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>> Bloomberg Audio Studios. Podcasts,

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>> Welcome to the Daybreak Asia podcast.

I'm Doug Krisner, and today we begin

with the Fed. On Wednesday, members of

the FOMC voted unanimously to leave

interest rates unchanged. Now, that move

was widely expected. The rate on Fed

funds held steady in a range of 3 and

1/2 to 3 and 3/4 percent. Now, officials

also signaled their next move may be to

raise interest rates, not cut them,

given the outlook for higher inflation.

Here is Fed Chair Kevin Warsh at his

first post-meeting news conference.

>> Persistently high prices are burden for

the American people.

But the recent past need not be

prologue.

I am pleased to report

that members of the FOMC are unambiguous

and unanimous. This committee will

deliver price stability.

>> Fed Chair Kevin Warsh there. For a

closer look, I'm joined by Jeffrey

Roche. He is the chief economist at LPL

Financial. Jeffrey, thank you so much

for being with us. Seems to me this tone

was maybe a little more hawkish that the

market was expecting. So, can you put

that in context given the fact that this

was Warsh's first meeting? I'm wondering

whether he was trying to buy a little

bit of credibility, perhaps, with the

bond market. Is that possible?

>> Well, I think you know, there's a lot of

pressure on Warsh. There was

a lot of chatter that he was going to be

a puppet to the president. Obviously, he

was picked by the president and

confirmed then by the Senate, but it was

all in the context of being a dovish

leader of the Fed. I think Warsh did the

right thing today, that he came out with

a a big bark. Maybe the bark's going to

be worse than the bite. I'm not sure.

Time will tell. But he was terse, curt,

straight to the point. I think he did

what had to be done. That

the bigger concern is runaway inflation.

It's not necessarily, you know,

something where we're we're thinking

about the brinks of recession. So, I

think he balanced it quite well.

>> There have been a lot of questions,

perhaps some concerns even, about the

degree to which the Fed is going to

alter its communication style with

markets. And Warsh said today that the

Fed has dropped forward guidance. Is

that a problem in your opinion?

>> Well, it's a little bit of a misnomer

because we certainly got plenty of

forward guidance from the summary of

economic projections.

So,

what was a little bit surprising, and

this certainly was making a statement,

was the very short statement released

earlier, 30 minutes before the chair

started his press conference, roughly

130 words or so. The previous statement

was roughly triple that. So, he he

certainly is is

going straight to the point, but I don't

know what's going to happen with the

summary of economic projections. He did

hint at saying that he was not

participating in in the forecast this

time around, but there were

plenty of committee members that did

participate with those dot plots. So, in

some ways, the markets did get plenty of

forward guidance. We did get an updated

dot plot. We did get more information

that several of these

governors and district presidents are

more so inclined now to indeed hike,

hence the the uptick in expectations

from futures markets. So,

we're we're still a little bit in the

dark because we don't know how much

change Warsh will enact after these task

forces come with their recommendations.

>> Well, I'm glad you bring up that fact

because and as a part of his opening

remarks, Warsh did announce the creation

of multiple task forces, I think five

areas and the aim here is to change the

way that the Fed operates. If you were

advising the Fed, I hate to put you in a

tough position, but I'm going to anyway.

How could the Fed improve the way that

it operates? Are there things that are a

little antiquated right now that need to

be addressed to improve the functioning

not only of the regulatory regime, but

the transmission mechanism and the way

in which kind of markets respond to what

the Fed is trying to achieve?

>> Well, I would say unambiguously, I was

pretty excited to hear that one of the

five task forces will be about data

collection and uh the the

updating on data. I think that is a very

fair point for the chair to call that

out in the press conference that there

are things uh either the the methodology

uh or the survey uh

calculations. There are a number of ways

that we legitimately could update and

bring into the current times and uh fix

some of the antiquated data that we rely

on as a private sector economist, no

doubt public sector uh Fed officials as

well. So,

very happy with uh with some of these

task force uh setups. Could be on net

for markets, for investors, on net this

could actually be a very good thing.

Now, the hard part of course is in the

interim waiting and uh somewhat being a

little bit in the fog as we sit here

today.

>> Most definitely, particularly where the

effects of the war with Iran are

concerned in higher energy prices. But

money markets right now, you talked

about the market response in terms of

futures, money markets are fully pricing

in a quarter point Fed hike by October,

maybe another one by March. I think

that's been fully priced in as well.

Does the market seem right now to be a

little too

uh optimistic about the degree to which

the Fed might tighten?

>> Well, I don't think the market has it

right. I we've seen this before where

market futures markets respond to uh the

press conference, whether it's Warsh or

whether it's Powell or

Bernanke or Yellen,

Greenspan even. So, I think markets are

are a little bit ahead of themselves.

And the reason why I say that is because

we know from the statement, from the

chair's own mouth during the press

conference, that a lot of these

inflationary pressures are supply

driven.

And we know that those things can

reverse quite quickly. And when that

does, you'll have a very very different

inflation dynamic.

>> What is your sense of the inflation

problem right now? I don't want to use

the term transitory. I'm sure it was

thrown around a lot today by

commentators looking at the Fed's

decision.

Do you think this is a temporary thing

that we are going to experience as a

result of the war with Iran, or are we

at risk for higher prices to remain

embedded in the economy for the

foreseeable future?

>> Well, I do think that there is some time

stamp on the energy-related inflation

we're seeing clearly connected to the

Middle East crisis. One thing that I

don't know, and I'm a little bit nervous

about, is the embedded inflation

pressures from households that have a

lot of cash. There are plenty of

households, when you look at household

net worth relative to disposable

personal income, that is at a very, very

high ratio. And so, from the demand side

of the equation, we still see

a lot of household spending, spending on

a number of

durable goods, certainly non-durables,

starting to see a little bit of slowdown

in terms of travel plans and

services in that regard. But, there is a

a strong demand for several sectors in

the economy that are demand driven. That

will stick around a lot longer than the

components that are supply driven.

>> The president has made trade policy a

cornerstone of his administration's

economic plan. And one of the things

that we saw today as a result of the

price action in the bond market, a much,

much stronger dollar. I think the

Bloomberg Dollar Spot Index was up about

7/10 of 1% today. If the dollar does

remain at these levels,

is that problematic for US trade?

>> Well, certainly, we've seen a pretty

strong and solid relationship between

dollar performance and import prices.

So, in in some ways, the biggest risk to

a strong dollar is probably emerging

markets, not necessarily domestically

inside the United States. I think what

this tells me, though, is whenever

there's this move toward dollar assets

when there's periods of uncertainty,

in some ways, it embeds in my mind the

view that the dollar is still this safe

haven asset. And and in in some ways,

you can argue from that that you still

have a little bit of benefit in the

exorbitant privilege, as it were, for US

markets because of that.

>> All right, Jeffrey, we'll leave it

there. Good stuff. Thank you so very

much. Jeffrey Roach is the chief

economist at LPL Financial, joining us

here on the Daybreak Asia podcast.

>> [music]

>> Welcome [music] back to the Daybreak

Asia podcast. I'm Doug Crisner. Equity

markets across the APAC region are

reacting to the Fed signaling it may

need to raise interest rates further to

contain inflation. Now, US money markets

have fully priced in a quarter point Fed

hike by October and another hike by

March of next year.

However, Ho Weng Lee, the senior macro

strategist at Lombard Odier, says the

Fed will hold rates steady until the end

of the year. Ho Weng spoke about his

outlook with Bloomberg TV host Avril

Hong.

>> So, you think no change till the end of

the year?

>> Well, that's still our base case, even

though this meeting proved to be a

little more hawkish than what we

expected. So, there is a bit of a

growing challenge to our to our

scenario.

Um at the end of the day,

labor market has been fairly solid, um

and uh capital markets have been quite

buoyant in terms of uh the activities

and sentiment. Um and inflation still

remains above target, so that it makes

sense why they're removing the dovish

language from the statement and the

communication. But, uh you know, the

backdrop before the meeting was that of

disruptions in the Strait of Hormuz and

energy market instability. That's now

fading from the view, so it's entirely

possible that a few months from now, the

assessment of some of these median dots

suggesting rate hike could actually

change. Uh so, uh for for these reasons,

we still think it makes sense for the

Fed to be a little more patient and look

through this uh a core inflation spike

that could prove temporary and simply uh

stand on the sidelines uh until the end

of the year. But, we have to

acknowledge, given the the message,

especially the repeated emphasis on

price stability from uh Chairman Wash uh

Chair Wash, and his uh uh initiative to

maybe change the communication

framework.

Maybe there is

a degree of caution that's required as

we go forward.

>> So, what we're seeing in markets today,

specifically on the bond market

reaction, do you think that's

appropriate? Should we be expecting more

volatility there?

>> We think that our assessment is that the

current bond market pricing is a little

bit excessive at the global level level

and also potentially for the US Treasury

market.

And if you have a hawkish central bank

that increases the chance of price

stability in the medium term, that's

actually not a bad news for for bond

market in the medium term. So, we think

the current rate pricing in the bond

market more or less reflect what's

achievable from many of these major

central banks.

Actually, some bond markets are showing

slightly excessive pricing for that. So,

there are we already see some

opportunities. We're not

you know

keen on increasing the duration risk

significantly, but we do see

opportunities in places like Europe and

Asia, Australia for instance, where you

know the rate hikes recently could

actually provide better trajectory for

bond market participants in the future.

>> And Japan? Do we just steer clear of

that?

>> [laughter]

>> Well, Japan is a slightly trickier story

to be frank.

So, BOJ delivered a rate hike and we

currently assume for the base case

semi-annual rate hikes. So, the next

move will likely occur in December.

But, you know, the intervention from the

finance ministry and the bank you know

of course rate hike by the Bank of Japan

and the guidance for additional hike

have not delivered the stability for the

yen yet.

So, that's a bit of concern and we also

have to wait for the the fiscal policy

signals from the cabinet regarding the

medium-term strategy. So, these

developments need to be digested by the

market participants

before we can be more aggressive. So,

when it comes to Japanese yield curve,

we're slightly more neutral as opposed

to European and Australian curves.

>> A wonderful equity though, as long as

yen remains roughly stable. It's a

positive enough backdrop to unlock

further gains. I mean, you look at how

things are faring in the early goings

today. It looks like, you know,

investors are still banking on that

memory up cycle, chip surge.

>> Well, first of all, if you look at the

fundamentals of the Japanese economy,

it's still pretty solid despite the

shocks that it has gone through due to

the situation in the in the Strait of

Hormuz. Um as you said, it's an economy

that's prime to respond very positively

to global cap ex cycle. And this is a

cycle that will get additional support

from the resolution of the risk in the

Strait of Hormuz because countries

around the world they'll try to boost

their infrastructure even further in

reaction to this. And Japan is perfectly

positioned for that. And of course,

there are AI plays, the picks and

shovels plays, you know, NAND memory and

you know, the the ceramic capacitors.

All these producers still in Japan. So,

they also benefit. So, that's the

fundamental picture uh

in our view.

>> Which I suppose will help Korea as well.

Those the same fundamentals.

>> Exactly. Exactly. So, when it comes to

the Central Bank policy in Asia Pacific

region, um we're in a pretty interesting

place in my view. So, so for Japan, for

the corporates, uh the stable yen around

this level still promises potential

further upgrade in earnings growth for

the Japanese companies. But for the

other Asia Pacific companies, especially

North Asia, there's an additional

tailwind now from the resolution of the

risk in Hormuz. And that's the reason

why we still remain constructive for

this segment of Asia Pacific region.

>> For Korea also, even as an EM,

you know, even if we see a bit of

heights, they can still sort of overcome

that given how we're seeing these

tailwinds from the memory up cycle.

>> So, we still subscribe to the view that

memory remains a key bottleneck in the

overall AI uh know, development. So,

that's still positive for the country

and we continue to see a violent list

upgrade in the earnings outlook for

Korea, not just this year, but also next

year. So, that's positive. Now, uh

regarding the external developments,

clearly the resolution of risk in home

moves, because Korea is a heavy net

import of energy from elsewhere, uh it's

going to be a a certainly a tailwind.

And finally, uh when it comes to

monetary policy, we do expect now some

rate hikes down the road, but uh for the

corporates, uh we think that's a

manageable event, because we don't think

the BOK will be very aggressively

hawkish.

>> On monetary policy, I have to ask you on

China though, because we got some

signals from the PBOC yesterday. Do you

think this is a central bank that's kind

of moving towards what a DM regime would

look like? Something more like what its

major peers are doing.

>> So, this is part of the medium-term

transition that we have seen for quite

some time now, you know, moving from the

deposit rate to the market-based rate uh

you know, a few years ago, and then

changing the framework framework again

in 2024.

So, it's actually a continuation of a

trend from our perspective. So, the PBOC

is quite keen, it seems, to move to a

market-priced a price-based uh you know,

monetary policy regime, and now they're

moving the benchmark from 7-day to

1-day, just like the other developed

market peers. However, they still seem

pretty keen on keeping the control and

capital accounts and targeting currency.

Those are the fundamental constraints in

moving fully to a price-based uh

monetary policy, and for that reason, uh

despite these efforts, we think the the

near-term implications are quite limited

for the Chinese market.

>> That was Homin Lee, the senior macro

strategist at Lombard Odier, speaking

with Bloomberg TV host Avril Hong,

bringing you their conversation here on

the Daybreak Asia podcast.

Thanks for listening [music] to today's

episode of the Bloomberg Daybreak Asia

edition podcast. Each weekday, we look

[music] 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 [music] from Hong Kong

to Singapore and Australia. I'm Doug

Krizner, and this is Bloomberg.