to get this in as well, the biggest move we're seeing, in fact, at this point in time on this key crisis is you're against the Mexican peso, right? The Mexican peso was sold off quite substantially last week. So you are getting a reversal of that, A saw it. In fact, we have a great story just to plug this as well on the Bloomberg talking about how the elections has really changed to calm on the Mexican peso, which was really the favored currency as far as a carry goes, ten day violence at the highest level since the pandemic hit on on Mexico. So how does that actually change and sort of mess with the math there, just to give you a sense of sort of Friday into this morning, weakness coming through a little bit off lows, if you could call it that. But yeah, quite a substantial move there as well. Back to the amFIX complex. And by the way, since you look at a two to move, a lot of that move also had to do with the fact that you have a stronger dollar, post US jobs. So incrementally because of the elections and political risk there and the premium getting baked back into why we're getting weakness across the currency space. I guess more on this in a moment. Yeah, well, definitely see that, as you mentioned about the macro risk really this week and the landmines that we have to kind of go through here. There's also one big one when it comes to the micro side of things, which is Apple, right. Said to lay out its vision for A.I. at its annual Worldwide Developers Conference later on today. Let's bring in Debbie Wu. She leads our North Asia tech coverage and joins us now from Taipei. Debbie, it's interesting. We've heard, obviously some air features before, but not really a full on air strategy from Apple itself. What is expected today, though? What we are expecting is that Apple is set to announce a series of features in its new iPhones. And then I think one of the highlight will be Apple's announcement of its partnership with Open. So I think that users and analysts will be interested in seeing what Apple will allow at the apps like Chat to be featured on new iPhones. But at the same time, Apple itself is not trying to come up with such a Chipotle application right now, but it is focused on offering AI enabled features in its applications, including in Siri and then photos and notes to make users slightly easier. But at the same time, if you want to use Apple's features, that means that you will need to add these iPhone 15 role models or the new iPhones coming out later this year. So it is possible that was Apple Saw and building on new features, it could help the company sort of ring a super replacement cycle one next year and this year and next year. Yeah. Debbie, talk more about that replacement cycle because it you know, as you you know, as you rolled out you know that told us about just now this looks like it might go simply beyond software. Talk to us about the hardware implications of of of what could be announced this week. Right. Oh so what fully new iPhones it is. We are not expecting any new announcement because that usually won't come until this autumn. But at the same time, the replacement cycles. So watch what the apple is doing is here is that it will only allow users with on your iPhone to use its AP features. And that means that if it's features that are attractive enough, user may be more willing to, well, buy new articles and try out the latest features. Debbie, thank you so much for laying that out for us. Lots to watch out for this week. Debbie will be there for us, right? By the way, you can also turn to your Bloomberg for clients. For more on this, a tell Ivy Go. We've a full blog post coming through as well as we move into this commentary, context, analysis, maybe some banter every now and then there from our expert editors here. Of course, the catch that of course, is the big one this week, at least on a micro. Yeah, it's interesting what Mark Gurman wrote too about it's not just about the current lineup of hardware products that could benefit from these futures, right? It could be a whole lineup of new gadgets that could come in play that could make this very, very exciting. Right. And I think the world has been waiting for A.I. to really kind of or apple at least catch up with this. The next big one from Apple outside of the just the phone right now you can talk about Vision pro AirPods even robots they've been talking about as going to take my iPhone. But me too. I'm sub 15. So yeah, I need some of those features. All right. Take a look at what I comes to Singapore now. Several bags caught up in the country's biggest money laundering scandal are ramping up scrutiny of its rich clients. Let's get to our Bloomberg reporter, Avril Hong. She has more on this. So what do we know so far overall about what the banks are doing to close these loopholes exploited by criminals? Yeah, guys, I mean, this is one of the largest money laundering scandals to ever hit the city state. About $3 billion of assets have been involved. Basically for context, just taking a few steps back. Before we talk about what the banks have been doing to close loopholes is these syndicate participants have been able to kind of exploit loopholes and they have been laundering the illegal proceeds from online gambling. So there's been a lot of questions raised since this case came to light last August as to how Singapore, as well as foreign banks operating in the city state, have been able, you know, kind of facilitated in a way such action. And the key questions have been raised as to whether they're doing enough to screen some of their ultra rich clients. The latest we're hearing from some of these banks is like the likes of Citi as well as DBS. They're tightening up their checks. They're giving more training for Citi, Some of the source and training materials that have been seen by Bloomberg is shows that they're teaching their private bankers how to spot some of these tricks that criminals might be used to mask their background or the source of their wealth. And some of the red flags include if these ultra rich clients or potential clients hail from Guangdong or Fujian Province, which is where most of these men were from, and yet don't speak English and hold golden passports from countries such as Turkey or Vanuatu. So those are some of the red flags. We also have the likes of DBS. You know, they're stepping up some of the vetting processes for major transactions. So that's what you're hearing so far from the banks. Okay. Now, once this and this review that's being conducted as well. So once that's done from a regulatory standpoint, April, what what then happens once we have a better understanding of the findings from that? Yeah. So the Singapore regulator, as has been going on site to these banks and conducting inspections, they've been interviewing the staffers, you know, trying to find out what some of the weaknesses in compliance checks are. And it has completed those inspections. But once the review concludes, it saw that the banks with the closest the biggest dealings with this syndicate are going to face fines. Some of these financial institutions, about 16 of them involved, wasn't just about how they took on deposits. They also lent to the locally incorporated firms of these criminals. They financed property transactions and for some of the biggest that had dealings with them includes the banks such as Citi, as well as Credit Suisse. So we are watching to see what kind of financial penalties potentially will be imposed upon them. And the criminal criminal case so far. APR, what do we know? What's the latest? Right. So there have been ten men that have been embroiled in this. They've all pleaded guilty. The last of them will be sentenced later today. And we have another 17. They're still under investigation and they remain at large. But the sentencing later today, I think, in a way, kind of paves the way for the next steps in the case. Because don't forget, there were billions in assets that were seized and questions being raised as to what happens to these. And it's become a bit trickier of late for the banks to kind of offload the properties among the luxury property downturn in the country. Guys. April, thank you so much. Abel Hong there in Singapore for us. Plenty more ahead here on the China show. So keep it here. You're watching Bloomberg. Welcome back to watching the China show. It's extremely cool and quite out there. Beautiful, serene picture, though, out of Tokyo this morning, a 10th of 1% on the upside. Well, make no doubt that this don't let this fool you into thinking that there is no big risk out of Japan this week. Of course, it's the BOJ. And what fireworks do you think they will engender and this market this week? Stay tuned for that. A preview, of course, coming up in a bit. But in a moment, though, let's talk more about Japan and the equity market implications of this whole, you know, this this whole value up. Improving corporate governance. Almost 60% of Japanese companies are holding AGM general meetings this week, and it's 30% of that, in fact, happening all on the same day, June 27th. Investors are certainly concerned that this could limit shareholder engagement just because everyone's in one place at one time. Logistics Issues. Hiroyuki Sanada Asia. Our Senior Asia Stock Report is here with us to talk us through. I mean, let's start there. Why is everyone having their thing on the same day? Can they just pick another day on the calendar? Hideaki. Hi there. This has a very deep historical roots. If I could spend one minute on this basically long time ago, aging and the place where people sort of link to gangsters, harassed companies many, many years ago, This may sound a little bit ridiculous, but it was a very, very serious issue. I still remember when Banksy committed suicide after a scandal involving his payment to these these type of people was revealed. So basically a lot of Japanese corporate. Exactly as well, horrified by Asians and the deed that they have been trying to finish Asian and as short as possible. And so it's almost like a small fish moving herds to defend themselves from predators. Now, these things have become a thing of the past, but they still tend to do on the same day. And partly that's because of a logistics. You got the whole these again three months after the end of financial year. But, you know, some companies need to spend a lot of time to prepare for that. So that those are the reasons. Let's do them all on the same day. So maybe you'll you'll get away with something that's interesting. What are investors expecting this time, this year's AGM season? And of course, we have the Toyota one that's coming up as well. Yeah, I mean, this season maybe not be seen as the background behind here. And you mentioned Toyota, which is a great example. I mean, Toyota shares held by big banks is probably the most prominent example of Japanese cross shareholdings. And basically they decided to unwind this now. So the process will start from I don't know exactly, but sometime later this year. So this may not apply to AGM, but this raises a very interesting point about the AGM. Basically, companies like Toyota are no longer can count on support from these Crociere shareholders, and that means they need to pay more attention to shareholders interest. Now, if if we take Toyota's example, Akio Toyoda, who is the former president of the company, got 98% of support in back in 2020, but his support has fallen below 90% in recent years. And for many Japanese CEOs, these four modules, I mean, if you only get 70% of support, whereas your rival gets 90%, you really look very in trouble. And that puts a lot of pressure on Japanese CEOs to basically listen to investors more. And so the investors will be scrutinizing how much support CEOs will get in these AGM. And some people even think that there may be a one or two CEOs who might get voted out in the AGM. Of course, that's a little bit speculative at the point. But remember, last year the president of Danone, which is a very long standing firm in Japan, he almost got voted out because he only got 50% because of lack of above board diversity. So the AGM season is only getting interesting from this year. Yeah, looks to be like the case. So I think you're hitting some of our senior Asia stock before about this upcoming AGM season in Japan. Sticking to Japan now as largest paper company, OJI Holdings says it won't be stepping up baby diaper production any further in China due to the nation's shrinking fertility rate. Speaking exclusively to Bloomberg, the CEO Hiroyuki Sono says they're looking to expand in areas where they have recently acquired projects. So couldn't we only come home with an entry in the market for baby diapers in Japan is becoming smaller and smaller because the population is decreasing. The fact that the market is getting smaller means that someone will have to exit the market sooner or later considering profitability. On the other hand, we have an aging society and a demand for diapers for adults has been increasing in Japan. The demand for diapers for adults is expected to increase to a certain extent, and a market is shifting. The domestic market still accounts for about 60% of our total sales, but we have been strengthening our overseas business for about ten years or so, and we would soon like to transfer more than half of our sales to overseas markets. Therefore, the Japanese market has become smaller in a sense, and we are thinking of expanding our business into areas that are growing more rapidly. We are in the process of implementing this plan. How big is your exposure to China that's also suffering from an aging population when it comes to baby diapers, but also for those who will be elderly. This name are too good. As for China, we have one big factory where in terms of overall exposure. It's not that big. I don't think it will even be 10% of our total exposure in terms of sales. Considering the various economic risks, we would like to maintain the current situation rather than increase investments in China. What we would like to do is to expand our business in Southeast Asia and Europe, where we have recently acquired some projects. Because you're trying to work multinational in different regions as well. How does a weaker yen affect your business strategy? Hmm. Unknown. Although we would like to shift more business overseas, about 60% of our sales still come from Japan. The current low value of the yen is making the cost of importing raw materials extremely high. This is one of the major problems for our business. Another big factor is that when M&A is conducted overseas, the yen is not used. So the price is determined in the local currency, such as dollars or euros, which is inevitably more expensive than when the yen is stronger. This has had a significant impact on our business. I know business is still hard. Is there a level of the yen that would be best for your business strategy going forward? And is there a base case for you thinking where the BOJ goes from here? Yes, I am doing that. And you know what will happen to the yen is hard to say because it's also up to the Bank of Japan. But for our company, it was relatively good when the yen was very strong and was around 110 to the dollar, even at around 130. The business environment would be good for us. I think the yen is a little too weak now. Yeah. There you go. OGE Holding CEO Hiroyuki Sono with of course, our Shery Ahn, who by the way deserves credit there. He's the only one who can probably sneak in a conversation and pivot that conversation from diapers to from babies to BOJ, from from the micro to the macro, as they say, interactive TV function. And if you can spot where Sherry snuck that in, missed that interview. Of course, for our global clients, you can find it at that function. But of your screens be able to watch it live. But also, as we point out, catch all the previous interviews you may have missed. Check that out. You can also become part of the conversation. Check it out. TV, Golf, This is Bloomberg. Here are some of the stories we're tracking for you today. Benny Gantz has resigned from Israel's emergency government criticizing Prime Minister Benjamin Netanyahu's handling of the war against Hamas. Gantz has accused Netanyahu of hesitating over strategic decisions due to political considerations. He also warned the military campaign against Hamas will last years. South Korea's largest organization of doctors have voted in favor of holding a strike on June 18. The Korean Medical Association says over 64,000 doctors or close to 90 or more percent of those who took part in the strike referendum, support the walkout. This is the first time it's taking collective action to protest against government plans to reform the medical sector. Now, if I check across these markets, let's start things off with Japanese government bonds here. So you had that melt up in yields from Friday, obviously on the back of the jobs report. And that's really being felt across the regions. You have what's happening in Iceland and also New Zealand, for example. It's also, as you can see, playing out, it might be setting up an interesting approach to the BOJ. This week's your 30 year yields are now up six basis points. The ten year is now clear of 101.02 is where we're nearing there. And I guess the thinking may be here if the Fed stop moving that the BOJ might need to. Now if you think about it that way, and as Mark Cranfield said from our own live TV, they have to do something about the yen. Right. And there's also the speculation that they might start reducing their bond purchases. Right. Maybe that's why you're seeing yields pick up as well, along with what we're seeing tracking these U.S. Treasury declines as well. But yes, the rest of the markets are doing this right now. It's pretty much slow going, but we're mostly lower when it comes to some equity markets here today. Obviously, there's the US jobs report that we're dealing with. All of this just there's just so much we talk about this week of how jampacked it is. A really no one's really, really to put a lot a whole lot of risk on the table here this morning. So you are seeing stocks mostly lower, still watching those zero futures. They're still on the weaker side as well. And the euro continue to be quite vulnerable against most pairs. Coming up the next hour, we'll be speaking with Vanguard Group as China gears up to welcome a record high of close to 12 million graduates into its job market this year. More on, of course, youth unemployment in China. A lot on the way. You're watching the China show. Welcome back to the second hour of the China show. For those who are not watching, you're probably out there here right now. Beautiful day out there for the Dragon Boat races that are just kicked off here. That's happening in Hong Kong as well as in China. Of course, that's why markets are shut for the holiday here today. So I hope you're getting your dragon boat in. Yeah, we'll be getting some rice dumplings in because we're certainly jealous we're at work here today day. Yeah, well, you know, if you're wondering, the traders are some of them are competing Bloomberg out there too. Yeah. So we're not biased, but we hope we achieve something for once. I'm kidding. I think we have done quite well in terms of our our team there at the festival anyway. Markets are shots were about 25% lighter than usual Asia Pacific, though we're still just below water. In fact, we should be much, much lower were it not for this bit up we're catching over in Japan, half of 1% of the upside here. A lot of central bank decisions, key ones this week, of course not that in any given week there is a certainly a fairly important one. But this week, of course, it's the Fed, it's that dot plot. And what will it show? And I think one word, if not makes things, will do one less. Yeah. As far as that's going from 3 to 2. Yeah. Well the dots shift right. 3 to 2 maybe. Or if it's one who knows what the market's going to do. Well, I want to have one. Yeah. So maybe we're more in line with markets. We'll see. Right. I mean, is are they going to continue on this sort of hawkish commentary after, of course, that inflation print that comes before that as well, After that strong, of course, nonfarm payrolls number that really shocked the market in some way, especially when it comes to some of these bond traders out there as well. So it's not just, you know, the Fed, we talk about Japan as well. That's the key one as well. Whether we're going to see anything from the central bank to try to defend or at least support the currency here, The markets already, at least used to be yields are moving higher here this morning. In between that, they're sandwiched between what Thailand and Taiwan do. And, you know, we forgot to mention Thailand, which is, you know, has become interesting this year because of the beginning of the government, the government leaning into the central bank to start easing rates for in in less very blatantly, I guess in many, many places you could actually say that. And Taiwan hiked recently, too. Yes. Oh, there we go. They're all interesting actually. Well, hopefully if there is a hike, it's not with the Fed this week. Now, market wise, though, as we were pointing out. So yields are pushing higher. They would be pushing higher and expect them to push high. In fact, that when you when you get underway over in Europe later today, we'd really Boeing futures coming under pressure in the early goings equity market futures zero Stoxx 50 to contract first row fourth fifth to the well yeah that to the right hand side of your screens there we're down about half of 1% now we don't normally see a move that's pronounced of course in Europe at this point of the day. There is a lot to unpack, of course as far as the politics there is concerned here, a two day look at the common currency. Just keep in mind, of course, we're coming off a strong dollar following the jobs report. So that's really leading to the big drop that you see on the left side of your screen and weakness as we open here early Monday in the Asia Pacific. And the euro is not just weak against the dollar, it's also weaker against just about every single one of its peers. And here's a look at some of the key ones on your screens on the back of this. Maybe for one, this far right surge we got out of the elections and perhaps also has to do with the fact that you are getting these elections unexpectedly coming through over in in France. In fact, more on that story. Mark Cranfield is with us right now are my strategy. Mark, what do you think is moving markets? Was it was it the the the the the breakdown of the vote or was it what Macron said after the vote took place? Oh, unquestionably the surprise decision to call an early French parliamentary election. So as you as you were saying earlier, I mean, traitors would be going into this. This is a big event week anyway. And traders would have been looking into this week. You got the US inflation report, you got a Federal Reserve meeting and you got the Bank of Japan meeting. Any one of those could move markets, but traders probably would have some kind of strategy in place already. What they didn't have in place was any kind of thinking about whether France recalled an early parliamentary election that brings in a whole level of uncertainty that they just wouldn't be prepared for. And so markets need to respond to that. We probably will only get a really clear picture of how people feel about it when the European markets open later in the day. And of course, people will be looking very closely at the yield spread between France and German bonds, which has been very quiet for several months, understandably, because there's been no real reason for anybody to push that around. But now there is you've got this decision here, which will come as a shock to many investors, and they will probably respond defensively. So we could see a pretty ugly day for French bonds, for French equities that could spill over into the euro currency. It's already a little bit weaker, but the real action will only happen once European markets open. And suddenly, instead of thinking that the Fed was the biggest risk this week, it might well be France. Yeah, we've got a UK election coming up as well. Alex It's interesting just the amount of election setbacks we've seen and it's really roiled this whole carry trade right now, whether it's in Mexico and the like. You know, how are you looking at these carry trades here moving forward, Mark? Well, the Kyrie trades are most definitely at risk because of the situation in the United States, where the economy obviously is doing an awful lot better than people expected. So you had a jobs report on Friday. I think you said it was four standard deviations better than expected. Well, that obviously means that it makes it very difficult for the Federal Reserve to lower interest rates any time soon. So you're talking about the DOT plots, but any sensible central bank will want to give themselves as many options on the table as possible. So most likely they will only reduce the DOT plots to two cuts instead of three. They will be trying to avoid giving the markets a shock and creating unnecessary volatility. So probably will be an incremental move, something like that. But clearly is giving you the signal to rate cuts further and further into the background. But the market may well look at it and say, well, even December is becoming a pretty challenging area for the Fed to start lowering interest rates, all of which supports the US dollar and doesn't help carry trades at all. Because as long as the US dollar is the powerful currency and it's yielding a decent amount close to 5% in the short term interest rates, really there's less incentive for people to go for these high yield risky currencies outside. So really, the DOT plots here may end up being another support for the US dollar. And another reason why people start to avoid emerging market currencies. And hence mark what the strategy you think they should be ahead of the DOJ and possibilities. On Friday, for example, it's back at 157. But I think from the Bank of Japan's point of view, if you read most of the reports, including on Bloomberg, that they're expected to prepare the market for a small interest rate hike in July and property to reduce bond purchases slightly. Well, that's pretty much no, that's a factor in the market. But the yen weakness really has been more persistent than they could have expected. They did a lot of intervention recently. By some accounts, the biggest intervention they've ever done. And yet dollar yen is still not too far away from the the highest levels that we saw earlier in the year. So really not very effective. It just shows you that the swing factor here for the markets for the yen is the Bank of Japan. So the best thing for them to do is surprise markets, surprise markets and bring forward the interest rate hike that is expected for July. If they do that on Friday. It will surely boost the yen. It might be a little bit disruptive for the equity market, but you can probably handle it. So really a hawkish surprise when the BOJ is quite a big possibility this week. Mark, Thank you, Mark over there and my strategist joining us out of Singapore. Coming up next, we'll talk more about China's job market as the country gears up to absorb over 11 million graduates into its workforce. We have Vanguard Group's chair, Juan, joining us to look at, of course, overall labor trends, youth unemployment, the like. This is Bloomberg. Welcome back. You're watching the China show. So a record 13 or nearly 13 and a half million people took the National College entrance exams known as Go Call in China. That's on Friday and Saturday. But the problem really of how to employ these students once, of course, they finish school, that's a big concern, of course, of the government with Chinese President Xi Jinping making youth unemployment a top priority at a Politburo study session that I think was announced back in late May. Yeah, I think we've went from now there was talk all year about the eating bitterness. You have to endure hardship and then there was a little bit of change in stance just recently. Here For more, let's get to our China correspondent, Ben Lowe. She's here with us in the studio. So set the context up for us. What's the youth unemployment situation looking like now and why is this what they call, quote, the priority of priorities from the government? Yeah, well, youth unemployment has hit record highs last year of over 20% in mid last year. And now it's come down quite a bit to just under 15% in April. But that's only after the government had changed the methodology for collecting the data. They had excluded students from a data set. And I've been speaking to say that this likely downplays the actual picture of unemployment because many of these students, they look for jobs quite early while they're still in school. So whether they can get a job really tells us a great deal about how the overall health of the labor market. So last year, I would say it's about the number of youth unemployment is about 2 to 3% of the labor force. Now it's just about 0.6%. So it's a small number. But the important thing is youth. They represent an outsized proportion of people who spend money in the economy because youths are the one going to the cinemas, to concerts. They are different from their parents generation in that they tend to think less of their long term financial goals. So if the government wants to get the economy going again and get people to spend again, they need to focus on the young people, make sure they have the income to spend and they are gainfully employed and the skills mismatch to that they need to close. Right. That was one of the things I think Chinese President Xi Jinping talked about what measures have been have been talked about to to address these concerns. And these are structural concerns, too. Yeah. So previously they have come up with, I would say, rather piecemeal measures. They were there were tax incentives and subsidies to get governments to employ young graduates. But these amounts were ranging from 1000 to ¥2000. So they are quite low. It's like over 100 to 300 plus dollars. That's not a huge amount to incentivize companies to hire, especially when the outlook for the economy is not great. So they need to kind of sort that out for us. But it's a chicken and egg problem because how you're going to get people to spend when their income is not there and how are you going to get people to hire when the economy is not good? And then they have to sort out the education mismatch problem. And that's something I think we want to look out for, whether there would be any reforms in the pipeline come July doing the party plenum. They have been trying to improve or upgrade the vocational education system, but that's facing a lot of resistance from parents because they see a lot of stigma about sending your kids to a vocational school instead of colleges. All right. And stick around. Our China correspondent Ben Lowe there. For more, let's bring in our next guest, Chang Wang, chief Asia Pacific economist at Vanguard Group to have a deeper look into, of course, the unemployment situation in China. Jim, always great to have you, first of all. Now, even after they change the methodology, we're still talking about a youth unemployment rate at around 15%, which is still a couple of times higher than the national headline figures. But I've got to wonder, why is it so high in your eyes? Is it something that's more cyclical or actually structural? Yeah. Thank you, Yvonne and David. Thank you for having me today. I think you are right. I mean, even after they changed, the methodology is still much higher than the headline unemployment rate. Now, actually, that is pretty common. Youth unemployment is always higher than the aggregate unemployment rates, you know, across many different countries because, you know, young worker, they are usually don't really have the experience or skills. But I think in China, 15% is still high. And also I think what is alarming is also that over the past several years, if you look at the old theories, right, you know, it was first reported in 2008 and it kept rising. Right. You know, so in 2008, that number started at 9.6%. And, you know, before it was suspended last year, it was already over 20%. So there was a rising crunch there. I think that is more concerning. Part of this is, I think, you know, the weak economy over the past several years. Right? We have a trade war, we have pandemic, we have regulatory tightening. And even today, we see the economy is still weak and gradual recovery. Right. You know, normalization after the pandemic, even by the end of this year, the gap will still be negative. So this is really more of. Very strong economy. And the second thing I would also say, as we just mentioned, there is a structural mismatch between the labor supply and demand. You know, the economy recovery so far is really, you know, mostly on the low end service industry benefiting migrant worker. On the other hand, the middle to high end service industry that hires a lot of new graduates actually suffer from regulatory tightening or persistent, you know, structural headwinds. So, yes, even manufacturing boom, you know, over the past several quarters. Right. But we all know that manufacturing is much less labor intensive than service. And also, I think that the recent boom is actually on the high end manufacturing, which is more technology centered. So many of the college graduates, even they are willing to work in those manufacturing sector. They don't have the skills, you know. Yeah. So talk to us then about know a lot of this also comes down to how we count and statistics. Right. And you know, there could be you know, there could be people who are choosing to skip finding that first job and going straight into say, you know, going for the master's degree, you know, otherwise they would have done a few years. And then the the Masters, there would also be people, I would imagine, because they saw they see what's happening in the labor market, just choosing to sit out and them now not being counted in the labor force. What is your estimate of the labor force right now? Is it shrinking or is it shrinking or is it actually expanding? Yeah, I think that's why I think we shouldn't just look at the unemployment rate. That's one indicator, right, to gauge the overall overall labor market conditions. You know, one thing I think it was not captured by the unemployment rate is really the declining, you know, labor force participation rate. Right. Especially among the younger generation. Right. As you mentioned, I think a lot of part of that is because they are discouraged, they have weak confidence in the labor market, their job prospects or, you know, income growth. So they choose to stay home, you know, and then they prepare for civil servant or graduate program exams. So, you know, that actually has an impact on their income and overall consumption, as you just mentioned earlier. And also, I think another thing that may not be captured by the unemployment rate is the underemployment as well. Right. So, you know, based on the statistic methodology, as long as you work one hour in a week, then you are counted as employed. Right. However, if you look at, you know, hotline, you can you do see the self-employed individual. They are getting less orders or there's like, you know, people are having less working hours. That's underemployment as well. Yeah, I think it's very interesting because if you just go online and look at any recruitment platforms in China, in China now, you would find that so many jobs have requirements for master's degree when the role doesn't really justify it. I'm talking about roles like office receptionists, and it's because there's just this glut of people with master's degree now and it's an employer's market right now. And so that's also my next question, because so many of these graduates, they're expecting to work in real estate and banking and tech. These are all the sectors that have been facing regulatory scrutiny and crackdowns and that aren't hiring as much as before. And the government knows that they need to reform the education system to ensure that the students come out with skills that fit the needs of the economy. But how do you think they're going to go about this? Yeah, I think one thing you just mentioned about, you know, like master student and a Ph.D. student, right. China actually has been expanding the graduate program admissions significantly in the past several years, especially during the pandemic started in 2020. That kind of delay, the, you know, undergraduate student unemployment. However, it doesn't really solve the problem. They just kick the can down the road and now they are coming to the market as well. So to that extent, it's not just the age group. 19 to 24 unemployment rate is going to pick up in the graduate season is also the age group, about 25 to 29 unemployment rate. I think in terms of the, you know, government, what they can do. Right. I think, you know, to a certain extent they can encourage, you know, say sector, you know, either the civil servant jobs or state owned enterprises for higher quality graduates or they can expand the, you know, postgraduate program. This does not really solve the fundamental problem. The education reform, you just mentioned it taking years, you know, to to you know, to have an impact on the labor market. I think ultimately, I think at this moment, the most important thing is still about the economy, right? You literally need to put up the economy and also the confidence, especially in the private sector. Right. You know, private sector hire of more than 80% contributes to over 80% of the total employment, you know, especially those new graduates. And so if the private sector business confidence is low, they are not willing to invest, they are not willing to hire, then, of course, you know, then consumers won't have the confidence. And of course, those college graduates either. Yeah. So if I don't have a job, I'm not going to spend big. I'm not going to buy a house. That certainly is something that we're seeing here right now. I mean, what are these implications then, if if, you know, the unemployment rate still remains high among the youth, what does this mean for the overall consumption recovery in China? Right. I think it's not just the youth population. Right. You know, they you know, age 19 to 2024, they are about 7% of the total labor force. But. If you look at the overall labor market conditions, one thing you would see is that, yes, the sentiment and confidence is still low. And in particular, I think one of the interesting shift change is that there is a shift in terms of the job growth and wage growth away from the middle to high end segment of the labor market towards lower end. So that's mostly low end service industry. That's like migrant workers. So, you know, if you put that together, I would say, you know, this is something that's going to make the consumption recovery more, you know, sluggish down the road. You know, like a lot of existing, you know, employees in many of the middle to high end industries still worry about their job security, is worry about how can they have confidence in terms of, you know, spending more. So I think this is where you're going to see our. Yes, continue in a very slow and weaker recovery of the consumption which is also feature to by consumption downgrade. Yes, people want to spend, but they're going to spend more prudently, cautiously. We'll have more with Ken Wong, head of Asia Pacific. Economists, of course, there, chief Asia-Pacific economist at Vanguard here. And by the way, for our Bloomberg clients who might have missed many of the sort of figures and statistics that we just showed you there, TV gold takes you back to our deep dive just now on the youth unemployment situation in China. This is Bloomberg. Welcome back. You're watching the China show. Here are some stories that we're following at this point. An update here in Israel, too. Benny Gantz has resigned as well from Israel's emergency government criticizing Prime Minister Benjamin Netanyahu's handling of the war against Hamas. Now, he he has accused Netanyahu of hesitating over strategic decisions due to political considerations. He also warned the military campaign against Hamas will last for years. Now, South Korea's largest organization of doctors have voted in favor of holding a strike on June 18. Now, the Korean Medical Association says over 64,000 doctors, that's about 90.6% of those who took part in the strike referendum supports the walkout. Now, this is the first time it's taken collective action to protest against government plans to reform the medical sector. So that's the strike given today statements about eight days from now. Just keep an eye on that, of course. Yes. This has not been resolved for months now. You take a look when it comes to this market dragon. Yeah, we're talking about the volumes across the board here. Several major markets are shut, including here in Hong Kong, China, Taiwan, Australia here this morning. So really the only equity market that's still seeing some decent green is maybe Japan, because given what we've been seeing with this weaker yen that's been back in play here, Cosby's Davos up in terms of 1% and the Dow futures are still in the red this morning. And we're watching these, of all things, ice cream makers in Korea. So they're rising. Apparently, there's a heat wave going on, not on the strike in South Korea. No, there's just it's just hot. Yeah. So that's why you're seeing this food and beverage index jumping here this morning. Yeah. The Korean food and beverage index up as much as 6%. K.B. is reporting for the summer this year, obviously higher temperatures than what we've seen in previous years. Now, we got plenty more ahead. This this is Bloomberg. 11:29 a.m. in Tokyo here right now. Japanese markets heading to that lunch break. At least we're seeing a little bit of upside, I guess, when it comes to equities there. That weaker yen certainly is helping. There were some GDP figures that were also revised as well here this morning. But GDP yields continue to tick higher here. We're up four basis points on your ten year here. We're just days away, of course, from that Bank of Japan decision. Dave. Yeah, more on that in a moment. To the rest of the region doing this as see have a lot of markets are up and run, not up and running today. We're flat on price. We're slightly lower. Also in S&P, the dollar is still stronger, which is perhaps why we're seeing some pain across most particularly detect and the interest rate sensitive sectors that are trading right now, like the index, as you can see, is down about half of 1% going into fairly what should be on paper, busy and eventful week filled with risk events out there. But of course, the difference between risk and riches to letter. So of course you do need to take one to maybe achieve the other. Okay, enough of that. Inflation is coming out of China this week. Too bad. Certainly the conversations around the lack of demand that this economy might again be front and center. The forecast, the median forecast for May is 0.4% coming off a 0.3% over a longer term view. As you can see, it's basically a low inflation environment. Is there an end in sight to this? Joining us still is Chen Wong, chief Asia-Pacific economist at Vanguard Group. Chen Wan, thank you for staying by for us. So inflation is just one of the many metrics that we're latching on to for any clue is whether the economy is responding to the current cocktail of policy stimulus. Where do you think where do you see inflation going? And is the sort of policy support enough so far? Yeah, I think the inflation is actually gradually coming back. Last year we have the deflation. You know, I think headline CPI is coming back to the positive territory. I mean, you have 0.3 they will point for that's a headline CPI. The core CPI actually is around 0.7, 0.8, slightly higher. And you know, a large part of that is a gradual recovery, normalization of the service inflation. Right. So but still, I think you you said it at the well, it's still a very low inflation environment. Right. I think a large part of that is really because of the sluggish domestic demand, especially on the consumer side and also significant build up in terms of the production capacity. Right. So, you know, over the last several quarters, you do see that the key driver of the Chinese economy has been this manufacturing investment industry production, and that kind of a significant supply demand imbalance is actually causing persistent deflation, a pressure on the good side and not just on the domestic side, but also, you know, for the global inflation. So we mentioned about some of the policies, whether it's on the housing market, talking about inventory and trying to at least reduce them. Do you think it's enough to talk about a turning point in the economy or really is it just to limit the downside further? Yeah, I think it's really just to protect that's anxiety, you know, prevent a sudden collapse of the financial system or the economy. But on the other hand, I don't think it's going to bring much upside in terms of economic growth, nor is going to be a decisive turning point when I think, you know, everybody knows that the property sector is actually in a structural downturn for years to come. You know, I think it will take many, many years to clean the inventory in the Chinese, you know, real estate market at this moment. So I don't think it's going to generate, you know, a decisive upturn in the economy or the capital market. The markets are now looking at the third Plenum as perhaps where we could get more catalysts for the market. Not so much, I guess, for the economy, as you point out, if things are going to get take some time here. What are your expectations ahead of the third Plenum? Well, I think, you know, to a certain extent, I mean, you know, the recent policy support that's ramping up, right, both in terms of fiscal policy, government bond issuance, accelerator and also a bunch of, you know, property, you know, stimulus measures. I do think that actually reduce the policy complacency risk. So we are seeing the growth actually decelerated quite significantly in the second quarter after the initial surge in the first two months of this year. But I think given this ramping up of the policy support and also the strong industry production and slow growth, we think that growth is probably likely to stabilize somewhat around one in the second half. So to that extent, I think 5% growth that's a government target this year is indeed achievable. However, I would to say I'm really skeptical about the sustainability of growth down the road. When you have the domestic household consumption still weak property sector in a persisting term. And also I think the strong actual growth is just unlikely to sustain, especially when the pension protectionism is rising. Yeah, tell us a bit more about that. Right. I mean, are exports quite vulnerable right now to those threats of rising tensions and and tariffs? And you don't think that's going to be enough in some ways to offset this domestic demand that continues to be weak? Well, I think if you look at the last few quarters. Right. You know, it's interesting because when you look at 2 to 3 industries, right. You know, machinery, equipment, you know, auto as well as non-metal mineral investment and production will pick up significantly in those three industries. And the contribution from those three industries actually has completely offset the drag from the property sector right now. I think that's why the China will still remain kind of stable around 5% at this moment. But then the question is, is it going to be sustainable because of this kind of the situation is ultimately leading to, you know, supply demand imbalance, you know, financial losses in the corporate sector. And then when when China is trying to export its excess capacity to the rest of the world, the protectionism is rising and also geopolitical risk is still there. You know, I think you guys actually imposed tariffs. Now, we could have say that's only 18 billion and, you know, it's likely to have a limited impact, but things could escalate from here. Europe is likely to join suits. And, you know, just a feel, you know, this week we hear that Turkey is also imposing tariffs on China, any export as well. So I think this is where I would be rather skeptical whether this kind of ever rising export growth will be the key growth driver for such a big economy like China. What's what's going well as far as what's going well? Yeah, What's going well? What's going on? Well, in the economy, I think to a certain extent, I think you could say that the government is there to, as we mentioned, to protect the downside. So one thing I would say is that their primary objective, I think, is especially when they are I don't think they have any intention to engineer a strong rebound in the economy because they are still worried about financial stability risk. So I think their main objective is to engineer a smooth deleveraging of the economy, slowly deflating the property bubble. So on that front, I think I don't think we should worry too much about, say, a sudden collapse of the financial system of the economy. But I think, you know, unless they really bring back the animal spirit of the private sector, they really stimulate household consumption. Otherwise, I think, you know, it is likely that the economy is just going to see continue the deceleration in terms of economic growth in coming years, 5% to 4%. And by the end of the decade, it's probably coming to 3%. Joanne, thanks so much for staying with us. Show on the chief Asia-Pacific economist at Vanguard Group joining us from San Francisco. Well, we talked about not just China, but really what's been going on, the U.S. economy as well. That surge in U.S. jobs and wage growth has traders pushing back their bets on the timing of the Fed rate cut or that. One at least. Bloomberg I pay you to call this a University of Cambridge. Queens College President Mohamed El-Erian says the data takes a July rate cut basically off the table. This is a really strong report on the demand side, not on the supply side, on the demand side, but strong in terms of demand for draw employees, strong in terms of wages paid, etc.. It does close the door on a July rate cut. I think that is it, you know, almost regardless of what the CPI number says next week. But then step back and ask the question of reconciliation with other data and then the story gets a lot more interesting. We have the situation where the backward looking data is strong, the forward looking data is weak. So we've got to sort of reconcile these two things, which leaves us to the point that Lisa raised, which is what is your view of the economy? Because if you don't. No. Have that view, you're going to continue to get whipsawed for quite a few months and you're going to miss windows of opportunity that are really important to slamming the door on a July rate cut seem reasonable to you or are you concerned that this is basically the wrong signal at a time where what comes next looks different than what came before? Look, it's reasonable for a Fed that is overly data dependent. There's no way that can cut or signal a cut in July with this data. They would have to change their reaction function and be public about it. And I don't see the Fed doing this. So that's why the door is shut now. Should it be shut? There's a much more interesting debate. You know, my view, we are in a weakening economy. There are no spare tires to speak of anymore. There's no pandemic savings. There's no fiscal huge new fiscal impulse coming. There are no spare tires in this economy. So if you get it wrong and you weaken too quickly, it's going to be a very difficult mistake to correct. The problem is, which is the other bit of my view that, you know, is we are living in a secularly inflationary world. Secularly, inflation is going to be higher because of all the transitions going on domestically. We no longer talk about liberalisation, deregulation, fiscal prudence, we talk about trade restriction, we talk about industrial policy, we talk about fiscal responsibility and globally we talk about fragmentation. All that means a more inflationary world, which then raises the question as to what should be the right inflation target. So if you put all this together, it does shut the door for this Fed, but it will not shut the door on a very active debate that's going on that tries to look forward, not back. Are you basically saying that the chance of a harder landing increases the longer the Fed does not cut rates, even if it appears strong on the surface? I do, because I focus a lot on the forward looking data and that is weakening significantly. So so, yes, that's where I am. But I understand that if your data dependent, there's no way you're going to come anywhere near my view because you would have to completely change your paradigm. And that was Bloomberg opinion columnist and University of Cambridge Queen's College President Mohamed El-Erian there on his outlook post U.S. jobs and the Fed's. That, of course, is also this week that it's about Thursday morning Asia time. And in a few hours after that, I just going to sneak this in it's game three of the NBA finals and maybe the Celtics are going for three no at that point. So they just took a game to a few minutes ago. Then we got plenty more ahead. This is number. Indian Prime Minister Narendra modi has been sworn in for his third straight term, this after suffering a bruising electoral setback. The force to share power for the first time now. Modi's swearing in ceremony was held the president's residence in New Delhi before some 8000 guests, including business tycoons Mukesh Ambani, a good of a nominee, as well as leaders from Bangladesh, Sri Lanka and the Maldives. Yeah. Now, the recent markets gyrations that we've seen, what we saw last week in the country has investors debating whether or not to buy the dip, whether that premium is still warranted. Now, about an hour back, we were joined by Rahul Chadha, who is the CEO and founder at Shakara Investment Management. They're just starting this new fund, of course, a pure India play that starts that gets underway in July. We asked him really why he's bullish and why that actually that strategy does make sense to him, that new consumer cohorts being developed in a new industry segment has been doing up a lot of multi-bagger. They're looking to clearly for a bottom up investor who's got a good result perspective being in Hong Kong, boots on the ground in Mumbai and a good global perspective in New York. I strongly believe that we can generate alpha. Now. Investors bullish on Indian equities have cited the promise of policy reforms and the economic growth model under Modi to justify this very expensive group of stocks. But the so-called Modi premium is now under scrutiny following the recent election setback for the ruling party. Abhishek finally is with us, our senior reporter for Asia Equities, to talk us through this. And well, the question there is why are markets or what are markets making of these premiums going into Modi 3.0. Well, if you take a look, markets have hit a new record, actually. So that means net flow of institutional money or all kinds of money is actually pretty confident of what what will be delivered under Modi 3.0. But the fact of the matter is it's a weaker than expected mandate for a prime minister under which India became the growth story that it is right now. So it obviously means some slowdown of that story. But, you know, it's like a car was getting driven at about 100 miles per hour. Now it is going to get driven at about 90 miles per hour. Nothing much changes apart from that. A playbook might change. There might be, you know, some concern about possible slowdown in policy making, you know, a possible focus on consumer as well, given the election mandate that government has gotten and, you know, budget upcoming budget, which I think is in July, will be a key test of this thesis as to whether government changes to start to tackle, you know, the voters which were not happy and then go on in doing pathbreaking reforms. Whether it is able to manage this call for possible populism and pragmatic policymaking. So budget would be a key test to all. This essentially means that, yeah, equity risk premium rises a little bit, which means lower expected returns. But as the net flow of money has shown us, you know, markets are trying to put this event behind us now. Yeah. And does it in any way change overall how people's strategy around this market has the investment playbook for India change in that context then? Yeah, definitely. I mean, it has changed and more so for foreign investors. So, you know, I've been a bit cagey about the India story altogether. They have been selling India, you know, weeks before election results came out, they called it right. The question was right. But, you know, markets had a mind of its own pockets on a new record. Right. So they're not in the money. But, you know, this just makes seen with my playbook around India bit defensive cross asset guys that we have talked to are preferring bonds You know I heard of that inclusion in the Jp morgan indexes followed by inclusion in some other indexes as well. So that's a nice tactical play there. On the stock side, the investment playbook has become a bit thin to interpret defensive values, making a bit of a comeback. Sectors that consumer sectors oriented towards consumer like mortgage finance, affordable housing, you know, affordable insurance, so on and so forth, that is looking good to many investors. There is a test of whether, you know, the India story and allied light sectors like infrastructure, etc., would continue to do well. That is yet to be seen. Like I said, budget would be a key to so bench. But defensive on the India play playbook and process of guys preferring bonds over stocks for now, I wish I thank you I wish I wish were there on the changing dynamics of course this India market post election and here are some other stories that we're tracking for you today. Speaking of elections of the German chancellor, Olaf Schulz, as Social Democrats saw their worst ever result in the European Parliament elections on Sunday, conservatives are on course to win some 30% of the vote and putting the SPD in third place behind the far right alternative for Germany. The outcome will establish which leaders will have the most leverage to claim the EU's top job. Italian Prime Minister of Georgia Maloney is set to solidify her power after winning the vote for the European Parliament. Her right wing party is on course to gain over 27% of votes, compared to the 6% in 2019. Meloni is projected victory comes amid a slew of positive results for right wing parties in Europe. Of course, as we talked about in Germany as well, led by France, of course, we'll leave you pictures outside of Hong Kong. It is a public holiday here today. And the boats are out. Not just the yachts are talking about the Dragon Boat race and those races are going on here this morning. There's also a drone show tonight. Yeah, but in Moorhead, this is Bloomberg. One wonder who she that is. Can we join you? You got your Bloomberg on. Let us know. Feel free to slip into our DMS. Oh, look at them. Go. Races are on this morning here. I believe this is the I don't know where it is, but I think there have been several places there. I always want to be the drummer. I don't know if I have the arm strength to do this, Dave, but certainly they're on. Those actually look like pros. Not to diminish, of course, the training man that many of our peers in the industry. Of course, I think Bloomberg has a couple of boats Yeah go blueberry that some of them of course in the background there just catching the glue. I'm kidding. Some of the banks, of course, are also competing here, but these actually look like I love it. So. Yeah. Oh, yeah. Good luck. Good luck to all of them there. That does take, of course, a lot of orchestrated strength, if you will. Now, this brings to mind some of the reports in the tourism sector here in Hong Kong. Right. So I was reading this, we were talking about a report this morning out of the dim sum daily. And they're citing data from the Immigration Department here that when you have these long weekends and you hope for the B industry that people are staying and spending, they're actually going north. Again, half a million, half a million have made their way through the checkpoints into Shenzhen. And who knows beyond that, of course, this move north. Yeah, this trend is not letting up anytime soon, Right? I mean, just the amount of families I talked to that go there for either, you know, everything from playrooms that are bigger, cheaper food that's cheaper to even getting their dental work. Right. I mean, that's something that you hear. This is not symbolism for anything. Yeah, but it was interesting. Now they're going to see a dentist there. There's also this whole trend of mainland. They talk about mainland visitors coming to Hong Kong. I think it wasn't around 130,000, so not enough to really offset the amount of Hong Kong people that I've really left this time around. And it just really begs the question of what the tourism industry is going to do in Hong Kong as a tourism board. Right. They talk about all this, these mega events in the second half. Right. You know, are these drone shows, these fireworks really going to cut it here? There is a drone show today. There is. There is one year later today. That's not Star Wars. It's actually it's pretty cool. It's really cool. Speaking of something that's on the way out, JGB yields here we go up across the board. You're to five, ten, 20, 30, 40. We have a couple on your screens coming up as well. On the back of this move up in yields we're seeing globally. It is a paring back, of course, of sovereign bonds, the BOJ this week. And as you can see, we're up by about seven basis points on long end 2.32%. Now, the dollar's also on the way up and this is all against impact. All the China dollar, Malaysia offshore and Korea and the Philippines, just to name a few. And these are fairly pronounced moves we're actually seeing in the dollar story. And of course, the weakness coming through there in the euro. On the back of the what we found out on the weekend there. Yeah. So that's turbocharging the dollar in some ways as well on the back of that strong jobs report on Friday. So this is what your global macro movers are looking like. It's mostly read across the screen, across these asset classes here today. Stocks mostly lower dollar firmer across Asia affects commodities are also on offer and bonds continue to see yields picking up on this Monday morning ahead of a jam packed week of macro event risk as well from the Fed, US inflation as well as at Bank of Japan meeting as well. That's it for us here on the China show. Bloomberg Markets Asia is up next. Stay with us.

Channel: Bloomberg Television

Views: 5,966

Keywords: Abhishek Vishnoi, Avril Hong, David Ingles, Debby Wu, Hideyuki Sano, Mark Cranfield, Minmin Low, Qian Wang, Rahul Chadha, Vanguard Group Inc., Yvonne Man

Id: qgisZVGEtqg

Length: 91min 37sec (5497 seconds)

Published: Mon Jun 10 2024