This podcast was first and originally published by BFM 89.9. Find the original link at https://www.bfm.my/podcast/morning-run/market-watch/us-economy-markets-inflation-rates-fed-loans
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…