This podcast is first and originally published by BFM 89.9 and can be found at https://www.bfm.my/podcast/morning-run/market-watch/fed-chairman-jerome-powell-hawkish-stance-rate-hikes-us-markets
In this podcast episode from BFM 89.9, the hosts discuss various topics related to global markets and trends. They start by reviewing how the US and Asian markets performed, with the Dow Jones, S&P 500, and Nasdaq experiencing declines while the Nikkei showed strength. The hosts then interview Tony Nash, CEO of Complete Intelligence, to gain insights into market movements.
Tony Nash shares his analysis of Jerome Powell’s testimony to Congress, highlighting a potential mismatch between market expectations and the Fed’s actual considerations. He emphasizes the Fed’s focus on bringing down the housing market, which could impact Americans’ spending power and inflation. Even a small move in the Fed’s mortgage-backed securities portfolio could send a hawkish message to the market.
Regarding the US economy, Tony discusses the strong job market and a 21% year-on-year rise in housing starts, indicating continued housing demand. He suggests that if wages and housing stall out, stagflation becomes a possibility, but it’s hard to predict without further data.
The hosts and Tony discuss the direction of markets given the Fed’s determination to raise rates and stretched valuations. They mention the importance of understanding the Fed’s messaging and its potential impact on market volatility. Tony suggests considering safe-haven assets like USD assets and debt during this period of uncertainty.
The conversation then shifts to the US’s interest in India as a counterweight to China’s supply chain dominance. Tony explains that while India can eventually meet the demands of US companies looking to diversify geopolitical risk, it needs to improve its physical logistics and supply chain networks to attract foreign investments effectively.
Transcript
BFM
This is a podcast from BFM 89.9: the Business Station.
BFM
BFM 89.9. Good morning. It’s 7:06 Am on Thursday the 22 June. You’re listening to the Morning Run. I’m Shazana Muktar with Wong Shou Ning and Mark Tan. In half an hour, we’re going to discuss what’s driving optimism in Japanese equity markets, even as the inflation rate stays high there. But as always, we’re going to kick start the morning with a look at how global markets closed overnight.
BFM
The US markets were in the rate again with the Dow Jones down 0.3%, S&P 500 down 0.5%, and Nasdaq down 1.2%. Over in the Asian markets, the Nikkei bull continues up 0.6%, Hang Seng down 2%, Shanghai Composite down 1.3%, STI up 0.1%, and FBMKLCI also up at 0.4%.
BFM
So for some insights into what’s moving markets we have on the line with us, Tony Nash, CEO of Complete Intelligence. Good morning, Tony. Thanks as always, for joining us. Let’s start with Jerome Powell’s testimony to Congress earlier today. What’s your read of his comments? Do you think that there’s a mismatch between what markets are pricing in and what the Fed is actually considering?
Tony
A little bit, yeah. He was very clear in his messages on housing that the Fed is focused on bringing down the housing market. So I think there’s very much a mismatch in as much as Americans perceive a lot of their wealth from their housing equity. And if the Fed is focused on bringing down that housing equity, which circles back into spending power, which would then have an impact on inflation, then that’s a very serious move. It would imply not only that interest rates would rise, but also that the Fed may tighten its mortgage-backed securities portfolio. I want to be careful when I say that I don’t think they would need to do much with their MBS to have a major impact on the market. So I’m not saying the Fed is going to aggressively tighten its MBS portfolio, but even a small move there could send a very hawkish message to the market.
BFM
Now, Tony, in spite of some decent job numbers, some US economy indicators are painting a more pessimistic picture for the economy. So is the US hated for a possible period of stagflation?
Tony
Well, it’s possible, but we have to keep our eye on two indicators. One is jobs, and the job market is pretty strong. The other one is housing. And I just talked about Powell’s discussion, but also we just had a report of housing starts yesterday, US time, and there is a 21% year-on-year rise of housing starts, which is a monster number. So we’ve seen a little bit of weakness in house prices regionally in the US. But seeing that 21% year on your housing starts number just tells us that there still is strength in housing demand. Now, if wages and housing both stall out, then, yeah, stagflation is a real possibility. If they don’t, then it’s really hard to get there.
BFM
Okay, Tony, so where do markets go from here? Because it looks like the Fed is determined to raise rates, yet indices, especially Nasdaq 29%, up S&P 500 up 13%, valuation starting to look a bit stretched. And of course, the gains have been on due to just a few names, a few companies. So what should investors do?
Tony
Well, and we also have things like some of Nvidia’s board members, there was just some news across The Wire that one of the board members is cashing in $51 million of Nvidia stock. So these are not kind of bullish signals that people are sending to their investors when their board members are cashing in tens and hundreds of millions of dollars of stock. So that would tell me that they think it’s probably as good as it gets, at least for now. So there were, at one point kind of seven names that were pushing markets up, and that broadened a little bit over the last two weeks, but it’s still a fairly, I would say, narrow market. And we’ve seen the down days, the last couple of down days where there’s not a lot of breadth in the upticks, but there is a lot of breadth in the downticks. And that makes me a little bit nervous. So I would look for some volatility until we have clarity on the Fed. So with the Fed pausing in June, they open the door for confusion. What message are they sending to markets? Are they sending messages that they’re done?
Tony
Or are they sending messages that they’re just going to pause, then raise, then pause, then raise? And that causes disorder and confusion in markets. We saw in the last Fed meeting, Powell, the Fed paused. And then Powell’s press conference was, to be honest, fairly dovish and almost apologetic. And then he came out with his message to Congress today, which was pretty hawkish. So the Fed really has to get a grasp on the message it wants to send. I would expect that the message would be more of what he said today than what he said in his press conference last week.
BFM
Okay, so what do we do? I think the reality is that markets will be somewhat volatile. The messaging is mixed. Do we raise our cash levels or are they safe haven assets that we should consider?
Tony
I think we have to be really careful because we have, say, emerging and medium kind of income market currencies that are weakening a bit. Right. And so that typically leads to a flight to USD assets, and that could hold up US equity markets much stronger than they probably should or go into US debt. So I think if we’re going to see volatility and also we see China not exactly strong and that stimulus not exactly coming out as it needs to be. We see Japanese markets really strong, but that’s really on loose monpal right. It’s not necessarily on industrial strength, and we see Europe kind of sketchy. So I would say safe havens. You look to debt, you look to USD assets and some other things while this is happening. We also see some weakness in commodities. Golds come off, crudes come off, a number of other things. So I wouldn’t necessarily say this is a sign that things are turning over, but I would say it’s a sign that people need to make sure that they’re properly hedged and have those contingencies in mind.
BFM
And meanwhile, looking at what’s happening in the US. With the visit of the Prime Minister of India, Narendra Modi. The US. Does seem to be cozying up to India as a counterweight to China’s supply chain dominance. But can India meet the demands of US companies, especially manufacturers seeking to diversify geopolitical risk away from China?
Tony
Yeah, I think that’s a really great question, and I think India eventually can meet those needs. But the supply chain capacity, they’re going to have to prove themselves on the physical supply chain capacity at ports with rail and trucking networks, domestically and other things. But the US is not necessarily taking a one-to-one substitutional look at India, say India is a substitute for China. US manufacturers are more taking a portfolio strategy for now. India, Vietnam, Thailand, Malaysia, Mexico, other places are really substitutional players for specialties that each of those locations have. So until India’s physical logistics and supply chain networks prove themselves, I don’t think we’ll see a massive move. The other part is India’s local governments really need to do a bit of what China did 20 years ago is they need to make that car trip from the airport to the hotel a really nice one. So that those people who are visiting and making those foreign direct investment decisions see a beautiful trip from the airport to their hotel to their office. And the Indian cities, they’ve done a lot of work compared to, say, 20 years ago, but they still need to work on that because it can scare some people off.
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.
BFM
I think his analysis of India is quite spot on because the infrastructure is talking about a hardware infrastructure for logistics, supply chain management may not be quite up to par to compete with China in the short term, but maybe in the mid long term, India can catch up.
BFM
Well, that’s exactly why the market is so excited, right? Because there is no infrastructure or limited infrastructure. So everyone’s thinking there’s money going to be poured into, there’s going to be fiscal stimulus. How do I benefit from this? And also, of course, world’s largest population, right? It’s overtaken China growing middle class. So very exciting things happening there. And it’s a counterweight to China’s dominance especially when it comes to manufacturing.
BFM
Indeed, lots of things to watch. And I think we will be covering more of Prime Minister Narendra Modi’s visit in the days ahead, but turning our attention to some of the international news that has crossed our front. Could we maybe take a look at what’s coming out of SoftBank right now? I think there was a reduction of almost 30% during the previous fiscal year. SoftBank Group’s Vision Fund is going to begin another round of layoffs as early as this week, according to sources that spoke to Bloomberg.
BFM
This follows the fact that SoftBank has lost $30.3 billion for the full fiscal year ended March and is really desperate to have some of its investments to IPO so that it can recover some of its funds. So the next IPO coming up is the Arm Limited, a British chip designer anticipated profit from the adoption of AI with the support of SoftBank and so on.
BFM
Yeah, it’s a question of whether he has lost his Midas touch. Right.
BFM
At one time, it seemed anything that he vouched for was something investors just flocked to.
BFM
Right, sure. And then he was also an early investor in companies like Uber Grab, for example. We work. We work well. Look how well that did. Right? So there are questions about his investment eye. Has he lost his touch? I wonder whether there’s been a lot of redemptions from his fund. So let’s watch this space. It’s never a good sign when companies need to cut so aggressively when it comes to jobs. And we’re talking about 30% of the fun stuff. That is quite a significant chop.
BFM
All right, 718 or coming up to 07:18 A.m., we’re heading into some messages, but when we come back, we’ll look at the top stories in the newspapers and portals this morning. Stay tuned to BFM 89.9.
BFM
You have been listening to a podcast from BFM 89.9, the business station. For more stories of the same kind, download the BFM app.