Approaching Shutdown, Asian Flip-Flop

Episode Summary

Executive Summary: The episode covers U.S. shutdown risk, the latest U.S. inflation and GDP data, and a deep dive into Asia-Pacific with emphasis on China and Japan. The hosts and guests argue that a prolonged shutdown would mainly hurt services, data availability, and confidence, while Asia remains weighed down by weak global trade, China’s property slump, and only cautiously improving Japanese conditions.

Main Topics: U.S. government shutdown risk and macro effects (Priority: 5/5): The hosts discuss the likely disruption from a shutdown, noting furloughed workers, delayed economic data, and indirect effects on services and business operations. They stress that the macro hit is usually small if short, but uncertainty and duration are the key risks. U.S. inflation, GDP, and housing data (Priority: 5/5): They review the latest U.S. PCE inflation, GDP revisions, and home price data. Core PCE eased, GDP/GDI revisions were modestly positive, and house prices showed renewed strength despite higher mortgage rates. Global trade slowdown and APAC dependence (Priority: 5/5): Steve Cochran explains that Asia’s export-heavy economies are being hit by weak U.S., European, and Chinese demand, while trade volumes globally have peaked and softened after pandemic-era goods demand normalized. China’s property crisis, weak demand, and structural slowdown (Priority: 5/5): The discussion frames China’s real estate collapse, weak household consumption, regulatory uncertainty, and youth unemployment as major imbalances limiting growth. The speakers argue China is moving into a slower, more difficult growth regime. Japan’s economic improvement and lingering limits (Priority: 4/5): Stefan Angrick argues Japan has improved on the back of stronger data, wages, inflation, and stock performance, but cautions that much of the shift is externally driven and may not represent a durable domestic-demand renaissance. Bank of Japan policy, yen weakness, and global bond markets (Priority: 4/5): The guests debate whether BOJ yield curve control changes are driving higher global rates and yen weakness. Stefan is skeptical that BOJ adjustments alone explain the move, citing modest yield shifts and broader global forces. U.S.-China-Japan financial interdependence (Priority: 4/5): The conversation highlights continued cross-border linkages, especially Treasury holdings and trade/investment ties, arguing that 'decoupling' is better understood as gradual de-risking or disengagement rather than a clean break.

Key Arguments: A short U.S. shutdown usually has limited macro impact, but the real risks are disruption, delayed data, and damage to confidence and governance. A shutdown could matter more than prior episodes because the Fed is highly data-dependent and may lose key employment and inflation readings. APAC economies are export-dependent, so weaker U.S., Europe, and China demand reduces trade volumes and slows regional growth. China’s property downturn is the single biggest domestic imbalance, but it is accompanied by weak household demand, regulatory uncertainty, high youth unemployment, and falling foreign direct investment. The speakers reject a simple 'decoupling' narrative; they prefer 'de-risking' or 'disengagement' because trade and investment ties remain substantial. Japan has shown real improvement in prices, wages, and growth, but much of the change is still driven by imported inflation and external conditions rather than a self-sustaining domestic-demand cycle. BOJ policy adjustments matter, but Stefan argues the effect on global bond markets is too small to be the main driver of the recent rise in global long-term rates. Japan remains deeply tied to China economically even as geopolitical tensions and historical grievances complicate the relationship.

Data Points: Potential U.S. shutdown date: October 1 - Referenced as the looming deadline for a federal government shutdown. Number of U.S. shutdowns since shutdowns became a thing: 22 or 23 - Mark notes shutdowns have occurred repeatedly since a 1980 court ruling. Longest U.S. shutdown: 35 days - The 2018-19 shutdown under President Trump over the border wall. Core PCE inflation, year over year: 3.9% - Latest August U.S. PCE deflator reading cited by Chris. Core PCE inflation, month over month: 0.1% - August reading came in softer than recent 0.2% prints. U.S. house price change: 0.8% m/m - Moody’s Analytics house price index showed monthly gains in August. Share of tracked housing markets at new high: 47% - Roughly half of more than 400 markets hit new highs in August. Japanese Treasury holdings: $1.1 trillion - Chris’s stat game: Japan remains the largest foreign holder of U.S. Treasuries. Chinese Treasury holdings: $822 billion - Chris’s stat game: China remains the second-largest foreign holder of U.S. Treasuries. China real estate investment decline from peak: -38% - Steve’s stat game: nominal real estate investment down from its April 2020 peak. Japan average earnings negative-growth months: 179 of 391 months - Stefan’s stat game: wage growth has been negative in about half the months since the early 1990s. Japan yen level: 149.1 per U.S. dollar - Stefan notes the yen was near recent lows before market intervention talk. Foreign direct investment into China: Back to 2009 levels - Steve says recent FDI into China has fallen to around 2009 levels. China near-term growth: Just below 5% - Steve suggests China may still grow just under 5% in the next year or so, before slowing further. Longer-run China growth estimate: 2% to 3% - Steve and Stefan argue China’s medium-term pace could fall toward advanced-economy-like growth rates.

Pivotal Quotes: "This is just another unfortunate series of events here, right? Just like the debt ceiling earlier this year." — Chris: Chris on the expected consequences of a potential U.S. government shutdown. "I think it’s really more the weakness in global demand." — Steve Cochran: Steve explaining the main cause of weak Asian trade rather than decoupling alone. "The number of times wage growth has turned negative since the early 90s." — Stefan Angrick: Stefan’s statistic illustrating Japan’s long wage stagnation.

Implications: Listeners should expect more volatility from shutdown risk, slower global trade, and China’s structural drag. Japan looks better than in past decades, but the rebound may be limited unless domestic demand strengthens and external forces stop doing the heavy lifting.