Futures Mixed on Fed Rate Cut Hopes, Tepid US Eco Data
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Welcome to the Bloomberg Daybreak Asia podcast. I'm Doug Krisner. Markets in the Asia-Pacific are reacting to some disappointing U.S. eco data. We had some weak prints on both hiring and services activity, and that in turn seemed to boost conviction in the Fed cutting interest rates as soon as September. In a moment, we'll get reaction from David Bonson. He is the CIO at the Bonson Group. But we begin this morning in Hong Kong.

Joining me now is Willem Sels. He is the Global CIO at HSBC Global Private Banking and Premier Wealth. Willem joins us from our studios in Hong Kong. Thank you for making time to chat with me. Let's begin with the global macro, if we can. Just the other day, the OECD cut its forecast for global growth. And given a lot of the sentiment indicators that we have been seeing and the weak readings that we have been looking at as a result of the trade war, that really shouldn't come as a surprise.

For the U.S., the OECD is saying we're going to see a deceleration in GDP, a pretty sharp one at that, to a rate of around 1.6%. That seems dramatic. Do you think that's about right? We have a 1.9% growth forecast for the U.S. I think most economists will agree that tariffs could lower growth and increase inflation to some extent directionally.

But I think what is most important for investors is that we are of the view that we don't go into a recession. And I'm glad that the OECD agrees with that. Neither recession nor stagflation. And that is to a very large extent because

Before we undergo this shock, we are actually in a relatively decent and healthy position from an economic perspective in the labor markets, in terms of corporate balance sheets. The Atlanta Fed thinks that we are currently running at a 3.8% growth rate, for example. So certainly the first quarter GDP number was misleading because it's all due to that front running of imports.

Corporate profits are healthy as well, with solid surprises and the margins are strong. So, I think we can undergo a shock without going into a recession. Does that necessarily mean that we should expect the Fed to lower interest rates by maybe 50 basis points between now and the end of the year?

So they are obviously in that bind where they are balancing the growth story together with the inflation story. So there is, at this point in time, as economic growth is reasonably resilient, less of an urge to cut.

But also, they are still looking at whether inflation allows them to cut. I do think that they will see some of the tariffs being absorbed in those VAT margins of the corporates, and therefore somewhat an increase in inflation to probably 2.9% this year.

But importantly, that is already priced into the bond market. But yes, we do expect a few cuts from the Fed still this year. So if we could take a step back and look at the global economy, worldwide manufacturing operating conditions were down for a second month in a row in May. That's according to JP Morgan. They have the global manufacturing PMI. I think it's at a five-month low now. And among large nations, you've got PMIs contracting in China, Germany, Japan, and the U.K.,

I know the PMI is a sentiment indicator. We call it soft data versus, you know, when you look at an industrial production reading, which is a more firm kind of hard data point. Are you seeing a big divergence between hard data and soft data still, or do you think that gap is beginning to narrow?

It's narrow a little bit, but there is indeed a gap. And of course, it's logical that you do get that gap. Also importantly, we need to realize that manufacturing in many countries is much smaller than services. So in the US, for example, it's 11% of GDP. It's about 8%, 9% of employment. Services is healthier.

And what I look at for the stock market, you see that correlation between an ISM manufacturing and how the stock market moves. That has broken down. It used to be very strongly correlated over the last decades, over the last three, four years, much less so. And that's obviously because of the growth in services and technology.

So as long as services and technology can do well, and we've seen good results from technology in the first quarter, I do think the stock market can hold up. You're in Hong Kong. Let's talk about the Asia-Pacific, China in particular. We recently heard from Treasury Secretary Scott Besson saying that China needs to shift to a more consumption-led economy to help ease global imbalances. That seems like...

It's a very obvious point. It's been out there in the zeitgeist for some time right now. But I'm curious to get your take on what Beijing could be doing to stimulate more domestic demand. I mean, is there some resistance, do you think, that the government has to try to improve domestic consumption?

China has been, you know, building out some of its, you know, domestic stimulus already. There were those exchange programs, you know, of consumer goods, for example. And we do think that we will, you know, continue to see, you know, stimulus added further.

but it doesn't want to react to every single change in US government policy. It's rather a longer term trend that we are seeing there. Again, from a stock market perspective, this is actually a very domestic economy. So the GDP exposure to US trade is much bigger than the

the actual stocks in the stock market, their exposure to the US. So to give you an idea of that,

Chinese stocks in the MSCI China, only their revenues, only 2.3% is goods exports to the US. So it's a very domestic market. And that's why I do think that, number one, that domestic stimulus is important, but also that makes it a bit more resilient in terms of the stock market vis-a-vis the tariff news flow. Right.

Right. We know that the deflation story in China is pretty bleak right now. And in essence, the government has been allowing excess products to be exported as a way of trying to help with the issue of overcapacity to some extent. And this is where the criticism is coming from on the part of the United States. Do you think that that's going to change in a meaningful way?

We do think that there is going to be further domestic stimulus on top of regional integration. So China doesn't just trade with the US, it trades a lot with the region as well. And that is also an avenue to continue those exports so that it continues to be in a balanced economy where you have exports as well as obviously that domestic stimulus feeding through into a bit more support for domestic demand.

I'm curious to get your take on the signals that you're getting from the U.S. bond market. I mean, the inflation story is one part of it. The deficit, the budget deficit story is another part of it. I mean, what is your takeaway, really, if you look at the price action in U.S. treasuries? So, I think there are three elements to look at. The inflation story, obviously, we will have a tariff impact on goods, obviously.

where you will have goods inflation rising, but goods inflation has not been the issue over the last number of months. It has been that services inflation. That is coming down. So if you add it up together, the components of CPI may change, but it will be a mild increase to around the 2.9% level. Then on top of that, the bond market is asking for two kinds of risk premiums. One is the real yield premiums.

which is simply the compensation over inflation expectations, and that is already at a multi-year high. The other one is the term premium, and the term premium compensates you for taking longer-dated risk, and that obviously needs to compensate for the difficulty to assess where is economic growth going over the next number of years and where is that debt pile going over the next number of years.

Well, that term premium as well is near multi-year highs. So I do think that the market compensates you with a risk premium. Clearly, we will have continued volatility until we get to the big beautiful bill being voted and then the budget being voted. But I do think that...

bonds have a place in portfolios because of the valuations that already incorporate that risk premium. And certainly for people who worry, of course, about recession risk. Willem, we've been having a number of conversations on this podcast about the degree to which foreign investors have been reducing their exposure to U.S. risk assets. Is that a trade that you're participating in?

We are seeing this a little bit from our Asian clients, but much less so from our European clients. And frankly, that is what you see as well in the data so far in terms of flows. Now, the tick data are very slow. You will have a new release.

So put it in your calendar for the 18th of June on the same day as the Fed, where you will see a lot of specific data around those flows. So far, it's indeed those Asians that have potentially been selling a little bit, but the Europeans been buying. What we are doing is rather than flee from the US, diversify a bit. And I think that is healthy. Asia is

merits and higher allocation in many portfolios, not just for diversification purposes, but also because of the improving fundamentals here. We were talking about the challenges to Chinese demand, but there is, on the other hand, the very strong technological innovation

that we have here in the region and that is creating a lot of excitement. And obviously those technology companies are trading at much lower multiples than in the US. So a lot of clients are very interested in that AI plus the application, so automation and so on. What markets in the Asia-Pacific are you favoring right now and for what reason?

So, mostly we're favoring India, China and Singapore. And that is indeed because of the point that we just touched on, which is that domestic angle. So, China, India and Singapore have somewhere between 2% and 4% of their revenues for the equity market coming from goods exports to the US. If you compare that to Korea, that's 12%. If you compare it to Japan, it's 18%.

So that's the choice that we're making here is that we think that the tariff volatility is going to continue to lead to equity market volatility. So to shield yourself, you go to those three domestic markets. Willem, we'll leave it there. Thank you so much. Willem Sells, the Global CIO at HSBC Global Private Banking and Premier Wealth. Joining from our Hong Kong studio here on the Daybreak Asia podcast.

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Welcome back to the Daybreak Asia podcast. I'm Doug Krisner. The latest economic news in the U.S. was a bit disappointing, and it seemed to boost the conviction in the Fed cutting interest rates as soon as September. We had the ISM measure of services activity contracting in May for the first time in a year.

And the private payroll survey from ADP showed weakness in job creation, the weakest job creation that we've had in about two years. So in the bond market today, we had yields down right across the treasury curve. For a closer look at the macro, I am joined by David Bonson. He is the founder, also the CIO at the Bonson Group. He is on the line from Newport Beach, California. David, thank you for making time to chat with me. Can we talk about...

What you saw today, Ian, not only the data, but the way in which the bond market performed, that was a pretty big move in the tenure. I think we were down about 10 basis points. Do you think the bond market is getting maybe a little too ahead of itself, given the fact that we still have a lot of uncertainty on this spending bill that is yet to get out of Congress?

I think that the bond market is properly responding to growth expectations. So this is a rally in bonds for the wrong reason. It's not coming from declining inflation expectations or greater stability. It's coming from declining real growth expectations.

If we want a 10-year around 4 to 4.3, you really want that because you're getting somewhere around 1.5 or 2 inflation expectations, and then another 2 to 3 real GDP growth. We're not getting that.

I think that the other side to this coin is very important, though. When the yield was up around 4.5 and everybody said, oh boy, the bond market is really revolting against this spending bill, that was rather exaggerated as well. So my own view is that...

the bond market is in a very tight range actually it is not pricing in a big extreme either for recession or for some sort of runaway fears about where the debt is going uh my fear is that the debt is going too high but it isn't the bond market saying so it's just our our expectations of real growth we also had the latest survey from the fed the beige book report and it seemed to underscore the risk facing the economy where overall activity

declined slightly, but all 12 fed districts did report elevated levels of uncertainty. And this seems directly correlated to the story on tariffs. Wouldn't you agree?

There's absolutely no question that that is correct, that the uncertainty is highly correlated to the tariff policy reality. Not only the difficulties of the policy, but the uncertainties around the policy, including implementation, timing, and just various expectations. So I expect to see more of it in data that we find out throughout month of May, there was a really

compressed reality of productive activity as a result of tariff uncertainty. But it's not just the story on weaker growth. I mean, the Beige Book indicates widespread expectations that both cost and prices are going to rise at a faster rate going forward. That sounds like a recipe for stagflation, which is the big concern.

Well, if that were the case, the bond market, you would see tip spreads widening. I just simply don't believe that we're seeing that. I think that we mix up the definition of inflation sometimes. I think that it's very true that tariffs raise prices on certain things.

But if inflation is indeed a monetary phenomenon, in theory, what it's doing is pushing prices higher on autos or steel, aluminum, and yet pushing prices lower on other things. My bigger fear as to why I see them as problematic is that they force a lower level of productive activity, a lower level of trade.

So I would be worried about the stag portion, but not the flation portion. I think there's downward pressure on prices, and I don't say that is a good thing. So where does this leave the Fed at the end of the day? We've got a policy decision in a couple of weeks. Well, it's pretty clear in the futures market that they don't intend to be cutting rates at the next meeting. The futures curve is indicating September. Do they end up acting in July? It's possible. It's not 0%, but-

I think you're going to get two to three cuts by the end of the year. And the question is more if you're going to start getting them a little bit sooner than later. So you get a couple other weak economic points. You know, this ISM services today, the ISM manufacturing the other day, the ADP number today. If you get a couple tag on negative economic data points, that will start more of a

narrative of the Fed doing so sooner than later. But I don't think it changes the terminal for the end of the year. I think at the most, they're going to cut 75 out. It's just a matter of when they start. So let's change gears if we can talk a little bit about the equity market. Are you still constructive on U.S. stocks?

Well, I am, but it requires someone being selective. It requires someone having a value orientation. I do not think that I'd be constructive on buying 40 PE stocks hoping they go to 50 PE.

And in some cases, that's been conservative. So unfortunately, for cap-weighted index investors, they're still heavily, heavily reliant on a few names. And I think that's going to prove to run in place for quite some time. But where there is better value, better opportunity, better, you know, P-E ratios,

and yet organic earnings growth. Ourselves as dividend growth investors are very focused on some of those names. And we think there's some good opportunities in financials and health care and consumer staples and energy. Without naming a specific stock or a specific company, are there generalizations that you can make about certain industry groups, groups right now that you believe have some type of advantage?

Yes, and again, I'm happy to talk individual names if you want me to, but if you'd rather I just talk sectors, that's fine. I think, like I said, the midstream energy sector provides a lot of great opportunity. There's very attractive yield spreads and very healthy financials. And so that sector to me is attractive regardless of where some of these issues around tariffs go. Similarly with health care, they've kind of priced in a lot of bad news. Some of the pharmaceutical names

There's this fear of the pricing executive order. There's a lot of upside possibility, because some of those things that the president has threatened are at risk of not happening once courts and Congress and other things get involved. But at the end of the day, the bad news seems to be disproportionately priced in. So we think pharma and energy offer some great opportunities where you're not trying to buy a stock at 30 times earnings.

What about the financials? We were talking a moment ago about your expectations for lower interest rates, a slower economy. Does that necessarily mean that you want to put money into the banks right now? No, I think when I talk about the financials, we're talking about asset managers. We're talking about investors.

some fee-based type businesses. There are a couple banks we own that we like, but as a group or as a sector, I think that the overall business model that's just requiring that interest margin is more difficult.

But again, the commercial banks tend to be more pro-cyclical and even in good times are pretty boring businesses. There are a couple we like, but the financials includes more than just the banks. And when you look at some of the asset managers, there's some good opportunities there. Before I let you go, David, I have to ask about opportunities offshore and whether you're compelled to look at markets elsewhere, particularly in Asia.

Well, we're more bottom-up investors, and so the top-down side, meaning looking at a country to provoke opportunity, is a little bit different than our process. What I would say is if one has a weak dollar thesis, if they believe that the end result

of a lot of these trade deals is going to be the administration wanting a weaker dollar, then I think emerging markets are finally gonna get a little better tailwind. And so we wouldn't mind Asia, excuse me, emerging markets

But in terms of the developed Asian, developed European markets, it's hard to get real bullish there. David, we'll leave it there. Thank you so much. David Bonson there. He is the founder, also the CIO at Bonson Group on the line from Newport Beach, California, 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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