00:00Of course, there's a lot that we don't know about this deal. There's a 60 day period where
00:03the two sides will need to successfully agree on some very difficult topics. But what do you make
00:09of it so far? And does it provide some relief when it comes to the inflation picture? Or is it
00:14too
00:15soon to tell? Good morning. Good morning. Thanks for having me. I think, you know, a deal, this is
00:22kind of indeed in line with our expectation. We have been expecting, you know, the street
00:29homeless to open in coming weeks. And then but it would take several months for the oil supply to
00:34gradually normalize and fully recover. Right. So but I think, you know, even so, I think there is
00:41still a lot of uncertainty, as you just mentioned. Right. How sustainable the deal is. I think that's
00:47kind of uncertainty still there. That said, if the deal is indeed, you know, come out, I would say
00:55it does not necessarily change our view about the economic outlook, but I would say it's
00:59indeed a shift in the risk balance a little bit, you know, reduce some of the downside risk.
01:04And then, you know, potentially we are going to get into the second half with a pretty,
01:09you know, solid growth for the global economy. Does it change expectations for what we could expect
01:16from the Fed under Walsh? Well, I mean, we are expecting the Fed to turn neutral. In fact,
01:25we are expecting some pretty hawkish, you know, change in the statement language, right, like
01:32dropping the easing bias or, you know, also dropping, remove the one rate cut in 2026. But this still
01:40appears to be more dobbish than what the market is expecting, right? You know, the market is currently
01:45expecting a hike in the early 2027. I think, you know, we are expecting the Fed to stay on hold
01:53just throughout this year and also next year. You know, I think when the oil shocks start to fade
02:00and inflation expectation remain, well, unheard of that may, you know, not see the need to hike. But it's
02:06also difficult to justify, you know, a cut when the core inflation is still very sticky and also financial
02:13condition remains quite accommodative. We're expecting that Kevin Walsh will avoid explicit
02:20guidance when it comes to the policy path. Are there any implications for central banks across
02:25Asia that, of course, a lot of the times follow the lead and the guidance from the Fed as well
02:30at a
02:30time, of course, when we're still trying to figure out what a Kevin Walsh-driven Fed will look like?
02:36Yeah, I think it did. I think, you know, the emerging market central bank in general should
02:42appreciate Fed actually have some patience so far, you know, and not to rush into interest rate hikes
02:49like the ECB because otherwise, you know, even stronger U.S. dollar or higher yield will put even
02:54more pressure on EM central banks. Now, I would say, you know, we are expecting the Fed to turn neutral
03:01next week, right? And to a certain extent, when we look at the EM central banks, I think they are
03:08still highly monitoring the situation. Not every central bank is going to react with hikes.
03:15You know, and then for those who does hike, do hike, I think they're hiking for different reasons,
03:21right? BI is trying to deal with the currency pressure. BSP is trying to, you know, fight
03:26against inflation pressure. But I would say they are still monitoring the situation closely.
03:31If U.S. dollar indeed weakened, then that actually reduced the urgency for BI to hike in the near
03:39term. One EM that's been pretty resilient has been China. We're getting activity data this week,
03:46but the picture domestically doesn't look that strong.
03:50Not at all, right? You know, I think China is actually continuing with this kind of two-speed economy.
03:56You know, on one hand, you know, industry production can continue to hold up well because of the strong
04:02exports. But on the other hand, you could see domestic demand actually remains in, you know,
04:08in the very weak situation. Retail sale growth, for example, could actually turn active. You know,
04:14this in May, you know, part of that is technical, some high base effect. But part of that is indeed
04:19showing this kind of weak household confidence, you know, weak labor markets and persistent housing
04:26downturn. So, yeah, domestic demand is weak. And I think that's also why, even though the inflation is
04:33high on the PPI producer side, but, you know, we hardly see much pass through to the consumer level.
04:40What's the picture like here where I am in Japan? We do have the Bank of Japan policy decision. How
04:47consequential will this announcement be, especially since Governor Ueda is expected to miss it?
04:54Right. You know, I would say, you know, Japan, some of the Asia central banks, what I say is that
05:00they hike for a different reason, right? You know, Japan, you know, and some other, you know,
05:06Northeast Asian economists, they're going to hike from a position of strength, right? Because the economic
05:13growth is very resilient. And eventually there will be domestic demand driven inflation. I think
05:19Japan is indeed the case, you know, regardless of the oil shock, Japan, the underlying inflation is actually
05:25continue to build up in terms of the underlying inflation pressure. And there is increasing concern that
05:32VOJ is lacking behind the curve. And that is going to put a lot of pressure on, you know, JGB
05:38yield,
05:38as well as the yen. So this is where we do expect VOJ to hike interest rate, you know, twice
05:45this year,
05:45and eventually bring the interest rate to 1.75% next year.
05:52It's interesting, because we're still waiting for details as to how quickly the Strait of Hormuz can reopen.
05:57But how much do you worry about the stickiness of existing inflation, right? Because even for places
06:02like Australia, for New Zealand, we're seeing a real troublesome situation for central banks to try
06:09and get inflation under control despite multiple rounds of tightening. So is there a scenario that
06:14even with the Middle East risk receding, that we still see these inflationary pressures coming through
06:20from energy? Well, I think this is where you need to watch really closely about the core inflation
06:26and domestic strength, domestic demand trends, right? You know, because I think, I mean, at this moment,
06:33most of the increase in oil prices actually feeding into the headline inflation level. And then the second
06:40round, the effect is gradually showing up, especially in places where inflation expectation is not well
06:47anchored. Now, in the U.S., for example, I would say, even though inflation's expectation is well anchored,
06:55but, you know, core service inflation is still pretty sticky, right? And also, there is an expectation
07:00that even oil price shrug fade, the AI demand is going to lift up the core goods prices. So, like,
07:08even
07:09though we are expecting inflation to coming down, but it's still likely to stay 3.2 percent by end of
07:14this year in terms of core PCE and 2.7 percent by end of next year. And that actually is
07:20going to be
07:21more than six years that inflation stay above central bank's target. So, um, that is actually
07:26something central bank need to stay vigilant. Chang Wang, good to have you with us. Chief Asia-Pacific
07:33Economist at Vanguard.
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