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Welcome to the Bloomberg Daybreak Asia podcast. I'm Doug Krisner, and we begin with tariffs. On Monday, President Trump is planning to announce levies of 25% on imported steel and aluminum. Joining me now for a closer look is Brian Fowler. He is senior editor for Bloomberg's North Asia EcoGov team. He joins us from our studios.
in Tokyo. Thanks for making time. I'm sure it's a busy day where you are. So we know, Brian, that Japan, South Korea and Taiwan are Asia's biggest steel exporters to the U.S. I think Australia also exports some steel and aluminum to the U.S. Do you have a sense of how these tariffs will bite?
Yeah. And I would also just I would add Vietnam to that list. So we don't know exactly. I mean, there's always the possibility that we'll see some exemptions or exclusions that kick in. I think Trump's general strategy is to start with the big sweeping gesture and then see how that gets implemented.
each country to kind of react and what he can get from them in order to maybe mitigate some of that impact. But we've seen share prices fall across the board. POSCO in Korea was down 4% at the open. Nippon Steel was down more than 2.5% here in Tokyo.
So it's definitely bad news for all these suppliers of steel and aluminum in Asia and, of course, Canada and Mexico and Brazil as well. I think the timing here is very interesting, particularly in light of the fact that just last week, Prime Minister Ishiba was at the White House and Nippon Steel came up as a part of the discussions. One of the takeaways here, at least from President Trump's viewpoint, is that Nippon will now invest in
heavily in U.S. Steel rather than a full-blown acquisition of the company. Give me your take on that before we talk a little bit about the impact that Ishiba's visit had. - Yeah, so that was a big question going into Ishiba's visit. We kind of knew that Trump was not in favor of an outright acquisition. We didn't know exactly how far or how hard Ishiba would push for it. The companies, of course, are still trying to push for an actual deal, an acquisition deal.
But it seems that the two leaders did agree that if that's maybe a bridge too far, that a big investment from Nippon Steel and U.S. Steel would be another way to go. Ishiba came back from the trip, and on Sunday he was on TV in Japan talking about it, and he voiced support for the idea of an investment, citing Trump's sort of enthusiasm.
emphasis on not letting that U.S. steel asset be controlled by a foreign entity. So it seems that the two leaders are on board with that. We'll have to see how the companies react later today. From what I've read, according to Bloomberg's reporting, is that Ishiba had an easy win when it came to energy policy. What happened here? Yeah. So first of all, I mean, the trip
was kind of a gamble on the part of Ishiba. I mean, we really did not know how he was going to do. We knew Shinzo Abe and Trump forged a really ferocious
close relationship that was genuine. And Ishiba is a little bit more soft, soft, muted. He's a little bit introverted, and we didn't think he would do that well. But it turns out that he got there, and he managed to combine flattery with an emphasis on all the investment that Japanese companies are going to make in the U.S. to set a positive tone for those talks.
And Trump did say, well, you know, I do want you to help us reduce the U.S. trade deficit with Japan, but that's a relatively tame push. And there was no direct response.
threat of tariffs against Japanese cars or pharmaceuticals. So it really looked like a big win for Ishiba. But then, of course, hours later, we had not only the steel and aluminum tariffs, but talk of reciprocal tariffs. So obviously, trade remains a huge
sort of point of concern and uncertainty for the whole world. As you know well, Japan imports nearly all of its energy. And I think there's a deal now for Japan to take a little bit more LNG from the U.S. Is that right? Yeah. And that was a big plus, I think. It was kind of a win-win for both sides, because as you say, Japan needs that energy and Trump wants pledges for purchasing that. Japan also talked about
possibly investing and contributing to the pipeline project in Alaska that's for gas and oil. That's another thing that Trump was looking for and probably kind of an easy win for Ishiba to suggest because it's in Japan's interest as well. What about the security alliance between these two countries? They're allies after all. Yeah, they're allies. And let's be clear, being allies hasn't really helped everyone, you know, Canada and Mexico.
But Japan, of course, is not involved in any kind of fentanyl or drug trade. No one accuses Japan of being in that area. And it doesn't share a border with the U.S., so there's no complication.
complaints about immigrants or anything like that. And instead, in place of that, Japan remains the bulwark for democracy and U.S. security interests in Asia. So I think that played into the hands of Ishiba and helped create a very friendly atmosphere for those talks. One of the things that happened during the Biden administration,
the administration then was effectively able to enlist Japan with a lot of export controls targeting China. Do you expect there to be a continuation of that type of policy now that Mr. Trump is in the office? It's going to be very interesting to watch and see how that plays out. Ishiba has not been particularly tough on China to date since taking over the premiership. But I think
he's definitely wary of the security threats. And Japan is very interested in protecting its regional assets in the Senkakus, for example. And so I think maybe with the relationship forged over the weekend, Japan,
Japan probably would be very likely to go along with what the U.S. requests in this part of the world. Brian, before I let you go, the Bank of Japan is on many people's minds in terms of tightening a little bit here as Japan deals with more robust inflation. Do we have a sense of how well inflation is under control in Japan right now? Or is there an upward push that may cause the BOJ maybe to raise rates as soon as March?
Yeah, that's an excellent question. I'm glad you asked. So the consensus is analysts are looking for the next hike to come in summer, in July. But I would say, no, I think it could come earlier than that. We're going to see not only inflation, which has been at the BOJ's target for about three years, at or above that target for three years, but we're also going to see the culmination of annual wage negotiations in March.
And it's looking like we're going to see robust pledges for wage increases this year, which would feed into the whole cycle that the BOJ wants to see of wages boosting consumption, boosting prices. So I think there's a pretty good case to be made for, actually, I would say April, late April, early May. The next meeting that I'm looking at is a two-day meeting that kind of
is over that late end of April, beginning of May. All right, we'll leave it there. Brian, thank you so much. Great stuff. Brian Fowler, senior editor for Bloomberg's North Asia EcoGov team, joining us from Tokyo here on the Daybreak Asia podcast.
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Welcome back to the Daybreak Asia podcast. I'm Doug Krisner. A key data point in the week ahead will be the report on U.S. retail inflation. It is due on Wednesday.
Now, it seems as though the progress toward further disinflation has essentially stalled just as the job market revved up late last year. You might recall that last Friday in the States, the government reported that employment growth showed kind of moderation, but still a very healthy labor market. Joining me now for a closer look is Shams Afzal. He is managing director at the Carnegie Investment Council, joining from Toledo, Ohio.
Shams, thank you so much for making time to chat with us. Talk to me a little bit about how you see the progress on inflation right now and whether there is the risk that it could prove perhaps a little more sticky than the market is braced for and whether that could lead to higher for longer rates. Yes, I think the dynamics today obviously are taking into consideration the unknowns from the tariff front.
And so, you know, three months ago, we may have expected two to three rate cuts. And now most people are thinking maybe one to two. So that has been a minor adjustment there. It could end up becoming only one if it ends up being that, you know, Mexico and Canada are back on at the 25 percent tariff level. So certainly a lot of uncertainty there. And we are looking at the markets also sort of reacting to this when you see some days where
when the market takes a dive, but the yield goes up and then there are other days markets sell off and the yields don't go down. And generally speaking, we're only seeing any improvement on the 10-year yield when there's an actual growth scare. Without the growth scare, we're not seeing the yields budge.
And when we think about inflation, the housing component of inflation still being about one third of it is becoming one of the stickiest pieces of the puzzle. So it's a chicken and egg kind of problem where you want inflation to go down, but the housing component is not going down. But you need the rates to go down before housing inflation goes down. So which one happens first?
remains to be seen. I mentioned the jobs data on Friday, but the other report that we got that I think is especially significant is
the University of Michigan data on consumer sentiment. We saw a deterioration in early February. I think that metric fell to a seven-month low. Consumers expressing a lot of concern about rising inflation going forward. I think the prediction here, consumers see an annual rate of around 4.3%. That in and of itself has to be troubling. And I would imagine that consumers are making the direct connection to the threat of tariffs.
Absolutely. I think there was a deeper dive into the crosstabs, if you will, of that survey. And what the survey is showing is the partisan divide in terms of how half the country was looking at inflation the last four years versus the other half looking at inflation this time around. And there is a bit of a political bias there. So I think we need to take that into consideration. But I think overall, the expectations are that
from the first term, we did see prices domestically go up because when steel tariffs were announced back in 2018, domestic producers actually matched the price increases to remain at the same price discrepancy
so that there is no price arbitrage remaining. And if the same thing actually shows up this year, then you have to expect the goods component of inflation will remain very much elevated. And that becomes quite a bit of a risk for those of us wanting to see 5% 30-year mortgages show up at any point this year.
We will also hear from Fed Chair Jay Powell in the week ahead. He has two days of testimony before Congress, the Senate first on Tuesday, then the House Financial Service Committee on Wednesday. Does he have a particularly tough job right now? Yes, the economy seems to be resilient, but there is so much unknown when it comes to the policies of the new administration.
Absolutely. I think he probably caught a bit of a break that was the most surprising, I think, aspect of last week, which is when Treasury Secretary Scott Besson came out and said that they're going to be hyper-focused on the 10-year yield and how they could bring about disinflationary aspects of supply-side economics to bear rather than put the pressure on Chairman Powell as they did the first term.
So that was a bit of a relief. So I think, you know, we may not see that much of a contentious relationship this time around. But how Powell speaks to the uncertainties of the, you know, sort of the tit for tat of the tariff wars will be eliminating in terms of how they're making policy decisions as a result of, you know, the very early months of the Trump administration.
So I hear what Treasury Secretary Besant was saying about short-term Fed policy, the Fed funds rate, but I'm wondering whether there is a risk that at some point, if the 10-year yield does not come down, that the administration could put a little bit of pressure on the Fed to
to use something like quantitative easing as a way of bringing yields in. Do you think that's a risk at all? - Well, the administration wanting to put them on the scale in itself is not a risk. How the Fed deals with that,
remains to be seen. My feeling is that the 10-year Treasury has had a high correlation over the last two years with the US dollar. So if the threat of tariffs actually take a backseat, I think so will the yields. So regardless of whether we get two rate cuts or more than that, if the yield follows the US dollar, then we should be quite okay.
Are we going to have to just accept that there is just going to be so much more volatility in markets, particularly on the equity side? Well, that's, I think, very much a given at this point. Generally, the first term of an incoming president is not that volatile because, you know, you have quite a lot of promise of, you know, expansionary policy and markets tend to like that. But this time around with the doge and everything else that has sort of added to the mix, you
you have to brace for much higher levels of volatility than the mid-teens VIX reading that we're getting so far into February. What about leadership? Last year, the story was about mega cap technology, particularly as it relates to
artificial intelligence. Will that continue to be kind of the driving theme this year? Well, from the very early readings from the quarter four earnings calls that we have seen from Google, Microsoft, Amazon, et cetera, that if you felt that $185 billion worth of capital expenditures from five names alone in technology was good,
going to be a high watermark. I think many of them are basically doubling down and we're looking at more than 1% of US GDP worth of capital expenditures coming from four names alone within this space.
So I think the growth scare aspect of the market volatility is probably overdone. We don't see recession in the horizon anytime soon. The challenge ends up becoming that the expansionary policy remains in place, and therefore, any further improvement on the yield curve
you know, remains pushed back perhaps into late 2025 or even 2026. To what extent has the thesis on artificial intelligence in the U.S. been disrupted by the story on China's deep seek?
Well, I think, you know, it's gone through multiple phases. Over the weekend, maybe a weekend ago, or perhaps two weekends at this point, it was all about, okay, you know, maybe the stranglehold that the Mac 7 have on AI is going to be no longer. But as we have dug into,
really the output from deep seek. It's appearing to be that a lot of the output is very derivative in terms of perhaps the model was strained on the output of chat GPT itself, right? But I think there are some significant breakthroughs that the Chinese have achieved, especially when it comes to assembly language efficiency, which I think our engineers probably can learn from and can adapt to. But I think some of the fears have subsided because
People are realizing that some of the breakthroughs that DeepSeek has brought to bear can be easily replicated. And again, the U.S. will still have the treasure trove of the data that future models are going to be trained upon. So the long-term AI leadership doesn't really change in my eyes, but I think we have a competitor to take seriously at this point for sure.
So, Shams, in terms of an investment strategy for the year ahead, I'm hearing strong dollar. That may be a headwind for U.S. multinationals. And maybe you just don't have enough in terms of economic growth here in the U.S. to justify a big bet on some of the small cap names. I'm wondering whether you want to be more exposed in the days ahead to kind of mid-cap companies.
Well, mid-cap, unless you're picking individual names, making a bet on Russell 1000s of the world does end up bringing a lot of regional banks in the mix, a lot of mortgage companies in the mix.
So that may not be an ideal solution. We are thinking that, you know, when you look across maybe the large caps and look into med tech space within health care that does not have, you know, seem to be caught into the tit for tat when it comes to the trade wars.
I think that's probably a reasonable place to look at. Some of the pharmaceutical names that have taken a massive hit as a result of some of the fears from RFK Jr.'s nomination announcement, we start to see that maybe there's some value there as well. And certainly, we don't think MAC7 is going to give up the leadership anytime soon. But I think within the large cap space is where we would recommend most investors to remain in place, unless
you know, we start to see a growth scare and maybe a faster, you know, curbing of the, you know, yield on the 10 year that might change the equation. But for now, we suggest that, you know, stick to the large caps. Shams, we'll leave it there. Shams Afzal is managing director at the Carnegie Investment Council, joining us from Toledo, Ohio, 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 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 Krisner, and this is Bloomberg.
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