In sydney. Im Annabelle Droulers in hong kong. I am kathleen hays. Conscious sentiment as traders recalibrate rate hike expectations. All major u. S. Indices had their worst months since june. The cleveland fed president makes it clear she does not expect the central bank to cut rates next year. She says they need to be above 4 . Australia holds a economic summit in canberra. Now, august is ending with a whimper rather than a bang. The likelihood of a fed visit pivot is embraced after the jackson hole speech. Jack josh jay powell gave a very hawkish message. Look at the futures. A little rebound here. Not surprising. It was not such a big move, just the totality of all major indices having the worst month since june. The s p down more than 4 in august. Every major asset class fell in august. New york crude is now down about . 71. 88. 84. For the month we had a drop of more than 9 in august. That was the biggest monthly drop since 2020, the start of the pandemic. People are worried about rate hikes. They are worried about slowdown in china. The 10 year. It looks like it is actually a little higher in yields and lower in price. Look at the 2year note. It was around this level yesterday. This is quite a month. The u. S. To year yield now at the highest level since november 2007. So, thats a big dramatic move in august. You have to wonder, if the markets are already acting like this, have they priced enough fed hawkish and is in or is there more to come . This is a big question over asian markets. Kathleen, is august is the guide, where are we looking for september . Look at asia. We have sydney futures sydney futures like this. New zealand on line. Keep an eye on the dollar against her g10 peers. Jobs data from the u. S. , adp numbers came through this morning. Nearing the 140 level. There are other big data events in asia this thursday. South korea, gdp, and experts data do in the next hour. What is interesting there, we had Industrial Production data yesterday that missed what economists were expecting. Ing points out that that weakness does not stack up well when the be ok is committing to more rate hikes year end. Pmi survey from china. We had unofficial reading yesterday. Slightly better than economists had been expecting. Broadly, it is a tale of two different regions in asia when it comes to how we are performing with the slowdown in china. North Asian Countries are in are faring well. Southeast asia is doing a little better. Still, we will get an update today, kathleen. Annabelle and heidi, if the markets have not heard it enough, if jay powell did not make it perfectly clear rates would go up, possibly, higher than markets7 have been anticipating and there will be no bank cuts the cleveland fed president made it clear again. Lets listen. My current few is it will be necessary to move the fed funds rate up to somewhere above 4 early next year and hold it there. I do not anticipate the fed cutting the fed funds rate target next year. High yields, remember when we spoke to esther george, president of the Kansas City Fed at their symposium last week, she made it clear that she thought above 4 , 4. 5 , possibly, even higher. It depends on inflation how it works. But, it is on the table now. I think it is interesting to wonder what the markets will do after this. Yes, you have to wonder if there is more repricing of expectations to come. The other thing is you are getting increasingly analyst saying investors are too preoccupied with the fed outlook. Mike wilson, the chief u. S. Equity strategist of Morgan Stanley is saying investors need to press for more pain. He says the u. S. Index stock index, particularly, the s p 500 has not hit bottom yet this year. He is talking up out not about not because the fed will be hawkish but because the equity market is too optimistic about the earnings outlook. He says earnings get cut if earnings get cut we will see the market bottom. They say that is probably between september and december. Lets get more on todays top stories with bloomberg reporter emily raqqa and cross asset asia editor. Emily, in terms of market moves today, what are you hearing from people . We have had the s p 500 falling for four state days straight days. It is a pivot a lot of stock pools were holding onto over the summer that is starting to wane. The market narrative has shifted from will we are wont we get a soft landing to how tough is the growth slowdown going to be. Yesterday, and s p the shorts the s p 500 had one of its biggest inflows since april 2020. What do we make of the fed reaction to the inflation battle as well as the latest jobs related market numbers . Tightening financial conditions are definitely weighing on the bond market. We saw yields rise. The 10 year yield is now close to 3. 2 . The hawkish rhetoric is there. The fed funds rate could go about 4 . It will stay there. What bonds, equities, and markets are looking at is we will have this prolonged time of tightening conditions. And now we are looking at this paradox of growth recession. This is bad for equity. Also, bad for bonds and financial conditions being tightened. The signal from the bond market. Its not positive now. We did see the treasury market having its worse months since april worst month since april. Across assets for august, the broadest cross asset drop since 1981. Emily, where do we go from here . Talking about Morgan Stanley. The call that we will not see a bottom for u. S. Equities, the s p in particular until september or december . Exactly. That cross asset risk is really in play here for the month of august. Stocks fell 4 . Bonds and commodities also felt. It is trading in coronation, barclays notice. It is a key risk investing in investors are looking at coming the cross asset correlation between stocks, bonds, commodities at one of the highest levels in 17 years. As we look to september, that has historically been a tough month for stocks. Now with correlations of this high traders are saying it could may be also be difficult for bonds and commodity then for any investor trying to use diversification for protection. They have a difficult road ahead. The last couple days, the asia trading week. We were watching equities closely. When you look at the move in the twoyear the past several days, yesterday down around 3. 2, 3. 4. Now it is 3. 9. A big move at the short end. It does that reverberate to asia as well . Definitely, that steepening of the yield curve is something that will weigh on asian markets. Certainly at the moment the futures are forecasting lower and we will likely see a lower open. Yes its interesting in asia. We do start lower and things tend to shift through the day. Look, we have marks coming out of china today, the slowdown in the economy there, the various measures that the government is taking. Those things are also something investors are looking at. It will likely impact asian markets. The steepening of the yield curve is definitely something that is not positive for equities in asia. Bloomberg reporter Emily Graffeo and cross to cross asset editor andreea papuc. A heightened outlook for Global Oil Markets this year and next. They slashed forecast for this years supply surplus in half to 400,000 barrels per day. Next year, 300,000 barrels per day. The former was 900,000 barrels. Australian home prices paid their largest monthly default in august. The countrys largest market slimmed 3. 2 . The National Index includes regional markets and dropped 1. 6 . This is the biggest since 1983. Rising Interest Rates are expected to drive further fault this year and next. The u. S. Justice Department Says white house records at Donald Trumps florida home may have concealed big moves before a june fbi search. Bloomberg forces say federal prosecutors are likely to wait until after the november Midterm Election to announce any charges against donald trump. Taiwan is warning it faces severe challenges from surging Chinese Military activity. An annual armed forces report says taipei expects the Peoples Liberation army to test more missiles and send more warplanes to create havoc. Chinese aircraft have reached the median line almost daily since Nancy Pelosis visit in august. Global news 24 hours a day on air and bloomberg quick take. I am vonnie quinn. This is bloomberg. Ahead, a hotel group hopes to grow fourfold in three years by increasing presence in the asianpacific. Their chief Development Officer joins us later to discuss those plans. We will discuss market moves with optimal capital who thinks investors have not fully priced in quantitative tightening from the fed. This is bloomberg. You are watching daybreak australia. Im Annabelle Droulers. The fed is on pace to double quantitative tightening starting this week. The Balance Sheet will be shrinking by 95 billion per month, 60 billion in treasuries plus 35 billion of mortgagebacked securities. In order to shrink the Treasury Holding by 60 billion per month, september will be the first month the fed will need to sell additional nonmature treasury bills. In september it will need to sell 16 billion worth. That is the white bar you can see here. Moving forward the amount of sales will vary month to month. Money markets funds might take some of the two point 2 trillion of cash parked in the fed reserve repo facility. We could see usage of this facility falling off gradually from record levels. Kathleen, thats something to be keeping a close watch on. A feeling perhaps reverberating through the economy. Our next guest says the market has not fully priced in qt quantitative tightening. Even though this plan has been on the books for several months now. With us is Frances Stacy director of strategy at optimal capital. People i have been talking to the past several months say the big thing is you will double the runoff, right . From 50 billion to 100 billion. That in of itself will potentially affect liquidity at markets pretty directly pretty immediately. Definitely. What is very interesting is the nasdaq is 26 down from its peak. We already have that selloff in place. They have not been tightening at the rate they said they would tighten. About 17 billion a month over the last 11 weeks, almost four months. Down about 52 billion on the Balance Sheets. If we jump that up to 95 billion from 17 billion per month, its actually kind of acceleration in tightening. Just from a mechanical perspective for viewers when you raise rates, basically, you are slowing the pace by this incentivizing lending at which new money comes into the system. When you are quantitative tightening you are yanking that out of the system and it reduces the critically liquidity mechanically a lot faster. What about businesses . What about borrowers . That has been pounded into my head. That the actual cost of capital will potentially change the turn you are expecting. How will we see that not just through the bond market, but through the economy, even equities eventually . Certainly it will disincentivize lending and for any businesses that have debt on their Balance Sheets where they have to raise money in that way, their debt service, depending on what their bonds look like, their Debt Service Costs will go up further on the margins. In addition to the fact we are anticipating taxcut advances. So wages are not still high because the labor market lagging indicator is still tight. I think we will see a pretty precipitous decline in some earnings and expectations. Breaking news now. About the california government declaring a grid emergency. They are raising the specter of a blackout. Anybody in california knows that this water shortage, the drought, this is just the latest part of what is going on. Can you give us a quick comment . A quick comment is i think that we set ourselves up for the risks and unfortunately fossil fuels will be with us for some time to come because of things like this. Doesnt does conversely mean there is more opportunity and more need to quickly accelerate the transition . Do you see opportunities in the transition process that investors should be looking at . While i think the fact that we are trying to accelerate is beneficial. But i do not think that yet the new Energy Sources can completely replicate old Energy Sources. I think thats why youre having great problems. But anytime we have challenges geopolitically are great is at risk. I think a slower transition in the interim while we have geopolitical risk and potential recession is probably ok. I still think fossil fuels will need to be with us for the backup for the next probably decade unfortunately. When it comes to the rest of the year we had at Morgan Stanley saying we are yet to see u. S. Stocks seeing a bottom. Their criticism is we are spending too much time fixating on what the fed says or does. What about earnings . Is that worse then we might expect after what has been a reasonable season . You know, as the fed strategy demands and as the labor market, which is their intention, gets loser, that will continue to weigh on consumers. Consumer sentiment, of course we have quite a split in the country. 40 of americans have assets. They are down 15 to 20 this year. 21 of americans are living paychecktopaycheck. They are subject to variable Interest Rates on credit cards and things like that. That bottom part of the consumerism will probably drop out and weigh on earnings. There is no way to destroy demand without unintended consequences. Back to the qt conversation. Over the last four months we have seen quantitative tightening. The markets are down. The s p is down 14. 1 over that time. If we go from tightening 62 billion to 380 billion, where will where we will be after the next four months iteration, you will see that that will weigh on liquidity and that will weigh on markets. There is a huge correlation to previous peaks of markets right alongside stopping asset purchases. Thats hard to ignore. While they say we may not want to Pay Attention to the fed, unfortunately is important. When you talk about the fed and the greenback as well, what assumptions are you making about Dollar Strength or weakness Going Forward . Tightening begets a stronger dollar. When you consider weakness in the u. S. Relative to europe or other places, the daughter gets even stronger. The problem is the fed will not give it because they want to. Regardless of what they are saying and all of this hawkish tough talk, if there are the quiddity shortages in the system , every time we raise rates by 75 basis points and accelerate the Balance Sheet, we are doing this at a record pace. Anytime you are doing it at a record pace it is hard when the system starts to recalibrate to catch the threshold for liquidity issues. Great to have you with us. Director of strategy at optimal capital. Get a roundup of this story to get your day going. Todays edition of daybreak, even find that at dayb. Customize the settings so you get the news on the industries and assets of the matter to you. This is berg. A quick check on the latest business flash headlines. Jensen set a soft target to divest more than 14 billion of an equity portfolio this year. The food delivery giant is among assets in line for the assessment and an estate sale could ease pressure from antimonopoly regulators. Earlier this months tencent denied reports it was planning to sell all of its may schwan stake worth 24 billion. Alibaba is among the first group of Company Selected by u. S. Regulators for audit inspection after last week u. S. Inspectors were granted access to the paperwork of chinese companies. Baidu, young china, and jd. Com have been selected. A look ahead at australia and new zealand. And canberra today executives, union officials, and experts will try to form a consensus on tackling high inflation, falling wages, and labor shortages. The australian is reporting the Origin Energy closure of its plant as well as growing threats of blackouts. Next, federal prosecutors will likely wait until after the november election to announce any charges against former u. S. President donald trump. We will have more on that next. This is bloomberg. Pst. Girl. 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Im vonnie quinn with first word headlines. U. S. Companies added the fewest jobs in august since early 2021. Adp says Business Payrolls rose one third 2000 132,000. The jobs report due friday will show private payrolls rising by 300,000. Said rose the cleveland fed president says the federal bank will need to raise its benchmark rate above 4 by early next year and she does not expect them lower through 2023. She expects inflation to drop to a range of 5 or 6 this year. The 5 increase is at any par