APAC Reacts to Hot US CPI Print; Honda & Nissan Earnings
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Welcome to the Bloomberg Daybreak Asia podcast. I'm Doug Krisner. On today's episode, we'll be getting a preview of earnings from Japanese auto giants Honda and Nissan. These reports come on the heels of a report in the Nikkei that these Japanese automakers will be backtracking on their planned merger. We'll be hearing from James Hong. He is head of Asia Autos at Macquarie Capital. But we begin in the States.

So markets right now are reducing their bets for Fed rate cuts. This is all in reaction to a hot reading on U.S. retail inflation. We had yields spiking across the Treasury curve today on news that CPI month-on-month at the core rate increased by four-tenths of 1%. And money markets are now projecting the first, perhaps the only, rate cut of the year will not come until December.

Joining us now for a closer look is Michael Green. He is portfolio manager, also the chief strategist at Simplify Asset Management. Michael, thank you for making time to chat with us. A lot of this increase in core consumer prices had to do with auto insurance, airfares, and that record monthly increase in the cost of prescription drugs. Are you worried at all about what we're seeing here in the tape?

I'm really not because I actually think a lot of what is occurring is unfortunately a seasonal function. If you look back to last summer when we were experiencing much lower than expected inflation numbers,

The seasonal adjustments at that point had pushed them down below where you would expect them to be. We're seeing the opposite of that in January. That's exactly, unfortunately, what we saw last year. It led markets astray to expect a return of inflation. I think a very similar phenomenon is playing out this year, unfortunately. So do you think markets are overreacting a bit? I don't.

I do. And I think actually Powell has tried to guide us in that direction, as has Secretary of the Treasury Scott Besant, indicating that they are focused on the longer end of the curve much more so than they are at the short end of the curve. You know, we have basically seen an environment in which people react to those hikes and expect or to those increases in inflation in expectation that the Fed is going to react to them

Powell told us very clearly in December, reiterated it in January, echoed by Waller in January as well, and a few other speakers, that what they're really focused on are what are called the market-derived prices or the market prices as compared to the imputed prices. And almost all the prices that you just mentioned to me, insurance, et cetera,

are imputed prices that are not really going to play a significant role in the Fed's consideration. The other one, of course, that you didn't mention was there was a huge spike in energy costs for heating homes in the United States.

That played through in January of 2025 that contributed 0.1 points. This time around it contributed 0.7. So it was a significant contributor that was really driven by usage associated with the very cold weather in January as compared to a meaningful inflation metric.

So if we can agree that the 10-year right now is a little above 460, I'm wondering whether there is risk that we have a move higher in yield, maybe closer to something of 5%, just based on the risk that maybe one of the big unknowns is the inflationary implications of tariff policy.

Well, that I think is actually playing a more meaningful role. We certainly saw an element of buying forward associated with consumer purchases in the fourth quarter of durable goods, items that are most likely to be affected by tariffs. It's unclear whether that was a legitimate acceleration or whether that was pulling forward in anticipation of tariffs raising prices.

I think the Fed has been pretty clear on this, that if ultimately the issue is tariffs driving prices, those are not really the same thing as an overheated economy driving prices. If anything, they're reducing purchasing power. There's no reason to double up with an interest rate response associated with it.

Could we see the 10-year go to 5%? Of course we can. Would that have any meaningful impact on the already impacted areas of our economy, like housing or others? I'd be very surprised if it has that meaningful of an impact

The much more important question is going to be, do we see that inflation start to retreat again in the areas that Powell is paying attention to? We had a pullback in oil prices here in New York today. WTI was down by more than two and a half percent. That seemed to coincide with President Trump saying that he's spoken with Russian President Putin about talks to end the war in Ukraine. To what extent does energy factor into what we've been talking about with respect to inflation?

Well, energy is obviously a critical component. It's much less so in the United States where we have access to natural gas at relatively low cost. Vice President Vance gave an impassioned speech highlighting the importance of energy and energy production, particularly as we talk about the AI revolution and the need for data centers with significant energy demands.

This is going to be a really interesting period because what President Trump is indicating is a return to a focus on baseline power building as compared to the variable and episodic contributions from things like wind and solar. It clearly is an impact, but anytime you take away a war, particularly a significant war like Ukraine, you have to expect that the price of oil, particularly if that Russian oil comes back onto the market in any meaningful way,

could really be negatively impacted. So that would be a contributing factor to lower inflation if we were to experience it. So you mentioned the demand for more energy as a result of this transformation that we're seeing right now in artificial intelligence. After the bell today, Cisco gave an upbeat sales forecast for the current quarter. This seems to reflect that companies are spending more on computing infrastructure as a part of the AI narrative. Is this a trade that you still must be participating in?

Well, I think it's an interesting question because is it a trade that you're actually playing for the AI enablers and the AI companies themselves? Or are you starting to make a play for how AI is impacting the economy? I will tell you candidly that I've started using the new chat GPT platform.

version one with the deep research capabilities and it is truly astonishing how powerful it is for anyone whose primary role is communications programming research analysis etc they are really really powerful tools but one of the critical things to understand anthropic just released an economic report on ai and it's astonishing because less than six percent of the workers in the workforce or less than six percent of the employment categories

are accounting for more than 50% of the AI usage. And so this is going to be a really interesting question. Does this become a widely diffused technology or does it become a technology that is used by a limited subset of our population until it's able to diffuse through educational systems, et cetera, and people become very comfortable using it?

It's not clear how quick the adoption path will be. It's clearly going to have a huge impact on those workers like myself who were affected by it. Just to let you know that OpenAI is nearing the release of a new AI model, I guess, ChatGPT 4.5.

From what I understand, this is going to be the last model that doesn't use additional computing power to mimic human reasoning. I'm sure you've been following the story on China's deep seek. To what extent do you regard this as transformational for the AI industry? Well, I think the key in its transformational capability is not that it's actually pushing the envelope in terms of capability like a 4.5 or the new deep research capability.

or chat GPT, but what it does do is highlight the inevitability that the sort of efficiency gains that we saw in the fiber optic revolution are coming for the AI revolution. I just want to remind people if you go back and listen to the commentary from the late 1990s about the costs of rolling out fiber optics and the switching networks,

Those estimates turned out to be way too high, and as a result we experienced extraordinary deflation in communication technology that now allows you and I to be talking over the Internet. One of the things that I remember from that period, talking about the need for greater Internet bandwidth, and it came as a bit of a surprise back then,

was DSL multiplex technology, right? And so we could use twisted pair that kind of the traditional phone lines and get much greater speed for connecting to the internet. And I think that really took the industry quite by surprise.

Well, there was that, and then the real revolution actually occurred in the switching technology and the amplification technology. The real costs associated with the fiber optic revolution, much like the AI revolution, were associated with actual physical building, digging up streets, laying fiber optic, etc.,

Because of the advances in related technologies, not dissimilar to the algorithmic advance in terms of memory utilization and lower power consumption that DeepSeq has identified and placed in open code so that it's available to everybody, open source code so that it's available to everybody and everybody will now begin adopting it. We just saw extraordinary improvements.

Again, going back to that fiber optic example, we are still today, 25 years later, using only a fraction of the laid fiber in the United States because we became so much more efficient at using it. And with the U.S. so far ahead of the rest of the world in data center construction, you have to believe that there is a risk of a similar bubble associated with it, which is why I caveat this.

Are you more interested in the actual companies producing AI technology or are you more interested in companies that are going to figure out how to exploit that technology to improve their business? So as long as we're talking about artificial intelligence, I think we have to include the chip makers away from NVIDIA for a moment.

Today, the Wall Street Journal reported a conversation about a potential factory partnership between Intel and Taiwan Semiconductor Manufacturing, obviously the world's largest contract chip maker. How do you want to be exposed to the chip stocks right now?

Well, I think the key component that you just hit is the NVIDIA dynamic. NVIDIA has experienced extraordinary profitability margins associated with their AI chips that seem unlikely to sustain. They didn't sustain before. It's unlikely they sustain going forward. Ultimately, we're finding out that the chips themselves, much like brain cells, are somewhat commoditized in their underlying features.

And so my bias is that we are still caught in an environment, and I shared with you some of the work that I've done around passive investing, in which as long as money is flowing in, it's going to meaningfully impact those largest stocks.

Once we begin to actually evaluate them on a discretionary basis and ask the key questions that we're discussing right now, you could see those prices correct quite sharply in a replay of what looked like the dot-com cycle. Michael, we'll leave it there. Thank you so much for being with us. Michael Green there. He is portfolio manager, also the chief strategist at Simplify Asset Management. Joining from here in New York City on the Daybreak Asia podcast.

Okay, business leaders, are you playing defense or are you on the offense? Are you just, excuse me, hey, I'm trying to talk business here.

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Welcome back to the Daybreak Asia podcast. I'm Doug Krisner. Later today, we'll be getting earnings from Japanese auto giants Honda and Nissan. These reports come on the heels of a story in the Nikkei indicating these two auto companies will be backtracking on their planned merger. For more, we heard from James Hong. He is head of Asia Autos at Macquarie Capital. He spoke earlier with Bloomberg Sherry Ahn and Heidi Stroud-Watts.

James, good to have you with us. We're seeing really Nissan under pressure today, Honda stock gaining ground. How much does this really reflect the outlook for business for these two companies, especially if we see, in fact, the merger talks collapsing? Yeah, well, I don't think that today's move really has to do with their third quarter operation result. It's more about the future of the company, especially when it comes to Nissan companies.

With the recent report on HONI getting interested, but it's not about acquisition, it's more about partnership, which also means that the burning cash situation of Nissan may not really turn around anytime soon. We are actually expecting more of the self-restruction plan to be announced, updated in the third quarter today. So I guess the total impact on their balance sheet and cash position will be the key focus. But at the moment,

Given the heights we had around these acquisitions from Honai or someone getting interested on Nissan, I guess that's basically dragging down the share price at the moment and hurting the sentiment.

Yeah. So how will Nissan stay above water if this talk in fact collapses and there's no merger? Well, I guess there will be a couple of things to do. I mean, at least the company needs to continue to deliver their self-restructuring plan and hoping that they persuade creditors or their stakeholders to continue to support the company.

do note that majority of their outstanding loan is already guaranteed by the Japanese government. So we don't really expect any issue, major financing related issue anytime soon for Nissan.

However, in order to deliver more positive message to the market and basically ease the concern around the sustainability of the business, we surely need to hear more about their outlook and the progress that they will deliver. And within that plan, probably the market will want to hear more about partnership, what kind of financial investor they're looking or how they fund their operation.

I mean, these are all the questions that still have yet been answered. And mainly a lot of analysts or investors will probably ask about it today, later afternoon on their earnings briefing. We have heard that Honghai is open to that partnership right through buying Renault's stake. Are there other partners or possibility, you know, roads ahead that are available to Nissan that might make sense?

Well, I mean, we've been hearing some of the, like, in Japan market, obviously, there are a lot of active private equity funds. So I do hear from some of the investors that there might be a potential target for this private equity, although we don't see Nissan as a very attractive target.

But when the company starts to carve out some of the overcapacity and the company wants to cut their capacity, I'm sure some of those factories can be sold to the potential buyers. It can be HONNA, it can be anyone else who is willing to enter the EV assembly business.

But again, I mean, again, all these are still remain as an uncertainty to us. At the end of the day, we still believe that Nissan will need to get support from the other big automaker. And without that, I mean, it seems a quite difficult situation for them. Survival is one thing, right? But, you know, being able to actually...

Regain competitiveness seems like a really big ask at the moment does scale on its own through through these sorts of you know a Collaboration or a merger like this actually help it compete with the Chinese manufacturers Yeah so the overall like over over capacity situation and the lack of scale actually started with as they lost their market share in China with the obviously competition from PYD or local companies and

But at the same time, their response to the changing market dynamic, such as growing demand for hybrid in the U.S., was actually a bit late. So we're basically seeing the Nissan with the weakening brand power every day. And obviously, on the other hand, we're seeing the Koreans and other hybrid manufacturers in Japan, which is basically Honda and Toyota, continue to do better in the U.S. market.

So for Nissan, as you said, I mean, sustainable survival was one thing, but the turnaround and becoming a better brand were becoming what they were, like, say, like 20 years ago,

we're still i don't think there is a lot of the confidence we don't have much of confidence on that one yet what does this actually mean for the broader auto industry here in japan and perhaps what we thought would be more accelerating moves towards consolidation

Right, right. We don't think that consolidation is off the table. I mean, given there are many of the Japanese automakers with a lack of scale to invest in software-defined vehicles, we've been seeing BYD basically guiding that all their vehicles, even cheaper ones, will have ADAS function as a basic feature.

And also the EV transition competition from Chinese, especially in China and ASEAN, which are basically the key market for Japanese automakers, and the changing environment in Europe and the U.S.,

We don't think that sub-scale company can actually deal with that efficiently. So consolidation is still there. It's just that when you look at the Japanese automotive industry, most of the members are within the Toyota umbrella, like Suzuki, Subaru, Mazda. But the question still remains on the three more independent companies, which are basically Honda, Nissan, and Mitsubishi. And

the Japan-French alliance or Japan-US alliance, which is a Honda and GM, has not really been successful. I'm sure there will be a lot of cultural issue between the two automotive groups there.

So still from the Japan automotive industry as a whole, we still believe that this consolidation and collaboration within the remaining three companies is still a viable option. It's just that the discussion just went bad for now, but I don't think that it's permanently gone.

From a more global perspective, we know that both Honda and Nissan are particularly vulnerable to trade tensions and tariffs because of the high share of those vehicles that get imported to the US from countries like Mexico and Canada. What's your assessment in terms of how big that exposure is?

Yeah, I mean, so not all the Japanese automakers are not free from those impacts to begin with. But when it comes to Nissan, we're basically seeing the larger dependency towards the Mexican operation compared to other companies. I mean, some of the popular models they produce, such as Sentra and Kicks, which is a small entry type of vehicles,

are accounting majority of their volume for their U.S. operation.

Unlike Nissan, Honda and Toyota still have room to adjust their production and location for those vehicles being produced in Mexico. So that actually puts a different situation. And also, when you look at the Mexican product to the U.S., it's either high, very expensive pickup trucks like U.S. companies and Toyota build in Mexico, or either low-end passenger cars.

So if there is actual tariff against the Mexican product, I'm sure these high ASP products are more likely

less since when it comes to their customer lessons tip those price changes, whereas it can actually be a cost cannot be really been passed on to the consumers for the those cheaper who has less affordability when buying the vehicles. So we're more negative concern about this exposure when it comes to to Nissan who are basically delivering very latest in margin at the moment, if not negative.

for their automotive business at the moment, especially in the US. James Hong, really great to have you with us as a head of Asian Autos at Macquarie Capital.

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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