Our CEO and founder, Tony Nash, recently joined the BFM Podcast show called Morning Run to discuss various topics, including the latest US CPI figures, the Fed rates, and the global GDP forecast. You can listen to the full podcast episode on the BFM website here: https://www.bfm.my/podcast/morning-run/market-watch/us-cpi-figures-fed-rates-global-gdp-forecast-svb.
In the latest episode of BFM’s Morning Run, CEO of Complete Intelligence, Tony Nash, discusses the US Consumer Price Index (CPI) numbers, which have been interpreted differently by different market analysts.
While the headline CPI showed that inflation is falling, the core CPI shows that inflation is still rising. The Fed has made it clear that core CPI is what they are monitoring, and market analysts predict that interest rates will continue to rise.
The minutes of the Fed also suggest that there are concerns about a possible banking crisis which may lead to tighter credit conditions, affecting households and businesses.
Commercial real estate is also being watched closely as there are fears that sales and office space may become vacant, creating further problems in the real estate sector.
Although the IMF has downgraded global GDP growth forecasts to the lowest level in 30 years, driven by high-interest rates and the banking crisis, Nash suggests that they may be optimistic and that GDP in the US and Europe may underperform. The strength of the labor market and the lack of negative GDP readings make it difficult to forecast a recession.
Transcript
BFM
This is a podcast from BFM 89.9. The Business Station. BFM 89.9. Good morning. It’s seven 6 A. M. On Thursday the 13 April. You’re listening to the Morning Run. I’m Shazana Mokhtar with Wong Shou Ning and Philip See. In half an hour, we’re going to discuss what’s affecting the price of gold. But as always, we’re going to kick start this rather cloudy morning with a look at how global markets closed.
BFM
Overnight, US markets all closed in the red. The Dow was down 0.1%, S&P 500 down 0.4%, and a Nasdaq was down 0.9%. Over across in Asia, it was mixed. The Nikkei was up 0.6%, as well as the China Composite up 0.4%. But unfortunately, Hang Seng was down 0.9%. Singapore’s STI down 0.4%. And back home, FBM KLCI was down 0.1%.
BFM
For some thoughts on where international markets are heading, we have on the line with us Tony Nash, CEO of Complete Intelligence. Good morning, Tony. Thanks as always for joining us. So we have to start with US CPI numbers that came out last night. What did you make of them and how do you think this will factor in the Fed’s monetary policy decision making at their next meeting?
Tony
Yeah, today’s CPI, really the perception was all in the eye of the beholder. So the headline CPI showed that inflation is falling. So those people who want the Fed to halt or to pivot to a more loose policy, they love seeing that and they want to declare victory over inflation. The core CPI shows that inflation is still rising. In fact, it accelerated a bit on last month. So the people who are looking at core are saying the Fed is going to continue to raise interest rates and continue to tighten. So the Feds made it pretty clear that core is what they’re monitoring. So markets are slightly down in the US this week because people are digesting this report and kind of coming to the fact that, you know, the, the Fed’s likely to raise on May 3 when they meet. Having said that, you know, CPI is only one of the indicators coming out this week. We start having bank earnings on Friday and we have some globally significant banks. So depending on the earnings and the reports of those banks, we’ll know more about what the Fed is likely to do once we hear the news on Friday.
BFM
And I guess then the question and consideration is, what do you make of the Fed minutes with officials sounding a little concerned about the bankering crisis, since it would lead to tighter credit conditions, impacting households and businesses? How will that frame the decision by the Fed them?
Tony
Yeah, those notes in the minutes were from kind of lower level Fed staff or mid level Fed staff, not from the Fed governors themselves. So it’s kind of a side note. It’s not necessarily the main thinking of the governors. So the voting members really have to figure out how to take inflation down.
Tony
So I think one of the things that will start to become louder in the coming weeks is commercial real estate. We’re starting to see some real problems in the commercial real estate sector in the US as buildings are vacant. We saw salesforce.com yesterday announced that they will completely abandon their building in San Francisco. They’re the largest employer and the largest commercial real estate building in San Francisco, and they’re abandoning their building. So commercial real estate, we expect to see problems, more problems in the coming months.
Tony
And so whether it’s solid banks or bank failures, whether it’s commercial real estate finding some, getting a break or not, I think there are several factors coming up as we’ve started to see interest rates rise. I think the Fed will be watching them very closely in the next two weeks.
BFM
Okay, I have a conundrum, Tony, because the Fed minutes, albeit written by junior officials, said forecast a mild recession starting later this year. But yet the job market still remains so robust. Is it possible to have a recession yet have almost full employment?
Tony
Well, that’s the problem. And nobody’s really forecasting a negative GDP reading. So if we continue to have strong or even moderate labor markets and we don’t have dramatically negative GDP readings, then it’s not really a recession. Right? And that’s where you get these kind of muddled definitions of things like recessions within the bureaucracy of the Fed. Whereas the Fed governors and the voting members, they’re accountable to public statements. So they’re pretty critical of when there will be a recession and when there won’t be a recession.
Tony
So you’re absolutely right to point out the strength of the labor market. Although it is weakening slightly, it’s not really weakening that much. So it is with tech companies. There have been layoffs with tech companies and so on, but we haven’t really seen it affect mainstream companies. And only when that happens will we start to really see the economy break.
BFM
Meanwhile, the IMF has downgraded global GDP growth forecasts to its lowest level in 30 years, driven by high interest rates and banking crisis. How much do you agree with their conclusions?
Tony
I think they’re a little bit optimistic. Our view is that GDP, at least in the US and Europe, will generally underperform the IMF’s downgraded expectations. Our view at Complete Intelligence is that we’re looking at GDP growth in Q2 and Q3, that’s under 1%, and that would put the overall annual growth right around 1%, maybe slightly over. I think IMF is still at 1.4, 1.6 or something for the US. Europe has struggles similar to the US. So we don’t really expect much growth in the US or Europe.
Tony
It’s not just interest rates, it’s access to credit that is affecting both consumers and businesses. We’ve seen small business reports both in Europe and the US say that small companies are having a lot of difficulty with access to credit. So none of these are expansionary indicators. None of these are good news, especially in developed markets. So I think the IMF is a little bit optimistic here, and I think when they issue their next report, I think they’re going to downgrade their forecasts even more.
BFM
But perhaps the confidence is in Asia, particularly with China. The question, though, is that do we expect the recovery of China post pandemic to mirror exactly what happened with the US and EU when they reopened a couple of years back?
Tony
Yeah, I think the IMF expects China to grow at 5.3 or something like that, and we really haven’t seen China take off that much yet. Of course things have come back, but I think at least a lot of people in Western markets expected kind of a rocket ship economy in China upon the reopen, and we really haven’t seen that. So will it grow 5%? Maybe, especially if we consider how muted China’s growth was last year, although I think it was overstated. But if China is suffering, so is Southeast Asia, and so we really have to be careful of expectations there. And Asia may be a star. India may do actually fairly well this year, but I still don’t think Asia will really perform at its potential even this year. I think we’re looking at ’24 before things really start to get back to kind of a level of comfort.
BFM
So, Tony, I want to bring the conversation back to the US because you alluded to this result season starts tomorrow for your big banks all report, I do believe, JPMorgan. What are your expectations in terms of earnings for this first quarter?
Tony
I think they’ll be well, they’ll be down on last year for sure. I think they’ll be mediocre. I don’t think they’ll be terrible. This is for the big banks, right? For regional banks and smaller banks, I think they’ll be very difficult because small and medium banks have had trouble keeping depositors. They’ve had trouble with their duration, which we’ve talked about before, meaning they hold very low interest rate government bonds, yet they lend relatively long term. And so they have loans out that are way below the interest rates today, and they have to hold those loans so they can’t pay for their operation. They can’t keep up with inflation based upon a two or three or 4% loan in the US. So small and regional banks are going to have a really tough time this quarter. And I think we’re fortunate that the Fed and the treasury have opened up new vehicles for them to access financing. I think we’re not out of the woods yet with those smaller banks, but I think for the global banks, the systemically important banks, I think they’ll be, again, worse than last year, but I think they’ll be okay.
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 mean, for me, I think the interesting thing is what is the Fed going to do now with this latest CPI print? And for Tony, he’s also kind of mixed in his view, right, whether there is going to be a definitive decision. And then adding to the mix is the whole SDB crisis, the banking confidence crisis. So that’s the big question mark in my view. Does it muddy the waters for the Fed?
BFM
Well, markets are pointing, if you look at interest rate swaps right at this moment, pointing to still a 25 basis points hike in this May meeting and the terminal rate pretty much close, but close looking at about 5.2%. I think that hasn’t changed at this juncture whether earnings season will actually pause. Some negative sentiment on this outlook, we will see. But I think pretty much if you look at the street, they really adjusted their numbers downwards. The expectations are that Q1 numbers, not going to be great. And as long as market doesn’t have any major surprises, you know what, everything will be hunky dory. The cup will suddenly be half full, not half empty.