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Welcome to the Daybreak Asia podcast.

I'm Doug Krer. The tone in Asian equity

trading is being influenced by continued

weakness in US chip stocks as well as

some mega cap earnings that were

reported after the bell. Now, the

Philadelphia semiconductor index was

down for a fifth straight session,

dropping 5.3%.

And in the last five trading days, the

socks is down nearly 16%. Now, regarding

those earnings, after the bell, Meta

gave a disappointing outlook for revenue

in the current quarter and Microsoft

reported results for the latest quarter

that were above forecast. For a closer

look at some of the market action, I'm

joined by MS Hong. He is one of the

chief analysts at Counterpoint Research

and he joins us from San Francisco.

Thank you for being here. Let me begin

with the chipmakers. I want to get your

take. Obviously, there's been a lot of

weakness lately. I just referenced the

pullback that we have seen in the

Philadelphia semiconductor index. What's

your sense of what's been happening with

the chip stocks lately?

>> Um, we can separate the two things at

the same time. Um one is a

sustainability of the capital spending

from the hyperscalers.

Um the other one is the so-called

giflation the price elasticity in demand

because memory pricing has been as you

pointed out uh very high up in the sky

and um people are concerning whether

this is going to weakening [snorts] uh

demand profile going forward. So

basically same thing the hyperscalers

may uh weaken its capital spending based

on lots of macro effects and the revenue

growth for example but at the same time

people are concerning that too much high

pricing in the memory is going to

destroy the demand which is what we are

seeing in the smartphone market that

everyone is needs to raise the either

pricing or pull back their production uh

because of the cost issue. So those are

two factors are making a bit more

concern in the market. So that has been

the one of the reason why dragging. On

top of it there are China factors that

one of its um competitors

uh listed in China market and um they

are coming with the own tools as well.

So those all together is making a

negative sentiment and profit taking

action in the market I believe. So,

you're speaking, I think, of CXMT, which

we can talk about in the moment. This is

the Chinese memory chip maker. Yes. That

just had an IPO uh recently. And I'm

glad you referred to the smartphone

makers because Qualcomm was also

reporting earnings for the latest

quarter after the bell in the US on

Wednesday. And we know this company is

the largest maker of those smartphone

processors. The forecast for profit in

the current quarter I think was a little

troublesome. It seems to be weak and it

kind of goes to the point that you made

about component shortages and rising

costs taking a toll on the smartphone

business. But I'm also curious to get

your take on what we've been hearing

coming out of South Korea. We had the

SKHEX numbers 557%

increase in operating profit. That

sounds stunning. And at the same time,

SKH's earmarked record capex for the

year of at least $31 billion. So

obviously, a company like this, which is

one of the leaders in high bandwidth

memory production, sees the market

continuing to expand. The demand for

these memory chips will continue far

into the future. Maybe it's into 2028.

But you're I sense a little dubious that

the market is going to hold up. What's

your what's your rationale?

Um

I believe the stock market is always

kind of a racing game relative to the

expectation. Um we all know that AI

demand is strong. We all know that SKH

Highix earnings is going to fly out. Um

but um these days uh these suppliers are

locking up their supply into a long-term

agreement three to five year deal. And

at the same time there is going to be a

certain level of a fixed pricing for the

longer term. So nowadays the pricing in

memory market is going up every day

every month. It's for example second

quarter pricing gone up like 80% 90%. So

if one company settle down in a

long-term contract a little bit earlier

then they're going to miss out all the

rallies during the quarter. I believe

that those um timing issue is making a

bit of um below consensus estimate

earnings in the second quarter and on

top of it um there are many issues that

we talk about is going to um have a

negative impact.

So initial response on the share price

despite all these good earnings and the

outlook um share price reaction was uh

quite negative.

So I'm just now as we're speaking

getting the earnings for the second

quarter from Samsung better than

expected at 71.27

trillion Korean Juan. This is for Q2.

Now we know that the memory chip

manufacturing industry is pretty

concentrated. There is Samsung and

SKhinx in South Korea. In the US, we

have Micron Technology. And now we have

a company in China, CXMT.

Can you imagine a world where CXMT

starts to export chips not just

manufactured for the Chinese market, but

something that would have kind of a

global impact. Of course, I believe that

the meaning of the IPO of CXMT is not

only that CXMT is making chips for local

market, but um the real meaning of the

IPO is that it is already a full global

supplier.

um we can't really name who is a

supplier because there are already

multiple customers are locking in the

supply of the C exempted chips not only

the high uh Chinese OEMs but also global

OEMs as well or some more people some

more companies are ready to um secure

the procurement because we are under

extreme supply shortage in the memory um

Chinese DMs are not cheaper than peer

groups anymore. But um if it helps to

solve the supply bottleneck,

why not?

>> Well, it's interesting you make that

point because on the Bloomberg right

now, I'm getting a headline that US

lawmakers have sent a letter to Apple

CEO Tim Cook basically advising or

warning Apple not to buy memory chips

from Chinese firms. What will the impact

of that type of policy be in your view?

>> Um, it is possible if the product is

being sold in US soil, but if the

product is being sold otherwise, for

example, in China or um nearby China, um

I believe that uh that's what apples are

looking for. Um, of course this is a

sensitive issue in terms of political

and um, geopolitical issue but however

um, I believe that more and more

companies are willing to take an

opportunity to source the chips from

China. Uh, for now the question is a

twofold. One is the product quality and

two is a political thing. M

>> um in terms of product quality it's not

the best I can say but you know DM and

NAND NAND is not really a standard

product but DRAM is a standard product

under Jed standard so if you are

qualified uh you can sell it you can

replace the uh chip vendors and at the

same time in China I reckon that there

is a a bit of a sales subsidy

For example, if you manufacture your

hardware in China and if you are buying

China chips, then you get entitled to

get some part of your procurement

proceed procurement amount from uh as a

subsidy. That is a good help especially

under these bomb cost concern.

When I'm listening to you, I'm thinking

of the Chinese electric vehicle

industry. And I don't know why with that

level of government subsidy, the degree

to which manufacturers in China were

able to offer very very low prices and

essentially put the pressure on any

competitor whether it was Tesla in China

or European car manufacturers. So is

this a part of the strategy too on the

part of Beijing that you want to come in

and apply pressure on competitors as a

way of making life very difficult for

them?

>> It is um but the difference between the

IT product and the automaker is

automakers are a lot more longtail

products. If you buy Tesla for example,

it can run five years but if you buy

smartphone maybe a year or two then you

need to replace it. Same goes to AI. Um

as smartphones and PCs are migrating

into an AI um the lifetime is going to

be a lot shorter. So it is yes um same

discipline same mandate uh but um

magnitude of um support is a little bit

different

>> so I'm glad you brought up AI before I

let you go I think we have to address

that issue because we were talking about

the earnings from Meta and Microsoft

obviously two hyperscalers we were

talking about the semiconductor complex

as well which is a critical part of the

entire AI ecosystem system. How are you

feeling about AI right now? And in terms

of whether or not the market is

vulnerable to any further

disappointment,

um is that a distinct possibility in

your view?

>> You know, this is um has been in the

market as a trillion dollar question and

it's going to be the same forever. Um

but in my own understanding this is a

once a lifetime opportunity and

innovation.

Um let's look back um 30 years ago when

I was young PC cost about $2,000.

Um so as an inflation adjusted basis

it's got to be minimum $10,000 or

$20,000 as of now. Um in the meantime PC

cost has been coming down dramatically.

AI cost not cost per token is going to

be the following the same way. So what

now these Meta or Microsoft, Google,

Amazon, these CSP guys as well as um GPU

guys, CPU guys are doing is more like um

I call it Jensen strategy aggressive

procurement and if it is a bit idle you

can hand it over to other companies like

a nail clouds which was 30 years ago

like a module company around the PC

companies.

>> M it's a good analogy.

>> So I believe that there is this kind of

aggressive procurement and development

and leadership is not shrinking it is

expanding. It is a spreading. You

probably have seen the AMD's recent

event advancing AI 2026.

They invested anthropic $5 billion which

is sharing the same thing. Some people

say this is a circular reference and

this is not sustainable

but we have to create such leadership

otherwise nobody put the money nothing's

going to happen. So in my understanding

let's assume up until today we only have

one Jensen what if we have a multiple

Jensen next year that is increasing

level of competition in AI and everybody

is moving ahead based on each different

workload.

So we don't really have to say this is

bad right.

>> MS we we will leave it there. Thank you

so very much Ms. Tuang is one of the

chief analysts at Counterpoint Research,

joining from San Francisco here on

[music] the Daybreak Asia podcast.

Welcome back to the Daybreak Asia

podcast. [music] I'm Doug Krer. Fed

policy makers left interest rates

unchanged for a fifth straight meeting.

Even so, that vote was fractured. Three

committee members were in favor of

raising the policy rate by 25 basis

points. And in his media briefing, Chair

Kevin Worsh sounded hawkish.

>> For some households, businesses, and

market professionals,

five years of high inflation have left a

mistaken impression. That's hard to

shake. That the Fed's implicit inflation

target was somehow above 2%. Let me

reiterate, there is no soft inflation

target. But the bond market seemed to

doubt his conviction. And there was a

bit of curiosity as to whether Worsh was

essentially outsourcing Fed policy and

letting the bond market do the

tightening. We had yield spiking at the

long end of the Treasury curve. The

third year was up 12 basis points in New

York trading to 5.21%.

That is the highest level since 2007.

And that's where we begin our

conversation with Subn Kmni Osan. Sabm

is professor of international economics

at Brown University. She spoke with

Bloomberg TV host Heidi Strad Watts.

>> A good family fight. He he got one,

that's for sure. I I do wonder when you

take a look at the defenting votes, when

you take a look at how markets are now

positioning for the next meeting, is

there an issue of credibility here at

stake?

>> Uh thank you so much uh Haiti for having

me on the show. So uh I I don't think we

are there yet. Of course, you know, you

can interpret this two ways. Uh, you

know, at at the kind of the bad side,

uh, you can interpret the increase in

long-term yields as maybe markets are,

uh, pricing in a problem with Fed

credibility. But my interpretation is

not that uh because you can also have a

positive interpretation saying, okay,

those increase in the yields tell us

that inflation is a problem. it stays

elevated which you know Fed admitted

this it is in their statement and

Governor Walsh said it several times uh

but it is more of a disagreement right

there is more of a disagreement between

the markets and the Fed and also within

the Fed which brings us back to this uh

good good family fight. Um one important

point here though that is put uh and

framed uh by markets and also uh within

today's development as a disagreement

between the hulks and those I wouldn't

frame it like that because I think that

framing tells you uh inflation is

elevated due to supply shocks but this

is one off so they will go away on their

own so Fed can look true. So all we are

disagreeing is about the timing about

the you know when they are going to uh

disappear and what is their going their

impact going to be. I think this is not

the right framing. I think the right

framing is the real disagreement is

about the model and how shocks

propagate. Uh and that is the big

unknown here.

And you can you can see that worry in

30-year yields, right, in terms of where

they're sitting at. Does that tell you

how concerned markets are, particularly

at the longer end there, worried about

enduring inflation?

>> Yes, markets clearly concerned about

inflation. Uh Fed is concerned too. Uh

it's just that markets are trying to

make a sense of this new Fed, right? So

we uh heard a very uh in a sense hawkish

fat I mean in the talk right so they uh

admit this agreement it is a 93

uh hold with three descendants from

regional fed presidents uh and you know

so the market is trying to understand

okay everybody agrees on inflation being

a problem but then why didn't you hike

today uh that's where the market is

right so market is trying to make sense

of the new Fed. If they are going to

give us tough talk and they do admit

inflation is a problem, when are they

going to hike or if they are not going

to hike, how are they going to deal with

this problem? So market is uh trying to

parse this out. Of course, the first

reaction uh you know should have been

long-term yields and that what happened.

So that's not surprising. But I think we

really have to watch what is going to

happen uh in the next few days uh in

terms of how market really try to uh

parse uh this new Fed uh information

coming from this new Fed uh that really

limits communication and also drops

forward guidance

>> and as we speak the backdrop is that

even at the moment we're hearing reports

of renewed US air strikes against Iran.

The straight of Hormuz remains closed.

Other key trading parts remain

contentious as well across the Middle

East. President Trump is trying to

rebuild his tariff war as well. So if

you take a look at those factors, I

guess what does your research tell us

about the enduring stickiness of this

type of inflation risk?

Indeed, this type of inflation uh is

persistent and that's the uh overarching

conclusion and headline result coming

from our research because our research

is based on global networks. We try to

understand the propagation of supply

shocks such as tariffs, such as hormones

closure, such as pandemic, such as the

the energy shock originally came from

the Russian war. We are trying to

understand how these supply shocks

travel through global production

networks through input output linkages

but also through global financial

networks. So that's I think something uh

uh both markets and and the Fed uh is

missing right now because it is it is a

macro view but it's a global macro view

right not just a very nationalistic

macro view and and our research shows us

that this type of inflation is

persistent uh under the uh assumption

that Fed looks true. So I do agree with

Governor Worsh that inflation is a

choice and Fed is going to determine if

these supply shocks are going to be

inflation or not at the end. But

unfortunately if Fed does look through

and treat these as level shocks so one

time increase in the price level this

goes both for tariff and hormuz then

they are going to create persistent

inflation even they disappear. So even

you know we saw entire Iran issue by

tomorrow still there's going to be

persistent inflation coming from that

and permanently higher inflation coming

from that if again uh uh Fed looks

through thinking this is just a one-off

shock the tariff fund we are now seeing

it actually the current uh over 4%

headline inflation over 3% uh core

inflation has a lot to do uh persistent

of that inflation has a lot to do with

the chairs from last year.

>> That is Submni Osan, professor of

international economics at Brown

University, speaking with Bloomberg TV

host Heidi Strad Watts, bringing you

their conversation here on the [music]

Daybreak Asia podcast.

Thanks for listening to today's episode

of the Bloomberg Daybreak Asia Edition

podcast. Each weekday, [music] we look

at the stories shaping markets, finance,

and geopolitics in the Asia-Pacific.

>> [music]

>> 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 [music]

and Australia. I'm Doug Krer, and this

is Bloomberg.

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