Investors seem to hope that this current cycle of rate hikes by the US Federal Reserve is near an end. Tony Nash, CEO of Complete Intelligence, talks to us about expectations that such a rally might or might not be sustainable as well as where he thinks commodities like crude oil and gold may be headed.
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They discuss recent market trends, particularly focusing on the performance of US stock market and the implications for the global economy. They speak with Tony Nash, CEO of Complete Intelligence, who provides insights on the sustainability of the current equity rally and the factors influencing it, such as corporate earnings, energy prices, and expectations for the US economy. Nash also shares his perspective on gold prices and the performance of companies like Disney and Arm Holdings.
The transcript also covers the quarterly earnings report of Disney, which exceeded analysts’ expectations due to profit growth in areas such as ESPN Plus and Theme Park, despite a decline in ad revenue and losses in the streaming business. Additionally, the earnings report from Arm Holdings reveals a sales forecast below expectations, attributed to a slump in smartphone sales and uncertainty surrounding new licensing deals. The discussion provides a comprehensive overview of recent market developments and their potential impact on various industries and companies.
Transcript:
BFM
BFM 89.9, good morning. It’s 7:06 AM on Thursday, the ninth of November. You’re listening to The Morning Run. I’m Shazana Mokhtar with Keith Kam. Now in half an hour, we’re going to discuss the trends impacting the outlook for the global insurance industry. But as always, we’re going to kickstart this morning with a look at how global markets closed overnight.
BFM
On Wall Street, the markets generally closed flat-ish. The Dow Jones was down 0.1 %, the S&P 500 was up 0.1 %, but the gain is still a gain. So it’s eight straight days of gains for the S&P 500. It’s the longest streak in two years. The Nasdaq was up 0.1 %. Earlier in the day, it was a red day for Asian markets. Japan’s Nikkei was down 0.3 %. Hongkong’s Hang Seng fell 0.6 %. Shanghai’s Composite was down 0.2 %, and the STI was down 1.4 %. The FBMKLCI closed 0.4 % lower yesterday.
BFM
So for some thoughts on what’s moving international markets, we have on the line with us, Tony Nash, CEO of Complete Intelligence. Tony, good morning. Always good to have you. So we do see US stocks have resumed their upward trend in hopes that this current cycle of rate hikes by the Fed is near an end. Are these green shoots pointing to a sustainable rally in equities, or do you see this as more of a dead cat bounce?
Tony Nash
Well, I think as far as the number of green days closing, I think we’ll take the win. It’s nice to see that after the few months we’ve had. I think we’re heading in more of a range trade until we get a good view of where things are headed. You can look at the implied pivot that the Fed has made, and you can make that assumption. You can also look at where energy prices are and say, Well, oil prices are falling. The Fed is potentially easing. That’s great for equities. But we’re looking at corporate profits that were mediocre this quarter, given where GDP growth was in Q3. If earnings don’t begin to break out and if we don’t have an actual move on rate cuts, then equities may stall out. Can we.
BFM
Just take a look at this earnings quarter so far, Tony? What have been the standouts for you? Which sectors or stocks do you see outperforming versus the laggards, perhaps?
Tony Nash
Yeah. I mean, of course, energy has had a tough time. I think we’ve seen some great tech earnings. But again, if we look at it on a relative basis, things are not necessarily accelerating as much as they had been. What my concern is about really is the deterioration of earnings. These earning surprises, I think at average, they were 6% or something. But when you have, say, a nominal GDP that’s at 8%, they’re not even really keeping up with the rate of inflation. We can look across sectors and say sector A was good, sector B was bad. But if they’re not keeping up with that 8% nominal GDP growth, then we have to really discount the impact of that earnings growth.
BFM
Tony, what I’ve been noticing is that we’ve been looking at consecutive days of gains going to seven, eight days. And it’s been a long time since we’ve been able to see something like that and forget how that felt. What are you expecting in terms of the US economy next year? Because I think a lot of people are expecting things to be a lot better, hence the winning streak.
Tony Nash
Yeah, I don’t know that things will be a lot better. I think people are looking for things to be good enough. If we keep the wage gains that we’ve got over the past couple of years and we start to see disinflation and we continue to see energy prices moderate, if we could get mortgage rates down just a little bit more, we could be in a real sweet spot. I mean, look, when people started talking about a soft landing for the Fed, a lot of people just a big eye roll and nobody really thought they could do this. But the two 75 basis point rate hikes they had over a year ago, I think they did shock the system a little bit. Then they’ve been very persistent in continuing with those. I do think that it might actually be possible to have a soft landing, which would be great. A soft landing is just a victory for everybody. The real problem I have, a real question I have is about valuation expansion. Would we continue to see valuation expansion? And would we be able to get margin expansion for manufacturing and services companies if we don’t have underlying inflation and the implied pricing power or infer pricing power from big companies?
Tony Nash
Because people have really accepted a lot of price rises over the past couple of years. A lot. And they’re really tiring of it.
BFM
What’s your prognosis for a Christmas rally, a year-end rally, so to speak? I mean, some of the analysts that I’ve read seem to be in favor of something like that happening.
Tony Nash
Yeah. I think we’re seeing it now. I suspect the further we get into Q4, we may realize that it’s not Q3 all over again, which was a great GDP print. If you look at things like trucking employment and trucking activity in the US, it’s way down, okay? That tells me that there is not necessarily the demand that people saw in previous quarters. Of course, there are other indicators we can look at, but I think things like trucking really tell us that we’re losing momentum on the growth that we saw in previous quarters and previous years.
BFM
Speaking of demand and growth, I do want to turn our attention to the energy prices because we are seeing, as you’ve mentioned, oil prices come down. I think this morning, Brent crude is actually trading below $80 per barrel. Wti is trading at $75. Some say that this is due to weak growth in the Chinese economy, but is that the main or only reason? What are the factors at play that you see that’s going to affect energy prices moving forward?
Tony Nash
Yeah, I don’t think it’s only China. Of course, people are looking at China. They’re looking at Chinese exports. They’re looking at expectations for economic growth. But again, I think people are looking at US growth and they’re looking at things like that trucking indicator I talked about and saying, Oh, gosh, we really are slowing down. Interest rates really are hurting people’s ability to build credit. Small and mid-sized companies, the borrowing cost for small and mid-sized companies in the US are in the double digits. If you want to get a small or medium-sized business loan, you’re looking at 12% or something. Really, the breaks are being put on consumption. I think that’s really what people are looking at with the crude prices. It’s really interesting to me that the US is getting to a place where they really have to start refilling the SPR, and we’re seeing these crude prices meshed down, which is, I guess, really fortunate for the US Department of Energy as they start to fill that up.
BFM
Tony, I just want to turn your attention to, pick your brains a little bit on gold prices. We saw it hit above $2,000 just a few days ago, a couple of weeks ago, and it’s now just below 2,000. And it’s hit 1,600 at one point during the year, one of its lowest. And some of the analysts’ reports that I’ve read is that we should actually buy on dips when it comes to gold. What’s your prognosis on this?
Tony Nash
Yeah, that’s not really my view. Gold got pretty hammered during US trading today. It touched $2,000 for a day or two, I think, in October, but it’s pretty much been in retreat sense. The dollar has been rising since November first, and commodities that we talked about crude and we’re looking at gold, commodities have really taken a hit with an appreciating dollar. With the Fed undertaking quantitative tightening, while interest rates remain high, it’s hard to see an environment where gold is sustainably over $2,000. We would have to see some QE or stopping of QT or an actual pivot or something. But we expect real downside for gold prices in November and December, and that’s baked into our forecast. We don’t see gold hitting 2,000 on a sustainable basis anytime before the end of the year.
BFM
Tony, thanks as always for the chat. 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 there on whether the Fed is actually managing to navigate that soft landing that we’ve been talking about all this year. Is it going to be soft or hard? And there is the possibility of a soft landing, but so many factors come into play really from now until whenever that happens.
BFM
But that seems to be what traders have been banking on the past week, actually, when you look at how the stock market has been, Wall Street has been performing, that soft landing as well as the scaling back of the fat tightening as well. But I picked up on the fact that he said that gold at above $2,000 is a bit overboard.
BFM
It is currently trading at 1,000-951 US dollars per ounce this morning. We’ll be following to see how that tracks for the rest of the morning. But let’s turn our attention to some of the earnings report. There have been a lot of companies that reported this morning. Starting off with Disney, the world’s largest entertainment company, they reported quarterly results that actually beat analysts’ expectations. Earnings grew to 82 cents a share, beating the 69 % average of analysts’ estimates. And this was thanks in part to profit at ESPN Plus as well as the growth at Theme Park. So everyone who’s been visiting Disneyland or Disney World around the world, they’ve actually been contributing to this impressive bottom line.
BFM
So this 100-year-old company, actually, it celebrated its centenary this year. Its revenue grew 5.4 % to $21.2 billion. That’s below estimates of 21.4 billion, no thanks to a decline in ad revenue. On top of the better than expected Q4 earnings, it will seek an additional two billion US dollars in cost savings from 5.5 billion US dollars to seven and a half billion. Interestingly, their streaming business actually lost $387 million in the quarter down sharply from the 1.47 billion loss a year ago. I guess you could say that competition in that space is really intense with so many services coming up.
BFM
Indeed. And I think these earnings are particularly significant for Bob Iger. He did come back a year ago to turn the company around. I think the jury is still out on whether he’s actually managed to do that, because while profits may be up, we do see that in terms of streaming, in terms of TV networks, there’s still a lot of decisions that are left on the table. I think Disney is also looking about its presence in India, how they’re looking to whether maintain that or out. And he’s also got activist investors coming up against him in the boardroom. So I think a lot of different calculations playing out for Bob Iger when it comes to Disney, definitely a story to watch moving forward. Can we quickly cover Arm? Because a semiconductor company, Arm Holdings, delivered its first earnings report since its IPO in September 2023, and it provided a sales forecast below Wall Street estimates. And this is because the company is dealing with a slump in smartphone sales and also uncertain timing for new licensing deals.
BFM
So in the just ended Q2, revenue grew 28 % to $806 million, topping the $747 million estimate. Licensing sales rose by 106 % year on year to $388 million last quarter, royalty revenue declined by five % to 418 million. That’s just short of the predicted $429 million.
BFM
So I’m taking a look at how Arm is looking like in terms of its stock price at the moment. Arm is currently trading at $54.40. It is down 1.6 %. If we take a look at how analysts are viewing this stock, don’t forget this was a really huge IPO earlier this year. I think they still like it. There are 19 buys, eight holds, and two sells for armed. Consensus target price is $61.25. Last price, as mentioned, $54.40. It’s 7:19 in the morning. We’re going to head into some messages, but we’ll come back to look at more news from the newspapers and portals this morning. Stay tuned to BFM 89.9.
In this podcast, the hosts discuss the performance of global markets and provide insights from Tony Nash, CEO of Complete Intelligence.
The US and Asian markets experienced declines, with concerns arising over potential downgrades of US banks. Nash believes the stock market has reached its highs for the year and advises caution in investment choices.
The conversation then shifts to the challenges facing the Chinese property sector, highlighting the impact on property developers and risks to China’s economy. The Eurozone’s GDP numbers show stagnation or decline, with Ireland’s outperformance driven by foreign companies. JPMorgan downgrades its forecast for Chinese GDP growth. The discussion also covers Target’s missed sales expectations and Cisco’s weaker outlook for its 2024 fiscal year.
The podcast also mentions the expectation of a slowdown in capital spending by cloud and telecom consumers in 2024, despite the dominance of cloud services offered by companies like Amazon and Microsoft. Stock details are provided, including the consensus target price and the number of buys, holds, and sales.
Chapters
01:21 Fed Meeting Minutes 02:11 Concerns about US Banks 03:15 Performance of Major Indices 04:45 Outlook for Market Direction 05:46 Investing in Stable Assets 06:04 China’s Property Sector Challenges 07:49 Eurozone GDP and Employment Figures 09:45 Consumer Stocks and US Retailers’ Performance 12:38 Cloud and telecom spending expectations
Transcript
Shazana
For some thoughts on what’s moving international 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 off with the latest Fed meeting minutes that were just released for July. How much of Fed chairman Powell’s Davish tone was shared by the other Fed policymakers?
Tony
Yes, some, but to be honest, not a lot. The Fed officials really see no recession for the rest of 2023. They’re saying spending is strong, real activity is stronger than anticipated. They really don’t see a recession at all. There’s really no reason for dovishness there. They still see inflation risks and they still see a potential need for higher rates. They’re also saying that quantitative tightening, meaning the shrinking of the money supply, will continue once interest rates stop because they’ve got a bunch of these items on their balance sheet that they’ll continue to let expire. So that will continue to put upward pressure on the dollar as well as higher interest rates.
Mark
Now, there are mountain concerns that Fitch could continue to downgrade US banks, including tier-one names like JPMorgan. So how do we get from a stable situation for US financial institutions a year ago to this current state of affairs?
Tony
Yeah, I think for the tier ones, this is really late. It doesn’t make a whole lot of sense. The tier ones are effectively US government institutions. And when they were buying the regional banks back in March, them taking on some extra risk probably made a lot of sense. But even those regional banks, for the most part, have gotten much stronger. Their balance sheets have gotten stronger. Their net interest margin and other things have gotten stronger over that time. This seems to be 4-5 months late. Unless these guys are expecting a massive real estate wipe out or some massive market event or something like that, this just doesn’t make a whole lot of sense because it should have already been done some time ago if it were going to happen.
Wong
Okay, can we talk about markets? Because if I look at the performance of the major indices, look at NASDAQ. It’s only up 28 % on a year to date basis. S&P.
Tony
Only?
Wong
Only, only. Yes, I love to use the word only. And S&P 500, 14 % up. So there has been some retracement. Do you expect further retracement? Because results season pretty much over about 80 % done. Where are markets going from here?
Tony
Yeah, I think we’ve seen the highs for the year. I don’t think we’re going much higher. It’s either sideways or marginally down from here. I think you’re going to see a lot of people say, Oh, gosh, we’re just getting started. There’s a GDP now in the US right now. The estimate on this quarter’s GDP is over 5 % or something right now, and people are saying, “We haven’t even gotten started on equity markets,” that sort of thing. And there are people who still believe we’re going into a massive recession. And it’s possible that we line up somewhere in the middle, which is what the Fed’s been trying to do. And it’s possible that things are volatile, but not necessarily directionally up or directionally down. I think generally for the rest of the year, that’s probably where we’re going to be. But we’re going to have days that look really good and we’re going to have days that look really bad. And there will be commentators that will extrapolate that out to either fantastic or dire.
Wong
Okay, so while markets trade sideways, where should we park our money?
Tony
Well, I think you have to look at what’s happening with, say, interest rates. I mean, it depends on how aggressive you are, but you really have to look at what’s stable. You have to look at what’s continuing to give value. I’d be careful of things that don’t give strong signals because with interest rates staying higher for longer, valuations are likely going to be compressed a bit. I’m not saying valuations are going to crash, but there’s likely going to be some valuation compression, and margins for companies are likely to continue to be compressed. So it just makes things difficult for companies that are just doing okay. So I would be really careful and I would look for some of those characteristics.
Shazana
Let’s turn our attention over to China because we do know that China is facing mounting headwinds in the property sector. How are you viewing this? Is this a storm in a teacup? Or are there signs that it could spill over to markets outside the mainland, especially in Hong Kong? What does that mean for investability in that region?
Tony
It’s a big problem. Real estate demand in China is very poor. We just had a report, I think it was out this morning in Asia, among 70 cities in China, 49 saw new home prices fall month over month from July. That was a previous month we saw prices fall in 38 cities. Real estate prices are falling. Of course, this is a major source of wealth for people in China. Property developers don’t have money because prices are falling, and so the amount coming in is falling and the value of the houses they have are falling. They can’t service their debt, they can’t service their existing properties, and it’s just a very difficult situation. When you look at the debt from Country Garden and Evergrande, their combined liabilities are approximately the size of the PBOC’s official non-performing loans for all of China. Okay, so those two companies on their own, they’re effectively equivalent to the debt that the PBOC claims for the rest of China. So it’s pretty bad. And today or sorry, yesterday, Asia time, Country Garden is warning of onshore bond default. So it’s not just an offshore phenomenon. Early on in this, this was an offshore phenomenon.
Tony
They had taken USD debt or something like that, and they were going to default on that. And that’s fine. That’s for rent, lenders. But defaulting onshore is something that’s relatively new.
Mark
Well, obviously not very good news for China, but now let’s switch our attention to Europe, where preliminary second quarter GDP from the Eurozone came out last night along with employment figures. What do the numbers tell you about the state of play in Europe and would they dodge a hard lending?
Tony
Yeah, it’s great for Ireland, really not great for the rest of Europe. So Ireland way outperformed pretty much everywhere else underperformed economic growth. So the EU generally, again, outside of Ireland, is either stagnating or declining. And a lot of the Ireland performance is based on foreign companies that have their headquarters in Ireland. So they’re reporting in Ireland, and it counts for economic growth there. So the underlying growth was weaker, of course, well, probably weaker than the GDP growth that was stated. So it was 0.3 % quarter-on-quarter. But again, like I said, given the 3.3 % jump with Irish GDP, it doesn’t really look good for the rest of the EU. Employment was up, which is great. But things, I guess, on the top line look stable. But if you take out Ireland’s performance, things really don’t look good. We now have a few countries in recession. Estonia, Hungary, and the Netherlands are in recession, which obviously is very difficult. We have industrial production. Industrial production was up the most in Ireland, which is great, but it’s also up in Denmark and Lithuania. So this isn’t a broad based economic success story. You have places like Germany and France, huge economies that are really struggling.
Tony
And you have powerhouse economies that punch above their weight, trading economies like the Netherlands, which are in a recession. So it’s a tough place for Europe right now.
Shazana
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. Commenting on a range of economies there. We’ve got the US, China, and ending with the Eurozone in the mix.
Mark
And not very good news for China as well. And JPMorgan, which at one time was very bullish on the Chinese GDP growth, predicting 6.4 % this year, has actually downgraded and lowered its full year forecast down to 4.8 %. I think this is one of the first few banks that come out to say GDP is going to be below 5 %. And for next year, they’re predicting it will only be a 4.2 % growth rate for China.
Shazana
All right. Well, meanwhile, if we take a look at what’s happening over in the US, I think, as Tony mentioned, recession is less and less likely, it seems, over there. But at the same time, we are seeing consumer stocks taking a hit due to softening consumption. We see Target missed its sales expectations even as it beat estimates for earnings in the second quarter. Revenue came in at $24.8 billion. This was a 5% drop from the previous year, while net income was $835 million, up from 183 million in the same period.
Mark
Last year. The retailer also cut both its full year’s sales and profit expectations because it’s struggling to convince customers to spend more than just necessities. This merchandise mix, which includes many fun and impulse-driven items, has become a liability as consumers focus on needs rather than wants.
This August 15, 2023 episode of Peter Lewis’ Money Talk discusses China’s property sector turmoil, with Country Garden, a primary developer, experiencing a sharp decline in shares due to bond trading woes. This setback led to its stock plunging to an all-time low, causing concern in the market.
Tony Nash, Founder of Complete Intelligence, joins the discussion, sharing insights on China’s economic landscape. The experts assess the potential responses of the Chinese government to this crisis and debate the effectiveness of previous measures.
They discuss the challenges of balancing economic stimulus with structural issues, contemplating the risk of currency devaluation. The conversation also touches on global implications, with Tony Nash highlighting the impact on investors and businesses, particularly those in Hong Kong.
The experts shift their focus to inflation and the Federal Reserve’s role. Tony Nash expresses caution, suggesting that although some progress has been made in combating inflation, the Fed might not declare victory yet.
The discussion concludes by speculating on future rate cuts, emphasizing the complexity of timing such decisions amidst solid employment numbers and ongoing economic adjustments.
Transcript
Peter
Let’s start with China’s property sector. Shares of distressed mainland property developer, Country Garden dropped to a new record low in Hong Kong after the trading was haunted in 10 of its onshore bonds. Shares in the group closed over 18% lower at just 80 Hong Kong cents. On Friday, Country Garden, which was formerly China’s largest developer by sales, saw its stock fall below a dollar for the first time since it was listed in Hong Kong back in 2007. The private home builder warned in an exchange filing of a net loss of $6.2 billion to $7.6 billion in the first half. And a week ago, it missed two coupon payments on $500 million of bonds, pushing it towards default unless it pays within a 30-day grace period. On Monday, Country Garden said it’s soliciting some bondholders feedback on a proposal to extend payment of a year-long notes due September the second. Stuart can ask you. I mean, when this property market crisis first started, we saw Evergrand run into trouble. Country Garden was one of those firms that was seen as being one of the stronger developers and immune to some of the problems, but it appears not to be the case, does it?
Peter
Tony, when you look at this from over there, how does it look? I mean, it looks like there’s not really any good options left, are there, for the Chinese governments here to try and sort this out?
Tony
Yeah, that’s the worry, Peter. I mean, look, Stuart gave a very enthusiastic outlook, which I think is great. But I think we have to, as you say, we have to look at the stimulus of the Chinese government or how the Chinese government is going to address it. This is one of those moments that feels again like almost like June 2015, where there could be intervention in the markets and it just falls flat. Then what happens after that and what happens after that and what happens after that? In the same environment where we have a CNY that is devaluing, it could be really not positive. When you’re talking about China exporting deflation, that’s just back to normal for us. We’ve seen China exporting inflation for the past few years, but for 20, 30 years before that, they really exported deflation. It’s overcapacity, deflation, and so on. Are we back into that business-as-usual camp for China, especially with their FDI down and other things? Are they going to have to go back into that old role of deflation exporter to be able to thrive?
Peter
The difference is between now and then, though, is that China, I mean, its exports have been slumping, haven’t they? So maybe it’s not such a strong position as it was back in 2015 to export anything around the world.
Tony
Without a doubt, China is in a very different place demographically. You also have Japan that has a Japanese Yen that is very… It’s not what it was in 2012. In 2012, JPY was at 76 or something. Now it’s at 145 or something. I mean, it’s… You have a central bank in Japan that’s very competitive, and China is having to deal with that. That’s one of the factors that’s coming into the calculation with CNY.
Peter
Tony, what would be your assessment? I mean, the issue in China is there’s plenty of supply, but just a lack of demand through this confidence issue. What do you do? Should the government maybe do what Hong Kong has done, what the US has done in the past, and just go and put more money into consumers’ pockets so that they can spend? Or is it the risk that they would just end up saving that and won’t even spend that either?
Tony
I think they did that in 2011, where they had the cars and other things. They’ve done that before. It was quite successful, but I don’t necessarily think it would have the efficacy that it had 11, 12 years ago. It’s tough, Peter, because there are some real structural issues that are worse. The structural issues were bad in 2011, but they’re worse now. It’s very, very difficult. I think that nobody wants to fix the problem, let’s be honest. Nobody wants to fix the structural problem. Okay, people want to kick the structural problem down the road. We could say this for the US and for the EU as well. That generally is not just a China problem, but China does not want to fix the problems. They just want to push the problems off. They’re going to have to continue to devalue the currency. That’s going to have to happen. They cannot spend more dollars on supporting their currency. They’re going to have to devalue their currency. We’re a few days away from having the weakest currency, weakest CNY since about 2007. This is a major issue for the PBOC, for the import-export authorities, and so on. There are some inevitable that the Chinese authorities are going to have to face, and those are the questions that I try to think about is, okay, they do value CNY, what happens then?
Tony
There’s a lot of US dollar debt that’s serviced from China and from Chinese companies overseas. Things become very, very difficult. So if we think that Country Garden and Evergrande are difficult now, it could become even more difficult as we round out 2023.
Peter
And if the Chinese year-on does devalue further, that’s bad news for investors, isn’t it? Into Chinese markets, it’s bad news for Hong Kong companies because a lot of them here earn their profits on the mainland. It’s bad news all around for the markets here.
Tony
Right, and this is why the PBOC will work very very hard, and the finance ministry will work very very hard to keep the currency around where it is. It’ll be very difficult to strengthen it from here. I think what they’re trying to do is stop it from devaluing more.
Peter
Tell me, what are your thoughts? Do you think the Fed is close to victory now in its battle against inflation?
Tony
I think they’re getting closer. I think if we look at things like Supercore, which is really what… Supercore inflation, which is what… Sorry, Supercore CPI, which is really what I think a lot of the Fed guys are looking at. It did tick higher in July, so I’m not opposing what Will has said, but I do think that we have… I don’t think we’re out of the woods in terms of inflation yet. When we look at where oil prices have come over the past couple of months, and we look at some of the other inflationary aspects of food and other things, it looks like and feels like we will hit a slight bump, say, in September, October. This is something that I’ve talked about with people for quite a long time with one of my colleagues, Albert. Is that a reacceleration, a massive long-term reacceleration? I don’t necessarily think so, but I don’t think the Fed, as Will said, I don’t think the Fed can hoist the mission accomplished flag because the economic response to COVID was crazy in terms of getting more money out into markets. If we look at the growth of money supply in the US, we still have $2.1 trillion in the US economy.
Tony
It’s not just interest rates that are being used to control inflation. We have to look at the money supply and whether or not that supply of money will be reined in through various means. The Fed has a number of tools, and even if we are hitting the numbers, they’re going to continue to tighten over the coming years. Well, say, over the coming 18 months, not just with interest rates, but with quantitative tightening.
Peter
Money supply has been coming down quite rapidly in the US, hasn’t it? Since the beginning of the year. Presumably, there’s still more time, more room for that to work its way through?
Tony
Oh, absolutely. We’re looking at contracting money supply into 2024.
Peter
Tony, in 30 seconds then, can we look forward to rate cuts from the Fed next year?
Tony
Certainly not in the first half. If there are rate cuts next year, it would likely be in the second half because, as Stuart said, employment is still strong and it wouldn’t really make a lot of sense for the Fed to be tightening and loosening at the same time.
Tony Nash, CEO and founder of Complete Intelligence joins The Morning Run team for updates on the global economy. Below is the summary in bullet points:
Tony Nash, CEO of Complete Intelligence, attributes the market pessimism to poor earnings quality and the appreciation of the US dollar impacting commodities.
Qualcomm, the largest maker of smartphone processors, saw a 25% decline in mobile chipsets, suggesting slower handset replacement and a potential impact on global consumption.
PayPal reported an increase in payment volume and made a profit this quarter, but experienced margin compression and an uptick in non-performing loans.
Fitch ratings downgraded the US long term foreign currency issue default rating to AA plus, citing governance and fiscal deterioration.
The downgrade is not expected to have a significant impact on the cost of US government debt.
The Fed’s decision to raise rates and reduce money supply will likely put upward pressure on the US dollar.
Treasury yields experienced a sudden rise, but there is no significant concern regarding the treasury market.
The Chinese recovery post-pandemic has stalled, and measures are being taken by the PBOC and NDRC to stimulate the economy, including slight devaluation of the CNY.
Tony Nash suggests a temporary devaluation of the CNY could help stimulate the Chinese economy.
Tony Nash is pessimistic about the soft landing outlook for the US economy, noting the poor quality of earnings and reduced disposable income for Americans.
PayPal CEO, Dan Shulman, plans to retire at the end of 2023 but will continue to serve on the PayPal Board of Directors.
Qualcomm’s earnings beat expectations, but the outlook suggests the smartphone industry is experiencing its worst downturn, leading to a decline in their stock price.
The smartphone downturn is attributed to weak demand and a slowdown in the Chinese market.
Consensus target prices for PayPal and Qualcomm remain positive, but the outlook for both companies is a concern for the market.
The BFM 89.9 Morning Run team discusses these market trends and company results.
Chapters:
0:05 Global Market Recap
1:14 Qualcomm’s Impact on Tech Sector
3:10 PayPal’s Earnings and Economic Impact
4:28 Fitch Ratings’ US Debt Downgrade
5:17 The Fed’s Impact on the Greenback
6:43 Treasury Yields and Debt Issuance
8:18 China’s Measures to Stimulate the Economy
9:56 Tony Nash’s Pessimistic Outlook on US Economy
11:42 Analysis of Qualcomm and PayPal’s Results
Transcript:
BFM
This is a podcast from BFM 89.9, The Business Station.
Shazana
BFM 89.9, good morning. It’s 706 AM on Thursday, the third of August. You are listening to The Morning Run. I’m Shazana Mukhtar with Wang Shaoning and Mark Tan. In half an hour, we’re going to catch up on developments in the deadly conflict in Myanmar and what the extension of the state of emergency means for the future of the country. But as always, at this time of morning, we’re going to begin with a recap on how global markets closed overnight.
Mark
It looks like a red ocean across the world. As the US markets were down, the Dow Jones was down 1 %, S&P 500 down 1.4 %, and the Nasdaq down 2.2 %. Over here in the Asian markets, the Nikeei was down 2.3 %, Hang Seng down 2.5 %, Shanghai Composite down 0.9 %, STI down 1.5 %, and FBM KLCI down 0.5 %.
Shazana
For some insights on what’s moving international markets, we have on the line with us, Tony Nash, CEO of Complete Intelligence. Good morning, Tony. Thanks for joining us. We are seeing a red board this morning. Why have US stocks slumped and what’s driving the market pessimism on this Wednesday evening for you?
Tony
Yeah, I think a lot of it is around earnings quality. Really, earnings quality has not done well this quarter. We also have the dollar appreciation, which has taken the shine off of some commodities. So people are looking at some of those related companies and really downgrading their expectations. So we’ve been saying within our forecast for months that August would be a down month. And so it’s falling in line with where we expected.
Wong
So, Tony, can we get your reactions to some of the results, mainly Qualcomm? And that’s significant because it’s the largest maker of smartphone processes. What does this then mean for the rest of the tech sector? Or is it just still going to be be wonderful for the magnificent 7 but bad for everybody else?
Tony
No, I mean, the mobile chipsets from Qualcomm are down by 25 %, which is huge. And can we extrapolate that to the rest of the tech sector? I think certainly for mobile hardware, you can look at that and maybe not 25 %, but look at some expectations around that, which isn’t good for consumption globally. It tells me that handset replacement is slower. That replacement cycle will be longer than it has been, at least for the past few years, which may tell me that consumers are a bit pinched, which we’re seeing in places. So when we look here in the US, we have student loans, federal student loans have to start being repaid again in September, October. So people are preparing for that here. And we look at parts of Asia, things aren’t growing, especially in China, at the rate that people had thought. And Europe is Europe has a problem. So I think disposable income, as expressed through, say, mobile and tech acquisitions, may be hit.
Wong
I think your view is confirmed by the results of PayPal, right? Because they’re seeing pressure on their margins and also loan provisioning climbing. So indicating that the health of the middle America is really feeling the pinch of inflation and the rising interest rates?
Tony
Oh, yeah. Well, so when we look at the inflation data from June and probably July, there’s this false belief that inflation has declined in June and July. But the fact is, we had very high crude oil prices in June of 2022 and still in July of 2022. So the base effects of those high crude prices have made the inflation reading look as if it’s lower. But the fact is we had $130 a barrel oil in June of ’22. So it’s really hard for people. So yes, the rate of earnings rises, meaning personal disposable earnings and wages, it’s still relatively high but it’s slowing but it’s still behind inflation. So, yeah, middle class Americans are really feeling it, especially with their mortgage rates rising as well.
Mark
Now, Fitch ratings cut its US long term foreign currency issue default rating to AA plus from Triple A, citing governance and fiscal deterioration as the main reasons. What are going to be the short and medium term impacts of this re-rating?
Tony
There may be a small increase in the cost of US government debt for a very short period of time. But I really don’t think there’s going to be much impact on that. It was notable to me that the same day that that news came out, the US dollar rose and even Wednesday, the US dollar rose. So that debt downgrade or marginal debt downgrade really hasn’t had much of an impact, nor do I expect it to have much of an impact. I wish US politicians would pay attention to it, but I just don’t think they will.
Shazana
Speaking of the Greenback, Tony, how will the Fed’s decision moving forward? I mean, there’s chatter that the Fed has not reached peak rates. Is that going to affect the Greenback’s performance?
Tony
Well, yeah, we have two considerations. First is rates and second is money supply. So with rates, we’re at about five and a half right now, I would not doubt if we saw 6%. So probably two more rate rises this year. And that will impact short term financing. So that will put upward pressure on the dollar. We also have the money supply, which is still well above trend growth. So we’re about, I think, two trillion dollars above trend growth in the US money supply. So the Fed has to rein that in over the next probably two years to bring the money supply down to, I think, 19 trillion dollars, which would be trend growth by 2024, 25. So as the money supply shrinks, that also puts upward pressure on the dollar as well. So I would look for the dollar to continue rising. There will be continued upward pressure. I don’t think that means we see dramatic, immediate upward pressure. I think that means we’ll see incremental upward pressure over the next couple of years.
Wong
Okay, let’s talk about treasuries because there was a sudden rise in treasury yields. If I look at the 30 year, it jumped 2%. And at the same time, the treasury will issue $103 billion next week. Should we be concerned?
Tony
No, I don’t think so. I don’t think anybody’s really worried about the treasury market. I do think that we have this soft landing narrative that we keep hearing, and I don’t doubt we’re going to see a soft landing, but that doesn’t mean it’s going to be easy. I think the economic growth estimate in the US is way high, especially for this quarter. And for Q4, again, you have student loans and other things that people are going to have to start paying back. And the amount of disposable income that a lot of Americans have is really shrunk. So I think is it predicting a recession? It might be, but I have to keep reminding people that we are coming out of really extraordinary times through COVID and through the fiscal and monetary policy that we had through COVID. Will this time be different? I really don’t know. And I think we have to take it bit by bit. So I’m not sure we’re necessarily going to see a sharp recession, say, the next 90 days or whatever. But I think we’ll certainly see things slow, and it may feel like a recession in the US without actually being one.
Mark
Now, let’s look at China, where the recovery post pandemic got off the blazing start this first half of the year, but seems to have stalled. So what measures are the PBOC using to get it moving again? And how successful do you think they will be based on what you’ve seen?
Tony
Yeah, it’s both the PBOC and NDRC taking measures to stimulate in China. And part of it is around local debt and just slightly loosening up some of those regulations. There are some measures around helping out with travel costs and other things. And then you also have the PBOC allowing CNY to devalue a bit. So I think the easy biggest mechanism for the Chinese economic authorities would be to allow CNY to devalue. They have plenty of crude oil in stock. They have plenty of metals in stock right now. So if they were to allow the CNY to devalue heading into a huge invoicing season for holiday shipments, this is coming in September, October to the West and to obviously other parts of Asia, that would allow the Chinese economy to absorb a lot of CNY denominated benefit. So it could be a temporary devaluation to say 7.3, 7.4, something like that, and it would help to stimulate things domestically. I think that’s their easiest path. Will they do it? I doubt it, but I think a slight deval in China would be in order and it would be their easiest path.
Shazana
Tony, thanks as always for the chat. 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. Sounding a little bit more pessimistic on the soft landing outlook for the US economy, not as, I suppose, bullish as some other commentators may be.
Wong
And also noting that the quality of the US earnings has not been that great. Reflected, I think, in the results of two companies that we want to cover. I think first one is PayPal. And why it’s important is because it’s a bit of a temperature check on how US consumers and businesses are doing. So notably, what has happened is that there has been a margin compression and on top of that, there’s been an uptick in non performing loans.
Mark
Now, also current CEO of PayPal, Dan Shulman, plans to retire at the end of 2023 but will continue to serve on the PayPal Board of Directors after he exits as CEO.
Shazana
Well, I think PayPal did increase in it in terms of payment volume, the total payment volume for the period with 376.5 million dollars, which was more than the 370 million dollars that was estimated. Net profit also, they made a profit this quarter of just over 1 billion US dollars versus a loss of 340 million dollars a year ago. So it’s not bad, but I suppose it’s…
Topics discussed: • Fed raises interest rates by 25bps. • US shares mixed, Treasury yields & dollar lower after Fed • Japan’s population drops by most on record
In this episode of “Peter Lewis’ Money Talk,” the CEO and founder of Complete Intelligence, Tony Nash, joins as a guest to discuss the recent developments in the global economy. The Federal Reserve’s decision to raise interest rates by 25 basis points to 5.25-5.50% is analyzed, with Tony providing insights into the potential implications of this move. He emphasizes the urgency to address inflation while also considering the impact on consumers and businesses facing higher inflation rates.
Contrary to some market perceptions, Tony interprets the Fed’s statements as hawkish, hinting at a more extended period of rate hikes and dismissing expectations of rate reductions in the near future. He points out the significance of base effects in measuring inflation, indicating that inflation rates may increase further as the effects of the previous year’s higher oil prices wane.
Tony and Peter also discuss the challenges faced by companies and consumers amid rising interest rates and deteriorating corporate earnings. They explore potential responses, such as companies cutting costs, possibly leading to workforce reductions, and how extreme weather conditions might impact the market. Additionally, the podcast delves into the situation in China, where there are concerns about deflation and potential devaluation of the currency to boost exports and stimulate domestic economic activity.
As the conversation touches on the European Central Bank (ECB), Tony suggests that Europe may experience a period of inflation due to the surge in energy prices but expects inflation to move towards disinflation over time.
Chapters
01:22 Fed Chairman Powell’s press conference 02:41 Decline in Japan’s population 04:09 US stock market reaction to Powell’s press conference 05:30 Chinese equities performance 06:08 Introduction of guests for discussion 07:20 Fed’s commitment to reaching 2% inflation target 09:07 Interpretation of Powell’s press conference 12:48 Uncertainty in economic data and Fed’s outlook 14:35 Peter doesn’t want to talk 14:38 Andrew questions recession definition 15:45 Peter comments on Powell’s statement 16:03 Tony on recession expectations 17:29 Tony on avoiding stagflation 17:43 Andrew on market volatility 18:27 Next phase: Fed holds rates steady 19:01 Andrew’s approval of Tony’s point 20:11 Tony on deteriorating earnings 22:08 Tony on layoffs and cost-cutting 22:35 Impact of layoffs and reduced savings 23:49 Andrew on climate investment opportunities 24:49 Andrew on climate crisis urgency 25:18 Tony on extreme weather and subsidies 26:31 Peter on Chinese deflation and impact 26:59 Andrew on Chinese deflation and global influence 28:21 Impact of China’s deflation 29:55 China’s need for devaluation 31:06 European Central Bank’s challenge 31:41 Base effect period in Europe 32:37 Replacement of Chinese Foreign Minister 35:27 Continuity in China’s foreign policy 36:54 Wang Yi as a temporary Foreign Minister 38:24 Wang Yi’s powerful position 39:12 Wang Yi’s role as stabilizer 40:57 No significant impact on China’s diplomacy 42:13 Introduction to the economy’s critical point 42:39 Concerns about achieving economic growth 43:20 Anticipation for the big stimulus package
Transcript
Peter
Every Monday to Friday this is Peter Lewis’s Money Talk.
Peter
Good morning. This is Peter Lewis, welcoming you to my podcast, Money Talk, for Thursday, the 27th of July. It’s Fed Day, and we have news and analysis on the Fed’s decision to raise interest rates. That’s coming up. This podcast is sponsored by Surfin Group, which is headquartered in Singapore and offers online financial services to 30 million customers across 10 countries. Thank you for making this podcast one of the most listened to financial podcasts in Hong Kong and Singapore. In today’s business and finance headlines, the Federal Reserve has raised the target rate for the Federal Funds rate by 25 basis points to five and a quarter to five and a half % in line with market expectations and with unanimous support from the Federal Open Market Committee. That brings borrowing costs to the highest level since January 2001. It marks the 11th increase since March 2022 when the Fed started raising borrowing costs from near zero to try to call the economy and ease price inflation. The US Central Bank resumed the tightening campaign following a pause in June after observing that the economy has been expanding at a moderate pace. Job gains have been robust in recent months and the unemployment rate has remained low while inflation remains elevated.
Peter
In a press conference after the meeting, Fed chairman drone Powell was perceived by financial markets as leaning more towards the Dovish side, raising hopes among traders that the current tightening cycle has ended. He emphasized how much the central bank has already done and the amount of time it can take for monetary policy to call inflation. We can afford to be a little patient as well as resolute as we let this unfold, he said. He added that it’s possible that the Fed could raise rates at the September meeting if the data warrants it, but also possible that the central bank could hold steady. Mr Powell insisted that the central bank would take a data dependent approach going forward when determining additional hikes and he then clarified that no decision to raise borrowing costs further has been made. Japan’s population has recorded the largest annual decline on record despite efforts to boost birth rates, data showed on Wednesday. The Ministry of Internal Affairs and Communications said the number of Japanese nationals fell by 801,000 in 2022 from a year earlier to 122.4 million. That’s the largest drop since records began in 1968. The population of Japanese residents has decreased for 14 consecutive years after peaking in 2009, but the population of foreign residents increased by 289,000 to 3 million.
Peter
That’s the first rise since the onset of the coronavirus pandemic in 2020. On today’s money talk, I’m joined by Andrew Ferris, the CEO of Econosis Advisory, and from the USA, Tony Nasch, Founder of Complete Intelligence. And with a view from Taiwan is Ross Fe gold, Business Development Director at SafePro Group. Us stocks swung into positive territory during Federal Reserve Chairman Gerome Powell’s press conference as he said there was disinflation. Even as he also said that central bank officials had not yet made a decision as to whether to raise interest rates again in September. But the main indices ended the session mixed. The S&P 500 saw a peak of 4,610 before pairing gains after drone Powell said he doesn’t see inflation returning to the 2 % target by 2025. The index ended the day virtually unchanged at 4,567, but at its highest level since April 2022. The Nasdaq composite lost 0.1 % to 14,127. The DAO added 82 points, that’s 0.2 % to 35,520, extending its rally to 13 days. That’s the longest winning streak since January 1987. And if the index rises for 14 straight days later today, it will match the longest streak in history, going back to June 1897.
Peter
That was roughly one year after the DAO was created in May 1896. After the closing bail, Facebook owner Meta reported better than expected results and issued optimistic guidance for the third quarter. The company returned to double digit revenue growth in the second quarter for the first time since the end of 2021, reporting that revenue in the three months ended June 30, rose 11 % to US$32 billion as advertising rebounded. Meta shares rose as much as 8 % in after hours trading, and prior to Wednesday’s close, the stock was up 159 % this year compared to the 19 % advance in the S&P 500. Chinese equities were low at Wednesday as the previous day’s euphoria over the Politburo’s statement of support for the beleaguered property sector and the promise of measures to boost consumption and the overall economy faded. Hong Kong’s Hang Seng Index retreated after Tuesday’s 4.1 % rebound and closed 69 points lower, that’s 0.4 % at 19,365. The tech index fell 0.9 % after a 6 % rally the previous day. And on the mainland, the Shanghai composite index slipped a third of a % to 3,223. The Hang Seng mainland properties index, which surged 14 % on Tuesday, retreated 1.8 % Wednesday.
Peter
And futures markets are pointing to a gain of 140 points for the Hang Seng at the open this morning, that’s around 0.7 %. And you can get more details on the latest market movements in my daily newsletter, which you’ll find at Peter Lewis Money talk. Sub stack. Com. Every Monday to Friday, this is Peter Lewis’s Money Talk. Let’s join our guests. We have with us in Prague this morning Andrew Ferris, the CEO of Econosis Advisory. Thank you for staying up for us once again on your world tour.
Andrew
Thank you. Perfectly all right, Peter. It’s a pleasure.
Peter
Okay. And over in Texas in the USA, we find Tony Ash, who is the founder of Complete Intelligence. Welcome, Tony.
Tony
Thank you, Peter. Thank you very much for having me.
Peter
You’re welcome. The Federal Reserve has raised the target rate there, as you heard, for the federal funds rate. So it raised the target range for the federal funds rates by 25 basis points to five and a quarter to five and a half %. That’s in line with market expectations and it was a unanimous decision from the FOMC. It brings borrowing costs to the highest level since January 2001. The Fed made minimal changes to its post meeting statements and failed to provide a clear indication of the FOMC’s future moves. The committee said it remained highly attentive to inflation risks and will continue to assess additional information and its implications for monetary policy, but it underscored the priority of bringing inflation back to the 2 % level. Andrew, let me ask you, how wed is the Fed to its 2 % level? Because it seems to me that if it is, there’s going to be more pain to come. The Fed is going to have to carry on raising rates and potentially tip the economy into recession to get there.
Andrew
Yeah, this is Peter. This is not an interpretation. This is effectively based in fact, because Powell was quoted in saying that he just doesn’t see that the 2 % inflation. I’m not quite sure what he actually said, or sorry, correction, the interpretation of what he actually said was whether this is going to stay till 2 % or we will not be able to get it there at 2 % in the year 2025. That is, well, I don’t know, strictly speaking, 24 months from now.
Peter
Yeah, that’s what I think he said. That’s what I think he did say, that he doesn’t anticipate it getting there to 2025.
Andrew
Then very, very briefly, of course, they’ve raised interest rates now to 525, 550. And then hopefully, let’s say, this will bring the inflation to %. And then, of course, the question is, is where they will be able to keep it at two % once the increases have failed it out or stopped? Because then, of course, the next expectation will be that they will start cutting interest rates. And if this will allow the inflation to begin to accelerate again, you know what I’m getting at? In other words, the scenario has to be a little bit more finessed. We don’t expect them to say, look, there is going to go at two % and then they will stay at 2 % despite the fact that it will start cutting interest rates. They are not saying that. But equally, they are not saying that enough is enough, 2 % will be there and that will keep the inflation there and that’s the end of the story. We don’t need to cut, we don’t need to increase. It’s a thankless task. Classical, have you stopped beating your wife? Kind of question. Whatever you say is wrong.
Peter
Tony, it is quite hard, isn’t it? To work out what is actually the Fed is saying. The markets initially took it quite positively, but then seemed to change their mind as the day wore on. But how do you see this?
Tony
I actually did not see it as doveish. It was interesting on the 2 %. He said we don’t see inflation hitting 2 % until 2025 or so. It could be later than 2025, his expectation hit 2 %. So on the one hand, we love the Fed raising rates, but on the other hand, we also have consumers and businesses paying higher inflation and seeing higher inflation. So there’s a real sense of urgency. At one point, Powell said policy is not restrictive enough or long enough to have its full intended effect. So he’s saying two things there. First of all, he doesn’t see policy as restrictive enough. Second of all, it hasn’t been in place long enough to have its full intended effect. He capped off that comment by saying, we have a long way to go. So this is the Fed chair saying these things. This is not some commentator. And so that’s the house of you. And when you keep in mind that it was a unanimous vote, to me, I actually saw this as a hawkish tilting press conference because there’s been this implied expectation that we’re going to get through 2023, and then in January of ’24 or so, we’re going to start seeing rate reductions.
Tony
But he made it pretty clear today that he doesn’t see rate reductions, certainly not in ’24 and probably later than that. So this elevated rate environment that we’re in right now, it sounds like he’s pretty comfortable here. Now, one thing also to keep in mind is we’re looking at year on year inflation with base effects. So this time last year in the US, crude oil was over $100. I think in June it hit $130 a barrel. And so if we’re looking at a 3 % core inflation rate in June with crude and secondary and torsionary impacts at $137, I think, once that comes down, that core inflation will rise even more. So there are other effects and he knows this. And I think what he’s doing is setting people up for September when those base effects really do come off and those inflation ratings are significantly higher likely. And people are saying, hey, you didn’t raise fast enough, or you didn’t continue raising fast enough. He’s conditioning people right now for the other side of these base effects, which will come in the second half of August and in September.
Peter
Yeah, I’m with you. I didn’t see how that was a particularly dovish statement. I saw plenty of things there which could indicate the Fed is going to continue. But I suppose, Andrew, the truth is in the matter, the Fed doesn’t mean now it’s until September. So we got four to two months of rounds of monthly data on jobs, inflation and consumer spending. The trend doesn’t seem particularly clear at the moment on any of them, does it? Andrew?
Andrew
Clearly, in terms of economics data, got a sound like an economist, the answer is yes and no, because the labor data, the job creation data have been strong. Inflation can down incredibly quickly if you think that a few weeks back, Peter, we’re talking at 6 %, and now it’s 3 %. But strangely enough, the PCE that used to be the favorite blue eyed boy or blue eyed girl to be politically correct, seems to have dropped out of the picture. So I’m not quite sure why now is the pure CPI inflation the one that we are gunning for. And yes, and hence the Fed has said that the turn economy do not see a recession, meaning two quarters back to back negative GDP growth, but definitely a slowing down in the economy. So what am I ended up with? I put all these things in a box, shake it out, let them drop on the floor, and I end up with the same mess.
Peter
So it is hard to read the words, but you mentioned something there that was noticeable in the statement, and that’s that Mr. Powell was saying the Fed now believes it can pull off a soft landing. He said the central bank’s own economists have now reversed their call that the US economy was going to enter recession. He said the staff now has a noticeable slowdown and growth starting later this year. But given the resilience of the economy recently, they are no longer forecasting a recession. What do you make of that?
Andrew
Sorry, is that me, Peter, you’re asking?
Peter
Sorry, I don’t want to talk to you. Yeah, sure. And then I’ll move on to Tony.
Andrew
Yeah, exactly that. And again, I always go back to the expression, what do they mean by recession? And given that they are in inverted commas American and they are in the Fed, they do mean two quarters back to back of negative GDP growth, which I will try to run with the numbers. I just can’t see this happening anytime soon under current circumstances. So if he means that, yes, I have no idea, he said this proudly that we’re going to soft land the economy and we’re going to have inflation down. And at the same time, as Tony also confirmed our suspicions, he says we’re going to bring the inflation down, but that ain’t going to happen till the year 24. If that, well, I hate when it becomes talmuric Bible interpretation of the words of the great master. And I mean, poor Powell, what else can he say? He will spell it out as clear as he can. And then we end up interpreting his words. And I think this is embarrassing.
Peter
Tony, he was rather self-congratulatory, wasn’t he, in his statement? He said, we’ve already done a lot already and we brought inflation down. He was saying, we’re going to get this soft landing now. Our own economists say that there’s not going to be a recession. He sounded rather proud of himself.
Tony
Yeah, but if you notice, he said our economists say there won’t be a recession. He didn’t say I, Jerome Powell, think there won’t be a recession. So he’s relying on the staff. So there’s deniability. And so I’ll tell you, at the beginning of ’23, what we were telling our clients is that we wouldn’t necessarily see a recession, but we would see very slow growth in Q3 and Q4. And I think that’s where this is just barely between 0 and 1 %. And I think that’s where Powell is heading. And I think that’s what he’s hedging toward is, the staff don’t see a they don’t see a recession, but we do expect a serious decelaration. And what he doesn’t want is a stagflationary environment where we do have a recession and we still have inflation. And this is I think is why he kept underscoring the fact that we have a long way to go. We’re not there yet. We’re not going to see recession. So he wants the optionality to be able to accelerate if needed and maybe not accelerate, but to continue to raise rates if needed. And I think he also doesn’t want to put the Fed in a position where they’re raising and then they’re lowering and they’re raising and they’re lowering because all that does is create uncertainty for people.
Tony
And it creates huge volatility, not just in markets, but also on the street, in the marketplace when people are buying homes or people are buying cars or buying groceries or whatever.
Andrew
Peter, I would like to add not only my full approval, but Tony has offered a pivoting point as far as I’m concerned. And that is, I will turn around to investment advisor stroke analysts and say, how dare you think that the Fed at any time is going to cut interest rates before year 25. Hello, they’re telling you this. Well, all right, it might change his mind as as data change, but unless the data are really spectacular, okay, we are going to be stuck with the number five for many years. I’m clearing my throat because we are now beginning to use the word 26 as opposed to just 24 or 25.
Peter
From what you’re both saying, really, it sounds like then that if economic activity slows in the final quarter of the year, the next phase, really, of this cycle is that the Fed just holds rates steady as inflation slows, which then means that inflation ingested, real rates are actually going higher, but it’s absolutely not going to cut. So am I right? Is that really what you’re saying? That’s going to be the next phase of this, assuming that we don’t get any more rate rises?
Andrew
I’ll jump again, Peter, and I will say yes.
Peter
Okay.
Andrew
Over to you, Tony.
Tony
Hey, Peter, I think that… Thanks for that. I think that we have to keep a couple of things in mind. First, rates are rising and companies and consumers are adjusting to that. Month by month, consumers put record amounts on credit each month. Consumers in the US had reserves to spend on price rises through, say, Q1 of 23, but now they don’t. And they’re having to buy things at these elevated prices on credit, and that’s a problem. Now, that’s on credit in rising interest rate environments, so that’s a problem. The other consideration is when we look at corporate earnings in the US, earnings have deteriorated in this quarter. We had great breakthrough earnings for Meta and other stuff, but they’re the exception, they’re not the rule. Earnings have deteriorated by about, I think, 3 % this quarter. I could be wrong there.
Peter
I think.
Tony
It’s.
Peter
Higher even. I think it may be higher than that, according to fact set.
Tony
Right. So we’re in a deteriorating earnings environment. And so companies are not able to continue to expand their margins like they have been able to do over the last two years. And so they’re feeling it on the financing side and they’re feeling it on the margin side. They’re also feeling it on the salary side because to hire people, it’s more and more expensive. And how mentioned payroll and salary quite a few times saying, really, inflation is a problem, but payrolls and employment are a real problem as well because they’re not slowing down.
Peter
And how is that then going to work its way out of the system? Is it going to be that there will be less vacancies advertised, or do you think there will actually be layoffs to try and ease the pressure before the latter?
Tony
I think there’ll be both. I think it’ll start with the former and end with the latter because when you have margin compression, when companies don’t have the margins or the earnings that they had in the past, they have to find places to cut costs. And we’re an environment right now where commodities generally are rising again. Those input costs are generally rising, but companies are going to have to find a way to cut some of their overhead so that they can get investors the earnings that they need. And so that’s going to have to come from somewhere. And it’s probably going to come in the form of headcount. Pex started doing this probably nine months ago, but it’s going to roll into other industry sectors as the margins begin to hurt.
Peter
And this Andrew is all going to come. Sorry, Andrew.
Andrew
No, no, no. Peter, you’re not in the place. You’re the boss here. I am not, again.
Peter
I was just going to say that really, what’s going to happen is that these layoffs are going to start, or the problems in the job markets are going to start also at the same time that people have used up all their paychecks from the stimulus and have run down their savings. So that’s presumably going to have quite a big hit on consumer confidence.
Andrew
Yes, but can I now… Yes, I cannot disagree on that. But can I twist the thing a little bit and bring two very important issues in here. And this is something that Tony has already touched. And I will, let’s say, try to stick my finger in the jugular, and that is what you buy in this market. Now, strictly speaking, if you really believe what Paolo is saying, I have no reason to disbelieve it at all, is really equities are going to be under pressure for the next two years by higher interest rates and a slow in economy. Okay, this is essential. And if you were to stick to bonds, then of course you will be permanently bedeviled at the time that the Fed may just begin to cut interest rates and therefore you’re going to be caught with a bundle of equities whose prices are falling. And in the middle of all that, I’m afraid I have to raise this because it really is really upsetting me. We are having in November, December, the COP meeting, that is the environment meeting of the United Nations, the 28th one taking place in Dubai. My God, what a horrible background situation.
Andrew
We are entering complete silence in the market. All the fires, the horrible weather. We’re back to the racism. We’re really thinking, Well, will the increase interest rates, decrease interest rates? There are two things here. There have to be colossal, but really colossal opportunities on climate updated investment because this is really ringing loudly and clear. Or on the other hand, given that I can tell you, because I observe this very, very closely for a number of clients, very little is being done. A lot is being done, but not anywhere near the 1.5 %. And given what has happened this year in the terms of the extremes weather we have had, and leave Greece aside, it was not just Greece, it was right through Europe, I think, Peter, to put it, let’s say, in a very gentle and diplomatically correct phrase, in the next five years, we are all going to be dead. So there will be a lot more things to worry rather than where their interest rates are going up.
Tony
Zilch.
Andrew
Influence in the market. Absolute silence. Nothing. Not one to use a good English expression, bloody word. I’m beginning to use to start to write in a great deal more without being alarmist. But this is the truth. This is what physically actually is happening. As Tony said, we’re going to have three more weeks whereby we’re going to die. Okay, if I was in Greece, we’ll have three more weeks where I’m going to die. Okay, so it’s not fun.
Peter
Tony, you’ve had the extreme weather as well, of course, in the US. Do you think this is going to start becoming a market issue?
Tony
I’m not sure. I don’t really have a view on that. It’s been hot in Texas this year, but I don’t know how much over normal it’s been hot. Last year it was pretty much the same pattern. So I honestly don’t know. The other thing that I… Just to add into what Peter said is, we have a situation where because of shutting down nuclear and other things, European countries particularly have started to rely on fossil fuels. And if we do enter a higher interest rate economic slowdown environment, there are very few economies, aside from Germany and Europe, that actually have the funds to subsidize the build out of green infrastructure.
Peter
Andrew, let me bring up another subject then and see what you think about this if I throw it into the mix. China is very close to falling into deflation, isn’t it? Certainly, we’re seeing disinflation in China. What impact is that going to have on the rest of the world, including the US?
Andrew
Well, there are three things going here. This deflation is… Hello, Peter?
Peter
Yeah, I’m here.
Andrew
Sorry, very sorry. I thought I have lost you also as well. No, I’m here. We can hear you. Chinese deflation is completely domestically driven. It is a matter for the Chinese to worry about because it is not driven by external factors, it is driven primarily by the domestic weakness of the economy, number one. Number two is the Renminbi has been consistently weak, which means that as far as the Chinese export in inflation, you would always think it in terms of Chinese products are cheaper than ever. B oth because domest, the prices are falling and also because the Renminbi is weak. So that’s potentially it’s a deflationary rather than an inflationary pressure on the world. And the third point is one great big resounding warning that it is not true that we’re looking at global economy. We are looking at economies that have got very much phases on their own. And blessed the little boots of Japan, they’re still sticking to negative interest rates as if nothing has happened. A lot has happened, but their policy appears to be consistent, not necessarily correct, but consistent. So China cannot be a bad deflationary influence in the world.
Andrew
On the contrary, if Chinese goods are of some importance as input in other countries, then there are good news. They’re going to be cheaper.
Peter
Okay. Tony, what I was asking Andrew, just as you got cut off there, was the impact of China on all of this. China is very close now to slipping into deflation. Consumer price inflation is zero. On the producer price level, it’s already negative. What’s the risk that China exports deflation around the world?
Tony
I think China exporting deflation is really the status quo. That’s what they’ve done for the past 25 years. So if they go back into exporting deflation, which they were doing before the COVID supply chain inflation hit, it’s business as usual for China. But with the domestic CPI and PPIs as low as they are, because China is entering or has already entered a balance sheet recession, I think they may have to devalue to a level that they’re not quite comfortable with in order to actually export that deflation. So they need stimulus within China, but it’s really hard to see them borrowing more and taking more debt because their debt levels are so high. So there’s a real likelihood that we see notable devaluation of C&Y to really boost exports in China so that they can get more domestic economic activity.
Peter
Let me ask you finally, just very quickly about the European Central Bank. They’re meeting later today. Andrew, they’re expected to lift rates as well. I think the ECB is probably fair to say is in a more difficult position than the Fed, isn’t it?
Andrew
Well, to the extent that in absolute terms, they’re having a watching rate of inflation between 5 % and 5.5 % and everybody else apparently is having lower rate of inflation. And yes, politically it is tricky because there are equal voices. For example, the Italians asking for stronger, tighter monetary policy, and presumably everybody else is not so. So yes, they are not yet at the point that they are seeing some light at the end of the tunnel. Although somebody said sarcastically, yes, light at the end of the tunnel, there was another trend coming in the opposite direction. But yes, they’re having a tougher period because still the increases in interest rates are not paying off as clearly they are doing so far in the United States.
Peter
Tony, final word to you. The ECB, are they behind the curve?
Tony
I think they are a bit, but I do think that will enter again, like the US is in a base effect period because of high energy prices from a year ago in June. Europe is about to enter that zone where natural gas prices and energy price has really spiked in Europe. And I think they’ll have 2-3 months of very good inflation readings, meaning inflation moving in the right direction toward disinflation.
Peter
Thank you both very much. That was Tony Nash, founder of Complete Intelligence over in the USA, and Andrew Ferris, who is the CEO of Econosis Advisory.
Peter
I’m joined now by Ross Fe gold, who is Business Development Director at SafePro Group over in Taiwan. Good morning, Ross.
Ross
Good morning.
Peter
Now, China has announced the replacement of Foreign Minister Chen Gang. What month after he disappeared from public view, Mr. Chen had been seen as a close associate of President Xizhiangping, China’s state news agency, Xintong Rua, said on Tuesday that the country’s Parliament, the National People’s Congress, had removed Mr. Ching and remained and replaced him with the country’s most senior diplomate, who is Wang Yee, who was his predecessor as Foreign Minister. Ross, what on earth do you make of this? It’s quite an astonishing situation, isn’t it? We still don’t really know what has happened to ching gang.
Ross
Yeah, two key things here. One, as you said, we don’t really know what happened to ching gang. But two, and probably more importantly is, regardless of what transpired and what the reason is for Qngang being replaced after the unexplained absence, other than the brief mention that there was a health issue, is continuity. And especially with Wang Y ee coming back as Foreign Minister, and he was the more senior foreign policy official anyway, this is not going to herald a change in how China interacts with other countries, whether it’s the countries that it’s friendly with or the countries that it has a more transactional relationship or the countries that it has a difficult relationship, obviously. Most notable one in the latter group would be the United States, but also increasingly Japan, Australia and Western Europe.
Peter
But it does raise some serious questions, doesn’t it, about transparency? I mean, even by the standards of the opaqueness of the Chinese Communist Party, this is an astonishing situation because he was handpicked, wasn’t he, by President Jiz hongping for this role. He’d been the US ambassador, the Chinese ambassador to the US for just about two years, and then he was elevated massively into this position, and now suddenly, equally abruptly, has been removed from it. It suggests there’s some very odd things at the lease going on in the Chinese Foreign Ministry?
Ross
It certainly does. But unfortunately, as you said, this is an opaque and not a transparent government. So until they tell us more, we can only speculate. And I’m sure many of the listeners have heard or read about the various theories for why Qinggong was removed, other than simply being a health reason, allegations of corruption, extra marital affairs, even espionage. Maybe e will get more information from the government in the coming days or weeks, and maybe we won’t. That’s just the nature of the system. A lot of attention has been put on to the aspect that it was he J inping personally who elevated Q ingang above other potential candidates in the Chinese government to take on this role, which he did take on at a relatively young age compared to some of his predecessors. But our arguably, it also shows that he, when necessary, will change somebody that was close to him or somebody that he had mentored or elevated. If the facts demand that he does so, he’s not going to keep someone on who is a political liability. And perhaps ching on have become a political liability for reasons that we don’t know yet.
Ross
And that us, he made the change. So I’d be very careful, even though some people are rushing to say so, that this shows some weakness in C. J. Pink’s position. In fact, one might argue it actually shows the opposite.
Peter
But you could argue, couldn’t you, that when you’ve handpicked someone, particularly durably, without counsel and without proper due diligence, when that goes wrong and it turns out to be a bad decision for whatever reason, it would normally put your judgment into question, wouldn’t it?
Ross
Well, at minimum, it might put the due diligence. Did you do the right due diligence? It’s a question. But we see that even in more transparent and democratic systems where people were hiding something in their background in a criminal matter or extra marital affair. And then it comes out once they’re elevated to the next highest position. So I think it’s the due diligence aspect. And if there was something there with Qigong, not health related, did they overlook it? Did they just not know about it? Or did they know about it and decide that it’s okay, we’ll live with it as long as it doesn’t come out. But they were worried for whatever reason recently that it would come out. We just don’t know. We might never know. But again, I don’t think this is going to signal any weakness in C. J inping’s overall command of the government and the party.
Peter
What about Wang Yee? Is this a temporary move until Beijing can find a suitable successor? Clearly, they needed to stabilize the situation. They’ve got important meetings coming up, issues going on with the US, so they need a stable foreign policy. So he’s obviously a stable pair of hands because he’s done the job before. But is this just a temporary move, do you think?
Ross
The expectation is this will be temporary, but nobody could really define temporary. So as you said, they need a steady hand to come in and stabilize the Ministry in his more senior role Wong. He was more a big picture guy when it came to foreign policy decisions. And the person who holds the title of Foreign Minister, which Chngong had, is more about the operational aspects of the Foreign Ministry. Now, now, Long E has got to do both. This is a big bureaucracy, the Foreign Ministry I’m referring to, and it needs to be run day to day. So he needs to make decisions about spending budgets, promotions, things like that. So that’s a lot of work. I don’t think there’s any expectation that Long E will do this open ended, of course. Again, this being China, they might surprise us. But the expectation is that they will look for a more suitable, younger candidate who could do it for a number of years. And that would not be Wang Yee. And Wang Yee probably doesn’t even want to do it. He did it already. He had been promoted upstairs to the more senior role, and he’d probably enjoy that.
Ross
One more thing on this point. To their credit, especially when we think about competition with the United States, whether it’s the Foreign Minister or Wang Yee as the foreign policy guy, but within the party apparatus, they travel a lot. And that’s one of the reasons why often feels like the US or Western Europe are a bit behind in places like Central South America or Africa, or even more in more recent years, Oceana, the Pacific Island countries that’s gotten so much attention US China competition. But they really do travel a lot. And whether Wang Yee wants to take on that burden is also something he’s going to have to consider. It might factor in how long he does this job on a.
Peter
Temporary basis. It leaves Wang Yee in a very powerful position, really, doesn’t it? Because he’s on the Politburo. He’s come back to being the Foreign Minister. He’s probably one of the most powerful ministers we’ve seen in a long time in terms of his status. So presumably he’s got very close ties. He’s certainly very trusted by President XI J inping.
Ross
Yeah, without a doubt. And that’s why he was brought in to stabilize the situation. That’s why he does trust him, does look at him as someone who could stabilize the situation. But again, I don’t think the intention is that it would be a long term solution.
Peter
Do you think it damages in any way China’s diplomatic efforts? Because it comes at an important time, doesn’t it? Where it’s got a lot of foreign policy challenges going on at the moment. So to lose your foreign minister at this time is not the best thing in the world.
Ross
Probably not, because, again, there will be continuity. And the countries that have a positive relationship with China, places like Africa, some of the countries in ASEAN, this will not change that. If there are programs that are in flight or under discussion, they probably won’t stop the discussions. They won’t be killed off. Interestingly, even in the news in recent days is talk about China trying to persuade Korea to reset that relationship a little bit, obviously, with the conservative president taking office last year, there was a bit of a reorientation to the United States. So these things seem to operate regardless of who is at the top of the apparatus. And I think that’s how most countries will approach their relations with China.
Peter
Now, the National People’s Congress has been busy this week because as well as removing the Foreign Minister, they’ve also removed the head of the People’s Bank of China. Although that was more expected, wasn’t it? He had the Yigang had reached retirement age and he’s been replaced by Pangong sheng, which was the expected move. But I suppose the thing there that’s noticeable is that it’s the first time since 2018 that the top two positions at the PBOC, the governor and the Communist Party secretary, have been held by the same person.
Ross
Yeah, that’s right. To be fair d upon, from most of the analysis of his skills, most people feel like he’s done a lot of different jobs in banking and in government related to the same issues and especially with foreign exchange. But and people generally will say that he’s qualified for the job. As far as unifying the two positions, one could say that given the doubts about economic growth for this year, probably going to be a little soft or slower compared to some of the great years of the past 20 or 30 years. Having one person do the job just ensures everything is moving in lockstep. And ultimately, that’s what he’s been paying once.
Peter
And it comes, obviously, when this is a critical point for the economy, isn’t it? The government wants to revitalize the private sector. It wants to boost consumption, wants to stabilize the housing market. The PBOC previously under Yee Gang had been quite conservative, hadn’t it? It didn’t really rush into making decisions, rarely changed monetary policy. Do you think things are going to change?
Ross
Yes, because if global outlook doesn’t look good and if the domestic outlook doesn’t look good, they’re going to have to do something. Clearly, they want economic growth in the five or above figure, 5 %, 6 %, and it might be very difficult to achieve that. And you just mentioned a long list of areas that are going to be of concern to policymakers. So, again, I think that shows it’s one of the justifications to have the same guy with both the party job and the civil service job. And we’re all waiting for the big S, the big stimulus package, what exactly will be in it and when will they announce it?
Peter
That’s what the markets are waiting for as well. Ross, thank you very much indeed. Always a pleasure to talk to you. That’s Ross Fe gold, who’s Business Development Director at Safe Road Group. Thank you for listening to Money Talk this morning. You can find more business and finance information from around Asia in my daily newsletter, which is at peterlouismoneytalk. Substack. Com on tomorrow’s program. I’m joined by Francis Leung, the CEO of GEO Securities, and Kenny Wayne, the head of investment strategy at KGI Asia. With a view from Australia is Tony Lawson, CEO of Staten Partners. Bye for now.
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.
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.
“Central Banks, Inflation, and Economic Challenges: Insights from Global Experts” brought together a distinguished panel of leading economists and policymakers, including Tony Nash, CEO and Founder of Complete Intelligence. The experts discussed the pivotal role of central banks, the rising concerns about inflation, and the economic challenges faced by nations worldwide.
Tony Nash, among other esteemed panelists, delved into the essential role played by central banks in maintaining economic stability. The discussion revolved around the measures implemented in response to escalating inflation rates observed in several countries, emphasizing the need to strike a balance between promoting economic growth and ensuring price stability.
The panelists highlighted the mounting worries surrounding inflation and its impact. They attributed the recent surge in inflation across various sectors to factors such as increased government spending, supply chain disruptions, and pent-up consumer demand. While acknowledging the expected inflation during economic recovery, the experts cautioned against prolonged and excessive inflation, which could erode consumer purchasing power and jeopardize long-term economic stability.
The challenges faced by central banks in navigating this delicate balance were a focal point of the discussion. The experts emphasized the importance of implementing appropriate measures to combat inflation without impeding economic growth. Failure to do so could undermine public trust in the central bank’s ability to maintain price stability.
Additionally, the panel underscored the significance of global cooperation in tackling these economic challenges. They stressed the importance of sharing insights, best practices, and collaborating among central banks and policymakers from different nations to mitigate the impact of inflation and foster sustainable economic growth.
The discussion also addressed the influence of technology on inflation dynamics. The experts acknowledged the transformative impact of technological advancements on various industries, affecting productivity and potentially altering price dynamics. This prompted a discussion on the adaptation of central bank policies to account for these changing dynamics and ensure effective control of inflation in an increasingly digital and interconnected world.
In conclusion, “Central Banks, Inflation, and Economic Challenges: Insights from Global Experts” featuring Tony Nash, CEO and Founder of Complete Intelligence, emphasized the crucial role played by central banks in managing economic stability and addressing the challenges posed by inflation. The discussion highlighted the importance of a balanced approach, considering both short-term economic recovery and long-term price stability. The experts underscored the significance of global cooperation and technological adaptation in effectively tackling these economic challenges and fostering sustainable growth in the years to come.
Transcript
Peter
Every Monday to Friday. This is Peter Lewis’s Money Talk. Money talk. Good morning. This is Peter Lewis and a warm welcome to Money Talk for Tuesday, the 13 June. Thank you for listening and for making this program one of the top ten most listened-to financial podcasts on Apple podcasts in Hong Kong. You can also find the show on Google Podcasts and Spotify. Just look for Peter Lewis’s MoneyTalk. And if you want more information on this program or would like to read my daily newsletter, then please go to my website peterlewismoneytalk.substac.com. This podcast is sponsored by Surfing Group, which is headquartered in Singapore and offers online financial services to 30 million customers across ten countries.
Peter
In today’s business and finance headlines, the US. Federal Reserve is expected to forego another interest rate hike in its monetary policy meeting, which starts later today. After more than a year of driving up interest rates, policymakers are expected to leave rates in a range of 5% to five and a quarter percent at their meeting, which concludes Thursday morning, Hong Kong time. Fed fund’s futures markets are pricing in a 77% probability of no change, but investors are laying 73% odds that the US Central Bank will increase rates again in July.
Peter
US consumer expectations for year ahead inflation fell to their lowest level in two years, according to the Federal Reserve Bank of New York’s latest survey. Median inflation expectations for the year ahead declined 0.3 percentage points to 4.1%. That’s the lowest reading since May 2021. India’s consumer price inflation has eased to the lowest level in 25 months. The annual inflation rate in India fell to four and a quarter percent in May from 4.7% in the previous month. That’s the lowest since April 2021 and firmly below market forecasts of 4.42%. Food inflation eased to 2.9% in May from 3.84% in the month of April. The food basket accounts for nearly half of the consumer price index in India.
Peter
On today’s Money Talk, I’m joined by Asian fund management industry consultant Stuart Oldcroft, Pete Sweeney, financial columnist at Reuters, and from the USA, Tony Nash, founder of Complete Intelligence. Peter Lewis’ Money Talk?
Peter
On Wall Street, US. Stocks rose Monday as investors anticipated the first pause in the central bank’s 14-month campaign to tame inflation. The benchmark S&P 500 climbed 0.9% to a 13-month high of 4339, consolidating its move last week into bull market territory.
Peter
The S&P 500 is up more than 21% now from its October 2022 low, but those gains have been driven almost entirely by just seven stocks. The tech heavy Nasdaq Composite added one and a half percent to end the session at 13,462. That’s the highest in almost 14 months and takes. The Nasdaq’s rebound from its 52 week low in December to 32%. The Dow climbed 190 points on 0.6% to close at 34,066. Chinese equities dropped on Monday morning as weak economic data from the country weighed on sentiment, but they staged a rebound in the afternoon session. Hong Kong’s Hang Seng Index recovered from losses of 0.7% earlier in the day to close 14 points, or 0.1%, higher at 19,404. And this morning, futures markets are pointing to a decline of about 110 points for the Hang Seng at the open, that’s 0.6%. On the mainland, the Shanghai Composite was down zero 1% at 3229, snapping a three day winning streak. Oil prices continue to come under pressure despite Saudi Arabia announcing an additional 1 million barrel a day production cut in July at the last meeting of OPEC. Plus, on Monday, Goldman Sachs revised its end of year price estimate for Brent crude to $86 from $95.
Peter
That’s the third downward revision in the past six months. Brent crude oil fell 3.9% to $71.84 a barrel, the lowest close since December 2021, as traders focused on lackluster demand growth. In China, oil prices are down about 25% now since OPEC began reducing supply last October. And you can get more details on the latest market movements in my daily newsletter, which you’ll find at Peter lewismontalk substac.com every Monday to Friday. This is Peter Lewis’s Money Talk. Peter Lewis Money Talk.
Peter
And we have a stellar panel of guests for you this morning. And as always on a Tuesday morning, we find Asian fund management industry consultant Stuart Orcroft. Morning to you, Stuart.
Stuart
Good morning to you, Peter.
Peter
And over in Japan this morning, we have Pete Sweeney, who’s financial columnist at Reuters. Morning, Pete.
Pete
Good morning, Peter. How are you?
Peter
I’m very well. And just to show how international our panel is today, over in the USA, we have Tony Nash, who is founder of Complete Intelligence. Morning, Tony.
Tony
Good morning, Peter.
Peter
It’s going to be a busy week for the central banks. Three of the big hitters are in action. The Fed meeting takes place today and tomorrow. The European Central Bank meets on Thursday. The bank of Japan’s meeting will conclude on Friday. Let’s start first. In Europe, economists expect the ECB to raise interest rates by another quarter percentage point. The ECB slowed the pace of its rate hikes to 25 basis points at its May meeting after a series of 75 and 50 basis point moves. ECB President Christine Lagarde said Monday it was too early to call a peak in core inflation, and she reaffirmed that rates will need to be increased again. Stuart, bit of a problem, isn’t this for the ECB because they’re raising rates as it’s now confirmed that the Eurozone is in a recession?
Stuart
Well, yes, they are in a recession, and that’s not a great surprise to most people. And the fact that they are raising rates is because they’re still a little bit behind the curve in the speed at which they are raising rates. So, yes, not an unexpected move. And I think we would expect them to stay probably a little bit behind the curve for a little bit longer, but they are catching up to whatever the US does and we’ll probably talk about that in a minute. But I think we all know that Europe is struggling a little bit, not only with the Russia Ukraine war, energy prices, rising inflation and things like that. So the ECB does need to start to take a bit more positive action and by raising rates that they think will help towards solving some of their problems. But we know that Europe is 29 different countries and each country has a different economic outlook, so it’s quite difficult to cover them all in just one interest rate.
Peter
Pete, what’s your assessment? Eurozone inflation is currently at 6.1%. That’s more than three times the ECB’s 2% target, but it is down from a peak of 10.6% in October last year. Do you think they’re getting on top of things?
Pete
I sure hope so. I know that everybody in Asia is watching this very carefully, but yeah, I don’t have deep insight into the US market at this point regarding, I mean, I think it’s wise for them to be as conservative as possible as they can, but 6.1% is still pretty blistering. So politically I don’t know how sustainable the current situation is.
Peter
Tony, what what are your thoughts on, on the Eurozone? First of all, I mean, as, as Pete said, these, this raising of interest rates, it is quite political as well, isn’t it? It’s not just economics.
Tony
Yeah, it’s very political and I do think, as Stuart and Pete said, they are behind the curve and 6.1% is still very high and there’s really nothing new here. It’s just a matter of who needs low interest rates really, and those will be the people lobbying against it. But I don’t think the Eurozone has a choice and I think they’ve really put themselves in a pretty awkward position.
Peter
Okay, well, the bank of Japan also meeting this week, they’re expected to remain on hold. Recently appointed Governor Kazaro Ueda indicated that the ultra easy monetary policy will remain in place until wage gains and inflation are stable and sustainable. So Stuart, this is the loosest monetary policy in the world, isn’t it, amongst all the major economies. Can it last?
Stuart
Well, they’ve kept a pretty good, very low rate of interest for a very long time in Japan. And the fact that they are beginning to move upwards, it isn’t very much, frankly. And indeed, I’m sure Pete, as he’s sitting in Japan right now, has probably got the opportunity of looking directly at what’s happening in the market and saying, well, it is going to change, but I’m not so sure it will.
Peter
Well beat you are there. Over there in Japan, at the moment, inflation is above the bank of Japan’s target as well, isn’t it? Yeah.
Pete
And originally this was what they called push inflation just solely imported food and energy prices from the shocks of the war in Ukraine and spillover from American inflation. Now the core core inflation that excludes food and energy is at 4.1%. The general services inflation, excluding government services is at 2%, which is the bank of Japan’s target core core inflation is now inflating higher than the rate that includes energy because the energy prices are coming off, but that’s still high. So the bank of Japan is in this very kind of precarious situation, right, because they would like to wait because they do not have the economic fundamentals they had back in the bubble years back in the 80s where everything was super overheated. But they’re definitely seeing some signs like the Japanese stock market is rocking right now. There’s definitely some signs of some warmth showing up. The risk is that, like in the United States and like in Europe, ueda conditioned by decades fighting deflation and with the experience of the bank of Japan tightening too prematurely repeatedly and having that blow up in their face is going to wait too long this time. And that what we’re actually going to I mean, everybody is worried about Ueda like pushing the button too soon and that’s going to pull startriation repatriating Japanese capital back into Yen Denominated assets bruises rally.
Pete
That’s already underway somewhat, but it’s slow and gradual. If he waits too long and it gets out of control. As we see right now in the US and Europe, once it starts cooking, it’s hard to take the heat off. And then you have to have a lot of hikes in a short period of time in one of the most popular funding currencies in the world. And that is just going to be bone rattling. So, yeah, he’s been very careful signaling that he’s not going to move and I take him at his word. But if you look at his language, he’s also kind of trying to have it both ways. He’s saying it’s possible there’s been this big change in the way that the Japanese think about inflation and it’s possible. Keep in mind the one thing that’s critical is the wage growth. And that’s what he wants to see before he hikes.
Peter
Is he seeing it?
Pete
Sort of, yeah. So they have the spring shinto wage negotiations that happened in April and the average number that came out of that looks like it was about 3%, which is below what inflation is now, but above target. But that’s like the union wages. So I can tell anecdotally that there’s a worker shortage in Japan and like in the informal sector, wage hikes are much higher just because you can’t get people. So it is possible that what we’re on the verge of is possible that there’s going to be a lot more inflation in Japan than they see and that they might wait too long and then we’re going to get another global shock.
Peter
Tony, if you look at it from over there, the bank of Japan’s sort of got a similar problem that other central banks around the world have got in that headline. Inflation is coming down, partly because commodity prices are coming down and energy prices are falling off, but core inflation is remaining pretty sticky. So that seems to be a problem that sort of links all the three central banks.
Tony
That’s right. And in the US, supercore inflation, it’s not core core. It’s supercore. It really is a reflection of service wages. Right. You come to a point where the measures that we’re looking at are really focusing in on what, at least this month or this quarter, the central bankers really want to focus on. And as Pete pointed out, wages are really the worry. In some sectors, they’re not moving. In other sectors, they’re moving a lot. And that’s really the concern here in the US as well. We all see energy prices declining after we all thought they would spike over the winter, and they didn’t, and they continue to fall. So the primary, secondary, tertiary impacts of energy inflation, those are really kind of hollowed out for a period of time. Right. So it’s really wages, goods inflation has passed. US services inflation were well into that. And it’s wages and particularly service wages that are the biggest worry.
Peter
When you look at what the Fed has done, Tony. They’ve raised their benchmark rate now over five percentage points. They’re at the highest level since 2007. The Fed sort of says it wants to pause to see the impact of those rate rises. Are you seeing the impact of those rate rises and what sort of impact are they having on the US economy?
Tony
Well, we see house prices, some house prices coming off, we see some layoffs, that sort of thing. But things are still very loose and we had a few banks collapse, as you may have heard, and things have been so loose that until we see a bit more tightening, we won’t see, say, residential real estate come into a reasonable realm. One of the big impacts that we are seeing, however, is commercial real estate. Okay? Now, commercial real estate is more of a function of work from home, really, than it is from interest rates, because companies are seeing that in the big urban centers in America, they’re not necessarily sending all of their workers back. So they’re renegotiating their leases. They’re not going to pay what they paid before. So the real estate investment trusts and the CRE guys are not able to the valuation on their buildings is not what it was. Right. And so the real problem we have there is if commercial real estate stays down by 30% valuations, in some cases, it’s a lot more. The folks that it really hits is the regional banks again. And so I think the Fed has to be really careful with CRE because it’s going to impact the regional banks in the same way we saw in March, and it’ll affect a lot more of them.
Tony
And so as they continue to raise, because they will continue to raise. They’re going to have to balance a lot of different concerns.
Peter
So could that be the next shoe to drop or be collapsing commercial real estate prices?
Tony
It’s already started dropping. I mean, look, we won’t really know. I know there’s a lot of talk about a Fed pause, but we won’t really know what the Fed is going to do until CPI comes out tomorrow. I mean, they already know, of course, right? But we won’t know until tomorrow. And so they’re kind of really on the edge of either a pause or a 25 hike. So we’ll know tomorrow, but we don’t know now. But yeah, commercial real estate in the US is absolutely where you need to be looking and it’s absolutely where we will see some real negative fallout.
Peter
Stuart, is the Fed right to pause? From what Tony is saying, it sounds like they haven’t got inflation down enough yet to really be thinking about sort of easing off on what they’re doing with inflation.
Stuart
Yeah, I don’t think it is right to pause. I would be in the 23% who say that the Fed might actually increase by 25 basis points later this week. I think that the Fed needs to continue to show that it is in control. It has, as you say, inflation and rising. Yes. Every time it increases its interest rates, that will be damaging to some of the regional banks because they will continue to struggle to finance themselves and have defaults and things like that. But the sooner the Fed gets all this out of the way, the sooner the economy in the US can start getting back to some state of normality. But I’ll also couch that by saying the chances of any of this really changing very much when we’ve got such a divisive political situation in the US at the moment, which will only get worse as next year’s presidential election occurs. I think the chances of all this improving are pretty slim.
Peter
Pete, which camp are you in? Are you in the pause camp or do you think they should keep going?
Pete
I think they should probably keep going. That’s just my instinct.
Peter
That’s based on what would be their bigger mistake, then they could keep raising rates and potentially tip the economy into recession. Or they could hold off and see inflation start to rise again. Which one of those two would be the bigger policy mistake? Or which one maybe would they be the most comfortable making?
Pete
Don’t we need a recession at this point? I thought that was supposed to be like everybody’s expecting a recession. Where’s the damn recession? I thought that was what was supposed to happen anyway.
Stuart
Hasn’t quite occurred yet. But it’s just waiting around the corner.
Pete
I mean, it’s not going to be a surprise to anybody, right? It’s not like people are like, oh my God, we went into recession. I feel like it’s been telegraphed and priced in and the problem is that they haven’t been able to deliver it.
Tony
Yeah, I don’t think it’ll be a surprise to anybody, but I do think the impact will be surprising because it always hurts, right? And it always feels worse than it is. So a recession always hurts when it hits you. And I think what the government is trying to do here in the US is to put it off as much as possible because Stewart brought up the election next year and they’re really trying to put it off as much as possible because if they were going to engineer a recession, it should have been 22.
Stuart
Yeah. But the stock market is completely oblivious to any of this. And what we’re seeing is back up to highs across the market. Yes, it’s only reflected in probably the returns from seven or eight major companies, but it’s still the fact that the market is at pretty high levels and seems to be ignoring the prospect of there being a recession. And I think this is the false signals that seem to be coming out from the market.
Peter
What’s the state of the consumer there, Tony? They had obviously a lot of handouts from the government during the pandemic. They bolstered their household balance sheets. Has that now worked off or are they still continuing to spend?
Tony
They’re definitely continuing to spend. And part of the problem here in the US and part of the reason it’s very difficult to hire staff is because unemployment benefits have continued to be largely not. They don’t end in a number of states. And so it’s really hard to get people at certain levels within companies because it’s just not economically feasible for people. So that’s forcing wages up and that’s forcing companies to take shortcuts that they don’t want to take. So I have some friends in the oil field. Somebody was telling me yesterday about somebody who was sent out to their site. They were not qualified to do what they were doing. The company had to send them out because they had to send someone. This is for a very dangerous job in the oil field and it caused a fire. And so companies are having to sub optimize because they can’t find people. And it’s largely because of a lot of these programs that are in place. And yes, the consumer is still spending and until that stops, we’re just going to keep going. I think the part that I’m really concerned about is, as Stewart says, it’s really seven stocks pushing the indices.
Tony
Right. That breadth is frightening. Should it not be? I assume it should be.
Peter
It’s about 25% of the market cap of the S and P 500, which is you would sort of think it’s unsustainable, wouldn’t you? And either other things, other sectors have to catch up or that outperformance is going to have to unwind or you rebase the index. There will be a little bit complex to do. Let me ask you about the Chinese consumer, then. I mean, the Chinese consumer clearly isn’t spending. We saw that from the inflation data. There’s zero inflation. Consumer price inflation. Virtually in China. And if you look at producer prices, it’s actually in deflation. Is that going to help the Fed? The ECB do their jobs. Is China going to export that disinflation? Or maybe even that producer price index deflation around the world?
Stuart
No, I don’t think it will. I think china and this is very much a domestic issue in china. I don’t think it’ll make any difference, because, as we’ve seen, china is increasingly self sufficient, is increasingly not importing from overseas, but still wants to be the manufacturing center of the world. So I think that whatever happens in China will stay in China for the most part.
Peter
What do you think, Pete? Do you think that there’s a chance that this could all be exported around the world? Because it’s a little bit odd, isn’t it? Here we have relatively high inflation in major economies around the world with the exception of China, which is sort of seeing certainly disinflation, if not outright deflation.
Pete
Yeah, I mean, obviously, China still has to import some stuff, and some of their desires to disconnect from the world are aspirational. Not realistic, but yeah. I mean, their domestic demand is weak. What we have is the absence of Chinese demand from key commodities markets. And most of that is related to the real estate slump. I think everything is related to the real estate slump. When we saw Japanese housing market correct. Back in 2014, 2015, absolutely nothing else in the economy went right until prowess prices went on a sustained rise. I think people and companies are most of their assets are in real estate. I think there is a sort of balance sheet recession in China, basically where people are trying to pay down debt and they just don’t know what’s happening with the most important asset in China. So I think that’s the break. What we see is recovery in retail spending, but it’s cautious. In Hong Kong. I mean, the mainlander is definitely back. They’re just not spending as much as they used to. And in China as well. So the new shape of the Chinese consumption economy is different from pre pandemic.
Pete
I Think. So some of this is probably a secular trend. But in the meantime, I don’t think the United States has to worry or anybody else has to worry about China suddenly having a boom in demand for its goods. Not just because it’s trying to wean itself from dependence, but because Chinese people are still hoarding enormous amounts of cash in bank deposits. We keep on seeing that number go up. And the thing is that China is not moving to massively stimulate real estate, which they’ve never been able to engineer recovery without doing that in the past. And they’re not directly stimulating consumption either. There’s no Equivalent Of A Western Style handout package, or even in Hong Kong, where they gave out some spending money, like China is not doing any of that, so they’re just going to kind of muddle along and that keeps any pressure they have on inflation coming off. Now, they might cut rates soon, but I don’t think that’s going to transmit into anything much at this point.
Peter
So it sounds like you sorry, Stuart.
Stuart
The idea of handing out a package, though, slightly different between Hong Kong, Macau, where you’ve got 7 million people in Hong Kong, half a million people in Macau, to 1.4 billion people, it makes massive difference. But I think we underestimate the benefit that Hong Kong might continue to receive, because we have seen what, 10 million people from China visit this year so far, and the numbers every week are increasing. They’re not spending in the traditional way of these sort of cheap jewelry shops, but they are getting out and spending in a broader part of the economy of Hong Kong. So I think Hong Kong is actually going to do quite well out of the change.
Pete
No, definitely. And they specifically benefited from this kind of frugality because Hong Kong is, on balance, approval destination. You can be Hong Kong by train, you don’t have to buy, I don’t know anybody looking at airplane tickets, but it’s a lot more expensive to fly to Japan and these other places. I agree. It’s nice for Hong Kong. It’s good for the hospitality industry, which has got beaten into the floor, but if they’re not buying the product handbags, it’s kind of selective. That said, luxury is still doing fine based on Chinese demand.
Peter
Tony how do you get the Chinese consumer to spend if you don’t want to do handouts, which the Chinese government doesn’t like doing, it doesn’t like giving money to people, you’ve got to find a way, haven’t you, of increasing sort of household disposable income, otherwise the consumer isn’t going to spend. So presumably the only way of doing that is cutting taxes or all these very high contributions that Chinese people have to make to social welfare funds. But the challenge for the government is it’s got to get household income up, disposable income up.
Tony
Peter they did have these stimulus packages, I think it was about twelve years ago, where it was for rural families to buy refrigerators and for people to buy cars and these sorts of things. I think those types of targeted stimulus packages could actually help. The problem, as Pete says, is real estate. If people are feeling that drag down their wealth, they will be careful to spend until they have some sort of targeted support. So if I were advising the Chinese government, I would say, what consumption sector do you need to goose? And let’s target some consumption there like you did 1012 years ago, and then get things going. It’s not a fix all, but at least it is a start to get things moving. I do think, though, the idea of deflationary China exporting to the world, it is helping some of these central bankers, right? We’re past goods inflation. China is on some level exporting deflation. That’s helping these central bankers fight their fight. But as we said earlier, the issue is services and wage inflation in Japan, US. Europe and so on.
Peter
There was a report from Goldman Sachs over the weekend on China’s property sector and they were saying this downturn could be a multi year growth drag on the economy. It sounds like from what the three of you are saying, you pretty well agree with that.
Pete
I mean, that’s the key thing, right? Well, it was overheated. So, I mean, I’m empathetic with the government here because you don’t have household formation. That justifies the amount of construction that was going on. It was a speculative industry. It was bad for the environment. It cannibalized funds for more productive endeavors. So I don’t mind property cooling off. I’m just saying if you’re going to have it be cool, you’re going to have to go out of your way to stimulate in kind of a different way now. I mean, like these subsidies for buying washing machines and cars. The problem with that is you kind of create a problem down that you can pull purchases forward, but that doesn’t actually create more consumer confidence. I mean, your average Chinese person doesn’t pay much income tax. That’s a problem with lowering taxes. A lot of these people don’t actually pay that stuff. Most of it comes out of the corporate sector where they’re already putting down taxes. And the problem is, at the receiving end of this are all the local governments who are supposed to be stimulating and handing out all this stuff, and their budgets are extremely strained.
Pete
They’re getting it from both ends, right? They’re getting it because their land sales are harder and to sell, and that’s a key point of revenue. And then their income is being reduced by all these tax cuts the government has been handing out to the corporate sector. So, I mean, you had a central bank advisor and I forget his name, I’m sorry, he said that we should just take hand out ¥4 trillion. We should just figure out a way to pass that around in some sort of designated consumption coupon. When you can spend on food. Whatever, in a way that makes people feel wealthier. That’s where the tribe of the ministry of finance is never going to go for it because of what is happening with these local governments and this huge local government debt crisis that’s underway, which we haven’t really talked about, but is actually the biggest risk facing china going forward. Nobody seems to know how they’re going to fix that one.
Peter
So, Stuart, it sounds like the state owned media is talking about a cut in the medium term lending facility on Thursday by maybe five to ten basis points. But. It sounds like that’s sort of tinkering around the edges, really. It doesn’t get to the root cause of the problem, not really.
Stuart
I think China is just going to have to take the medicine that’s being dished out at the moment by markets, and it may not be received too well, but at the same time, China is in a pretty good position to accept it. Yes, the property market is in a bad way. The stock market is in a bad way at the moment. Interest rates are pretty low, so there isn’t a lot of wiggle room available to PVoC either. So I think we’re going to have to wait and see what happens. Of course, one big issue might be geopolitical changes. China is wanting to start to see an improvement in its relationship with other places around the world. It’s trying very hard in the sort of Ukraine Russia war, but that doesn’t directly affect the economy, but it does directly affect sentiment.
Peter
Tony, let me give the last word to you then, on that point. US Secretary of State Anthony Blinken is apparently traveling to China this week for these long delayed talks. How good a sign is this that maybe things are improving between the US and China?
Tony
Yeah, I don’t necessarily think it’s improving or deteriorating. I think it’s probably a neutral position. Blinken has been fairly assertive on China policy and he has not really impressed since the Anchorage meeting, he has been seen as a fairly weak foreign minister or secretary of State. So I don’t really take a view either way that it’s an improvement or a deterioration per se. I think we have to wait and see what comes out the other side of this.
Peter
Actually, Pete, let me just get a final thought from you on that. Are you seeing signs of improvements, at least? They’re talking, aren’t they, even if they’re not actually resolving their core differences?
Pete
No, unfortunately, I think this is kind of the new normal, where it’s just going to be terrible, but short of abominable. So, I mean, this sort of thing, I mean, I just don’t think the two sides understand each other or how to fix the relationship. I think also in the Chinese government, well, I mean, both governments kind of want to play nice and play mean at the same time. China will try and reassure do, make some reassuring gesture, and then float a balloon, a spy balloon over or raid a bunch of due diligence firms. And the US is kind of saying, well, let’s cooperate on environmental stuff, but we’re going to keep on sanctioning you on these other things. I mean, there’s not really a solid foundation for improvement that I see. So it’s good that they’re talking, but are these talks likely to get anywhere positive? Yeah. And Pete, what do they have to agree about? They’ve kind of put themselves in the position where they’re opposed.
Tony
Diplomacy is having discussions for some result, it’s not just having discussions. Right? And so my grad work was in diplomacy. And so when I see people flying around to sit with each other, sitting with each other and talking is not diplomacy. Diplomacy is having a constructive conversation that has some result. Right. And I actually don’t know if they’re going to go anywhere with this.
Peter
Okay, well, great to hear your thoughts. That’s Tony Nash, founder of Complete Intelligence pete Sweeney, who is financial columnist at Reuters and our regular Tuesday morning correspondent, Stuart Alcroft, who’s an Asian fund management industry consultant. Thank you for listening to MoneyTalk this morning. You can find more business and finance information from around Asia in my daily newsletter, which is at peterlewismoneytalk. Substac.com. On tomorrow’s program, I’m joined by capital preservation specialist Nzo von File and Louis Coyce, chief Asia economist at SP Global Ratings. With a view from Japan is Nick Smith, japan strategist at CLSA. See you tomorrow, money talk.
Tony Nash, CEO of Complete Intelligence, was featured on BFM 89.9’s Morning Run podcast, providing insights on various market trends. In terms of the US treasury market, swap contracts indicate a potential rate hike by the Federal Reserve in July, reaching a peak of 5.3%. Tony agrees with this expectation, citing inflation and a robust job market as factors supporting a rate hike.
Discussing Q1 earnings in the US, Tony notes a slight deterioration in the quality of earnings compared to the previous quarter. Companies’ ability to raise prices has been impacted, with customers feeling the burden of rising costs. This trend is exemplified by the Q2 earnings of Cracker Barrel, a mid-working class restaurant, experiencing pressure on prices and a decline in volume sales.
Tony expresses surprise at the performance of financials, which outperformed expectations, while the IT sector did not fare as well. He highlights the recent calm in IT markets following post-earnings volatility.
The conversation shifts to fixed income, with indications of a potential inverted yield curve and a bond market pointing towards a recession. In contrast, equity markets remain resilient. Tony believes that while equity markets are not as high as in September 2021, they factor in strong labor and inflation. He acknowledges that bond markets are typically more pessimistic, and the unprecedented levels of stimulus make the situation more complex. He suggests that both markets hold valid perspectives, with expectations of slower growth in the middle of the year, followed by acceleration in Q4.
Regarding oil, Tony does not foresee the US Biden administration replenishing the Strategic Petroleum Reserve (SPR) in the near future. The recent OPEC supply cut has caused oil prices to rebound, but overall demand is not as strong as anticipated. Factors such as disappointment in China’s demand and increased unofficial Russian oil supply add further complexity to the market.
These insights from Tony Nash provide a comprehensive understanding of market trends, including the potential rate hike, earnings quality, bond and equity markets, and the oil industry.
This is a podcast from BFM 89.9, the Business Station. BFM 89.9. It’s 7:06, Thursday, the 8 June. And, of course, you’re listening to The Morning Run with Mark Tan, and I’m Wong Shou Ning. Now, in about 30 minutes, we’ll be speaking to Elvent I, senior analyst at Bloomberg Intelligence, for reasons as to why palm oil prices continue to decline, and maybe, perhaps the second half of 2023 will it look better? But in the meantime, let’s recap how global markets closed.
BFM
Yesterday, over at the US markets, the Dow was up 0.3%. However, S&P 500 was down 0.4%, and the Nasdaq down 1.3%. In the Asian markets, we had a mixed back of results, with Nikkei down 1.8%, Hang Seng up 0.8%, Shanghai Composite up 0.1%, Straight Times Index down 0.3%, and the FBMKLCR, I believe, was also down 4.52%.
BFM
Okay, so for some insights on where international markets are heading, we speak to Tony Nash, CEO of Complete Intelligence. Good morning, Tony. Let’s talk about the treasury market in the US. Because the rate on swap contracts are suggesting that the Federal Reserve will raise rates in July, climbing to a peak of 5.3%. That’s the swap contracts. Are you in that camp that expects a rate hike?
Tony
Oh, yeah, absolutely. The Fed chair, during his speeches, has said that there is a lag in the impact on markets, but we continue to see inflation and we continue to see strong job markets. So, yes, I believe we will see a hike, and there may be a pause. There may not be a pause, but we continue to see strong activity on the labor front, which is one of the things that the Fed is watching very closely.
BFM
Tony, the US quarter one earnings have all been released. So how would you assess the quality of those earnings compared to the last quarter of 2022?
Tony
Yeah, I think they’re deteriorating a bit. The earnings have been okay, some of them have been good. But we’ve really started to see companies’ abilities to raise price erode a bit. So we had this narrative in 2022 where companies would continue to push their price rises, in many cases double digits, onto their customers, and it wouldn’t really impact their volume sales. But customers right now are becoming pretty overburdened with cost. We see credit expanding in the US at higher rates, and consumers are just exhausted. So we saw that in some Q2 earnings. So if you look at kind of a mid working class restaurant called Cracker Barrel here in the US, they just put out their earnings last week, and they talked about how there was pressure on prices. Now through 2022, cracker Barrel had real pricing power. But they’ve seen not only pressure on their prices, but they’ve always also seen volume declines. And so they’re a really interesting bellwether for what’s happening in the middle of America.
BFM
Were there any sectors that surprised you this earnings season? In terms of the strength of their results or even conversely, the weakness of their results?
Tony
Yeah, I think financials surprised me a little bit because of what we saw in banks in March. I think I expected financials to do not as well as they did. So there was a little bit of a positive surprise there. IT didn’t really perform well. So I expected IT to perform a little bit better than they did. But I guess those would be my two highlights. Now, what’s happened is we’ve seen a lot of IT names run over the past few weeks even after their earnings were out. Some of that seems to be calming down a little bit though now.
BFM
Okay, Tony, can we talk about I like to talk about fixed income. The indications are that we are looking at an inverted yield curve, perhaps. Again, it doesn’t seem to go away, does it? Because trading in the yield curve was active, especially as a 30 year treasury, like the selling pressure in the five year. I’m just curious. This indicates that the bond market is pointing towards a recession, but yet the equity market doesn’t. Who’s right, who’s wrong?
Tony
Well, that’s really interesting. I think. Well, equities are not as high as they were in September of ’22, right? So we did see markets really turn down in Q3 and Q4 of ’22 and things have done really. I’m sorry, I meant September ’21. We have seen things recover since say, September of ’22. Right? So I think what the equity markets are looking at is the fact that we continue to have strong labor, that we continue to see inflation. The bond markets, they’re always pessimist bond markets, right? Bond markets are always expecting a recession. But this is the second inversion we’ve seen in a very short time. So I think what I have to keep in mind is we are coming from, and we’re about to say the word unprecedented, right? But we are coming from unprecedented levels of stimulus. So we are not going to have a traditional exit from that stimulus because it was so much because it was monetary and fiscal because it was so quick and all this other stuff. And so the tail on that has been slow to decline and I think both markets are seeing what they want in the data.
Tony
So can I say today which one is more right? Actually, I can’t. I think it’s probably somewhere in the middle. And what we’ve expected for some time is that growth in the middle of this year would slow, not be a recession, but slow pretty dramatically and then we would start to see growth accelerate again in Q4 of this year. So I know there’s a little bit of a caveat, but I kind of think they’re both right. I think equities price in expectations of revenue performance, I just think that’s going to be put off a little bit until Q4.
BFM
Tony, let’s turn our attention to oil. The US Strategic Petroleum Reserve (SPR) is at records low after drawing down 180 million barrels in 2022. So do you see the US. Biden administration replenishing this shortfall anytime soon?
Tony
Yeah, I don’t see that. I think it’s highly unlikely because typically the Secretary of Energy will announce plans to refill the SPR when they do it. And we haven’t seen any announcements saying, hey, we’re buying 50 million barrels or 20 million barrels or whatever. And so until we see that, I just don’t think that’s a realistic expectation. And so the OPEC price rise was the OPEC sorry, supply cut, although it was relatively small, was somewhat unexpected in that I believe that the Energy Secretary had hoped that supply would continue, and maybe with growth slowing, energy prices would decline. But since we saw the OPEC price cut or supply cut come in, we’ve seen crude prices come back a little bit. I think it’s not a perfect scenario for the Energy Secretary and for refilling the SPR.
BFM
Okay, but what does this then mean for prices? Is demand so weak that even these supply cuts and this is the second round of supply cuts in a few months, OPEC has done it, did it earlier on maybe a month or two ago. Is this really due to China not taking up the demand that markets originally anticipated?
Tony
Well, I think there are a number of factors. I’ll just say I think demand is probably not as strong as people hoped. I don’t necessarily think it’s weak. I think it’s not as strong as people had hoped. We do have kind of disappointment in China, but we also have strong growth in India, so they don’t necessarily balance each other out, but India is picking up some of the slack. But also keep in mind, we have a lot of unrecorded barrels and distillates coming from Russia. So that’s unofficial, say, consumption. Right. And it’s competing with other grades of crude oil. So until that’s reformalized or until sanctions are really enforced, I just think that it’s going to be really hard to understand where those markets are going and what an OPEC cut will actually do unless it’s a dramatic cut.
BFM
All right, thank you very much for your time. That was Tony Nash, CEO of Complete Intelligence, explaining as to why oil prices are still hovering where they are. Went up a little bit, but not significantly due to despite the fact that supply has been curtailed by OPEC Plus. So there’s some Russian oil floating around in the market.
BFM
Indeed. And it’s still way below the $80 per barrel.
BFM
That 120 at one time, I feel.
BFM
Like, yeah, that was early in the year. Some analysts said that there was still a chance for it to reach that far right, to reach that high. But I don’t see that trending that way. If you look at oil Brent crude this morning, $76.95, it is about 0.9% up from previous year, previous day, but still 8% down on a year to day basis.
BFM
Yeah. So not great. And something that’s not great is GameStop.
BFM
Okay.
BFM
It was such a hot meme stock that’s right. During COVID Remember that? There was no reason for it, it was loss making, and yet people plowed money into it thinking, okay, let’s bet against all the institutional fund managers.
BFM
So GameStop shares plunged more than 20% after the company announced that he has fired its CEO, Matthew Furlong, and appointed its board chairman, Ryan Cohen, as executive chairman, effective immediately. This was the same Day reported a revenue drop and a narrow loss in his fiscal first quarter compared to the year ago period. So GameStop has 4400 stores, bricks and mortar, with most of it in the US. And it reminds me a little bit of Blockbuster, where everybody is moving from bricks and mortar to online, and you’re selling games. So wouldn’t you be buying games online now?
BFM
I think that was part of how to say, confusion, right? When GameStop took off, its stock took off during the pandemic because especially since everyone was at home, the stores weren’t even open. So why was there so much, I guess, investor enthusiasm for this? It was really those retail stock, those stock trends that really took off during the pandemic. But sales are down for this quarter, both in US. And Canada. They are down by double digits. It dropped in Australia by 8.9%, but it did increase in Europe by 26%.
BFM
So saw a game stop shop in Dublin, I was like, hey, is this the meme stock that we talk about? Because it’s of course not here in Malaysia. Nonetheless, the stock is actually up 41% on a year to date basis. And I think I’m going to guess that the street really doesn’t like this name. I mean, it’s in structural decline, right? And I’m right, because actually there are only three analysts that cover this. Zero buys, one whole two sells at the moment. Now, let’s turn our attention to what is quite a familiar name, at least for me, because I grew up drinking this, eating it. Campbell Soup. They announced third quarter profits that were above street expectations on the back of multiple price hikes, with a 12% increase in average selling prices in the previous quarter.
BFM
Revenue rose 5% to $2.2 billion, in line with the company’s expectations. Adjusted earnings per share declined 3% year on year from seventy cents to sixty eight cents. These, however, bid analysts expectations of $0.64. So my favorite mushroom soup has gotten more expensive by the looks of it.
BFM
Everything has gotten more expensive in the shops, unfortunately. Everything. Yeah, but the stock is actually down close to 20% on a year to date basis. And let’s see, the analysts, do they like this name? Not really. Three buys, eleven holds, six sells. Target price for the stock, $52 last time, price during regular market hours is actually down four dollars and fifty one cents to forty six US dollars. Shaz, what’s your favorite flavor?
BFM
I have to say I’m with Mark on cream of mushroom soup. Right, can’t go wrong with that. Very traditional Campbell soup flavor.
BFM
You all are not drinking enough. That’s why the share price is where is probably.
BFM
Yeah, I need to stock up then.
BFM
But up next, we’ll be covering the top stories in the newspapers and portals this morning. Stay tuned. BFM 89.9 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.
In this podcast episode from BFM 89.9, the hosts discuss the latest updates on global markets and dive into the US debt talks. They are joined by Tony Nash, CEO of Complete Intelligence, who shares his perspective on the debt ceiling and its potential impact on the markets. Tony believes that a US debt default is unlikely and views the current concerns as overblown political maneuvering. He highlights that the debt ceiling issue arises regularly and is often resolved at the last minute, causing frustration among Americans.
The conversation then shifts to the state of the US economy, particularly the labor market. Tony notes that there is fatigue in jobs growth, with ongoing layoffs in various industries, including tech companies. The hosts also discuss the recent rise in the US April services PMI, indicating a shift from goods to services and suggesting continued growth in the services sector.
Nvidia’s quarterly results become the focus of the discussion, as the company outperformed expectations and experienced significant stock price growth. Tony explains that Nvidia is a key player in the AI infrastructure space and has benefited from the increasing adoption of AI and machine learning technologies. However, he cautions that the high valuation and potential impact of a recession on corporate infrastructure spending could affect Nvidia’s future performance.
The podcast concludes with a recap of Nvidia’s financial performance and analyst expectations, noting the positive sales figures and high target price. The hosts question whether a company involved in AI deserves the current forward PE ratio of 66 times.
Overall, this podcast provides insights into the US debt ceiling issue, the state of the labor market, and the performance of Nvidia in the context of the broader market trends.
Transcript
BFM
This is a podcast from BFM 89.9. The Business Station. BFM 89.9. It’s 7:06 A.M. On Thursday the 25 May. You’re listening to the Morning Run. I’m Shazana Mokhtar, with Wong Shou Ning and Mark Tan. In half an hour, we’re going to be discussing the outlook for Netflix and the US streaming services. But as always, we’re going to kick start the morning with a recap on how global markets closed overnight.
BFM
The markets are all red, probably thanks to the jitters surrounding the US debt talks. In the US markets, the Dow Jones was down 0.8%, S&P500 down 0.7%, and Nasdaq down 0.6%. Over here in the Asian markets, Nikkei down 0.9%, Hang Seng down 1.6%, Shanghai Composite down 1.3%, STI down 0.1%, and our own FBM KLCI down 0.1%.
BFM
All right, so for more insights on what’s moving markets we have on the line with us, Tony Nash, CEO of Complete Intelligence. Tony, good morning. Thanks, as always, for joining us. So let’s start with what seems to be keeping markets on tenterhooks. In recent commentary, though, you’ve opined that a US debt default really isn’t on the table. So why do you say that? And why are current concerns of a debt default overblown, in your view?
Tony
Yeah, so the debt ceiling literally happens every other year in the US. And it’s happened for the past 15 years. So I’ve said this many times. This is shameless partisan positioning intended to show politicians coming to the rescue of a crisis that they created themselves. So they’ll get media attention. Then at the last minute, probably after the deadline, they’ll miraculously find a solution when everything seems the most chaotic. So this is something that most Americans are really frustrated by. It’s like we know they’re not going to default. If they do, it’s ridiculous, and it’s just shameless partisanship. So are people here worried? To be honest, not really. I think a bunch of portfolio managers are being very careful in markets, but on a personal level, I seriously doubt that many people are all that worried.
BFM
So, putting aside the political shenanigans, of much greater importance to global markets is the state of the US economy, particularly the labor market. Is there a sense of fatigue in jobs growth or more room for expansion?
Tony
There’s definitely fatigue. If we look at the data since the end of COVID there’s a metric that the Fed…
Tony
Okay, we’re going to try and get Tony back to talk more about what’s happening with the US labor market. But as he said earlier about the debt ceiling, he’s taken a little bit of a, I guess, sanguine tone on it. He’s less worried that debt default will actually have long term implications. He thinks things will be resolved, just that it’ll take a lot of drama to get there.
BFM
Yeah, but the consequences are already being felt. I mean, I’m seeing this headline on Bloomberg, United States may be cut by Fitch on debt limit fight because US ratings have been placed on Watch Negative from Outlook Stable by Fitch. So the rating watch reflects the increased political partisanship that is hindering reaching a solution to race or suspend a debt limit despite the fast approaching, as we call it, X State. This is the first rating agency that has already given them some warning snakes, right? And once this happens, what this means is that the cost of borrowing is going to rise quite significantly on top of the fact that the interest rate in the US is already 5.2%. I mean, the Feds have raised it what, ten times since last year?
BFM
There’s a lot of moving parts to this picture, and I think there’s also discussion on what is it that other stakeholders in the US government can do if Congress can’t get its act together, what can the Treasury do? Can the Fed do anything? In any case, I think the Treasury will probably try to prioritize the debts that it owes, which means that some people will may not receive their bills. I think looking at Social Security and Medicaid and Medicare, hospitals, roads, who’s going to maintain all that?
BFM
Well, I do think that we have Tony back on the line. Tony, can you hear us?
Tony
Hi, guys. There you go. Sorry about that.
BFM
No worries.
Tony
On the debt ceiling. What’s interesting what’s happened is this week people in Congress asked Janet Yellen how she did her calculation on finding that X date. So it’s a kind of mysterious calculation and nobody knows. So people are trying to dig into that to understand when actually is the date, because nobody’s showing any math, nobody’s showing any data around it. And again, it seems like this is being hyped as a political ploy. So what you rightly point out about if it does come, the US government will have to prioritize payments. Right? And that’s fine. But again, voters and legislators don’t actually know how she’s coming up with that X date and a lot of people just don’t trust her.
BFM
Well, coming back to the point we were discussing earlier on the labor market, Tony, what’s your sense of how jobs is doing there?
Tony
Yes, jobs are in a rough spot. So there’s a metric called continuous unemployment claims and they’re at their highest level since the end of 2021. So I know that isn’t a long period, but stimulus is worn off, consumer credit levels are rising really fast, and tech companies are still laying off staff. So Verizon, a big telecom carrier here, just announced today that they’re going to be doing layoffs. So we’ve seen the Amazon and Facebook. Facebook yesterday announced another layoff. And so what’s happening now? That those initial layoff announcements were made to give a boost to stock prices. But now that that boost is largely expanded, people are simply not hiring. So they’re choosing not to hire for open jobs as a way to contain their workforce through just retirements and quits and that sort of thing.
BFM
Now, Tony, the US April services PMI rose from 55.1 from 53.6, surpassing the market expectation of 52.6. Isn’t this further evidence that at least in this sector, growth hasn’t been tempered by inflation or the rate hikes?
Tony
Yeah, well, certainly I think what it’s showing is an ongoing shift from goods to services. So during COVID everyone loaded up on goods. For the past twelve to 18 months, we’ve seen a trade off of goods purchases to services purchases. That services PLI will likely continue for the next two to three months, partly because the summer here in the US is holiday season, it’s vacation season, and so services will continue to thrive through that period. So we would expect a services PMI decline, maybe not necessarily contraction, but at least decline in Q3, probably mid Q3.
BFM
Okay, Tony, can we talk about one results, one set of results that came out last night, and that’s Nvidia. Right. They really beat street expectations up 20 over percent stock price. This is one tech stock that has done exceptionally well, I think a lot to do with AI. Are you bull on this name?
Tony
Well, Nvidia has done very well, and definitely top line growth surpassed expectations. So Nvidia is to the AI boom, which Cisco was to the Internet boom 20 plus years ago. Right. So they’re selling the infrastructure for AI and machine learning and a lot of these new capabilities, and people need them. And that same infrastructure is used for crypto mining and other things. So they planned extremely well, and they’re kind of reaping the profits of that right now. So as long as we continue to see companies adopting and expanding AI and machine learning capabilities, the value in Nvidia should be there. I don’t necessarily want to make a prediction on the stock price where it is right now. It’s a pretty high price in terms of valuation and other things. But I think in terms of corporate performance, it’s certainly strong and will remain strong.
BFM
So do you think any stock that has an edge or have first mover advantage when it comes to AI deserves a premium? Just pretty much like Tesla when it comes to electric vehicles?
Tony
Well, I think when you’re looking at a stock value, you have to look at the forward expectations. And so do you believe, or does an investor believe that that company that provides either AI software or AI hardware or something like that, do they believe there’s growth in that area? And if they believe there’s growth, so what’s the multiple on that growth and how quickly will it come? That’s how people come up with those price expectations.
BFM
Yeah, because when I look at Nvidia, the Bloomberg showing a PE of 66 times forward PE. So it looks like markets are really expecting a lot of growth.
Tony
Oh, yeah, they do. And I think part of the problem is people really load up on hardware first. And so that growth may very well continue at that same pace. But it really all depends on what happens to corporate infrastructure spending. And if that corporate infrastructure, meaning IT infrastructure spending continues, then it’s really good news for Nvidia. If we do hit a recession, then corporate infrastructure spending could be hit and that could hit Nvidia in a negative way.
BFM
Tony, thanks as always for the chat. That was Tony Nash, CEO of Complete Intelligence, talking to us about some of the trends that he sees moving markets in the days and weeks ahead. Capping the conversation there with just some thoughts on how Nvidia has performed. And we do have their results coming out overnight, right? They did really well, performing well beyond Wall Street expectations. Their sales in the three months ending July will be about $11 billion, which is 53% higher than what analysts were foreseeing.
BFM
Revenue for the first quarter was $7.2 billion versus 6.5 expected, while earnings per share was $1.9 adjusted versus the $0.92 expected.
BFM
Okay. Sorry.
BFM
Net income was $2.5 billion versus $1.62 billion from the same period last year.
BFM
Okay. I’m so excited to tell you how many analysts cover this. Well, a lot. 44 buys, 13 holds. No sells at all. At all. Okay. So consensus target price, $307, which is already very, very close to the regular market hours share price, which was down one dollars. And but I know aftermarket hours, the stock boomed, shattered by ceiling by going up by 20%. So I won’t be surprised if a lot of the analysts actually rush out to upgrade. But the ceiling to me is the fact that PE forward PES are 66 times. Do you think a company involved in AI deserves 66 times? Which was my question for Tony.
BFM
That’s right. And I think AI is going to be driving a lot of investor interest in these kinds of stocks. But let’s turn to another stock in the tech sector that hasn’t been doing so well or hasn’t done so well recently. Then that’s snowflake. Their sales outlook for the current quarter fell short of analyst expectations, and this did lead to a share downturn. Snowflake software helps businesses organize data in the cloud, and their quarterly revenue is expected to be growing at 34%, but well below Wall Street expectations.
BFM
Snowflake also cut its outlook for the fiscal year, saying product revenue will be about $2.6 billion versus 2.7 it predicted early in March. Analysts had feared that a slowdown demand for cloud services would dance. Snowflake’s pay as you go model.
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Okay.
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But still quite popular with analysts. 29 buys, 13 holds, two sells, albeit not as popular as Nvidia. Consensus target price for the stock, $188. Last time, priced during regular market hours, it was up all right at 718 in the morning.
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We’re going to take a quick break, but we’ll come back to cover more top stories in the newspapers and portals this morning. Stay tuned BFM 89.9.
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