The Week Ahead – Time to look out the window

From the moment that the computers are shipped to the moment that they start earning could be many months and the amount of float because we're talking about a fairly significant investment. The amount of float is quite large and so we need to help, we need to help these companies reduce that and I think that's reducing the supply chain, making it easier for them to stand up, the computing is going to make a big difference. Hello and welcome to the weekhead on the Mora Podcast. My name is Juven Parkuelis, Chief Southeast Asia economist at Morae in Singapore and today is Friday the 23rd of October. We have a jam packed episode for you and writing so because it's a big week for markets next week with a few global center banks lined up including the Fed, the ECB and the B.O.J. Jeremy Schwartz, our chief US economist, Andrei Shapanek, our senior European economist and Yuhichiro Nusaki, our economist in Tokyo will preview those upcoming decisions. We'll also have some updates on the situation in France, signs of contagion effects and prospects of ECB stepping in. Of course, with the past week casting the spotlight on AI related wobbles in global equity markets, as you heard that clip from NVIDIA CEO Jensen Huang outlining some challenges of parts of the AI supply chain, I'm very delighted that our special guest CW Chung, our joint head of APEC equity strategy who also oversees equity coverage for career technology and semiconductor sectors, is also joining us and will explain why he remains constructive in the tech sector overall, should be a good one. So let's dive in. Okay, we start with my special guest CW Chung who is our joint head of APEC equity research and he oversees equity coverage for career technology and semiconductor sectors out of Hong Kong. Really delighted that he can join us today, especially if this juncture when sentiment in markets have been jittery, particularly on equities on the back of some AI related concerns earlier. So yeah, hi CW, great to have you in the podcast and thanks for your time. Yeah, my pleasure. So just first question, you published a report this week, really interesting, and you outlined why you remain constructive, particularly on the memory sector. Can you elaborate on that please? Sure, as you we all know that we are at the AI era and AI need a lot of computing power, including GPU and memory, but basically memory industry is a kind of supply and demand dynamics industry. So the mismatch between a very strong roughly growing demand versus limited supply, so memory guys are trying to increase the supply, but it physically takes several years to make a new greenfield capacity. So we believe it may take some more time for supply to catch up demand. Okay, got it. And in your report, you talked about markets maybe underestimating the strong AI demand and the earnings that this can generate across the value chain. Why do you think that is the case? Yeah, because AI industry is a kind of very new one, and there are not sufficient data to analyze this industry yet. Also, major CSP companies are key computing power provider to the AI industry. They are actually buying a lot of AI service from MVDA and also memory from memory companies, but basically most of the people are used to kind of chat to BT or cloud. They are making losses right now, and also on CSP companies, they are kind of generating negative recovery cash flow from this year, because we huge KPX, each cohort investment is very profitable from this CSP companies. However, general people just to listen every day that this very familiar AI frontier model companies are making losses, and the CSP companies are raising funds to fulfill this kind of KPX. So everyone may think that all these industries are not profitable, but in reality, they are very profitable only few selective AI model companies, and the nail cloud companies, they are not very profitable, but in general, they are very profitable. Okay, yeah, that's really interesting. And so that's affecting market sentiment because they sort of watch the big names more closely than the others, I guess is what you're saying. Okay, and you alluded to this in your first, in your response to the first question with regards to the chip supply situation. So just want to ask what is your outlook on that? How long will this current chip shortage last? The overall industry, even AI company, they realize that they need a huge memory supply and that was a sort called a last year. And then even if the industry overall realized that they need to have a much more capacity, once they make decision, it physically takes at least two years to build a clean room, and once the clean room is ready, they need to install the equipment, and then wait for in and wait for it physically takes minimum three years. That's why we cannot change anything for three years. So as a super cycle, started a pharmaceutical last year, we believe that maybe additional supply may come out in 2028 at all. Even it comes out maybe as a demand, I'll become bigger and better and better every month. Even in 2028 supply, new supply, whether you can catch up demand is a not yet subtle at all. Okay, got it. So yeah, it's still a few years, even though it started since late last year in terms of building more capacity. Okay, final question, CW. So I know I've said you're pretty constructive on the sector. What would be the main risk that you're watching against that view? Yeah, of course, the key risk will be, or if AI is useless, it turned out to be useless, then it can be a kind of huge risk, but there is no one probably concerned about such a risk. We believe that the capability of AI is actually better and even better cause a better AI train the next generation AI. So we can see much more accelerated progress of the AI capability. However, everyone still need a kind of capital because there is a some time lag. Like the memory industry, once they make a start to spend the k-packs or CSPs, they need to spend the k-packs now, but it physically takes up to three years to gain the return from this investment. So coming a couple of years, the overall global big tech companies, they need to spend almost trillion dollars over k-packs. It is growing like a hundred percent this year and next year we still expect another 70 percent. And following year, still can grow maybe 20, 30, 40 percent kind of speed. So whether macro environment can afford this kind of a huge capital requirement or the every government also need a capital to this day. So there will be severe competition for the capital market. So maybe someone who is not financially strong, they may face some capital shortage issue. This can be one biggest risk we may think about. Okay, brilliant. Yeah, I think we can leave it here and thanks very much for all your insights, CW. Thanks. Okay, let's now go to the U.S. and I'm joined by Jeremy Schwartz, our U.S. Chief Economist. Hey Jeremy, welcome back to the podcast. Hey, you've been screwed back. Okay, we just focused on really the big event of next week and that's the Fed. So I guess first question for you is will the higher than expected CPI print move the needle and prompt the Fed into action or are we too close to the midterms for a back-to-back hike? Yeah, so in a vacuum you might have expected the Fed to react strongly to the inflation data and we're going to talk a little bit more about the details. their later. But what we saw ahead of the CPI number was Fed speak kind of moving aggressively to push back against October probability when it was more priced in the market. So a number of core officials like Vice Chair Jefferson, New York, President Williams, and Governor Waller all came out and pretty explicitly tried to push back on October. You're on top of that, you've also gotten a bit of market stress recently, in addition to the sell-off in Treasury yields, there's been some cracks in credit markets, particularly concerns about AI, and then potentially some spillovers from Europe as well. So our view on the Fed has been that they are willing to hike if the market is pressing them to do so and if the data are clearly calling for it. But they're not eager too. And I think with the midterm elections just around the corner, with the market only priced around three or four basis points of tightening, and with Fed speak having gone out on a limb, trying to signal patients, we don't think even the strong inflation data for October is going to be enough to get them to feel that greater urgency. We think it's more likely that they tee up a move in December and skip this meeting. Okay, good. And on that front, maybe just a quick follow-up, do you think the tone will signal towards that or will it be a bit more neutral? Yeah, so Worsh is not going to give explicit forward guidance and say that they're expecting to move at an upcoming meeting or kind of in the near term later this year even. But what I think he will do is kind of avoid pushing back against the expectation for future tightening. So we think he's likely to still sound hawkish on inflation. He's likely to continue to say that he doesn't see conditions as particularly restrictive. And normally one thing that he mentioned, the IMF side alliance shortly before the blackout period, was saying inflation data had come around in line with what the committee was expecting in September, which he's normally not a fan of the dot plot, but I think the way the market interpreted that was that the committee would deliver something like the dot plot, a median, which calls for two hikes this year. So I think he has some subtle tools in his toolkit to make sure that December stays priced without needing to kind of break his kind of own commitment to avoid forward guidance. Okay, got it. Yeah, we were there in Bangkok last week for our award event as well and yeah, it was interesting that he said, yeah, he does look out the window when it comes to making assessments of the economy for policy decisions. Finally, Jeremy, on the inflation outlook, we have also the September core PC on tab next week. What do you expect there? Yeah, so we do expect an acceleration. We think that core PC is going to pick up to around 32 basis points month on month. So we've revised that higher since the CPI and people members last week. We came into those expecting to 0.2 of certainly some upside-to-price in some of the source data for PC. Notably, we're expecting some strength and super core services, but also within goods price inflation. It seems like there has been some outperformance in some tech-related items, which is notable because federal officials have been very willing to look past tariff inflation pressure. They've been willing to look past energy spill overs from their on-war, but inflation pressures coming from the AI CapEx bloom have raised a few more red flags at the Fed. So we think the details here, in addition to the ugly headline, will raise concerns about persistent inflation? How continuing through 2027? Okay, got it. That might be also supportive of your call that they hike again in December. Just to complete the picture for Central Banks in North America, we also have the Bank of Canada next week, and we now expect a 25 basis point hike, given some hawkish remarks from the governor on inflation spill overs from the energy price shock, although we acknowledge that this is still a close call. So, yeah, let's leave it here, Jeremy. Thanks very much again. Yeah, thanks. Okay, now let's swing over to London. Hey, Andrea, welcome back to the podcast and thank for your time. Hey, you've been thanks. It's always a pleasure to be on the podcast. Great. So, I guess it's a big week for Central Banks, and the ECB is on tap. So what do you expect there, and eat potential for some fireworks? I mean, look, hopefully, and I think the gods can be hoping this. Hopefully, it'll be a really boring meeting with not much happening. We're going to be aware of forecast, I think the consensus view is very much this as well. No rate, no rate change at the October meeting. The ECB should leave. We think the deper rate unchanged at 2.5%. We think the ECB want to wait and evaluate how the previous rate hikes. So those that occurred in June and in September will sort of percolate and affect the economy, as well as assess how the current wage negotiations are occurring in terms of determining second ground inflation effects next year. Recall the ECB is on this sort of gradual hiking cycle to sort of nipping the bud, the risk of those second round inflation effects through the wage demand channel. And it's a pretty important to assess the extent to which you see wage demands rise in Q4 and feed into the 2027 wage growth data. In terms of the Q&A, look, there's going to be lots of questions about France. There's going to be lots of questions about the rate path going forward. Our personal views, our house view, is that essentially the ECB will raise rates again in December and then again in March. So if we're causing a terminal deper rate of 3% reached by March next year. In terms of France, the key question from ECB's perspective is will they activate TPI? Will they intervene? And we just don't think so. We think the bar is very high for the ECB to do that. And a guy also probably want to evade those questions really. So he can be like, hey, look, this is not so, you'll probably say something along the lines of we have the tools to lean against unmarried disorderly market moves that inhibit the transmission of monetary policy as she has done in the past. Okay, got it. We'll come to France in a second, but we also have the UK budget next week. Are there any important things that you want to flag? Are you watching out for? I mean, look, this is Chancellor Healey's first budget. So it's Wednesday, the 28th of October at 12.30 London time. He's likely to allow fall in fiscal headroom. We think to around 15 billion pounds. I think that's the sort of key takeaway following this September, public finance data. The cash deficit is no longer surprising to the upside. Still, we think the combination of lower run rates of NSNI inflows and the need for cost of living support over the winter will mean a four billion overshoot of the financing requirements for 2026 to 2027. I think in terms of these sort of splits from sort of guilt versus tea bills, probably equally. So that's two billion of each issue in terms of existing plans, which were around 246 billion and five billion respectively. So the sort of summarized the key thing really is basically slightly less fiscal headroom than previously and slightly increased issuance but equally between guilt and tea bills. Okay, got it. So now finally, let's get an update from you on the situation in France. What's the latest there? Where do we go from here? And for me, really interesting to hear your thoughts on whether you're concerned about contagion effects with the rest of Europe. Now look, I mean, so at the moment, I mean, at the time of recording, the 10-year-old moon spread, it's widened to about 175 basis points. That's up from almost 160 yesterday. So basically, a one-day change, you're talking 15 basis points. That's quite a sharp move, and the session isn't yet over. It's also worth noting the 10-year-old BTP spread. That's around 50 basis points, up to around 44, 45 yesterday. So more like a five basis point move. So you are seeing those signs of contagion. Essentially, the widening of France versus Germany is dragging along with it Italy and Spain and other countries. And I think that's the sort of key question mark around where the ECB is concerned and investors more generally. It is worth noting on the 7th of July, we did push the product piece whereby we sort of spoke about how we think the spread, France versus Italy should be wider versus where it was trading. Our perspective is very much the fact is the ECB is going to want to see that contagion effectively be much worse and so basically the widening of France as a Germany to drag much higher the other countries before it sort of steps in. If you recall, for example, the sort of macro backdrop when the ECB introduced TPI, we essentially had Italy versus Germany widening at a very sharp pace to almost 250 basis points. We're very far from those levels and also that sort of speed as well to sort of be questioning, okay, should the ECB be stepping in? As I mentioned earlier already, the ECB is going to sort of push back against the idea of stepping in, refrain from answering those sorts of questions, simply saying, hey, look, we have the tools necessary if needs be. But the question is what's the sort of level, what's the sort of point in time where you could see intervention and it's worth bringing my intervention. I speak about TPI because everyone's talking about TPI. Intervention could also be verbal intervention, it could also be Stopping quantitative tightening, restarting partial quantitative easing, or is the reinvestment of maturing bonds. It can also be bringing forward the timeline for the structural bond portfolio to allow the ECB to deviate from the capital key. So there are a few things the ECB could be thinking about. Bottom line is, though, it's all about contagion to other markets, where the ECB would be forced to step in, where a long way from that point we think. Okay, got it, so there's some of it, but not significant enough for ECB to step in. Okay, that's very clear. Thank you very much, Andre. Thanks, you've been great as always. Now we go to Japan, and I'm joined by Nuzaki-san from our economic team in Tokyo. Hi, Nuzaki-san. Thank you very much for joining today. Hi, Evan. So, yeah, a big week next week with a BOJ on Friday. So what do you expect from their decision? We expect the BOJ to leave its policy rate unchanged at the next meeting. This is the market consensus. Since the previous meeting in September, there has been no new evidence of upside risks to domestic inflation. I mean, the long-term inflation expectation for Q3 has etched down, and the PPI has declined for two consecutive months. With the FOMC scheduled surgery before the BOJ meeting, also widely expected to hold rates unchanged. We see little need for the BOJ to raise rates at the consecutive meetings. Of the nine board members, we believe only the most hawkish member Takata is likely to argue for consecutive rate hike. The BOJ has so far maintained that the underlying inflation, inflation, excluding one of factors such as energy prices or following the exchange, is approaching 2%. But has yet to reach it to 2%. However, major media reports that the BOJ is leaning toward judging that inflation has reached 2%. This would come 14 years after the BOJ first set its 2% target. Going forward, we expect the BOJ to continue raising rates as the adjustment of the degree of monetary accommodation by around 2 or 3 more hikes. At 3 month intervals, as it confirms that the underlying inflation has become family entrenched at 2%. Okay, got it. So it sounds like a pause for now. And then in terms of the tone, what are you expecting from the quarterly outlook and anything significant to watch out for from the press conference as well? We expect the GDP outdrug to revised upward for FY2026. And the CPI outdrug should be literally changed for FY2026, but revised upward for FY2027. The upward revision to the inflation outdrug will reflect higher oil prices with core CPI, inflation, excluding fresh food, expected to remain in the mid-2% range in both 2026 and 2027. On the other hand, there is so far no evidence of second-round effects on wages. We believe the outdrug for inflation to ease to around 2% year-on-year in 2028 will remain unchanged. At the press conference after the meeting, attention will focus on whether the weather signals rate hike at its next meeting in December. Markets have already priced in about 80% probability of a next rate hike. We would like to see whether weather uses the expression like next meeting. Okay, interesting. Yeah, let's see here. Thank you very much. Thank you, Ivan. For the rest of the region, we also have a couple of central banks to watch RBNZ and BOT, which we both expect to keep their policy rates unchanged. Although it's a relatively close call for the RBNZ, we assign a 60% probability to our base case of an unchanged cash rate versus a 40% chance that they could deliver at 25 base points hike. In the Bank of Thailand, we expect a unanimous vote again for the MPC because growth is below potential and the BOT sees the need for one entire policy to remain accommodative. And you might even argue that they could sound a bit dovish because we think they can cut their CPA implementation forecast to 2% from 2.8 to quite substantial and indicate that the pass through effects were lower than they first expected. Speaking of inflation, we have the all-important headline CPI data for Australia. We think it's going to rise by a firm 0.4% month and month in September, boosted by volatile and seasonal items, including higher fuel and accommodation costs. With this, however, we think the trim mean CPI will be likely better behaved rising by around 0.2 month and month. And then finally, we have China official manufacturing PMI data. It should moderate to 49.8 for the month and October, reflecting a pool back following a seasonal rebound in previous month. And then the official non-manufacturing PMI is also likely to soften to around 50, owing to weak travel demand during the National Day or Golden Week holiday. Well, that's it for now. Thank you again for listening to our podcast edited and produced by John Dalton. Please like and subscribe to the Morris podcast from your usual provider. We'd love to hear your feedback. So please feel free to write a review and share this podcast to anyone you think might be interested. You can check out numerousconnects.com for more of our research and updates. Have a great week ahead. In a complex and unpredictable world, where a sunset in one market means a sunrise in another, one investment bank always looks beyond the horizon. To help our clients release the potential of tomorrow, today, Nomoro, connecting markets, East and West. Disclaimer. This content has been prepared by Nomoro solely for information purposes. It is not intended to form the basis of any investment decision and is not an offer or solicitation of an offer to buy or sell or enter into any agreement with respect to any security product service, including but not limited to investment advisory services or investments. The opinions expressed in the content do not constitute investment advice nor is legal, regulatory accounting or tax advice and may change at any time without notice. You should seek independent advice as appropriate for individual circumstances. For further information, disclaimers and disclosures, please visit Nomoro Connects at www.nomoroconnects.com