Global Inflation in Focus; UBS CEO Sergio Ermotti | Bloomberg Daybreak: Asia Edition

Bloomberg Audio Studios, podcasts, radio, news. Welcome to the Bloomberg Daybreak Asia podcast. I'm Doug Krer. Here in the States, producer prices unexpectedly fell in August month on month for the first time in four months. Meanwhile, in China, the latest reading on factory gate inflation shows persistent deflationary pressures, while Chinese consumer inflation slipped to a six-month low. And in a moment, we'll bring you an exclusive conversation with Sergio Ermotti, the CEO of UBS. But we begin here in the States, where Treasury yields dropped right across the curve and much of the equity market extended record highs. Joining me now is Eric Fine, portfolio manager and head of active EM debt at VANC. He joins us from New York City. Eric, thank you for making time. Give me your sense of how you feel about the inflationary story right now. I know there are a couple of threads here and as a part of that the tariff story obviously, but give me your overall sense of where we are directionally in terms of inflation.

I think we don't know yet. One big concern is that tariffs are still working through the system at the same time the Fed is getting more dovish. The market is pricing about 70 basis points of cuts by year end. So the inflation story is very uncertain, but the market is trying to see through it. You could see a scenario in a few quarters where stagflation resumes as a concern for the US. Inflation in China is very different – it's deflation, which is bullish for the Chinese currency and bearish for the dollar. That means even though inflation is important for developed markets, it's almost the opposite for EM and EM currencies. They've done well this year because they have high real rates and are waiting for the Fed to cut. Tariffs fit into this: if a country devalues after a trade agreement, it's three steps backward. Most Asian and EM countries have high positive net international investment positions with the US, meaning they own more US assets than we own of theirs. They are up to their necks in dollars. If dollars go down, they reshore those dollars. So the dollar down means other currencies up, giving them flexibility. The dollar story is correlated with expectations for Fed easing – maybe as many as three cuts this year after the PPI number. Earlier we had a downward revision in employment growth of about 900,000 over the last 12 months. The market now expects aggressive Fed easing given labor market weakness and contained inflation.

Do you think the market's thinking is a little misguided here? And is the Fed in particular in a very difficult situation?

I think in terms of what the 10-year or 30-year yield could do, it could rally a lot, but that's mostly due to positioning. The consensus steepener trade is unwinding. PPI gave a green light today; we'll see CPI for the final green light. The inflation downtrend will be affected by the owner's equivalent rent calculation. A rally of another 50 basis points is entirely possible, but I think it's mainly due to positioning. On employment, there's great uncertainty due to migration and the new methodology. The pain trade is that the steepener unwinds, resulting in a rates rally. But in a few quarters, that may seem warranted; I think it's still very uncertain.

A moment ago you mentioned stagflation. Talk to me a little bit about the risk you see right now of a stagflationary environment.

I think stagflation should be the central case for highly indebted developed markets. The only real solutions to high indebtedness are default or inflation, and default is not really a scenario. Inflation solves the problem but it moves to the political and social level, as seen in the US election focused on inflation. Over many years, consumers and investors need to figure out nominal versus real. So stagflation should be central case, especially if the dollar continues to weaken and if the Fed's independence is undermined. In an extreme scenario, YCC would underline the phenomenon. There are winners from dollar down – not just gold, but currencies like CNY will be stable, while other emerging markets with high real interest rates and cheap currencies that export commodities have decades of orthodoxy on inflation. If the Fed cuts, it will be a big support for those currencies. That's the better way to invest in bonds, through the orthodox fiscal and monetary policies of many emerging markets.

All right, Eric, good stuff. Thank you so much. We'll leave it there with Eric Fine, portfolio manager and head of active EM debt at VANC, here in New York City on the Daybreak Asia podcast.

Welcome back to the Daybreak Asia podcast. I'm Doug Krer. As promised, here is some of our exclusive conversation with the CEO of UBS, Sergio Ermotti. He says the impact of global tariffs on the American economy as well as Fed policy both remain unclear. It was last month when Bloomberg reported the Swiss economy minister sought input from UBS as the Swiss government scrambled to get an improved US trade deal. The Trump administration has imposed levies of 39% on Swiss exports to the US, the highest tariff rate for any developed nation. Ermotti is in Hong Kong for the annual UBS Disruptive Technology Summit, which begins later today. Here he is speaking exclusively with Bloomberg's David Inglace in our Hong Kong bureau.

Good morning and it's very nice to see you.

In the region. What are you looking forward to this entire event about disruptive technologies? How is the bank looking to get involved here?

Right. I think you and I were just talking before we started that people tend to overestimate in the short term how quickly things can change, but in this case things are moving fairly quickly. How is your team looking at opportunities for the bank internally or externally?