This podcast first appeared and was originally published at https://www.bfm.my/podcast/morning-run/market-watch/fed-chair-jay-powell-utters-dreaded-r-word on June 23, 2022.
SM: BFM 89.9. Good morning. You are listening to The Morning Run. I’m Shazana Mokhtar with Khoo Hsu Chuang and Wong Shou Ning at on Thursday the 2020 3 June. In half an hour, we’re going to get an update on the situation in Sri Lanka and what the most viable path out of the economic quagmire that they find themselves in at the moment. But first, as always, let’s recap how global markets closed yesterday.
WSN: Guess what? Every market was down. Every single market that we cover, at least, the down nested were down zero 2%. SMP 500, down zero 1%. Nikki, two to five in Japan was down 0.4%. Hong Seng, Hong Kong, down 2.6%. Shanghai was down 1.2%. Straight times Index in Singapore down 0.8%. And our very own FBM KLCI having a bit of a bad day. It was down 1.8%.
SM: So, mark it’s all in the red this morning. For some thoughts on why, we speak to Tony Nash, CEO of Complete Intelligence. Tony, good morning. Thanks, as always, for joining us. Now, the Fed Chair, Jerome Powell came closest to admitting that a recession is inevitable, as engineering a soft landing would be challenging. These are remarks that he made overnight. Does this mean a less hawkish stance by the central bank going forward, do you think?
TN: Well, I think what they’re trying to do is kind of moderate the perception of their hawkish actions that they’ve taken over the past two months. So you have interest rates, rate rises happening, but you also have quantitative tightening starting as well, which means that the Fed is selling assets on their balance sheet. And what quantitative tightening does is it takes currency out of the market, so the money supply is smaller, which makes that currency more valuable, and it puts pressure on, say, equities and other things because money is not as easy. So, yeah, I think they’re trying to help people not see things as hawkish as they are, but they’re still trying to talk down inflation.
KHC: Yes. Tony, so the narrative existingly for recession is further out in 2023, but there’s one or two banks now in the US saying that 2022, the latter half could be the recession. What’s your opinion?
TN: Yeah, I think look, we already had a negative GDP number in Q1, so it’s quite possible that we see another one in, say, Q3 or something like that. What’s interesting to me is total commercial lending is still rising. So we saw total commercial lending, I’m not talking about consumer credit, I’m talking about bank lending. And so we saw in 2008, we saw in 2020, bank lending either declined or flattened here. It’s still on a steep curve. So that tells me that there’s still activity in the economy that people aren’t completely afraid. Yet you do see commercial and industrial loans still growing in the US as well. So I don’t necessarily think there’s a huge amount of say over the past couple of weeks, I’ve started to see people use the word depression. And we see this every time there’s a recession. People take it to an extreme. I’m not quite sure we’re there yet. A lot of people act like it’s a no brainer. We’re already in a recession, but we saw that in Q1. It doesn’t feel good. We may see it later in the year as well.
WSN: Okay, so, Tony, we know that the technical definition of a recession is two quarters of negative growth. Assuming that happens, so we have a technical recession. Just curious, how painful will this recession be? How long will it take for recovery? Or is it too early to try and make a guess on this?
TN: No, I think typically recessions are probably two quarters. Even if they’re say a shallow recession, what typically happens is the job losses are the most painful. And so we’ve heard so much over the past a year and a half about talent shortages and this sort of thing, and a lot of jobs unfilled. So what’s happening now is the investors and the banking analysts are transitioning their expectation on company performance. So during Covid, they were like, basically saying, look, just hold it together, don’t go belly up as a business, just keep running. And we’ll have a wide birth of kind of loss and other stuff for you. During COVID, we’re normalizing now. So analysts are pushing very hard for management teams to produce normal metrics for performance, and many of them aren’t doing it. And we saw with some of the retail numbers and some other numbers coming in, so what’s going to hurt the most is layoffs. And that’s going to come even with a shallow recession, we’re going to see layoffs. Will that happen now? We’ve seen that in tech. I wouldn’t expect other layouts to start until probably Q3. So that’s what’s going to hurt and finding jobs, it’s going to hurt coming out of this.
KHC: Yeah. Another metric, Tony, I saw that house prices continue to ratchet higher. I think average home prices in the US is nearly half a million US dollars. Do you see any kind of impact in terms of maybe a correction on that price rent?
TN: Yeah. So when we look at, say, the median home price in the US. It’s $428,000. Okay. So just under the 500 you mentioned. Now in January of this year, if you took out a mortgage in the US. Which the term for mortgage in the US. Is typically 30 years. So if you took out a 30 year mortgage, your monthly payment would have been around $1,700. Okay. In June. Now, that same size mortgage would cost you $2,500 a month. Okay. So we have $700 more a month just over the last six months. That hurts. So I think we’re starting to feel the pinch. There’s still demand for housing, but the affordability of housing has really dried up. It’s really hard for people to get the house that they want or need, and people are either choosing to stay in place or they’re just buying something of lower quality or different location or something.
SM: So, Tony, let’s switch over to what’s happening in Europe. The Eurozone’s first quarter GDP growth rose 0.6% on a quarterly basis and 5.4% on a yearly one. What do you make of these numbers? Do they show that Europe might avoid a recession this year?
TN: Yes, I think that’s going to be really hard. Europe is on really weak ground because they’ve had negative interest rates for quite some time now, and the ECB is talking about coming out of a negative interest rate stance. So when you look at that in Q One, you already had household consumption at a negative growth rate, negative 0.7% quarter on quarter, and you had public expenditures. So government spending down zero, quarter on quarter. So households and governments are spending less than they were the previous quarter. So it looks pretty bad. You even have things like fixed capital formation, which is kind of long term hard investments like roads and buildings and stuff. It rose just over zero. So Europe is really on this thin edge of having a growing economy or not. And so I think with rising interest rates in Europe and energy prices and other inflationary pressures, it’s going to be really hard for Europe to stay out of recession this year.
WSN: Tony, I want to ask about currency, because if you look at the Bloomberg spot in dollar, it’s up 7% on a year to date basis. Of course, in every other country is feeling the pinch. What is your view on the dollar? Is it bad or good for the economy?
TN: It depends on where you are. What the treasury and the Fed are trying to do right now is strengthen the dollar so that these commodities that are nominated in dollars or priced in dollars go down for American consumers. Okay, so you source copper globally, you appreciate the dollar. The price of copper goes down just by function of the currency that it’s nominated in. That’s fine for American consumers and American companies. But if you’re in a developing or in middle market or even just not America, look at Japan, right? Their currency has depreciated dramatically. And for, say, Japanese to buy things that are normally priced in US. Dollars, it’s, I think, 26% more expensive than it was, say, six months ago. Okay, so it hurts if you’re outside of the US. So what has to be done? Well, for countries that are importing things that are based in dollars, so energy and food and other things, they’re going to have to raise their interest rates and tighten fiscally and other things. Otherwise those products just get more and more expensive in local currency terms. So it’s going to be hard. It’s going to be a rough time for emerging markets, especially.
KHC: Yeah. Tony switching our attention to Hong Kong, China. There’s a report coming from the city state that John Lee, the new CEO, is working on a strategy to reopen borders with China. Do you think this pretends, maybe a relaxation of the covered rules within China itself?
TN: I hope so, guys. Really, I mean, Asia and the world really needs China to loosen their covert rules. They’re the second largest economy in the world. They’re the major manufacturer for the world. They are the bottleneck for the global economy. So we hear about how Ukraine, the Russia Ukraine war, is impacting inflation. That is nothing compared to what China is doing with bottlenecking manufacturing and trade. So we really need to encourage China to open up. And I did some analysis a few weeks ago. There is, on average, one covet death reported per day in China. Okay? So China is closed for a one over 1.4 billion chance of dying. Okay? So that’s like 70 to the right of the decimal point before the first number appears in a percentage term. So there’s a minuscule chance of dying and they’re closing for that. So it just doesn’t make economic sense, it doesn’t make public health sense for them to close. So we really need to encourage China to open up so that the rest of the world economy heals.
SM: Tony, thanks very much for speaking to us this morning. 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 to come, ending there with an appeal to the Chinese government to please open your borders.
WSN: Please. Because I think what’s very disruptive is also this constant opening and then closing and opening and closing, and we can see the impact of that, especially when it comes to supply chain disruptions, like China still the factory to the rest of the world. But very quickly, I think we also have news coming out of us, and this is so much related to inflation because President Joe Biden has basically called on US. Congress to suspend the federal tax for 90 days. Currently, the federal tax stands at $0.18 for a gallon of regular gasoline and $24 per gallon of diesel fuel. So basically trying to calm down. I think also as America goes into summer holidays and driving season starts and I think we’ve seen prices as much as $5, $6 per gallon, which is a shocker to most households. So this is him, I think, making the political overtures that, yes, I’m aware inflation is a problem and let’s try and do something. But I think whether he can get the bipartisan support is always a problem in the US.
KHC: Yeah, we follow the local US papers over the past seven days, actually, he’s been introducing on a day by day basis different, different measures to try and address gas prices, which is of course, a political hot potato in the US.
SM: Very quickly, the UK still sticking on prices? Inflation has hit a 40 year high in the UK of 9.1% on a year on year basis. In May, it’s the highest rate out of the G Seven countries, and it was even higher than the 9% increase recorded in April. So inflation not abating in the UK. 719 in the morning. We’re heading into some messages. And when we come back, how are businesses embracing ESG in their strategies and frameworks? Stay tuned to BFM 89 Nine.