Dollar is a good currency to own because you get a much better yield in US: Mark Matthews

Mark Matthews

The dollar is a good currency to own because you get a much higher yield in the US than in Europe, China, Japan, or most other countries, says Mark Matthews Head of Research, Asia for Julius Baer. In the second part of his exclusive interview with Moneycontrol, Mark Matthews shares his views on US Fed rates, dollar, crude oil and China. Here are the edited excerpts.

What do you make of the US CPI data? What do the inflation numbers look like going ahead?

It was not a surprise. I don't think there was a single item in the entire CPI data that was surprising. Everything was exactly as expected. Gasoline prices were responsible for the rise in headline inflation, which was expected.

Core inflation, which modestly decelerated over July, was brought down in part by rental prices. If we look at the real-time rental indices, which the core reading tends to lag by about nine months, they have come down a lot. So we can be quite sure that that will continue to drive the core down. Property, what they call shelter, is 40 percent of the core CPI, which is something the Fed (the Federal Reserve, the US central bank) really focuses on.

When we look at Fed fund futures, we can see that the market has basically decided there will be no more rate hikes, or at least that the chance of a rate hike is extremely low, and I think that's correct. I think that the last rate hike happened in July.

The next question is, when do we see a rate cut. Because the economy is so strong, it's unlikely there will be a rate cut for months to come. The average gap between the last rate hike and the first rate cut is around 10 months, and I think it would be about the same this time before we see a rate cut. In other words, it should possibly be sometime next summer.

Do we now reconcile to crude settling in a higher band, upwards of $90? What’s your sense?

Our sense is it's going to come back down. The reason it went up was because of the Saudi production cuts, which have been extended until the end of the year. Saudi can rightly see that with China and Europe in a funk, there will be less demand and therefore they can cut production in response to that.

At the same time, we reckon that increased production from Russia, Iran, and Venezuela, the so-called rogue states, will make up for about 80 percent of the Saudi output cuts. There is also new supply coming from Brazil and several other sources. So, other suppliers will come and take advantage of these high prices, and we see oil going back down to about $75 a barrel next year.

We think this high is transitory and other producers, apart from Saudi, will take advantage of these elevated prices. But Saudi doesn't want to do all the hard work by itself. Why should it be reducing its own output by a million barrels a day if all of a sudden other countries come in and fill that void. So ultimately, we think there's lots of supply out there still and it will help bring down the price.

What is your sense of the Dollar index?

If we take the view that the Fed won't raise rates any more, then the spread of US treasury yields over government bond yields in the rest of the world should not continue to expand. But it is rather high. You get a much better yield in the US than in Europe, China, Japan, or most other countries. The Dollar is a good currency to own. But I don't expect it to continue rising much more from here, because the Chinese and the Japanese don't want to see their currencies go down further. But I don't see it collapsing either.

What’s your sense of commodity prices, because there’s been some buoyancy there?

There are only two commodities that we like, which are nickel and copper. That's because of the transition to electric vehicles (EVs). Both are required for the infrastructure that needs to be put in place for EVs and their batteries. Apart from that, we think there is ample supply of commodities and generally, economies are becoming more efficient with improved technology, which means lesser consumption of commodities, including oil.

What are your growth assumptions for China? A Bank of America report said that China’s property credit risk is top of mind for most global fund managers. The SEC (the US securities regulator) has also asked financial institutions for data on exposure to China’s property market. Is that a real concern?

I don't think it is for the financial markets because most of the Chinese property bonds —both onshore and offshore — are owned by wealthy people. Of course, it's painful for them to not get their money back, but they can absorb it. I don't think we'll actually see outright defaults though. It'll be more of an extension of repayment and court processes. While technically, I don't think we're going to see defaults, they will end up becoming de facto defaults anyway.

The Chinese government clearly wants the property sector to become a less meaningful part of their economy, and I think that's a good decision on their part, because about 20 percent of the residential stock — about 50 million units — is not being used.

Both property and infrastructure were drivers of their economy, but there is oversupply in both and they've decided to take tough measures now. They have to reorient the economy towards more productive sectors. This will mean low growth for the next few years. Then we'll look back a few years from now and realise that it was the right thing to do. But it’s going to be a painful process.

Do you see bonds continuing to attract attention next year?

I think so. If there's generally a view that rates are not going up anymore, then now is the time to be locking in good yields. As we head toward the first rate cut next summer, we could start to see some capital appreciation in bonds too. The performance of bonds has been mediocre. They are basically flat on-year, if you look at treasury returns, for example.

But I don't think that will continue. In fact, 10-year Treasury returns were down in 2021 and 2022. They're flat this year. But there was never an instance when they were down three years in a row, and it's one series where we can go back really far, to the year 1790. I don't think they'll be down this year, so we think that's the best place to be. The top of our pecking order would be investment-grade bonds.