00:00In recent days, particularly since the market took a turn in pricing, we've seen guests be a little less concerned about the labor market than they had been before this data blackout.
00:11You are still concerned about the labor market. Explain why.
00:16Good morning and thanks for having me.
00:19Yes, I think that, you know, what you have seen in the data, Lal, is that some of the second tier data indicators, also some of the private sector indicators, have still indicated a tentative signal that the layoff rate is beginning to pick up.
00:34And I think that's important because what you had going into the shutdown was a labor market where you didn't see a lot of hiring, but there was not that much concern around firing.
00:44And I think what I am looking to see in the upcoming reports is whether those tentative indications that layoffs and the layoff rate is beginning to pick up is actually something that is borne out or substantiated in the full set of, you know, payrolls and household survey data that we get.
01:02I think that's the key thing to watch.
01:04So you say that this is going to lead to dollar weakness, Kamakhshia.
01:09The administration won't be too pleased about that.
01:11Is there something that can be done?
01:14Look, I think that the dollar weakness is a function of the fact that, you know, our our view that, you know, the U.S. economy and markets are less exceptional than they have been in the past.
01:27And as a result of that, the dollar no longer warrants its very rich valuation.
01:31We've already seen that valuation erode to a significant extent, you know, so far this year.
01:37We think there is more to go in that.
01:39And that's just a reflection of the fact that we think the Fed is going to be easing, you know, easing policy more in December again next year.
01:47That's something I think that is consistent with some of the views that the administration has expressed.
01:52And on the other hand, we don't have quite as much easing priced into the rest of the major G10 markets with the exception of the U.K.
01:59So it's really the U.S. where we are seeing this combination of somewhat softer data and, you know, more significant, deeper policy easing, which we think will keep the dollar on the back foot.
02:09And of course, I imagine that if Kevin Hassett were to be the next Fed chair, that wouldn't change your thesis in the slightest.
02:15It would add weight to it, in fact.
02:18Yeah, I think it's one of the additional reasons why the skew to rates in the U.S. might be, you know, more towards deeper cuts rather than the other side of the distribution.
02:28I think that there are a number of forces pushing in that direction, you know, the weakness in the economy, the fact that, you know, you might also see some of the worst tariff impacts on inflation pass into the rearview mirror as you go through, you know, the early part of next year.
02:43And a reshaped Fed might add to that impulse in direction of weaker rates in a softer dollar.
02:49I want to ask you about the yen, because we saw a little bit of relief today, obviously.
02:54It's back below 156, but I mean, that's still pretty weak for the Japanese yen.
03:00What happens if we get this hike in December?
03:04Yeah, I think that that is probably one of the things that is actually pushing the BOJ towards a potential hike in December.
03:11Remember, they were looking for two things to feel comfortable about hiking.
03:15One was that the U.S. economy, while it was slowing as a result of the sort of, you know, aftermath of Liberation Day, but was not really going into a tailspin of any kind.
03:26That's definitely been confirmed in the last couple of quarters.
03:29And the other thing they wanted to get confirmation was that you had a self-sustaining wage growth trend.
03:35And you're beginning to see some early indication that that may be playing out, too.
03:38So I think those are the things that are pushing the BOJ to, you know, consider hiking in December.
03:43You know, we've had a call for them to go in January for a long time, but I think they probably are feeling comfortable enough.
03:50And I think that's important because, you know, we've seen the yen weakness, as you said.
03:54It's sort of weakened considerably further after the new prime minister.
03:59And, you know, a weak yen is not popular in Japan either.
04:02And so I think you're going to see some pushback, both from the administration, but also from the BOJ against, you know, an excessive amount of yen beaconing from current levels.
04:12Kamakshi, I have to ask you about your favorite currency pairs at the moment.
04:15Is there any way to play this global sort of, you know, upturn in events?
04:20So we have, you know, tariffs going on certain countries and, you know, getting lowered in other countries and so on.
04:26How do you play a scenario like that through the FX space?
04:31Right. Look, it's hard.
04:32I mean, as you were saying, you know, you're seeing not just that it's going on against certain countries and going off against other countries.
04:37It's also within countries there are certain goods being exempted, certain ones not.
04:41So I think that those are hard trends to play out from a macro standpoint.
04:44But I think I'd say one of our, you know, highest conviction views related to this is we think that the CNY, the Chinese renminbi, is a currency that's going to continue to appreciate on a sustained basis.
04:55What's happened there is exactly in line with what you're saying.
04:58You know, you had this kind of very high levels of tariffs threatened early on.
05:01There's now a detente.
05:03You have some more reasonable trade outcomes.
05:04And the Chinese currency is very undervalued in our metrics.
05:08As long as you have this combination of, you know, good trade relations and very significant growth in Chinese exports that you are seeing,
05:16I think policy authorities there will be willing to let the CNY appreciate on a gradual but sustained basis.
05:23It's making new year to date lows every week.
05:25We've seen that this week as well.
05:27I think that trend has a lot further to run in FX markets.
05:30And beyond FX, just in terms of your EM strategy, part of the portfolio, is China investable these days?
05:38I mean, we saw this huge run up for the stock market.
05:40Is there more to go or, you know, would you be getting a little bit trepidatious right now?
05:45No, I think there is more to go.
05:47I think that, you know, certainly, you know, China also provides, you know, exposure to some of those high tech industries that have been doing well in global stock markets across the world.
05:56So I think there's definitely more to go there in the domestic equity market.
06:00As I mentioned, I think the currency is on a more, you know, stronger trajectory as well.
06:04We think that's likely to continue as well.
06:07And that's an important ballast or support for the broader emerging market universe.
06:11It's kind of hard for EM as a whole, particularly EM equities, to do well if China is not doing well.
06:17So I think that's important.
06:18I think there's also opportunities on the local rates market side in emerging markets.
06:22But that is more amongst the higher yielding countries, places where the rate cut cycle will get going, hasn't really got going.
06:29Brazil is the most obvious example.
06:31I think there's a lot of potential both in Brazilian equities and bond markets going into next year.
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