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Welcome to the Bloomberg Daybreak Asia podcast.

I'm Doug Krisner.

The FED wrapped up its annual Jackson Holl Symposium on Saturday, but it was on Friday.

In that keynote address that FED Shair J.

Powell signaled a rate cut could happen as soon as September.

With policy and restrictive territory.

The baseline outlook and the shifting balance of risks may warrant adjusting our policy stance, Marjorie.

Policy is not on a preset course.

FMC members will make these decisions based solely on their assessment of the data and its implications for the economic outlook and the balance of risks.

Jay Powell.

There now, at the end of this week, we're going to get the Fed's preferred measure of inflation, the personal consumption expenditures price indexes do on Friday.

Also do this week Chinese industrial profits for the month of July.

And in a moment we'll talk with Qing Wong, chief apack economist at Vanguard Group.

But we begin here in the States.

Joining me now is Matt Orton.

He is head of Advisory Solutions and market strategy at Raymond James' Investment Management.

Matt, thanks for making time to chat with me.

I want to begin with the Powell speech.

What did you think?

What did you make of what Powell had to say?

So, you know, Doug, I think the Powell speech was more Dubvish than a lot of folks were expecting, myself included, and it certainly I think changes the narrative in the market a little bit.

I think rather than being focused on inflation as much, we're really going to be keenly focused on the employment data that comes.

So PCE matters this week, but nowhere near as much as payrolls are going to matter on September fifth, and so given the massive rally that happened after the duvish tilt that Powell took, I think the earnings we get from some of the tech companies in Nvidia first and foremost on Wednesday of this week are going to be really important for sustaining the rally, especially and I'll call it, you know, higher beta parts of the market.

And then we'll see whether or not the data we get continues this very very optimistic outlook on the case for not only just a September cut, but increasing the chances of cuts going into the end of the year.

We can talk about Nvidia in a moment, but I want to get your sense on the degree to which there may have been a bit of short covering that was a part of that rally on Friday.

Oh, there absolutely was.

When you look at some of the biggest outperformers on Friday, a lot of names with higher short interest were squeezed higher.

I think this whole small cap complex in particular, you know, had one of its best days in quite a long time, and a part of that was just very extended leveraged short futures positioning and a number of the small cap indices.

And then you look at the home billers that also had a massive rally.

Banks, smaller cap banks.

You really saw I think not only just a squeeze, but anything that could be supported by the prospect of lower interest rates really caught quite a bid on on Friday.

So after the bell on Wednesday, we'll get the numbers from in Vidia.

Clearly this company is at the center of artificial intelligence development, and the whole story around AI and in Nvidia now really is I think a bell weather for not only AI, but the broader market as well.

When you look at the weight of Nvidia within the S and P five hundred being at nearly eight percent, that's a pretty powerful force.

So there's a lot riding on this number.

What are you going to be looking at critically for the Nvidia story?

Is it more the outlook?

You know, I don't think Nvidia is going to miss numbers that would be quite a shock.

It's how much does Nvidia beat by?

And then really critically is what are the expectations going forward?

Because just to break down the importance of Nvidia earnings, Nvidia alone has contributed just about twenty percent of the earnings growth of the S and P five hundred this year.

I mean, that's a staggering number.

And if you just add in the entire AI complex I call that information technology broadly speaking, some of the other ancillary AI trades, like the electric equipment company, some of the utilities, those collectively have contributed north of eighty percent of the earnings growth of the S and P five hundred.

So the degree of how much this trade continues absolutely matters.

We got good data and really good cap X numbers coming out of the hyperscalers So the hope is is that Innvidia's guidance is going to project strength with respect to the read through from that.

And I think it's even more critical because we've seen a recent pretty aggressive rotation out of momentum technology into values and cyclicals over the past two weeks or so that's really left a lot of investors in these trades feeling pretty whipsod.

So I think being able to see strength from Nvidia is going to be critical to getting this AI trade on a sustainable path going forward to to help I guess lean out of that rotation and see the bellweathers and hopefully broader market forces really lead the market higher.

So there is a lot of importance put on Wednesday and then by extension Thursday where you get Dell and Marvel, which will be almost a continuation on the semispace.

So to your point about the hyperscalers, if you look at companies like Meta, Microsoft, Alphabet, Amazon, those companies equate to about forty percent of the revenue for in Vidia.

Is this stock kind of the situation where we like to use the term price to perfection.

Anyone who's set in vidious price to perfection in the past has been wrong just because the stock continues to go higher.

But I think Doug your point is taken because I don't often love to see stocks run up into the earnings report, where there's so much importance put on what it is the company is going to report and guide in particular, So the bar is just set incredibly high for Nvidia, So I think valuation wise, the earnings number could be spectacular.

You could continue to see multiple contraction on a stock like Nvidia supported by strong earnings.

But it's really all about the guide going forward and how much strength and read through you're going to get from those hyperscalers that you just mentioned going into their outlook over the rest of this year and forward into twenty twenty six.

So at the end of the week, it's the Fed's preferred measure of inflation PCE.

I think the core rate is expected to be a kind of a an uncomfortable level annually, a two point nine percent from a year ago.

Do you think that that would dissuade the FED from kind of the course that we seem to be on right now, with Powell articulating that concern about a weaker labor market may carry the day rather than a little bit of worry about inflation.

Yeah, I don't think it's going to change the outlook that much because I think expectations have been pretty accurate going forward and we've kind of seen all the components that are going to feed to PCE.

So I can't imagine it's going to be a big deviation one way or the other on the numbers that we get this week, and especially with Powell talking about this curious balance during his speech, where really we're the emphasis is going to be on employment, and so I think all of that just minimizes the importance of what we're going to get with respect to the inflation numbers and really will emphasize the importance of the NFP that we're going to get on Friday the fifth.

So we're talking a lot about the US market.

I'm curious if you look offshore right now, are you finding value?

Absolutely?

You know.

One of my key themes Doug heading into this year for clients and especially the back half of this year was building balance, and to me, balances across asset classes.

It's across geographies, across sectors, industries, market capitalizations.

So in addition to looking more at small caps and opportunities in higher quality small caps.

I've really been trying to find opportunities across international markets and emerging markets, in particular the two big You know, China has had a lot of strength recently despite some of the economic challenges that the country faces.

The strength being projected by the large internet companies, and in some of the actions the government is taking with respect to semiconductors and building more within China, I think that provides a boost for the strength in China to continue.

And you're seeing risk taking increase on shore, so all of that I think can continue the trend that you've had.

So China looks very interesting to me.

And also in the EM complex, India has really been the big underperformer.

You've seen a lot of weakness over the past few months.

A decent chunk of that has been disappointing earnings.

But after some of the changes the government is making with respect to tax reform, that should help incentivize consumption to really get the economic growth numbers, which by the way, are probably going to be around seven percent of GDP growth.

I think that should turn around some of the weakness and earnings, and that to me also looks very interesting.

Not only from a relative valuation standpoint, but also just from a long term secular investment theme of a country with one point four billion people and a massive growing consumer class.

So if we had to identify themes, then the sense that I'm getting let's talk China and then I'll let you go.

Is it more tech driven than being consumption driven?

Is that the thesis it is the consumer in China has been weak.

I don't know when and if that's ever going to turn.

Maybe it terms that the government actually takes some of the massiveiscal action that I think is going to be necessary in a country where there's just increased savers.

So a lot of the growth and a lot of the earnings to me are coming from the technology complex, and you've seen really strong earnings from the Big four.

In addition, you're seeing strength in some of those semiconductor names where I think the government's moving industrial policy to help support them, especially as the US and China continue while maybe not explicitly in the news, but there's certainly a continuing i'll say war for Ai dominance that's happening in China's going to invest heavily there, so there's certainly room for that trade to also continue and add into the market, and those are just bigger weights within the market as well.

Okay, Matt, We'll leave it there.

Thanks so much.

Matt Orton there.

He is head of Advisory Solutions and Market Strategy at Raymond James Investment Management.

Joining us here on the Daybreak Asia Podcast.

Welcome back to the Daybreak Asia Podcast.

I'm Doug Chrisner.

Equity markets across the Asia Pacific are following in the footsteps of last Friday's rally on Wall Street and Chair J.

Powell opening the door to a resumption in rate cuts, maybe as soon as next month.

For more, we heard from Chen Wang chief Apaka Khan missed at the Vanguard Group.

She spoke with Bloomberg TV host Sherry On and April Hong on the Asia trade.

So we are still unpacking some of these Powell comments.

The read through is that it.

Was very dubvish.

How much cover does this provide Asian central banks, including the Bank of Korea that has a decision due this week.

Thanks for reminding me today.

Good morning.

You know, to a certain extent, I would encourage rite the tone of power to be very dolish.

I think it's actually a pretty balanced tone.

It does recognize that the balance of risk is shifting, so that makes us September clot to be the baseline.

At this moment, we have been expecting two cuts this year, September and December.

That seems to be still appropriate.

After Power's comments on Friday, however, I think when you listen to his fish and comments, you know he continued to emphasize the risk of inflation.

So to that extent, even if we get a cut in September, I would more characterize as a more hookish cut, And I think you still I think the decision of FAT will be very much depend on our data, especially how weak the labor market will be when they actually make that decision in September.

In terms of the Asia central banks, now, of course everybody is watching FAT what they will do, but I think ultimately for Easia central banks, their decision will still very much depend on the domestic situation as well as their reaction function.

Right, especially the weaker dollars about this year is providing central banks some you know, flexibility right to make their decision.

You mentioned about bankok Korea, I would say they probably want to stay on hold this week to be in rather a wead and see mode, right.

You know, on one hand, we always know that bankok and cares a lot about financial stability, risk, housing prices, household dett and at the same time we do know Korean growth all look actually has improved slightly recently.

So I think they would just want to you know, wait a little bit and then you know, probably right until October to see what the FED will do.

But on that FED rate decision coming on September, what are you seeing in terms of the economic data that has share power leaning towards a cut because we continue to see inflationary pressures high in the United States, and of course more fiscal policy perhaps opening the tabs for more overheated economy there.

Yeah, I mean totally.

I think at this moment what is clear in powers comments is that FED is willing to look through the tariff related inflation as long as inflation expectation is well anchored in the long term.

Right.

So given that, I think in terms of the reaction function, you clearly see the focus is shifting towards the labor market strands.

So I think the question here is that how weak the labor you know market is especially I would say, whether the weakening in the labor demand you know, versus the decline in labor supply.

So I think the critical data to watch obviously inflation will be the one.

But unless there are significant junk inflation data, then I think the key is uh see, you know, what is a non found payroll you know number?

And also where the unemployment rate goes.

I think that would be something to be critically watched by FAD.

Now that said, I would say, even though power set, there should be adjustment in term monitrey policy.

I would say that adjustment will be very gradual and also to certain stam be rather limited.

One is, as you were saying that the leasi risk, it's definitely on the outside, especially when the economy seems to be running, you know, pretty hard with the Cisco policy, stimulus that's coming.

And the other one is also the neutral rate in the economy is higher.

So even though we do except that to continue to cut into twenty twenty six, we see them stop at three point five percent, you know, by end of next year.

What about what else we heard from jackson Hole, including from boj Governor Kazua, talking about how the tight labor market exerts upward pressure on wages.

Is that Holcus enough read through to you that maybe coalesces expectations around an October rate type.

Yes, I think BOG is really the outlier among global central banks.

So I think, you know, Japan's situation is a bit different from you know, other countries.

You know, at this moment, we see that japan growth at this moment is uh really sustained by domestic demands.

We do see some structural turnaround in domestic you know, both consumption and investment.

And also we do see that there is a structural change in the price setting and which setting behavior sustained by very like a tight labor market.

Right, So given that, I would say, you know, we do see a good chance that inflation will continue to pass through from wage to price and then inflation core inflation should be able to sustain you know, around two percent, and that actually provide enough support for BOJ to hike you know, interest rate later this year, especially when the trade external uncertainty actually has reduced quite a bit after the trade agreement has been achieved.

So this is where we actually see BOJ to hike once this year and then continue to do so and gradually bring the interest rate to neutral income years.

Deflationary pressure is, on the other hand, affecting the Chinese economy.

As we continue to get data that doesn't look too positive, Will we see the PVOC moving at any point?

Does more easy money make sense for this economy at this point?

Well, I think when you look at China, China is totally the opposite story.

The weakness is really on the domestic side, right, I mean, expert has been holding up as so well, you know, so far this year, but you know, we do see actually more signs of domestic slow down and also this kind of significant demand supply imbalance is really driving this deflation and re pressure.

That's I think exactly why the government is actually trying to address this more structural issue with the anti evolution you know campaign.

But I would say, you know, to deal with this deflation challenge, the key is really on, you know, boosting up the demand.

On the other hand, I think the anti anti evolution campaign is likely to be rather gradual and sector specific, so the impact on you know, addressing the deflation challenge is likely to be limited.

Now in terms of central bank I would say, yes, I do think there's room to cut interest rate you know when the economy is stucking into this kind of persistent deflationary pressure.

But we always know that central bank in China is always reluctant to cut interest rate, so we expect only a very modest ten based point cut later this year.

But even that, I would say it's probably only later this year when the policy makers see more concrete evidence of a of a downturn in the economy.

That is when they're going to step up with more policystems, both monetary and the cisco.

Right, Chiang Wang.

Good to have you with LA's chief Asia Pacific economist at Vanguard Group.

Thanks for listening to today's episode of the Bloomberg Daybreak Asia Edition podcast.

Each weekday, we look at the story 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 Chrisner, and this is Bloomberg