Markets Await Fed Decision

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1:00Cheaper prescriptions that are easier to get and care that looks at the whole person. How you need it. Optum is helping make Healthcare work as one for everyone. Learn more at business.optum.com. Bloomberg Audio Studios. Podcasts, radio, news. Podcasts, radio, news. Welcome to the daybreak Asia Podcast. I'm Doug Krissner. So the Fed's rate decision is on Wednesday, and I think it's fair to say the stakes are pretty high. If the Fed were not to hike as the market is expecting, yields on long-term bonds could move much higher as the market demands more compensation for the risk that inflation will remain elevated. Early in New York trading on Tuesday, the yield on the 10-year punctured that 5% level, which is the highest we've seen in nearly two decades. Now, in terms of market expectations right now, there is a probability of around 90% that we will indeed see a 25 basis point rate hike, that's according to the money markets.

2:04A rate hike could also provoke fresh criticism from the White House, because President Trump recently said the US should have the lowest borrowing cost in the world. For a closer look at how Asia is bracing for the Fed decision, let's bring in Bloomberg's Leanteng II managing director for Asia equities, joining from our studios in Singapore. Thank you for being here. Can you give me a sense of what markets across the APEC region are bracing for? Yeah, it's very likely. I guess, as you mentioned, basically pretty much a full 25 basis point hike is priced in. So if Kavanaugh does not hike, I guess, the market will lose more of the faith in the credibility of the central banker. And of course, he's in a very difficult place. As you mentioned, Trump wants to keep rates low and he was hand picked by Trump. He needed to deliver something that shows his royalty to Trump, but at the same time,

3:06he really needs to watch his credibility with the market. And so it's very likely that the market will actually force him to do the right thing right now, which is to taper the inflation that we're seeing in the energy market, oil prices, if we're looking at one 10, pretty close. And that's already been reflected in the global bond market. We're seeing a lot of bond vigilantes sort of talking about how the Fed really has to act. And yeah, the market is already showing that, basically. So Brent, you're right, flirting with the 110 level. WTI is a little above 105 as you and I are speaking. Our markets in Asia coming to accept this idea that crude oil prices may remain elevated for quite some time. I think it's become clear that Saudi Arabia in particular is running out of options to export its oil. That's just one factor. So the question is whether or not investors in Asia are really coming to terms with the fact that we could see crude oil well

4:09above 100 for some time to come. Definitely. I think it is increasingly emerging as a new risk factor that the market is pricing in right now, because previously most of the folks in the market were expecting a relatively short war. But Trump mentioned a few days ago that he actually does not expect the war to end before the midterm elections. So that really is a wake-up call for investors. We are here for the long run. And yeah, for Asia, especially those markets that are big energy importers, I think they are really scrambling to think about their long-term plan. Is there a way to reduce fuel consumption, energy consumption domestically? Or is there many other avenues? I should say out there that they could source the energy that they need for their markets. Yeah. And how does that translate to investors? I think it's just again higher inflation for longer. And again,

5:15that's reflected in the bond yields. And if you look at the equity market, these days it has been under pressure. I would say in a relatively orderly and calm fashion, if you look at the VIX still very calm level, I think one thing that's cushioning this is really the kind of relatively robust corporate earnings, right? Not just in the US, but also in markets like Japan, in Korea, and in Taiwan, or even in China. So yeah, it doesn't seem like markets are, equity markets that is are reacted in a violent way, but I think some kind of negativity is creeping back in for sure. So in the Asia Pacific, when you talk about the earning story, immediately in my mind, I start to think of artificial intelligence and a lot of the hardware companies that have benefited from this trend that's been unfolding now for well more than, I mean, a couple of years, I think it's fair to say. And I'm wondering about the reaction out to this ground swell of concern in the states over

6:16the risk that many people feel AI represents not only in economic terms, but in terms of security concerns, cybersecurity especially. What's the mood? I would say the mood is short term cautious, longer term, I think people are still trying to figure it out, whether the kind of, I would say cause for slower AI development would actually become a reality, right? And if that is really the case, then obviously there will be a lot of repercussions for the whole AI supply chain and all these major players in Asia. But so far, I think investors are seeing a lot of sort of skepticism right now, because we need to obviously listen to what all those AI leaders say, but also look at what they do, they are indeed more and more cause, including Zuckerberg this morning talking about how he wants to

7:16have a third party evaluator for his AI model development. But if you look at the kind of fundraising activity, OpenAI reportedly is considering another fundraising round of valuing the company at a even higher valuation of $1.2 trillion. And if you look at Anthropic, they are they're spending on data centers and AI computing power has been accelerating. So I mean, if you look at actually data, they are not slowing down. And if that's a case, so what is the message they're sending to their rivals and competitors? Basically, they should also be spending and be raising money and be pushing the frontier even further. So all that is translating to sort of a very murky picture for investors. What will actually happen with all the discussion going on about the security? Our San Francisco tech team actually has already heard chatters and some

8:19of the AI labs are actually accelerating some of the developments. So it is really a debate on whether and those companies should really slow down or whether it's just a way for them to actually accelerate a bit further. Yeah, we heard from Jensen Wong on Tuesday in the States. He kind of dismissed this need for our new AI security regulations. But I'm listening to you and I'm wondering, okay, we know what the story is in so far as the United States is concerned. How do you think China is grappling with what may represent a real risk for some of the stability that the government is known for? Yeah, I think China right now, oh, I'm also seeing conflicting signals, right? There is a China spy agency official coming out to say that he sees AI posing some kind of danger to destabilize China's regime, which is a pretty big core and among the first

9:20that we saw publicly from an official out of China. But then there is also a foreign ministry talking about how US AI doomsayers, this is something they China disagree with. So I think China, they obviously has their own agenda to win the AI race. They feel obliged to maybe take the AI safety issue a little bit more seriously. But in reality, if you look at the corporate level activity, we have a publicly listed LLM company ZAI that just came out on last Friday to raise five billion dollars in both shares and convertible bond to fund their AI development. And we're expecting its peers to do so very soon as well. Again, there is just no sign that the kind of AI development is really slowing down on a corporate level. Yeah, it's interesting that you make that point because I think many economists and states have

10:21pointed to the build out of the data center trend as one of the drivers for overall economic growth. And I'm wondering, do we know anything about how the move in artificial intelligence is impacting the broader Chinese economy? Is it much smaller relative to the overall size of the economy, let's say compared to what the US is seeing where AI as a contributor to overall GDP? Is it a different story entirely? I would say it's a similar story, but while I don't have the data at my hand right now, my sense is that China definitely is growing the kind of AI-related GDP contribution, probably not as big as the US contribution as of yet, but the growth rate may be even faster in China. The latest we know is that deep seek is building a bunch of data centers in Mongolia, right? And that is very public news and we're talking about huge usage of Huawei's chips

11:28and just a lot of gigabytes or watts being talked about there. So there will definitely be its competitors following suit. Again, China is a market where if one business area is seeing growth and a lot of competitors will jump in right away so that pattern has played out over and over again. And I would say right now the GDP component or contribution from AI is still relatively small. That's why you saw in yesterday's China data release, the consumption is still very bad and overall domestic investments are bad, but one thing that is the brighter spot is the export-related manufacturing sector and that is AI-related. So just to answer your question, yes, it's growing, but it's probably too small relatively speaking right now to make a major sort of significant change on China's growth trajectory. Yeah, that industrial output figure was above expectations,

12:33which are absolutely right too when it comes to domestic demand and the weakness that we are seeing particularly in the retail sales figure. Leontang, thank you so very much. It's always a pleasure. Bloomberg's Leontang 2 is managing editor for Asia Equities joining from Singapore here on The Daybreak Asia Podcast. Some people treat Chachypt like some kind of smart search engine and some use it to get work done. Chachypt work is a new way of working in Chachypt that can take action across your apps and files, stay with a project for hours if needed, and turn a goal into finished work. It's designed to help you move from a chaotic starting point to a reviewable first version. So all the source materials, briefs, and scattered information that you have to grind through to turn into something useful can just become something useful. Put Chachypt to work on your most ambitious ideas and projects. Get started at chachypt.com by selecting Work Mode, available on

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14:34Welcome back to the daybreak Asia podcast. I'm Doug Krisner. And as I mentioned a moment ago, markets are now pricing in a probability of a 25 basis point rate hike that is greater than 90%. And that is where we begin our conversation with Luigi Sparanza. Luigi is global head of markets 360 and the chief economist at BNP Paraba. He spoke with Bloomberg TV host David Englis and kind of on man. Rates are going up again. Yes. Fed, how many should we expect? Not just today. Our base case has been for a while actually three rate hikes. So we expect one today, another one in December, and then generally March. But let me put in this way. If we are wrong on three, it's because they are full rather than two. I think the background is really strong. The case for politics is really strong. We have an economy which is running about trend. We have a liberal market

15:34which is tightening and we have an underlying inflationary problem in the US. How bad is inflation problem for us to go three possibly four hikes? Yes. So look, I mean the global environment is favorable. First of all, I think that's important. Protectionism, you know tariffs. But in general, political fragmentation is leading to what I say is subottima location resources. Then you go to the I-Boost. So pressure on commodity prices, on chips. And this is showing up in the data. I was impressed by a piece of data which is pricing computers and equipment investment. They've been in deflation for six decades and now running in the US 11% year on year. This is symptomatic of higher goods prices which makes this underlying effect. It's quite difficult. It's entrenched effectively. So I'll just bet three would not make the trick. This is more about preventing the economy from overreating the natural leading inflation to 2%

16:38within a reasonable time frame. Okay. Let me marry the Fed conversation with the long end of the treasury curve. And obviously we've seen a I wouldn't say a de-anchoring but certainly long and rates have risen quite substantially. That has to do more with the debt burden. It looks like the economy is doing well. How worried should we be over the US being able to cope with this debt burden? If the economy as you put it is actually, you know, you cannot grow, you can outgrow your debt anyway if you're growing. Yeah. I think look at this premium on the fiscal side as it contained. I think this is very much more a story of real growth. It's a real growth story. I think fundamentally still a real growth story. There is an element of fed credibility being questioned which you know if the Fed increased rates in San Ducish, we can have a consolidation. But I guess it's a real story. Now the key risk is that we are moving towards a narrative of concern over fiscal trends. Not just in the US a bit everywhere. But that's a risk I would say. So our view at this point is look we have the target 5%.

17:42So we reach the target. How keep it sort of bearish bias here. So our strategy is prefer if you want to to to to to effectively this is on the yield terms. On the yield curve. So it's prefer short thresholds in rallies rather than buying in deep. I mean that's under the story. So I think 5% is not the ceiling. Okay. If one wants to say hi. Okay 5% is not the ceiling Luigi. That's interesting. Because if the Fed does actually hike as you say could that be a stable enough anchor for the long enough curve? Yeah I think it can lead to some consolidation. Absolutely. Because we would reduce a bit the kind of risk of the Fed losing credibility here. But to me it's a probably no opportunity to go short again in any any any consolidation. Because the fundamental story is still about growth,

18:45about inflation risks, about some fiscal premium which I think is not fully priced in at this stage. And what about your other DM markets? I mean the BOJ comes up next after the Fed. That's almost like near guarantee that they're going to hike this week as well. You also have the ECB that just hiked rates. BOE. How is pricing look to you on those key markets now? Yeah. So the about the bank of Japan I think will they'll increase rates and the messages should be reasonably oakish here suggesting an acceleration in the pace of rate access of one for each quarter. Until we get to 175 I guess that to be a good point for the bank of Japan to take a pose. But we expect them then to resume rate highs later in the year for a 10 year rate of around 250. ECB as well actually on the CB we are probably the markets I think a bit too sanguine about the CB. I do expect another one in December but once you reach the three territory and the kind of the

19:49new to rate range the probably the top is 250 then I think the CB is going to be a bit more cautious about further rate highs and markets are apprising. Our base case is for them to stop at to 75. If they go further I would think they will have to cut rates at later stage and that's no price that toll so I'll be probably be more more dovish from from from the CB perspective. There is a key difference here between the CB and other central banks like Bank of Japan and the Fed. Inflation is million energy issue at this stage so it's a negative supply shock for the economy while for Japan for the Fed is much more domestic regenerated in trend. It's probably a bit more action. With all these hikes priced and if they do proceed with raising interest rates just about across the world how does growth look to you this time next year? How will the economy absorb these and the probability then that we might get an easing cycle earlier than expect? I know that's looking

20:50way way ahead but how do we need to be thinking about the next 24 months of global growth? I think look economy is proven very resilient to do a number of shocks. If you think about the tariff first if you think of the energy shock the reality is that the economy is still running about trend a bit everywhere so I think despite the retire price and which I think will be delivered mostly the economy will remain resilient. Why? I think there are a number of factors here but households and corporate balance sheets are very healthy so I think that we're able to withstand the shock from higher interest rates. Even if you increase rates at the speed that the pace I think monetary policy will still remain a demarcative we've seen a significant increase in real in a in a new rates here so I don't think the intention is actually to slow the economy again just to prevent overreading as a fiscal policy supportive there is a high demand so I guess the economy will actually surprise and prove resilient again to the the the cutting in monetary conditions

21:53we are likely to be within it. It's a that was Luigi Sparanza global head of markets 360 and the chief economist of B&P Paraba speaking with Bloomberg TV host David Inglace and Ivan Mann bringing you their conversation here on the daybreak Asia podcast. Thanks for listening to today's episode of the Bloomberg Daybreak Asia Edition podcast each week day 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 Krizener and this is Bloomberg.