# AI Disruption, Fed Strategy, and Market Rotation

**Podcast:** Bloomberg Daybreak: Asia Edition
**Published:** 2026-02-04

## Transcript

Bloomberg Audio Studios, podcasts, radio news.
Welcome to the Bloomberg Day Break Asia Podcast.
I'm Doug Chrisner.
In the U.S.
on Tuesday, shares in software firms tumbled on fears over how AI will impact their core businesses.
And the catalyst was the release of a new AI tool from Anthropic.
The company says it can automate work like contract reviewing and legal briefings.
So, not surprisingly, the first wave of selling was in stocks associated with legal and data services technology.
Then most of the software sector and much of the fintech sector were hit as well.
All told, roughly 285 billion dollars in market value was erased from stocks in those industries.
Here is Bloomberg analyst Mandeep Singh.
It is a valuation story.
They're just selling everything in software.
And so to me, this is a sign of, you know, just indiscriminate selling, and at some point uh we'll have a bottom.
That's Bloomberg analyst Mandeep Singh.
Let's turn to the Fed next and the nomination of Kevin Walsh as chair.
Now, markets are already betting on a more dovish tilt.
If confirmed, Walsh would take his post just in time for the Fed's June meeting.
For a closer look now, I'm joined by Bill Lee.
He is chief economist at Global Economic Advisors.
Bill, thank you so much for being here.
In the past, you know well that Walsh has been considered to be a hawk.
So let's assume for a moment that he is confirmed as Fed chair.
How would you characterize what we're likely to see from the Fed under his leadership?
Well, Doug, you know, Walsh has been really mischaracterized in the sense that um he cares particularly about inflation.
But that doesn't mean that he can't let interest rates go down.
Um he has been um uh really propagating uh something that uh I've been calling the wash maneuver.
Um you can you can lower rates if so long as you remove the inflationary pressure uh by uh by changing the balance sheet.
And he's also said the Fed balance sheet has way overbloated.
So what Kevin Walsh is proposing to do is to lower rates, but at the same time offset the inflationary pressure from the lower rates from uh by by contracting the balance sheet.
And and for him, uh the balance sheet um bloat that we've seen since uh uh essentially since 2008, since QE two is something that really has to be addressed because um, in his opinion, uh the Fed shouldn't be so prominent in the marketplace.
And in emergencies like 2008, of course that was the right thing to do and expand the balance sheet.
But when Bernanke proposed, look, I'm gonna go into QE2 to keep providing the economy with support, Walsh said to him, I wouldn't do that if I were in your seat.
Uh but I'm not dissenting publicly on the on the committee.
But what I am doing, if you if you're going to continue to do QE2, I do I quit because I don't believe in what you're doing.
So that gives you a sense that he is he is very concerned about inflation.
He's very concerned about the proper role of the Fed in financial markets, and he's a man of principle.
So if the aim of reducing the balance sheet is to essentially remove liquidity from the system, doesn't lowering rates just do the opposite?
Help me understand that tension.
I think that what what what you have to keep in mind is lowering rates will enable consumers and small businesses to get loans at a lower rate.
But whether the banks can give the loans or not will depend upon how much liquidity they have, right?
Um now on where consumers are most concerned would be at the long end of the market.
And that's really controlled more by the tenure rate and fiscal policy.
Um but but in terms of the shorter term inventory lending that that businesses do, um the liquidity is a big factor uh along with the rate itself.
So for the businesses that are able to get loans at the lower rates, uh they're they're they're very happy.
Um but but the Fed can still contain the amount of loans that are given by banks by limiting their ability to lend.
Um and and that that is partly by by by draining the reserves and liquidity in that short-term market.
So so the rates have a role, uh, but also the amount of liquidity has a role.
During the period of time that we were waiting for the nominee for Fed chair, there was a lot of discussion around the notion of Fed independence.
Is that something that you're concerned by?
Fed independence is probably the single most important thing uh for any central bank because uh a central bank won't be credible unless it has that independence.
Um but but I think what what we've misunderstood or the press has misunderstood about the charges against Powell is is not so much an issue of independence, although it's related because let's face it, Trump doesn't like Powell because he he hasn't lowered rates.
But that's true.
I mean, Doug, we know that's true of every American president going back to Lyndon Johnson.
And I don't know, I don't think you're as old as I am, but but Lyndon Johnson, um, back in 1965 when Vietnam was uh was was starting to grow, William McChesney Martin had just raised interest rates.
And what did what did Lyndon Johnson do?
He brought McCesney Martin to ranch in Texas and said and shoved them up against the wall and said, My boys are dying in Vietnam and you won't give me any money?
What's wrong with you?
Right?
Right now, now that that kind of you know physical bullying, right, makes what the name calling of of Donald Trump look like he's a pussycat.
Um so and and and rumor had it, by the way, that uh since that incident with McCesney Martin, rates stayed unchanged until Johnson announced his retirement.
So so in that sense, right?
I mean I think Fed independence is one thing, but I think why get back to the issue of why was was why is is is is uh the Fed being put in the on on the on the you know in in the sites of the department justice or everything else, is because the Fed has really grown beyond its main mandate of monetary policy and bank supervision.
Um what what the Fed has done over the last 20 years is that it's increased its budget by four times, which is bigger than the growth of federal spending, bigger than uh uh larger than inflation.
Um, and the Fed has gone, the mission creep has really set in, allowing the Fed to go into climate policy, uh diversity, uh equity and and inclusion policies.
And essentially increased staff and going into areas that it really has no business doing.
And Kevin Walsh has been very serious about limiting the role of the Fed in the marketplace.
For him, the ideal central bank would be one where no one really cares about what it's doing.
It's going to be in the background.
Um, and and I think that's where he's trying to bring the back bring back the Fed.
Bill, let's pivot and look at the impact of tariffs on the economy.
Today there was a coalition of former farm group leaders and former U.S.
government officials that said tariff policies from the Trump administration are causing damage to American farmers.
And the group went on to say that substantial action is needed.
This group also said the indiscriminate and haphazard nature of current tariff policy has not revitalized American manufacturing and it's significantly damaged the American farm economy.
So how do you understand the impact of tariffs on the economy?
Well, broadly speaking, I think the the program that Donald Trump's put in place is less a direct tariff policy, but rather an investment incentive policy.
What he's what he's done um when he got elected was he he made pr uh some promises of lowering uh taxes, shrinking the size of government, and and removing regulation.
Um and and he said to the world in the first novel speech he made last year um was to say the U.S.
is open for business.
If you come do business and build uh factories and create jobs in the United States, uh we will put a tariff barrier around you to prevent you uh uh from suffering from unfair competition.
Uh so so the tariffs were uh were hand in hand with investment policies.
Now you're right to say that um some of the tariffs have have really hurt sp specific sectors and farmers in particular, because the trade deals were made with a lot of agricultural promises.
Um remember phase one of the Donald Trump's uh first administration, right?
The the Chinese promise to buy a lot of soybeans.
Uh well, there was a lot of hemming and hawing, and then eventually the purchases of soybeans instead of going to American farmers, went to Brazil.
Um so so we've had deals where the our current parties didn't fulfill their obligation as part of the deal.
Currently, I think what the administration has tried to do, and even in the first administration, has been to repay the farmers, right?
Giving them some some help and some some relief uh through the use of the tariff revenues.
So so um sector and sec certain sectors have been hurt, there's no question about it, but the overall impact on the economy has been a massive infusion of capital into the economy.
And and a lot of it is toward manufacturing, but I think the a lot of it is toward investment, like you know, the kind of uh deals that we see with Nippon Steel, uh trying to revive US steel, right?
The the the TSMC coming into Arizona and trying to revive the chip industry.
Those are the kind of um, I think the investment policies that Donald Trump has tried to put in place um to uh using tariffs as an incentive.
So, what is your assessment on how well the American economy is performing these days?
Oh, it is doing spectacularly.
I mean, in in um growth right now is estimated to be well above 5%, uh 5.5%, almost 6%.
And if you sort of take into account that in the in the in the last quarter, the the shutdown of government took away about a percentage point from growth, and uh Atlanta Fed is estimating the the quarter growth to be about 5.65.7.
We're above six, which is phenomenal.
Um now is that inflationary or non-inflationary?
Well, from the labor market, you can see that very few jobs are being created.
So so all of this growth is coming from productivity.
Um companies are just not willing or less incentivized to hire people because the productivity is making work so so so productive.
Now, this productivity is not AI uh uh uh yet, anyway, because it it it it really gave is is come from the uh investments that were made in the pre uh the post-COVID era over the last three years, and that's when productivity has really surged.
Just imagine what will happen when AI starts to kick in.
So so the the real issue I think faced the American economy is we're going into a slow, higher economy.
Uh new people coming into the labor force are having a tough time finding jobs.
And that's something that has to be addressed, which is why uh Trump and Walsh himself says we need to lower rates to encourage the uh employment in at least the intersensitive sectors like housing and construction.
Um and meanwhile, uh, you know, the growth itself and then profits, uh Wall Street is as happy to, you know uh profit margins are growing because we have we're able to produce the same stuff but as we before, but that's at lower costs.
Or given the same cost, we could produce a hell of a lot more stuff uh without having to raise prices.
And so I think uh we're in the best of all worlds.
So, what's your expectation then in terms of rate cuts this year?
Well, I as I said, I think um the the opinion of uh of the uh Governor Walsh is that uh we still need to help the job creation process.
And the best way for the Fed to help job creation and keep to its mandate of maximum employment uh is to lower interest rates to help the interest sensitive sectors, specifically housing and construction.
Um but it's but I think the the mandate for for meeting inflation is is less a concern because productivity it gives us a huge inflation hedge.
Uh and on top of that, if Chairman Powell is right about the the tariffs bleeding off toward the middle of this year, um, well, then the inflation is less of a problem because as you said, if it weren't for inflation, we'd be closer to 2.2% on the PC deflator, which is their main gauge of inflation, uh, than we are at than the 2.7% uh that we are at uh currently indicates.
So the gap between where we are and their target is is actually quite small once the tariffs roll off.
And and even the Fed anticipates it'll roll off by the middle of the year.
Bill, we'll leave it there.
It's always a pleasure.
Thanks so much.
Uh Bill Lee, their chief economist at Global Economic Advisors joining us here on the Daybreak Asia podcast.
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Welcome back to the Daybreak Asia Podcast.
I'm Doug Chrisner.
And as I mentioned earlier, we had a sell-off in software stocks in the U.S.
session.
That in turn led the equity benchmarks lower.
And we're seeing similar weakness in several markets in the APAC, especially Japan.
That's where we begin our conversation with Christian Knolting.
He is the global CIO at Deutsche Bank Wealth Management.
Christian spoke with Bloomberg TV host Sherry On and Avril Home.
Perhaps investors looking for the next fresh macro catalyst, watching oil prices as well, with this on again, off again risk premium uh being revived between the US and Iran tensions.
There is a lot to unpack.
Joining us now is Christian Nolte, Global CIO at Deutsche Bank.
So, Christian, let's start off with tech if we can.
What do you make of this route uh underway?
Yeah, I think look year to date is still okay, but I think we need to watch the earnings season very closely.
Where I think on average, of course, there's some disappointments, some upsides, companies do deliver results.
But I think from my point of view, the difference is the upside surprise is a bit lower than in previous earnings seasons.
So the market whisper was always a bit higher.
And then even if companies come with their results as expected, then there's some downside because probably the market was ex expecting or hoping even for a bit more.
And those companies who don't deliver, then are of course much to the downside.
That has been seen last time as well.
But the difference I think is the upside surprise, which is a bit lower this time.
Okay.
You've also been sort of looking for other opportunities along the AI value chain.
With that in mind, you look at utilities as well.
Correct.
What are you seeing in terms of the earnings performance and the trajectory there?
So I think that's very positive so far what we have been seeing.
So it's not only so first of all, we think the AI trade is not over.
Yeah, we think it's a structural change which will continue.
But last October we did start really to look into not only chips but other parts of the business as well.
So data center needs electricity, and that's why we came to utilities as well.
And the good thing about this is it has balanced quite nicely the portfolio, even in times where markets came back a little bit, like last October, last November, where we see a little bit of setback, it creates quite a robust portfolio.
Because sometimes people say utilities are much more stable.
Yes, less volatile for sure.
Normally pay a good dividend as well.
So I think this is also a topic for this year to balance out the portfolio.
Maybe some there are some let's say higher weights because of positive price development.
But let's revisit this and say what creates a robust portfolio.
I think very important for 26.
And Christian, it's the revisiting that's very important, right?
Because I remember just a year ago or so that we were very much watching the software makers because we thought we're going to be looking at hardware stocks this year, but then the next upside could be in software.
And then you have Anthropic's new AI tool just sending all of these stocks on a sell-off.
Um given that we really can't anticipate what sort of disruption artificial intelligence could bring.
Are there any bulletproof calls in this sector that you can make at this point that doesn't matter what sort of innovation we could see next?
Well, I think bulletproof, I wish to be very honest, we need to see the development in the markets.
And I think around this time last year we had deep sea coming up, which also disrupted the market.
Now you see further developments in AI, especially when it comes like you mentioned, to agentic AI, which I think is the next step.
So I think this tool brings probably some cost reduction, some discussion which companies could uh prove to be still on the right space.
Of course you need software, but I think here also we go down the value chain.
So from my point of view, what helps most is to say, okay, you have some in ships, you have some in data centers, you have some in electricity.
That's why we are saying uh look at all the value chain really to balance out.
And I think again, this year shows that probably that's helped to create uh rather the right portfolio for this year.
And how do you factor the currency shocks, especially when we're not quite sure what the Trump administration wants to do on that end?
Yeah, of course, there is a lot of discussion or has been already this year of the weaker dollar.
So from my point of view, it's probably also not in the interest of the US to get a very weak dollar because eventually that would create or add to inflation.
Uh, and inflation then would mean that at least the long end of the curve in the US would rise.
We've been seeing this.
We've always factored that if ten year treasuries go to 450, there's also a kind of a negative market reaction on the equity side.
So I think inflation is something to be watched.
I think the good news for the US, what we see is for the next month is coming months, so not only one, some more.
It's coming down a little bit.
But after this, I could imagine that inflation comes up again.
So our forecast is for US inflation to stay far above two, two and a half to two point eight percent towards the end of the year.
And that's why you need to watch this.
That's why I think the US is not interested to get an extremely uh weak dollar.
So some some movement we can see, but I think over the last days we have also seen some stabilization after some calls from the US as well.
We are seeing though, I guess to your point about utilities and broadening out of the AI trade, that value is beating growth.
Where do you see that playing out for the rest of the year?
Yeah, I think that could potentially continue.
As I said, right, you need to reshuffle a little bit on the portfolio space because if you think last year, actually, sorry to say, you did not really need diversification because some stocks have driven everything.
So I think to broaden out makes a lot of sense.
We look especially into small and mid-caps, which oftentimes is more value than the tech large caps from our point of view.
And the performance starts to be better.
And here we also have a call more on Europe because here mid and small kips could be interesting from our point of view if you now eventually see some growth coming up in Europe as well.
So at least there's some demand I can see from clients here from Asia, but also from the US looking into Europe.
And we're bringing it to you here on the Daybreak Asia Podcast.
Thanks for listening to today's episode of the Bloomberg Daybreak Asia Edition Podcast.
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