Stocks Rally As the Fed Holds Rates
22:37 Share

There are presentations.

And then there are Canva presentations. With Canva, you can use AI to take your presentation to the next level. You can generate dynamic slides and text with a simple prompt. You can drag and drop graphics and charts from Canva's media library and add interactive elements to plus up your deck. And with collaboration tools built in, the whole team can work together better. You'll love the presentations you can easily design with Canva. Your clients and coworkers will too. Love your work with Canva presentations at canva.com.

Yeah.

Whatever challenge comes next, let Microsoft help you keep pushing forward. For more details, visit Microsoft.com slash challengers. Bloomberg Audio Studios. Podcasts. Radio. News.

Welcome to the Daybreak Asia podcast. I'm Doug Krisner. So it's two down, one to go. We had a couple of key central bank decisions in the last 24 hours. And as expected, both the Bank of Japan and the Fed held their policy rates steady, although for very different reasons. Up next, it's the Bank of England. Let's take a closer look at how rate policy is playing out in markets these days. Our guest is Mark Cranfield. He is Bloomberg Markets Live strategist, general manager, and CEO of the Bank of England.

joining from Singapore. Mark, first of all, have you been surprised by anything you heard from either the BOJ or the Fed? I think the Fed, to some investors, may be sounding a little bit complacent on the inflation outlook. They seem pretty relaxed saying that they're going to be transitory, which may be not the best word for them to use on that, given the history with that. But anyway, I think that's where the

they may start to feel the heat from the market. I think the bond vigilantes in the U.S. will be looking pretty closely at that and saying, well, we don't feel so quite so relaxed as you guys on the Federal Reserve. And we're seeing a little bit of steepening in the Treasury curve already.

And there is certainly room for that to play out further if investors get the sense that the Fed is willing to look through upticks in inflation when at the same time the other economic numbers may start to be affected by future tariffs, which we expect some more to come in next week. And clearly the whole data outlook for the U.S. is looking a little bit more uncertain. So if you get a slightly weakening economy with inflation,

rising inflation at the same time. The bond vigilantes are not going to like that at all. And they're going to punish the market for that, even if the Federal Reserve messaging is very relaxed about the whole thing. Yeah, relaxed indeed with two more rate cuts forecast for the year. But as you're suggesting, I mean, the idea here is we're talking about a situation that feels like stagflation, does it not?

It certainly is beginning to smell like it. It's something which is very bad for financial markets typically. If it gets a route, if you don't stamp it out quickly, it doesn't really help the bond market, doesn't help the equity market much either as well. So it's something which definitely private sector commentators will be looking at very closely. The central bank may have their own reasons for trying to thread a more neutral path, but you can't disguise the numbers. People will see

what is going on in the economic data and the impulse on the ground, and they'll make their own conclusions. And if they do sense that a segflation is coming back, you will see volatility in the financial markets off the back of that.

What are the implications for the dollar? Right now, there's been so much trade tension and noise in the foreign exchange. For a while, it felt like the threats of tariffs from the U.S. side were dollar positive, but there's been so much volatility, it's hard to know what's actually going on. So, coming back to the Fed and what we heard today, what is your sense of where the dollar goes from here?

I think initially, people will see it as being a slight negative for the US dollar, because if the Fed is going to keep to two more rate cuts this year, that probably puts them on the dovish side in relation to some of the other central banks. The European Central Bank is certainly going to have to dial back a bit now that Germany looks as though it's going to get a very big spend for defense. That certainly is something the ECB will take into account very closely. So that

It's slightly positive for the euro, and it means the ECB can't cut rates as quickly as thought. So if the Fed does go ahead, they stand out as being a bit softer. We're just talking about the Bank of Japan. Clearly, they want to increase interest rates again. The timing is a bit uncertain.

but that would work out to be slightly positive for the yen. So you've got two of the biggest currencies that look as though they're going to be going in the opposite direction to where the dollar would want to go. It's not going to be a clear path. It's going to be along the way,

You can throw in all kinds of international issues such as whether tariffs and retaliation, geopolitical issues that will disrupt the view. But certainly, if the Fed does stick to the idea that there are more rates coming, that generally is not going to be good for the U.S. dollar.

What about the influence that it would have on the thinking at the Bank of Japan? I mean, we know the bias right now at the BOJ is to tighten. We could talk whether or not that may happen as soon as May or not, or maybe it gets pushed to midsummer. But if the Fed is a little bit more dovish, does that give the BOJ a little bit more flexibility?

I think it does in terms of the exchange rate. So if you think back to last year, Bank of Japan raised interest rates in July. Pretty quickly, it triggered a meltdown in Japanese equities because people were unwinding positions in the Japanese yen. Dollar-yen plunged, caused havoc for a while in Japanese markets. The Bank of Japan got lots of blame from the politicians that, why did you do that? And of course, this big mess. And so the speed of the yen move certainly pushed back any

any thinking of the Bank of Japan had on the next rate hike. It didn't come until January, so six months later. This time around is quite different. Dollar/yen has been coming down gradually this year, even though there's only been one rate hike from the Bank of Japan. So if the dollar/yen stays on a generally slow descent,

that's actually good for the Bank of Japan because there's much less risk that if they raise rates again, it will have a big disruptive impact on equities in Japan. So that could be certainly a reason for them to go a bit earlier. The market is currently pricing for somewhere around September or October. But if they are able to go in May or June, it would probably be because the yen is very stable and it gives them the window to go earlier.

One of the things we know about the Japanese currency is that it's very strongly correlated to U.S. Treasury yields. And I bring us back to the yield story because the other thing that we heard from the Fed today is that they are going to slow the pace of winding down the balance sheet. What are the ramifications here for markets? Well, that's slightly bearish for the long end of the market, certainly. The

That's partly why we're going to get some more steepening, I suspect, is because you're going to have a situation where the Fed dot plots are much more effective on the short end of the curve. So you'll probably find maturities up to about two, three years in the Treasury curve. The yields there can probably continue to stay a bit soft because people are very focused on the next Fed action. But if the Fed is going to look through inflation and if they're also reducing inflation,

the tail off in the balance sheet. That's probably negative for the longer end of the curve more. So you're going to get it almost like a twist situation where investors will be reluctant to be too aggressive in buying the long end, but they're much more keen to buy the short end, which also plays into the geopolitical situation as well. If you want the hedge short,

against disruptions in geopolitics, you also prefer to hold short-duration bonds as well. So more steepening looks like the outcome in that case. So I mentioned a decision from the Bank of England in the next few hours. How do you think the BOE is going to proceed?

No, they're not expected to do anything today. And they'll be very interested to see what the UK Chancellor has to say next week. This is going to be making a big statement about spending for the government. So the Bank of England clearly...

You're seeing there's got pretty ambitious targets from the UK government to get the deficit down. The Bank of England obviously wants to see success in that area before they go ahead to lower interest rates. And traders are pretty much on the same page. They pretty much expect that the Bank of England wants more time to digest how successful the UK government is in reining in spending and into generally getting a...

things under control. The UK Treasury over the last few years has really been on a spending spree and that needs to be reined in. So that looks as though it's starting to happen, but it does need the official data to show that and it isn't yet supporting the case. So probably more time. And the best thing that central banks tend to do when they want more time is they just stay on hold for a while and try to give as neutral a message as they can. And traders will accept that. On the flip side, the pound is

is having a reasonably good time, generally because the U.S. dollar is a little bit softer. And of course, it helps that the euro is improving. So that feeds off to the pound as well. Mark, we'll leave it there. It's always a pleasure. Thank you so much for joining us. Mark Cranfield there. He is Bloomberg Markets Live strategist, joining from Singapore here on the Daybreak Asia podcast.

Deep domain expertise, strong relationships, broad capabilities. It's what makes Stifel one of the industry's leading providers of M&A and capital-raising services in the middle market. But don't just take anyone's word for it. IFR has named Stifel U.S. Mid-Market Equity House of the Year five times in the last 10 years.

When it comes to investment banking, Stiefel is the name you should know. To learn more about how Stiefel can help you address your most complex investment banking needs, visit StiefelInstitutional.com. Stiefel, Nicholas & Company, Inc., member SIPC and New York Stock Exchange.

Every business starts with an idea. How can you go from daydreamer to industry leader? Amazon Business accelerates your journey. With smart business buying, get everything you need to grow in one familiar place, from office supplies to IT essentials and maintenance tools. Amazon Business takes the buying experience you know and love from Amazon, plus tools that help you save costs and make insights-based decisions. Ready to bring your visions to life? Learn how at amazonbusiness.com.

Welcome back to the Daybreak Asia podcast. I'm Doug Krizner. So the Fed held interest rate policy steady today. That wasn't a big surprise at all. Policymakers cited uncertainty around the economic outlook as well as the impact of President Trump's trade policies on inflation and growth.

And Fed Chair Jay Powell said the base case is for the inflationary impact of tariffs to prove, wait for it, transitory. Let's take a closer look now with our guest, Jamie Cox. He's managing partner at Harris Financial Group. Jamie joins us from Richmond, Virginia. Thank you for making time to chat with us. What do you think of when you hear Jay Powell say transitory? Does it bring back memories?

Yes, it's a traumatizing thing for the Fed to say transitory when the last couple of times that they have used the phrase, it's been terribly wrong. However, those are the magic words for the markets today. For the past couple of weeks, markets have been all over the place trying to figure out and cost out what the trade policies from the administration were going to be and how the impact

what impact that would have on the Federal Reserve. And we got some answers on that today. It looks to me as though the Fed is much ado about nothing. Basically, they have not been their path of

you know the rate path that they had set forth has really not changed and and oh by the way they've actually done a couple of things that actually eased the minds of markets today by reducing the pace of the runoff of the balance sheet um on in particular on treasuries uh there was some concern that the fed would continue its pace of of runoff and that could precipitate

some decline in reserves at a time when the debt ceiling could be an issue. But the Fed put that to bed as well today by basically reducing down the runoff to near nothing. They can basically extend the duration of runoff and it not have any impact or any negative impact on bank reserves. And so I think that was probably one of the most important parts, maybe one of the most overlooked parts of the Fed statement today,

And I think that's going to prove to be the most important as we move through the more complicated parts of the debt ceiling debate and controversy in the next couple of weeks and months. Well, I can get to the thoughts that you may have on the balance sheet and the adjustment that they have made to the level of shrinkage, if I can put it that way. But let's talk a little bit about what officials are expecting in terms of slower growth and higher inflation. That feels to me like a scenario for stagflation. Isn't that concerning to you?

I think that is completely in the cards. The last thing that we want is a statutory environment and the tariffs bring that back into focus for everyone. We had gotten in a place last year where inflation was declining at a reasonable rate and growth was pretty steady.

with tariffs you sort of you sort of have these levers pushing the wrong way and and i think it's all about duration if the tariffs end up being bluster if the tariffs end up being short in duration then there's really nothing to be concerned about but if it precipitates

what could be a very long and drawn out trade war for sure, it can bring stagflation into the equation. And I, I, that's not my base case, but I do believe that markets should be more concerned about it than they currently are. Uh, because we have seen the president dig in. We've seen the tariff regime grow as the days have gone on. So it's definitely something that, that, uh,

all of us in markets need to be paying attention to, particularly for those of us who have retirees as clients and we're trying to help them produce income and also maintain solid investment portfolios. It's one of the worst scenarios for investment is that stagflationary environment. So if the market wants to discount that risk and yields would necessarily want to move higher in that scenario, isn't shrinking the balance sheet at a slower rate running the risk of

distorting market function a little bit.

Possibly, but I think the Fed is more interested in making sure that they don't drain reserves. I mean, over the past couple of years, they've been able to have a free pass on draining the balance sheet because it has largely been financed through reverse repos. But now it's going to come from bank reserves. So I think they're more interested in averting a banking or funding crisis in the banking system, more so than they're worried about

some of the longer run components of what that can mean. So I think that's why if I'm just sort of speculating, I'm speculating that they didn't completely end

quantitative tightening, they just reduced it down to a snail's pace to get through the funding crisis potential, and then they'll reevaluate, decide how they want to move forward from there. You'll note that they did not alter the path of their runoff of mortgage-backed securities. It was very much isolated to treasuries. Okay, fair enough. Powell also said the odds for recession have moved up a bit, although they're not high in his words, and the Fed is still assuming that maybe we can squeeze in two rate cuts

this year. Does that square with your thinking? I think that the economy, based on some of the most recent data in industrial production, may be stronger than what people appreciate. I think the headline risk and the shock of tariffs have

caused a lot of shifts in sentiment, but I'm not so certain that it's translated into every sector of the economy just yet. I think it may be sort of shocking all of consumers, but consumers are still spending, they're still traveling. So I feel like that recession risk is definitely not something I'm focused on in the short run. I think

If the tariff risk grows and the trade war escalates and we start seeing job loss, then perhaps that might be an issue. But I feel like we're in a position where the Fed can cut rates to normalize, but they're not trying to cut rates to accommodate. And I think that

that fulcrum is something that's really important to pay attention to because if the Fed is cutting rates to accommodate, that's a much different thing. And I think that's the worst of the scenarios. What I hope is, is they can just normalize with a couple of cuts to get to the point where rates are not restrictive, but not have to go all the way to make the rate structure accommodative where they're trying to support economic growth. I don't see that at this point.

I see right now that we just have some interruptions and hopefully they're short-lived. So you don't feel that there is a risk that these tariffs are protracted, that they could last for a while? No, I think the administration has a messaging problem on tariffs. And I think that they've done a poor job of using the tariffs as a cudgel for

policies or trying to push countries in different directions. But what it appears to me is that they finally arrived at a place where they can get the messaging right with reciprocal tariffs.

where if a country is tariffing us on a particular product, we have a reciprocal tariff. I think people can get behind that because it makes perfect sense. But to use them in these broad brush manners has not worked very well. And so I think that we're going to see a transition, and I think we're seeing it already, where the tariffs will have

a shorter half-life because reciprocal tariffs have the equal ability to go lower as they do to stay the same. And so I think that's maybe an unequal chance of actually being reduced. And I think the Treasury Secretary actually mentioned that in some of his remarks yesterday to some media outlets about how they had seen reciprocal tariffs already have a positive impact where people, where countries are actually now incentivized to bring tariffs to zero in certain products. And I think that's

That particular strategy is going to work out to be beneficial and maybe what they arrive at and finally get the messaging on tariffs correct. But what about the aim of reshoring manufacturing? Is that going to end up happening as the result of this?

I don't think so. I think that there are other ways to reshore manufacturing foreign trade zones, which have been around for decades. You could provide economic incentives through those vehicles rather than trying to disincentivize

You know, using using tariffs. I think there's probably one country in particular that may face a solid tariff regime, and that would be China. I think that maybe that's the one country where tariffs have been in place for some time or probably will remain so. But it really hasn't.

um affected our trade relationship with them that much so i i think that when it's all said and done the european the the canadian the mexican tariffs these are all going to end up in some type of trade deals like a rewrite of the us mca or something with europe but i think that when it's all said and done the dust settles our tariff regime is largely going to be focused on china

So trade policy is obviously just one aspect of what the Trump administration is intending to do in terms of overall economic policy. Deregulation has been another centerpiece. Are you optimistic that we're going to see some signs on deregulation this year?

I think in the banking sector and in cryptocurrency, I think there's an enormous amount of deregulation that is happening and will continue to happen. I don't know yet whether it will all be good.

But I do know that it is basically in motion. I'm not certain about the other sectors, but it seems like where it is going to accrue and be most beneficial from people who buy stocks, I think that if you're buying financials, I think that's one area where deregulation is going to accrue positively for profitability of these firms.

Otherwise yet to be determined, but it seems like that's where the focus is at the moment. What about tax policy? I mean, the Trump tax cuts is something that the market really was looking forward to seeing unfold this year. Are you probably optimistic that that is going to happen as a result of congressional legislation, right?

I think it will happen, but I think the market may underappreciate how complicated that's going to be. In my meetings on the Hill with various committee staff, I've done that four or five times over the past six months.

There is a lot of back and forth. There's a lot of horse trading that will have to happen to get the payfors necessary to facilitate even keeping the law as is. And I think it's important for people to recognize how thin the margins are in the House of Representatives. You have in the House currently a two-seat

And one of those members, Thomas Bassett from Kentucky, he's well known to vote against most spending packages anyway. So you really only have a one seat majority for at least a month or two. And so you then have to couple that with the last time that Trump had a tax package. I think 13 Republicans voted against it.

These are tough votes for people, tough votes for some members because there are parts of the law that could be detrimental to their districts. And in particular, there were – the New York and California delegations had difficulties with the Tax Cut Job Act because of the SALT deduction.

And so there are going to be some components of the tax legislation that are going to be difficult pills to swallow for House Republicans. And so I think that's going to – it's going to – people may underappreciate how complicated it will be to get to the end product.

and then what it will take to get some of the revenue raised to get the bill through reconciliation, to make it through the Byrd rule. Last time, there was repatriation of foreign earnings that was financing a fair portion of the tax cut that no longer exists in a big way. So you have to raise revenue in other ways.

And I think that's going to be, in fact, I know because that's what they keep asking every time we go is how give us ideas, give us suggestions on what we can do to pay for and continue to finance the tax cuts. Jamie, thank you so much. Great to get your perspective on a number of topics. Jamie Cox, their managing partner at Harris Financial Group, joining from Richmond, Virginia, here 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 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 Krisner, and this is Bloomberg.

There are presentations.

And then there are Canva presentations. With Canva, you can use AI to take your presentation to the next level. You can generate dynamic slides and text with a simple prompt. You can drag and drop graphics and charts from Canva's media library and add interactive elements to plus up your deck. And with collaboration tools built in, the whole team can work together better. You'll love the presentations you can easily design with Canva. Your clients and coworkers will too. Love your work with Canva presentations at canva.com.