This podcast was first and originally published by the BFM 89.9 The Business Station for its podcast show called Morning Run. Find the original link here: https://www.bfm.my/podcast/morning-run/market-watch/fomc-minutes-fed-funds-target-rate-2023-july
In a recent episode of the BFM 89.9 Morning Run podcast, Tony Nash, CEO of Complete Intelligence, provided insights on various economic trends affecting international markets. The discussion began with an analysis of the Federal Open Market Committee (FOMC) minutes and their impact on future rate hikes. While the previous rate rise was unanimous, the notes revealed a lack of unanimity on further rate hikes, with some members still in favor of a 25 basis point increase. Concerns over inflation and a strong labor market were cited as reasons for their stance. The committee’s commitment to the 2% inflation target was highlighted, indicating the possibility of a rate hike in July.
The conversation then shifted to the upcoming US nonfarm payroll numbers, with Tony expressing the view that job growth may appear positive on the surface, but declining productivity compared to hourly earnings is a concerning factor. The declining productivity in the US workforce necessitates continued hiring to maintain output, indicating potential long-term challenges.
Regarding investor strategies in a market with expectations of rate hikes and high stock prices, Tony emphasized the difficulty of making long-term predictions due to the uncertainty surrounding the Federal Reserve’s actions. The discussion also touched on the Fed’s plans to reduce its balance sheet, potentially unloading equities, which could impact market dynamics. The growing gap between wage increases and productivity declines raised concerns about workforce efficiency and the need for productivity-focused investments.
The podcast then turned to the oil market, where Saudi Arabia and Russia aimed to stabilize prices by cutting production quotas in August. Tony expressed the view that the success of these measures depends on the potential for a recession. Without significant stimuli, crude prices are expected to remain relatively stable over the next few months, with small declines projected. However, the introduction of a massive stimulus package in China or the US could lead to a sharp increase in crude prices.
The discussion also covered concerns about the Chinese economy, as recent data suggests a slowdown in growth and factory activity. Tony highlighted the cautious behavior of Chinese consumers and companies and the challenges faced by the government in introducing stimulus programs due to balance sheet constraints. The podcast delved into China’s efforts to strengthen its currency, the yuan (CNY), despite the need to weaken it for export growth. Tony speculated that China’s leadership may not fully recognize the magnitude of the country’s economic problems and emphasized the delicate balance between international standing and domestic market health.
The episode concluded with a discussion on China’s announcement to restrict exports of metals used in electric components. Tony viewed this as a tactical move to gain attention rather than a sustained enforcement effort. Trade issues and restrictions were considered tricky, with ways to circumvent them always possible.
Overall, the podcast provided a comprehensive analysis of economic trends in both the US and China, highlighting uncertainties and challenges in the global market landscape.
Transcript
BFM
For some insights on where international markets are heading, we speak to Tony N ash, CEO of Complete Intelligence. Good morning, Tony. Thanks as always for joining us. So I’m sure everyone’s parsing through the FOMC minutes that were released last night. What is your outlook on further rate hikes after the Fed’s unexpected pause in June based on these minutes?
Tony
So the previous rate rise was unanimous. And so this pause, what we saw in the notes with this, this pause was not unanimous. There were several voters who were still in favor of a 25 basis point hike. Their main concern and their main desire to have a hike is, of course, inflation, but also the labor market with jobs continuing to be way too strong. One of the quotes from the note says there were few clear signs that inflation was on a path to return to the committee’s 2 % objective. So they really still do take that 2 % objective seriously, which I think a lot of people have said, “Yeah, maybe we’ll hit that in a couple of years.” But these guys are really looking at that on an ongoing basis, which I think is notable. So we haven’t seen labor markets slow down much, and inflation is still rising, of course. So seems like a July hike is still very much on the cards.
BFM
Tony, do you have an opinion on how US nonfarm payroll numbers will look when they come out tomorrow?
Tony
Yeah, they probably still continue to look pretty good. The problem is that in the US is that productivity has fallen so quickly compared to average hourly earnings. So workers in the US now are so unproductive that companies must keep hiring just to get the same amount of work done. So new jobs, although it looks good on the headline, it’s not necessarily a good thing because productivity is declining so quickly.
BFM
Tony, help us connect the dots. We know, well, it’s likely that the Fed will raise rates at this July meeting. It doesn’t look like they’re going to cut rates at all this year. If anything, it’s probably going to be a 2024 decision. At the same time, markets are so high. What should investors do?
Tony
Honestly, it’s a tough one. It’s really hard to look beyond a pretty short horizon because we don’t really know what the Fed is going to do. The Fed also talked about reducing its balance sheet even more. So if the Fed reduces its balance sheet, they’re looking at unloading equities, they’re looking at unloading probably not mortgage backed securities yet, but at some point that will be the case. So if the Fed unloads equities from its balance sheet, then that really removes the floor for some of the price action we’ve seen. So the gap between wage rises and productivity declines is really concerning because, again, it’s just showing a highly inefficient workforce, and it shows that companies really need to invest in productivity, and likely that will have to come after some headcount cut. So I know I’m mixing a few different issues, but it is a really strange time for the US right now. And I think there’s more uncertainty in the near term than most people would be comfortable with.
BFM
Let’s take a look at what’s happening in oil markets because Saudi Arabia and Russia are attempting to provide more price support for oil by cutting production quotas in August. How successful do you think this measure is going to be in propping up prices?
Tony
I think it really all depends on where we think and when we think a recession is going to come. If we feel like we’re headed into a recession then the production cuts will stave off crude from heading too low. If we view that we’re going to continue to have the same nominal rate of growth, then it’ll stabilize production. Our view is that crude will likely meander or muddle through the next probably three or four months. We don’t see a dramatic price increase. I know that some traders are saying we’re going to see crude at $90 soon. That’s possible. It’s just not something that we see. We’re seeing relatively small declines over the next few months. We just don’t see a lot of strength coming back into the market. So if we see something like a massive China stimulus package that actually has money going out or a new US stimulus package, I know that sounds crazy, but something like that, then we could see a sharp increase in crude prices. Short of that, I think we’re we’re in a zone heading a little bit further down.
BFM
Since you brought up China, so far, all the data points coming out show the economy is not really improving. Things are slowing down. Factory activity even grew slower in June, according to the Chia S&P Global Manufacturing PMI. How worried should we be over the Chinese economy?
Tony
It is a bit worrying because we just haven’t seen the rise we would expect post-opening up. There was a short burst of activity, but really not long. So it tells me that Chinese consumers are wary, Chinese companies are wary, they’re being very cautious. And I think it’s really difficult for the government to introduce stimulus programs just because of where their balance sheet is. So the strange part about where China is right now is we see efforts to strengthen the CNY when in fact they should probably be weakening the CNY to push exports up. So it’s in a strange position. I suspect that the leadership in China is not really recognizing the magnitude of China’s economic problems because that obviously filters down to discontent, and we don’t really want to see that. But I do think they have bigger domestic political issues, and I suspect they’re also looking at China’s international standing. There’s so much focus on China’s international standing that they’re trying to… It’s a delicate balance of the appreciation of CNY versus depreciation and using CNY for international transactions versus depreciation for the health of the domestic market. So it’s a tricky situation they’re in right now.
BFM
Now, Tony, China just announced plans to restrict exports of helium and Germanium, two metals used to manufacture electric components. So is this a continued tit for tat response to the West of placing restrictions on chip exports? And how crucial are those commodities to both the US and Europe?
Tony
Yeah, of course it is. I really think that it’s an announcement to get some headlines and flex muscles. I’m not sure that it’s something that they can afford to enforce for a protracted period of time. If we look at, say, Gallium, arsenide wafer imports to the US, the largest source by far is Taiwan. And so the quandri that the mainland is in is, do they restrict Gallium exports to Taiwan? Is that an international move or not? It’s a tricky discussion. They can’t control Taiwanese exports to the US, but the US receives four times more Gallion arsenide wafers from Taiwan than anywhere else. So it’s a tricky situation. Trade issues and restrictions are always tricky. There’s always a way to circumvent them. An announcement like this is only as strong as the enforcement mechanism. So China can announce this, but if they choose not to enforce it, then it’s just paper. It’s just words on a page.
BFM
Tony, thanks very much for speaking with us. That was Tony Nash, CEO of Complete Intelligence, giving us his take on some of the trends that he sees moving markets in the days and weeks ahead, weighing in on developments both in the US economy as well as in China, where they just can’t seem to get things off the ground in terms of getting that recovery momentum going. And I think we do have a story coming out of China on property.
BFM
So they’re facing challenges on that front. As we know, it’s a critical sector. It accounts for one quarter of China’s GDP. And defaulted property developer Ximal Group holding actually failed to find a buyer for their $1.8 billion US dollar project at a forced auction, even at a heavy 20 % discount. And Sino Ocean Group saw its bonds tumble after this. And it’s a state backed builder told some creditors it’s been working with two major shareholders on its debt load.