262154082 - 1_x1b8olq7 - PID 1851201 Good afternoon everyone and welcome to the real vision daily briefing I'm sending to you live from Copenhagen, Denmark. Today it's Thursday, the 23rd of you. And we have a very interesting macro backdrop to discuss today. And with me today. Is Western Nakamura, the global markets editor from real vision in Tokyo. Western. Very warm. Welcome to the show. Thanks a lot. Great. Biao with you. It is, I mean, what a macro backdrop to have on a day like this. We've had a, basically a landslide in European interest rates. On the back of this appointing P MIs, out of Europe. But otherwise, I'm basically curious whether the market is slowly but surely changing its narrative towards a growth scare instead of an inflation scare. Let's start with that $1 million question worse than what do you make of that question? Yeah. I think that that's probably been underway for in our last few weeks and starting to pick up steam. I think that still though by and large, it's still mostly an inflation scare thing because simply because of the fact that as we saw with Chairman parallel for his second day in front of the house. This time, buddy is just the Fed is just inflation, inflation, inflation, and so are the rest of the central banks that globe central banks, with the exception of one central bank. But so I think that yeah, they're good. They're going to express concern about recession, about growth slowdown, but they really need to get inflation under control. But that's just my sir. What's your what's your view on that? That tilt? I think it's interesting that we've seen cracks appearing in the commodity space. We've seen oil prices retracing from high as we've seen, the copper price retracing for mice, et cetera, right? We've seen the first signs of the cycle turning against this in the commodity space. And what I find really interesting is that we have this very close relationship between inflation expectations and commodity prices overall across the globe. And that's one thing that could eventually lead to some, some kind of topic. But then the central banks, that commodities have started to turn. What do you make of the pricing in commodity space that we've seen recently? Okay, So I'm just going to lay this out. Markets are extremely confusing right out to me. Is like everything that I am kind of accustomed to. I mean, I'm I'm always kind of very much on my toes. I'm always trying to question my own sort of thesis. I'm trying to on a daily basis almost just try to reprove if I'm if I'm in the right direction on. But really since the SMB, the Swiss National Bank, when they suddenly high Greeks rates last week. That is when things just really fell apart. I mean, even basic things like, you know, dollar, yen and ten-year treasury yields. And just some basic yield spreads between nominal yields, Raspbian, US, Japan, all that kind of thing like that. They have nothing to do with one another anymore. With regards to commodities. Copper, when I think of copper, I think of USD, CNH. Those are that correlation has broken down as well. So I'm, I'm very lost. So I'm hoping you can have some some sort of access rates, especially, especially with copper. I mean, I've been banging the drum for quite a while that if you look at the credit cycle, the amount of credit available to the private sector across the globe. We've seen the material slowdown in that metric over the past 23 quarters in a row. And to me that's usually the typical harbinger before you see a slowdown in the commodity pricing. And the reason is that credit is a leading indicator of growth. And we've had the PMI is out today from, from the urea, but also from the market and the USA. Basically pointing south. No surprise to me, but apparently a surprise to the market given what we've seen in interest rate space, it can particularly in Europe. But to me, it is the first sign that the cycle is clearly rolling over on growth. And I think that will turn into a topic for central banks eventually during the second half of the year. The, the tricky thing here is timing, right? Because they have high inflation and growth cycle that is clearly weakening. What do you make of that cocktail? Basically high inflation and slowing growth. It's tricky to maneuver as a central bank, right? Certainly as I am of the August in the gym Bianco camp in which, you know, I mean, at the end of the day, well, as far as the Fed is concerned, this is, you know, they, they do have the dual mandate. And growth is not one of those too bad. It's also us, sorry, I certainly have full full employment. And so they have one job and that is to tackle inflation. And if that means that they need to break things, then they're going to have to break things because it's not their job. Despite the last decade or so of artificial intervention and kiwi and so on and so forth. It is not their job to support asset markets, it's their job to maintain price stability. And clearly we are not, we are not expecting, I think that yeah, Again, it tilts more towards towards that way, but but I want to actually ask you about, you know, especially in Europe today was seemed to just horrendous with like, you know, especially in Germany, Kim eyes and you had some thoughts about manufacturer BMIs, but Services penalize. Can you elaborate on that a little bit? Well, basically, I think it's a done deal that manufacturing PMI will look horrendous over the next couple of quarters. That's basically just the lagged effect of interest rates rising. We know that manufacturing BMIs are very sensitive to interest rates. So when we see interest rates rising, and the way we've seen over the past couple of quarters, it will eventually lead to very, very negative manufacturing PMOS. But until now, we've sort of cling to the straw that the service PMI would stay positive. Due to the reopened in effects on the economy, tourism, booming, traveling, booming, et cetera. But the first sign today from the German PMI was basically that the service sector is also under water, which is a game changer to me. And I think that's why we have this very fierce reaction in interest rate space in Europe, we've fat a double-digit move in 10-year your swaps as a consequence of this PMI figure. And I think it's a fair move given what we've seen from these BMIs. Because if both services and manufacturing, Alright, of the PMIS or moving down, then it eventually means that the GDP number will look very bad. So the ECB is now basically is stuck between a rock and a hard place. Because inflation is still hot. But growth is looking exception of the lackluster already. And that's a tricky thing to maneuver because it's especially within the Euro area. What do you do when inflation is hot and the growth is not, right? When you have a couple of countries within the Euro area dependent on very low interest rates. It's not an easy decision, right? So I mean, I'm happy that I'm not on the board of the European Central Bank, etc. because it will be an extremely tricky decision. I want to ask you a question or another central bank currently also being discussed across the macro landscape, and that's the Bank of Japan. I know that you've been following this central bank very fiercely. And we've had a lot of debate on going on whether they will need to increase the ceiling on the yield curve controlled in the ten-year point. What's your take on that? Is it is it a feasible scenario at all? Yeah. Of course it's feasible. I mean, you know, it's, it's, it's certainly feasible. The question is how and when. But they cannot legally, they can't cap 25 basis points forever in a rising yield environment. When you're getting, you know, last week, you had a record amount of fixed rate operation and GDP buying from the bank. Japan matched with foreigners record net selling GDPs to the base band. And you saw insane volatility in GGB says, Well, I think that they were dating back to maybe even above the March 2020 levels. But but the way that I see my kind of overall takeaway from BAHA, not having changed the 25 basis point band and yield curve control. And thereby, I guess a few widows were made that day to add to the large graveyard of widows. But basically. So Japan, when it come, when it comes to currency versus the end versus JDBC. The save one to burn the other. So currently there sit there supporting the GDP market and they're going to burn the end in order to do so. And I think that this question of ethics intervention that is not coming for live, that's very far away. And I don't mean by like in terms of time measuring that in terms of circumstance. And so I I, you know, like it's not a certain level. There's a lot people have say like a 135, 140 want, but it's not a certain level. That's that's going to be some line in the sand. It's the velocity and the volatility. It gets to that level. By the way that I see it is you have less than one year left for this gentlemen, Mr. Corrado, as the longest running langauge band governor in history. And at that point you're probably going to get a policy, a major policy shift. But before then, as of yesterday, we had the Upper House election campaign season start and that's coming coming in early July. And then depending on how that goes, That's going to maybe influence who was going to take the helm at the DOJ. Until then though, the message I'm getting is just a very clear, the Yen can go to ****. The Bank of Japan is going to cap 25 basis points or that they're going to defend the, you know, the, the, the JTB market above and beyond anything else. And even if that means dollar yen at 140, 150. The alternative is that you have, you know, borrowing costs spike and more so that if the Bank of Japan essentially is perceived to be getting into market forces for foreigners selling shorting futures, Jamie futures. If that's what can basically drive the central bank policy, then the central bank has no more policy, credibility. Ammo left. Dlj could do whatever it is that they want to do and they don't really care about foreigners that mulch them. But, but now it's, the reason it's different this time is because for the first time since Abenomics really, people on the route in Japan are feeling inflation and they're ****** off. And they are going to express that view at the ballot box. And you're starting to now get Japan to join the rest of the Western democratic capitalist nations in the non-independence of central banks and the politicization of central banks. But that's basically my, my view to creditors. Basically, you know, he's, he's plant has flagged down. But the more that the foreigners push on JB is, the more firm he has to be. And so we're just going to be this we're reinforcing sort of thing. He cannot give in at any point. So that's what are your thoughts? I know that you're, you're closely watching it too. Well. I'm tempted to take the opposites. I have this bed. Basically because it is very tricky to defend an easy monetary policy stance as soon as the inflation is running above target. And in that regard, we have an inflation report outs war as far as I'm concerned in Japan, right. The 24th of June. And few hours? Yeah. Yeah. Yeah. Yeah. Exactly. Yeah. That meeting that just after midnight. My time, I'm in Europe. So that's why I'd say to war. The point being that on my models, headline inflation would spike towards 3%. I mean, it's not massive compared to what we see in Europe and what we see in the US because that's, I mean, almost close to double-digit territory, right butt 3% mass of a GPS. It's massive in Japan because you've been used to like, let's say 0%, 0.5%, stuff like that. Yeah. What do you make of that the bait, as soon as inflation turns above target, Is that something that could alter the picture? Yeah, So I think you're spot on with your understanding of that. So sepia, if it's headline CPI in Japan goes from 2% to 3%, that is, would be much more of a macro, global macro shock like data point than do US CPI going from an 8 handle to the 10 handle. Because what like what's a 10 out of it? Sorry, terribly high. And yeah, that's going to move markets. But just as you said, it's generations, it's three decades. Generations of people who are accustomed to prices do not go up. Cash is king. You know, there's, the yen has maintained purchasing power and all that. Well, not so much anymore. And you have a huge, huge increases in just basic cost of living because of imports of energy and food and all that. You have absolutely no wage growth of ketchup of ASU, a real wages that are just plummeting and people are ****** off for the first time. So the big appended a survey in February of 2020 to write the $4.1 dollar and was 115 ripe for checkoff? And they did a survey of just kind of like regular people, not, not within the financial universe. And they asked them, Do you know what yield curve controllers? And, and about a third of respondents said they'd never heard of them for log or another third set. Like they they're kind of familiar but not really or whatever. Well, now everyone knows what what it is. So now for the first time it's become, yeah. So if you have a 3% handle, CPI, that is going to, I mean, you don't really even need that number printed. People are already feeling it. However, what you're going to get from the bank, Japan is transitory. We've heard that phrase before. But Westin, a question from my side, I'm based in Europe. We have a lot of the audience based in the US. The topic of Bank of Japan and the yield curve control. Is it something that we should care about if we're not based in Japan? Yeah. Absolutely. Absolutely. The so James Aiken was on real vision recently with Raul talking about, I mean, this allows guess. We'll come on to religious talking about this very topic because this is the global macro trade right now is a dollar yen that, that is the F, By the way, just so everyone knows that is also the FOMC play because there's so much uncertainty with FOMC policy in the near term and like from and rate vol is so high if people want it rather than, rather than making a bet on FOMC policy, people are instead just shorting the and against the dollar and they're playing, they're playing them. The policy divergence rather than the US policy itself. So that's why it's so Darwin is like the macro trade right now. But the reason that matters is because Japan is, has the largest net international investment position, it deploys most capital overseas. It is the largest foreign credit to the United States in terms as a country and all that. And it be OJ's yield curve control is artificial or is indirect us yield curve control. If you have yields kept at 0 or around 0 and an aging society that's cash-rich and yield starved, you send that capital goes overseas and buys Europeans like that, like terrible credit, like high yields, negative yielding, high yield debt in Europe and stuff like that, as well as US treasuries and so on and so forth. And so that's been keeping a lid on, on, on, on risk-free rate for the last half decade plus. And that has allowed for a low rate environment that has therefore ripple effects across risk assets. And then when you, and so, and so when you are now currently an environment where every center is removing accommodative policy. Doj has only one left and then they are unable to or unwilling to maintain that, that peg at 25 basis points, then that's when like the bottom really falls. I don't know the fixed income market, that's when you get sovereign yield spike. Credit yields a blow out or dispensable out, and risk assets to just just planet. So that's the significance. Arnoff, did I miss anything? Did you? You're perfectly right. One thing that I would like to add is the discussion on commodities and the link to Japan and Germany. I lives as I like to put it, on the outskirts of Germany, just north of it and Denmark. And I, and I feel the pain right now of being a commodity importer. I know Japan feels the exact same pain of being an energy importer right now. Yeah. Surely not. Surely not, but you come second in line basically. And point being that it hurts on the currency side when you are basically stuck in a commodity importing regime during a time of rising prices and commodities, right? And that's exactly why we see the Europe being weak and the Japanese Yen being weak. What's your take on this whole commodity regime and how it plays into Bank of Japan policy and maybe even fiscal policy in Japan and maybe even Europe. So on gear up and I'm going to have to deliver to you up on that for Japan. Yeah. So in early June you start to see a decoupling of tenure us nominal yields and dollar yen, which we're lockstep. Take critique movement. And so they kind of decorrelated. That was largely because Dalia and start to move alongside crude oil prices rather than the yield spread. So being short, the yen isn't just monetary policy towards display. It is also a, like you said, a commodity being short commodities and having to buy at like spot market in an ever higher prices. Just forward to just keep your basic grid. Running Ozzie and AUD JPY. That was like that's kinda my go-to. Like we're going to short the Yan against something you should know AT JPY, although it did have a pullback, would probably be your best bet to do so because you have RBA who is also hiking rates. And so you have the positive versions there, plus you got the commodity sort of upside Kicker from, from there as well. But in terms of fiscal policy to be due, sorry, you are starting to see some measures from the government trying to subsidize a lot of its energy as well. But it doesn't matter who like if it's the governor or if it's privately, I'll come is that somebody has to buy spot LNG and Sally-Anne to do so then by a Yahtzee dollars or US USD or whatever maybe. But what's going on in the European side? Yeah. I mean, it's a big best. If you look at the German Energy Policy, they've closed nuclear plants over the past 34 years in a row. And now they are slowly but surely reopening coal plants. And they are basically buying indirectly, at least call from Russia, even though they tell the public that they're not doing so. So it's I mean, you cannot make this **** up. It's not pretty. In Denmark. We basically based on renewables, but we are a small country. That's much, much, much easier. But the big countries within the Eurozone, the US, is still very, very reliant on Russia. Since that truth, there was there was a Bloomberg article out which just wanted your thoughts on I'm not necessarily saying I believe it or not either way, but they were basically saying that Germany is is basically calling this a Lehman moment. Yeah. Yeah, yeah. What are your thoughts on? I mean, is it like that really kind of are out there analogy. But normally, if we assume that the current energy resource storages are intact until winner, they're basically not sufficient. So if we don't get sufficient supplies from now on until October, November, then we should basically, the faster the seat belt in Europe. That's the consequence of that. And it is an ongoing debate. I know German politicians are running around trying to solve the situation. I mean, it's the first time in like three or four decades that this is the hardest topic. And I basically assume that we will have a very tough winter as a consequence of this situation. I wanted to play a clip for your Western in this regard because earlier this week, Chengjiang, the head of research at variant perception, talked about his call of this commodity super cycle unfolding. And he gave an update on, on this particular view. So let's have a look at this clip and get back to the commodity debate. Again, going back to the tactical cyclical structural framework. I think all the stuff we talked about in terms of the structural setup for a commodity super cycle is still valid. But now it's probably tells me most was energy specifically when the supply response has been a lot less, where the capital constraints are still very, very strong. So again, structurally it's still a very favorable environment. However, again, we have an issue where cyclically as the business cycle slows down, as the things we mentioned, why the bullwhip effect starts to come to an end when the pool for the demand starts to slow down, then you don't have a four Lima anymore. So in our mind is structurally because it's so good, it's still going to ultimately that the trend is still going to be higher. But you probably want to focus a bit more on the specific setters. Whether a supply constraint still very obviously real, so energy being the obvious one. And then within that, because the business cycle slowing down, because that's valid, concerns now about demand not being able to sustain a 100 previous array of increase. That also suggest that you go into a more kind of slower pace against potential or more volatile pace against right now. So I will say is, is still very much a structural sees is still valid. If there's market volatility and less options is by dips into a store. Seasat makes sense. But whilst the cyclical picture and these on the ********* indicates the showing that, you know, commodities are probably run off a bit too much on, you kind of want to, if you don't want to have necessarily the full risk allocation and for commitment to the tray Boltzmann. So think it's very valid and the key insight that the supply constraint very real. You can watch the entire interview with a Chengjiang on the real vision platform if you are an essential plus or pro subscriber. But as you can see that I have the lights back on in your view, it's very expensive to have them on. That's why I only have them on for your paper. Upset about that Western, I mean, the cycle is very interesting also when it comes to the outlook for central banks. We've heard Jay Paul's saying that the price at the pump, this is basically what it is now. Or at least he said that a directory, right? What do you make of that commodity cycle? We've seen that kind of a slowdown in recent weeks, but is it a game changer, a model? So, well, first of all, we're going to clip, I think, Kansas, brilliant, brilliant guy. And you're like, I've seen them on religion like a few years ago. Heat somehow just keeps looking younger, good for him. But he knew that clip, what he's talking about a kind of reminds me of something they knew. You were talking to Maggie lake which was recently which was that, you know, what he's saying is like, yeah, you have the structural upside for commodities, but you have to pick your spots, you have to pick what? You can't just go blindly long Bloomberg commodities index basket or something like that. And you have no, like you have to really get your time incorrect. And so that really reminds me of when I was watching you talking about putting on a long duration trade. As well as we're talking about going and putting on a long EN trade. So what are your thoughts on that? I mean, I feel like it sounds in a very good point. Like right now, it isn't this blindly long sort of commodities for the inflection point, you really do have to pick and choose like because if you're, if you were long hg copper IUD be destroyed right now and that's also for So what I guess, what are your thoughts about how about being long treasuries? What's your call? I'm that I'm accepted wisdom. That's that's the honest coal from here. If you look at that, we have a growth cycle that is very clearly slowing. We've got new evidence of that today. We have a liquid, It's a cycle that is very clearly slowing. Bank of Japan is the only exception, but otherwise, all big central banks are pulling liquidity back from markets. And that's usually something that leads to less risk appetite and more appetite for long bonds. And then thirdly, we need the inflation cycle to turn. And if we look at inflation expectations, they have started to turn break-even czar back to laws that we see for quite a, quite a few months is something to consider. And I guess the ultimate trigger, which is something you cannot really wait for, is the final confirmation from spot inflation. If we get a couple of months in a row with declining month and month inflation in the US or in Europe. That is your final call to buy bonds. We don't have that yet. But I kind of suspect that it's too late to join the party. If you wait for that signal, What's your take on it? I was going to say like by the time you get that print, I mean, the trades are, that's where you can meet. That's where you'd sell, maybe rate or exit. I mean, for me, my my kind of personally my sweet spot is, so I truly chain mostly vol on futures, but it's weeks. So I don't, I'm, I'm not, you know, like light gray long-term. But and and I will trade against my view as well and just stay very flexible. Ultimately, I'm just straight flows driven. But yeah, I mean, I think that once you get those prints, it's over. So that's what makes it so top right is that you have to like a day like today would have been like you'd think like, okay, is this where I think like gf five-year wounds dropped like some sort of record or something like that in terms of a drug. And so those are, those are days where I like. Those are either extreme moves because of illiquidity or extreme moves because there's actual real money that's going to get more momentum behind it and we won't know until it's done. I think the big surprise today is that's the service sector was down so much. And the PMI? Pmi, yeah. Yeah, because that basically means that the entire economy is down. And if the service sector is down, then the recession is near. And when the recession is there, you should buy bonds that there's, at least in my view, we have a couple of questions that I want to debate with you before we conclude tonight's debate. There's a question or oil, could we go back 100 a barrel? Is that a feasible scenario? What do you make of that? What's the now? Of course. Yeah. Yeah. I mean, yes or if but it's going to be because of assuming talk about WTI but does, doesn't remember, but it's going to be because of outsize options positioning. So if he's aren't getting close to the 100 handle, it, you're going to see that there's going to be a massive wall of puts you through that. You can have a dealer like a gamma flip and you're just going to go down to mid-1990s like that, that later that day. So certainly is yeah, which is, which might be a buying opportunity. Yeah, true. But if we go up 100, it's because of that demand side, not the supply side. In my humble opinion. We have another question directed to you, Western, in regards to the Bank of Japan that we've talked a lot about tonight. Bow asks whether he says here, the Bank of Japan is at 0 and now owns half of the GDPs issued. The rest of the world is raising interest rates and tightening the balance sheets into a slowing economy. In your opinion, which model breaks first of the two? Which maps between Japan versus everybody else? I, I mean, I guess defined breaks. But first of all, they could break simultaneously. One could be knowledge has not really an isolation per se. That's why people also needs to be here. It was about like like Japan. Like I said, if Japan, Let's go over it's 25 base point yield curve control by choice or by force via the RBA who's now pretending to make my choice, whatever it is, that, that is going to cause a ripple effects and duration everywhere. And that's going to destroy your Css everywhere. So it's not just Japan thing, so it's like it's not like in Japan breaks thing or, or something else. But I think that Japan, because you have a current account surplus, you have an unlimited printing, printing press and you do have it is one of the world's global reserve currencies, but it is a major effects pair. E, They can, they can basically just keep doing this and keep acquiring GDP is what's difference between owning 60 percent of outstanding share issuance, 70 percent of thing issuance versus now, they can do that until corrode as terms over. But at that point they're going to have to start to Signal or potentially not saying alone and and change policy. So I don't think that I don't think that this current structure will break because of the fact that you have the finish line for Kronos soon. I like both of you. I think the Bank of Japan will break at some point. They will at least to increase this target for the ten-year yield curve control. That's my view. Are these highlights a bit on that? So I would agree. So again, depending on how you define break, but like they said in 2013, two years, 2%. So it's been MacFarlane has been like four times longer and they're nowhere near like that until recently. So you could say that array felt like when I know many years ago, so I'd already broken you felt there. So exactly Western. So let's conclude on tonight's discussion. The Bank of Japan is under fierce pressure. It will be very interesting over the next couple of weeks whether they can actually control this yield curve. Given the amount of pressure that they are faced with. By a big instance, international institutions. We have compelling evidence from the eurozone that the service sector is also under immense pressure, which leads a recession closure as far as I'm concerned. And also that could be a signal that interest rates are going down in the long end of the yield curve. Western. Thank you very much for, for joining the Joia was a pleasure to talk to us about. Thank you so much fun, which does against time. We should definitely do it. Again. Everyone out there, Thanks for watching real vision daily briefing. We will be back tomorrow. My colleague, Maggie lake will interview Jim Bianco on the developments again tomorrow. And I think it will be another interesting day in markets. Thanks for watching.