Japan's Concern Over China Rare Earth Curbs, Credit Woes Hit Wall Street | Bloomberg Daybreak:…
Summary
Japan's Economic Concerns: Japan's finance minister expressed serious concern over China's export controls on rare earth minerals, emphasizing the need for coordinated G7 action to mitigate impacts on global supply chains.
US-Japan Trade Relations: The US-Japan trade relationship is significantly impacted by tariffs, particularly in the auto industry, with Japanese automakers benefiting from increased market share due to their efficiency in hybrid technologies.
Monetary Policy in Japan: The Bank of Japan is expected to raise interest rates by 25 basis points late this year or early next year, contingent on real wage growth, which is crucial for sustained economic improvement.
Japanese Equities Outlook: Despite short-term high valuations, Japan's equity market presents long-term opportunities due to improving GDP growth and corporate profit guidance, alongside better capital allocation policies.
US Credit Market Concerns: Recent fraud-related charge-offs by regional banks have raised concerns, though analysts see these as isolated incidents without systemic risk, amidst a generally stable credit market.
Federal Reserve Rate Policy: Divergent views within the Fed suggest potential for further rate cuts, with some advocating for larger cuts due to economic risks from the US-China trade tensions.
AI and Semiconductor Sector: The AI trade continues to show strong momentum, supported by robust capex and revenue growth, although future profitability and debt issuance remain areas to watch.
Gold and Economic Indicators: Gold prices have reached record highs, driven by weaker dollar trends, central bank reserves, and persistent inflation concerns, reflecting broader economic uncertainties.
Transcript
[Music] Bloomberg Audio Studios, podcasts, radio, news. Welcome to the Daybreak Asia podcast. I'm Doug Krnner. We are well aware of how markets reacted to Beijing's move on export controls for rare earth minerals. Well, political leaders are taking notice as well. Today on the sidelines of the meetings of the IMF and World Bank, Japan's finance minister voiced serious concern and he stressed the importance of coordinated action from G7 nations to avert a negative impact on global supply chains. For a look now at Japan and how it's being impacted by the US China trade war, I'm joined by Shentaro Takawuchi who is portfolio manager at Matthews Asia. Shentaro joins us from San Francisco. Thank you for making time to chat with me. Let's begin with a little bit of exploration here as to how Japan is being caught up in the USChina trade war. Can you give me some perspective? >> Sure. So with regards to the tensions between US and China, um unfortunately the new reality is that uh the one way of globalization is at least slowing if not reversing. meaning that the capital expenditure uh of manufacturing activity across the world would be inefficient uh than before. Uh you can no longer make everything at one uh area and export it uh globally. Um in that way I think we believe that uh Japanese uh manufacturers uh will actually benefit from that increase of capital expenditure um coming from I would say less efficient uh capex spending. >> So I want to change gears because we are hearing that the Trump administration is poised to ease some tariffs on the US auto industry. We are being told that the commerce department is set to announce a 5-year extension. This would allow automakers to reduce what they pay in tariffs on imported car parts. Now, we both know that the Trump administration has been in the process of redefining US trade relations largely through the use of tariffs and Japan has clearly been impacted a great deal. Steel, yes, but particularly autos. Give me your sense of what's going on on the ground in Japan as it relates to US trade policy, especially for the car makers. Yes, I think uh regarding US and Japan, the most the single most important industry uh for the Japanese export sector uh is in autos. um given that how many people are actually employed uh in Japan and um encouragingly that uh Japan and uh the US has reached a deal uh with regards to the tariff rates and um also another thing that is benefiting uh from for the Japanese automakers is uh they are actually increasing market share as a result of that uh given their efficiency in um in their hybrid technologies. >> Let's pivot to monetary policy in Japan. Governor UEA has indicated that the BOJ will continue to tighten if the BOJ has confidence in achieving its economic outlook. Now, we know that inflation is obviously a big problem now and I'm curious to get the House view at Matthews Asia when it comes to predicting the next step for the BOJ. >> Yes. So our base scenario is a 25 basis point uh raise uh sometime late this year or early next year um and then put on hold for uh at 75 basis points uh for a while. Uh the reason why I say this is there are uh shoots of uh real wage growth happening in the larger corporate space. Um hopefully that will trickle down to theme which is 99% of all the corporates in Japan. Um and Governor Weda is really looking at the real wage growth to happen to have a sustained uh pace of raising rates but um basically our case is a 25 basis points and put on hold for the time being. >> So how do you expect the the market to continue performing? I mean the equity market in Japan is very close to record highs. We're not quite there. We're seeing a little bit of weakness actually in the Friday morning session. What is your outlook for for Japanese equities? Yes, in the very short term um Japan market is trading at 16 times for 12 uh month uh price to earnings uh which is in the high end of a 10-year range. Uh it is a fact that some thematic fields such as defense and AI related names are trading at all-time high valuations. However, mid to long term, uh we see opportunities for Japan equities as an asset class mainly because one um nominal GDP growth which we view as a proxy to domestic topline growth is starting to gain traction. So, Japan lacked meaningful nominal GDP growth for nearly 30 years. And additionally, an adjustment of uh overly conservative tariff impact of Japanese corporate profit guidance for this year, earnings revisions are starting to improve. And uh secondly um lower return on equities compared to US and Europe uh which have capped Japan valuation levels is starting to see improvement via a margin improvement as well as better capital allocation policies. uh unwinding cross shareholdings have been um have been happening but still 10% of outstanding is held uh by the corporates and by bringing that down towards zero we'll have meaningful upward uh pressure in the return on equities uh hopefully leading to the valuation expansion and third uh but not least um it is not a crowded trade um Japan despite its relatively stronger performance it is still common underweight among global investors and it's very far from a crowded trade. Uh we don't expect that US exceptionalism to reverse overnight. Uh but we still see a meaningful gap between opportunities that the Japan equities have and investors real positioning. >> Speaking of positioning, maybe we can move into the political environment right now in Japan. There's been a lot of volatility. I think we can agree on that much. Son A Takahichi appeared as though a couple of weeks ago she was set to become the first female prime minister of Japan. Is that very much in doubt now? Can you give me a sense of what Matthews Asia is expecting on the political front? >> Sure. So this past few weeks was full of surprising outcomes. uh even like when Takahuchi got elected uh Kisumi was initially the most favored to win the LDP leader race but in the end Takayichi won the runoff in the end and then K suddenly withdrew from the 26-year outstanding coalition and this past week has been a scramble of all party leaders meeting each other to secure the majority and as of today October 17th morning in Asia uh LDP and Japan Innovation Party IEN the second largest opposition party is currently in talks for a possible coalition alliance. So the possibility of Takahayi becoming prime minister came down after the uh break up of LDP come coalition but came back up. Uh given that if LDP is coalitions um happen it will bring the maximum total seats in the lower house to 231 which is only two short of majority and lower house of 120 which is only about five shy of of majority. But again, nothing is certain until the diet vote to elect the next prime minister uh which is scheduled to be held on 21st of October. So our current view is that LTB is coalition if that happens along with a possible collaboration with other parties for selected uh legislation legislation uh will likely involve uh fiscal expansionary policies uh which we view positively from a domestic demand perspective. Um Isan uh has been calling for lower uh social insurance premium for working generations to uh boost household income. Uh other parties some parties are um advocating for raising income tax threshold uh abolishing provisional gasoline and diesel taxes. So th these areas and other uh areas of possible change. uh but again you know real wage growth is really critical for domestic consumption as well as uh normalization of uh BOJ rate policies. >> Okay. So that's what your expectations would be for a prime minister Takahuchi in terms of the domestic economy in Japan. Do you expect should she become prime minister that the relationship with the United States would shift in in a meaningful way? >> Yes. So I I think the base case is that uh US and Japan continues to be an important uh ally and uh they're working together. Uh Takayuchi um was very close to uh Prime Minister Abbe uh whom Abbe was very close to uh President Trump. Uh so I think on a relative basis um I think Japan is in a good situation uh between the two countries of US and Japan. >> Shentaro we'll leave it there. Thank you so very much for joining us. Shentaro Takawuchi who is portfolio manager at Matthews Asia joining from San Francisco here on the Daybreak Asia podcast. [Music] Welcome back to the Daybreak Asia podcast. I'm Doug Krer. The equity market in the US retreated today on worries over credit quality. We had two regional banks disclosing sizable charge offs related to alleged fraud. Zans Bank Corp. and Western Alliance Bank Corp. both said they were victims of fraud on loans made to fund investments in distressed commercial mortgages. Now, analysts were saying this seems to be kind of a an isolated case. Nothing here to suggest systemic risk. For a closer look now, I'm joined by Jeff Palma. He is head of multi-asset at Cohen and Steers. Jeff joins us from here in New York City. Thank you so much, sir, for making time to chat with me. Can we begin with the story on credit? Yesterday, we heard from Jamie Diamond, obviously the head of JP Morgan Chase. He seemed to issue this kind of ominous warning about credit risk with some of the high-profile collapses that we have seen, two in particular. Diamond said, "When you see one cockroach, they're probably more." What What do you think of what he had to say yesterday and what unfolded today? >> I I think as you say, Doug, it's an interesting combination the timing of these things. Jamie Diamond's warning, the first brand's uh event a couple of weeks ago and and then these today. What's interesting is it comes against a backdrop where in general um credit markets have been very sanguin. Spreads are very tight. People have been very comfortable with how growth has has behaved and default rates have been very very low. It does seem like it's isolated and uh idiosyncratic as they say. Um, but you know, there have also been signs that the lower end of the consumer spectrum is weak or has been weakening. I think it fits in with some of the narrative about weaker unemployment, uh, weaker, uh, employment numbers. And so, we'll just sort of have to see how this plays out. I agree. So far, uh, it doesn't look systemic, though. >> So, we had some Fed speak today. Chris Waller, the Fed governor, was saying the policy makers can keep lowering rates in quarter point increments because the labor market really has been faltering and it needs support. But then we heard from Fed Governor Steven Myron and he was advocating for a larger cut. He said this flare up that we have seen lately in the US China trade war is created more downside risk for the economy. He wants to see a halfp point cut. And then when you put into context what we saw in the regional banks today, I think the KBW regional bank index was down about 6.8%. Do we need to consider the fact not only that the Fed is going to continue to ease, but we may need a larger rate cut? >> Yeah. Well, this is the the tension uh that's happening within the the Fed. I mean, Steven Myin now in his short tenure has made it very clear that he thinks rates need to be substantially lower. most of the rest of the board uh thinks that rates only need to be, you know, lowered gradually. By the way, some, as we saw in the last dot plot, you know, don't think rates need to be lowered at all, maybe even need to go higher at some point. And, you know, it sort of gets to the the current situation in the economy. Some some call it the K-shaped economy, right? Where parts of the economy are doing really well. That would be high-end consumers and things buoyed by capex spending. And then there's everything else which is really struggling. And it's pretty clear that the employment backdrop has been weakening. Uh and it doesn't help, you know, the tariff news in general is pretty negative for the employment backdrop. You put that on the other on one hand and on the other hand, uh inflation hasn't moderated and in fact seems pretty sticky. So our own view is that you get a couple of rate cuts uh but that might be it uh barring any much deeper weakness in the economy. >> So what do you make of the behavior of the bond market? We had yields at the short end. And I'm looking at the 2-year that was down about eight basis points or so in New York, the lowest I think since around 2022. How do you evaluate the price action in the bond market? >> Uh it's a big move and um you know it's certainly consistent with with a view that bond markets are pushing for more rate cuts, right? Certainly more aggressively than that narrative that I just uh talked about from our you know from our side and uh same you know from Waller's view. seems to push more towards people getting concerned about growth. What's odd about it for me is if you really believe a weak growth backdrop, you would expect equities to be a bit weaker. Now, maybe if financials are starting to to tell that story, you're seeing some of it, but you know, you're certainly not seeing it more broadly within risk asset markets. The other thing that we've been dealing with here in terms of market action, concern about uh more tension in the US China trade relation today as part of the uh World Bank IMF meetings that are going on in Washington. We heard from Japan's finance minister. He seemed to voice a lot of concern here, serious concern over China's latest export controls when it comes to rare earth elements. and he said that really it's important now for some type of coordinated action from G7 nations to avert any type of negative impact that this may have on global supply chains. So it's not just from the US side. Other countries are beginning to express concern about the way in which China is dealing with the United States and how that may impact other countries and other markets. Are we perhaps flirting with something that could turn a lot more serious? Um I mean my sense here is that it's more likely people kind of laying out very uh wide if you like bid ask uh in terms of a negotiation policy right President Trump is kind of laying one side a very aggressive tariffs potentially 100% which is highly highly unlikely and equally on the other side I think China is trying to play its card uh you know which it views very strongly as being rare earths I I think and uh you know this would just sort of you know uh you know kind of lead us likely towards something more moderate something in the middle because I think it doesn't really as you say suit anybody uh including not just the US and China but kind of the broader world economy to have a kind of a a massive flare up that that results in kind of a full meltdown of global trade. >> So obviously rare earths are critical when you look at semiconductor production. We had uh some pretty strong numbers from TSMC overnight. Revenue guidance was also increased a bit. And the day before ASML, the Dutch chipm equipment firm, reported its highest bookings for its cuttingedge extreme ultraviolet tools since the fourth quarter of 23. So there seems to be a lot of positivity still around the AI trade. How do you feel about this right now? Are we late stage or is there still a lot more in the way of upside? >> Yeah, I mean there's there's clearly a lot of momentum there as as I mentioned before there you know that's been a a key underpinning of of growth here in the US. Uh my best sense here is that there's a good vis there's good visibility for capex in the I AI trade generally. Uh you know certainly for the next year maybe even beyond that. The good news is there's uh there's still a lot of cash funded capex right. So, it's all being funded or largely being funded out of free cash flow. Um, and we're still seeing great growth. We're still seeing uh people be quite positive about the outlook for revenue generation to to kind of follow. Um, I think where the questions start to play out over the next 12 to 24 months is one, do we get the revenue handoff to help uh protect free cash flow? Uh, do we need to start seeing uh, you know, companies issue debt? we've only seen very very small pieces of that and ultimately can there be kind of profitability that comes from it. So I think it's too soon to to completely freak out about it but there's enough questions on the horizon um you know to to kind of keep an eye on on exactly how it would all play out >> which makes this rally that we have seen in gold all the more interesting. You'd think that this is some type of haven right given a lot of the risk that may be on the horizon. We broke above in the spot price in New York trading $4,300 an ounce. So, we're clearly at records. What does this mean to you? >> Gold's been uh amazing and and equally so has silver. Um they've certainly kind of bug, as you say, it's sort of uh if you view it through the lens of a risk trade, uh it's sort of inconsistent with what we're seeing in in other markets. I think there's a a couple of different avenues, though. One is the dollar has definitely been weaker this year. Uh and I think in general and when you kind of link this to some of the China questions, there's definitely questions about um reserve currency status and the strength of kind of broad fiat currencies and I think that that's helping to uh support uh gold central bank reserves of gold have certainly increased and so that that's probably a piece as well. Uh and then the other piece is that you know as I said before inflation's been a little bit sticky. uh we're not getting down towards the Fed's target of 2% and our view is that we're not going to we're going to hang closer to 3% going forward. And so maybe there's a little bit of kind of an inflation element uh under the hood there as well. I don't think that independently any one of those things helps to fully explain the move that we've seen in precious metals, but maybe collectively it helps to explain the direction of travel. >> So we had the Russell 2000 down about 2% today. maybe some concern about the strength of the economy. Before I let you go, do we are we flirting with a recession potentially? >> So, we don't think so. Uh we think that the economy is going to remain fairly resilient. Um but, you know, there is definitely this case that, you know, the the the stool that we've been, you know, supporting the economy with is really kind of two legs. It's this one of, you know, some consumers and some capex. I think what we really need to see is that that support broadens out over the course of the next year. That is some of the objective of lower interest rates. Um it's some of the objective of uh some easier fiscal policy. Keep in mind we are going to get some fiscal stimulus through the the bill that was passed earlier this year, the budget bill that was passed earlier this year. Um those sorts of things should help the underlying economy. But if you kind of bring this conversation full circle, you know, if there's some are some underlying concerns about trade and employment and credit, you know, those would probably be the areas that that cause things to slow down more quickly. >> Okay, Jeeoff, we'll leave it there. Thanks so much. Always a pleasure. Jeff Palma is head of multiasset at Cohen and Steers joining us from here in New York City on the Daybreak Asia podcast. Thanks for listening to today's episode of the Bloomberg Daybreak Asia Edition podcast. Each weekday we look at the stories shaping markets, finance, and geopolitics in the Asia-Pacific. You can find us on Apple, Spotify, the Bloomberg Podcast YouTube channel, or anywhere else you listen. Join us again tomorrow for insight on the market moves from Hong Kong to Singapore and Australia. I'm Doug Krer, and this is Bloomberg. [Music]
Japan's Concern Over China Rare Earth Curbs, Credit Woes Hit Wall Street | Bloomberg Daybreak:…
Summary
Transcript
[Music] Bloomberg Audio Studios, podcasts, radio, news. Welcome to the Daybreak Asia podcast. I'm Doug Krnner. We are well aware of how markets reacted to Beijing's move on export controls for rare earth minerals. Well, political leaders are taking notice as well. Today on the sidelines of the meetings of the IMF and World Bank, Japan's finance minister voiced serious concern and he stressed the importance of coordinated action from G7 nations to avert a negative impact on global supply chains. For a look now at Japan and how it's being impacted by the US China trade war, I'm joined by Shentaro Takawuchi who is portfolio manager at Matthews Asia. Shentaro joins us from San Francisco. Thank you for making time to chat with me. Let's begin with a little bit of exploration here as to how Japan is being caught up in the USChina trade war. Can you give me some perspective? >> Sure. So with regards to the tensions between US and China, um unfortunately the new reality is that uh the one way of globalization is at least slowing if not reversing. meaning that the capital expenditure uh of manufacturing activity across the world would be inefficient uh than before. Uh you can no longer make everything at one uh area and export it uh globally. Um in that way I think we believe that uh Japanese uh manufacturers uh will actually benefit from that increase of capital expenditure um coming from I would say less efficient uh capex spending. >> So I want to change gears because we are hearing that the Trump administration is poised to ease some tariffs on the US auto industry. We are being told that the commerce department is set to announce a 5-year extension. This would allow automakers to reduce what they pay in tariffs on imported car parts. Now, we both know that the Trump administration has been in the process of redefining US trade relations largely through the use of tariffs and Japan has clearly been impacted a great deal. Steel, yes, but particularly autos. Give me your sense of what's going on on the ground in Japan as it relates to US trade policy, especially for the car makers. Yes, I think uh regarding US and Japan, the most the single most important industry uh for the Japanese export sector uh is in autos. um given that how many people are actually employed uh in Japan and um encouragingly that uh Japan and uh the US has reached a deal uh with regards to the tariff rates and um also another thing that is benefiting uh from for the Japanese automakers is uh they are actually increasing market share as a result of that uh given their efficiency in um in their hybrid technologies. >> Let's pivot to monetary policy in Japan. Governor UEA has indicated that the BOJ will continue to tighten if the BOJ has confidence in achieving its economic outlook. Now, we know that inflation is obviously a big problem now and I'm curious to get the House view at Matthews Asia when it comes to predicting the next step for the BOJ. >> Yes. So our base scenario is a 25 basis point uh raise uh sometime late this year or early next year um and then put on hold for uh at 75 basis points uh for a while. Uh the reason why I say this is there are uh shoots of uh real wage growth happening in the larger corporate space. Um hopefully that will trickle down to theme which is 99% of all the corporates in Japan. Um and Governor Weda is really looking at the real wage growth to happen to have a sustained uh pace of raising rates but um basically our case is a 25 basis points and put on hold for the time being. >> So how do you expect the the market to continue performing? I mean the equity market in Japan is very close to record highs. We're not quite there. We're seeing a little bit of weakness actually in the Friday morning session. What is your outlook for for Japanese equities? Yes, in the very short term um Japan market is trading at 16 times for 12 uh month uh price to earnings uh which is in the high end of a 10-year range. Uh it is a fact that some thematic fields such as defense and AI related names are trading at all-time high valuations. However, mid to long term, uh we see opportunities for Japan equities as an asset class mainly because one um nominal GDP growth which we view as a proxy to domestic topline growth is starting to gain traction. So, Japan lacked meaningful nominal GDP growth for nearly 30 years. And additionally, an adjustment of uh overly conservative tariff impact of Japanese corporate profit guidance for this year, earnings revisions are starting to improve. And uh secondly um lower return on equities compared to US and Europe uh which have capped Japan valuation levels is starting to see improvement via a margin improvement as well as better capital allocation policies. uh unwinding cross shareholdings have been um have been happening but still 10% of outstanding is held uh by the corporates and by bringing that down towards zero we'll have meaningful upward uh pressure in the return on equities uh hopefully leading to the valuation expansion and third uh but not least um it is not a crowded trade um Japan despite its relatively stronger performance it is still common underweight among global investors and it's very far from a crowded trade. Uh we don't expect that US exceptionalism to reverse overnight. Uh but we still see a meaningful gap between opportunities that the Japan equities have and investors real positioning. >> Speaking of positioning, maybe we can move into the political environment right now in Japan. There's been a lot of volatility. I think we can agree on that much. Son A Takahichi appeared as though a couple of weeks ago she was set to become the first female prime minister of Japan. Is that very much in doubt now? Can you give me a sense of what Matthews Asia is expecting on the political front? >> Sure. So this past few weeks was full of surprising outcomes. uh even like when Takahuchi got elected uh Kisumi was initially the most favored to win the LDP leader race but in the end Takayichi won the runoff in the end and then K suddenly withdrew from the 26-year outstanding coalition and this past week has been a scramble of all party leaders meeting each other to secure the majority and as of today October 17th morning in Asia uh LDP and Japan Innovation Party IEN the second largest opposition party is currently in talks for a possible coalition alliance. So the possibility of Takahayi becoming prime minister came down after the uh break up of LDP come coalition but came back up. Uh given that if LDP is coalitions um happen it will bring the maximum total seats in the lower house to 231 which is only two short of majority and lower house of 120 which is only about five shy of of majority. But again, nothing is certain until the diet vote to elect the next prime minister uh which is scheduled to be held on 21st of October. So our current view is that LTB is coalition if that happens along with a possible collaboration with other parties for selected uh legislation legislation uh will likely involve uh fiscal expansionary policies uh which we view positively from a domestic demand perspective. Um Isan uh has been calling for lower uh social insurance premium for working generations to uh boost household income. Uh other parties some parties are um advocating for raising income tax threshold uh abolishing provisional gasoline and diesel taxes. So th these areas and other uh areas of possible change. uh but again you know real wage growth is really critical for domestic consumption as well as uh normalization of uh BOJ rate policies. >> Okay. So that's what your expectations would be for a prime minister Takahuchi in terms of the domestic economy in Japan. Do you expect should she become prime minister that the relationship with the United States would shift in in a meaningful way? >> Yes. So I I think the base case is that uh US and Japan continues to be an important uh ally and uh they're working together. Uh Takayuchi um was very close to uh Prime Minister Abbe uh whom Abbe was very close to uh President Trump. Uh so I think on a relative basis um I think Japan is in a good situation uh between the two countries of US and Japan. >> Shentaro we'll leave it there. Thank you so very much for joining us. Shentaro Takawuchi who is portfolio manager at Matthews Asia joining from San Francisco here on the Daybreak Asia podcast. [Music] Welcome back to the Daybreak Asia podcast. I'm Doug Krer. The equity market in the US retreated today on worries over credit quality. We had two regional banks disclosing sizable charge offs related to alleged fraud. Zans Bank Corp. and Western Alliance Bank Corp. both said they were victims of fraud on loans made to fund investments in distressed commercial mortgages. Now, analysts were saying this seems to be kind of a an isolated case. Nothing here to suggest systemic risk. For a closer look now, I'm joined by Jeff Palma. He is head of multi-asset at Cohen and Steers. Jeff joins us from here in New York City. Thank you so much, sir, for making time to chat with me. Can we begin with the story on credit? Yesterday, we heard from Jamie Diamond, obviously the head of JP Morgan Chase. He seemed to issue this kind of ominous warning about credit risk with some of the high-profile collapses that we have seen, two in particular. Diamond said, "When you see one cockroach, they're probably more." What What do you think of what he had to say yesterday and what unfolded today? >> I I think as you say, Doug, it's an interesting combination the timing of these things. Jamie Diamond's warning, the first brand's uh event a couple of weeks ago and and then these today. What's interesting is it comes against a backdrop where in general um credit markets have been very sanguin. Spreads are very tight. People have been very comfortable with how growth has has behaved and default rates have been very very low. It does seem like it's isolated and uh idiosyncratic as they say. Um, but you know, there have also been signs that the lower end of the consumer spectrum is weak or has been weakening. I think it fits in with some of the narrative about weaker unemployment, uh, weaker, uh, employment numbers. And so, we'll just sort of have to see how this plays out. I agree. So far, uh, it doesn't look systemic, though. >> So, we had some Fed speak today. Chris Waller, the Fed governor, was saying the policy makers can keep lowering rates in quarter point increments because the labor market really has been faltering and it needs support. But then we heard from Fed Governor Steven Myron and he was advocating for a larger cut. He said this flare up that we have seen lately in the US China trade war is created more downside risk for the economy. He wants to see a halfp point cut. And then when you put into context what we saw in the regional banks today, I think the KBW regional bank index was down about 6.8%. Do we need to consider the fact not only that the Fed is going to continue to ease, but we may need a larger rate cut? >> Yeah. Well, this is the the tension uh that's happening within the the Fed. I mean, Steven Myin now in his short tenure has made it very clear that he thinks rates need to be substantially lower. most of the rest of the board uh thinks that rates only need to be, you know, lowered gradually. By the way, some, as we saw in the last dot plot, you know, don't think rates need to be lowered at all, maybe even need to go higher at some point. And, you know, it sort of gets to the the current situation in the economy. Some some call it the K-shaped economy, right? Where parts of the economy are doing really well. That would be high-end consumers and things buoyed by capex spending. And then there's everything else which is really struggling. And it's pretty clear that the employment backdrop has been weakening. Uh and it doesn't help, you know, the tariff news in general is pretty negative for the employment backdrop. You put that on the other on one hand and on the other hand, uh inflation hasn't moderated and in fact seems pretty sticky. So our own view is that you get a couple of rate cuts uh but that might be it uh barring any much deeper weakness in the economy. >> So what do you make of the behavior of the bond market? We had yields at the short end. And I'm looking at the 2-year that was down about eight basis points or so in New York, the lowest I think since around 2022. How do you evaluate the price action in the bond market? >> Uh it's a big move and um you know it's certainly consistent with with a view that bond markets are pushing for more rate cuts, right? Certainly more aggressively than that narrative that I just uh talked about from our you know from our side and uh same you know from Waller's view. seems to push more towards people getting concerned about growth. What's odd about it for me is if you really believe a weak growth backdrop, you would expect equities to be a bit weaker. Now, maybe if financials are starting to to tell that story, you're seeing some of it, but you know, you're certainly not seeing it more broadly within risk asset markets. The other thing that we've been dealing with here in terms of market action, concern about uh more tension in the US China trade relation today as part of the uh World Bank IMF meetings that are going on in Washington. We heard from Japan's finance minister. He seemed to voice a lot of concern here, serious concern over China's latest export controls when it comes to rare earth elements. and he said that really it's important now for some type of coordinated action from G7 nations to avert any type of negative impact that this may have on global supply chains. So it's not just from the US side. Other countries are beginning to express concern about the way in which China is dealing with the United States and how that may impact other countries and other markets. Are we perhaps flirting with something that could turn a lot more serious? Um I mean my sense here is that it's more likely people kind of laying out very uh wide if you like bid ask uh in terms of a negotiation policy right President Trump is kind of laying one side a very aggressive tariffs potentially 100% which is highly highly unlikely and equally on the other side I think China is trying to play its card uh you know which it views very strongly as being rare earths I I think and uh you know this would just sort of you know uh you know kind of lead us likely towards something more moderate something in the middle because I think it doesn't really as you say suit anybody uh including not just the US and China but kind of the broader world economy to have a kind of a a massive flare up that that results in kind of a full meltdown of global trade. >> So obviously rare earths are critical when you look at semiconductor production. We had uh some pretty strong numbers from TSMC overnight. Revenue guidance was also increased a bit. And the day before ASML, the Dutch chipm equipment firm, reported its highest bookings for its cuttingedge extreme ultraviolet tools since the fourth quarter of 23. So there seems to be a lot of positivity still around the AI trade. How do you feel about this right now? Are we late stage or is there still a lot more in the way of upside? >> Yeah, I mean there's there's clearly a lot of momentum there as as I mentioned before there you know that's been a a key underpinning of of growth here in the US. Uh my best sense here is that there's a good vis there's good visibility for capex in the I AI trade generally. Uh you know certainly for the next year maybe even beyond that. The good news is there's uh there's still a lot of cash funded capex right. So, it's all being funded or largely being funded out of free cash flow. Um, and we're still seeing great growth. We're still seeing uh people be quite positive about the outlook for revenue generation to to kind of follow. Um, I think where the questions start to play out over the next 12 to 24 months is one, do we get the revenue handoff to help uh protect free cash flow? Uh, do we need to start seeing uh, you know, companies issue debt? we've only seen very very small pieces of that and ultimately can there be kind of profitability that comes from it. So I think it's too soon to to completely freak out about it but there's enough questions on the horizon um you know to to kind of keep an eye on on exactly how it would all play out >> which makes this rally that we have seen in gold all the more interesting. You'd think that this is some type of haven right given a lot of the risk that may be on the horizon. We broke above in the spot price in New York trading $4,300 an ounce. So, we're clearly at records. What does this mean to you? >> Gold's been uh amazing and and equally so has silver. Um they've certainly kind of bug, as you say, it's sort of uh if you view it through the lens of a risk trade, uh it's sort of inconsistent with what we're seeing in in other markets. I think there's a a couple of different avenues, though. One is the dollar has definitely been weaker this year. Uh and I think in general and when you kind of link this to some of the China questions, there's definitely questions about um reserve currency status and the strength of kind of broad fiat currencies and I think that that's helping to uh support uh gold central bank reserves of gold have certainly increased and so that that's probably a piece as well. Uh and then the other piece is that you know as I said before inflation's been a little bit sticky. uh we're not getting down towards the Fed's target of 2% and our view is that we're not going to we're going to hang closer to 3% going forward. And so maybe there's a little bit of kind of an inflation element uh under the hood there as well. I don't think that independently any one of those things helps to fully explain the move that we've seen in precious metals, but maybe collectively it helps to explain the direction of travel. >> So we had the Russell 2000 down about 2% today. maybe some concern about the strength of the economy. Before I let you go, do we are we flirting with a recession potentially? >> So, we don't think so. Uh we think that the economy is going to remain fairly resilient. Um but, you know, there is definitely this case that, you know, the the the stool that we've been, you know, supporting the economy with is really kind of two legs. It's this one of, you know, some consumers and some capex. I think what we really need to see is that that support broadens out over the course of the next year. That is some of the objective of lower interest rates. Um it's some of the objective of uh some easier fiscal policy. Keep in mind we are going to get some fiscal stimulus through the the bill that was passed earlier this year, the budget bill that was passed earlier this year. Um those sorts of things should help the underlying economy. But if you kind of bring this conversation full circle, you know, if there's some are some underlying concerns about trade and employment and credit, you know, those would probably be the areas that that cause things to slow down more quickly. >> Okay, Jeeoff, we'll leave it there. Thanks so much. Always a pleasure. Jeff Palma is head of multiasset at Cohen and Steers joining us from here in New York City on the Daybreak Asia podcast. Thanks for listening to today's episode of the Bloomberg Daybreak Asia Edition podcast. Each weekday we look at the stories shaping markets, finance, and geopolitics in the Asia-Pacific. You can find us on Apple, Spotify, the Bloomberg Podcast YouTube channel, or anywhere else you listen. Join us again tomorrow for insight on the market moves from Hong Kong to Singapore and Australia. I'm Doug Krer, and this is Bloomberg. [Music]