June 13, 2025 • 38 mins
Bloomberg Daybreak Weekend with Tom Busby takes a look at some of the stories we'll be tracking in the coming week.
- In the US – a look ahead to next week’s Fed decision.
- In the UK – a look ahead to next week’s Bank of England decision.
- In Asia – a look ahead to next week's Bank of Japan decision.
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Speaker 1 (00:00):
Bloomberg Audio Studios, Podcasts, radio news.
Speaker 2 (00:10):
This is Bloomberg day Break Weekend, our global look at
the top stories in the coming week from our Daybreak
anchors all around the world. Straight ahead on the program, Well,
look ahead to this week's monetary policy decision from the
Fed what it means for interest rates. I'm Tom Busby
in New York.
Speaker 3 (00:24):
I'm Caroline Hepkea in London, where we're looking at whether
the Bank of England does decide to hold steady on
interest rates.
Speaker 4 (00:30):
I'm Doug Prisner looking at the challenges for the Bank
of Japan as it faces a decision on interest rates
in the coming week.
Speaker 1 (00:38):
That's all straight ahead on Bloomberg Daybreak Weekend on Bloomberg
eleven three zero, New York, Bloomberg ninety nine to one, Washington, DC,
Bloomberg ninety two to nine, Boston, DAB Digital Radio, London,
Sirius XM one twenty one, and around the world on
Bloomberg Radio, dot Com and the Bloomberg Business App.
Speaker 5 (01:02):
Good day to you.
Speaker 2 (01:03):
I'm Tom Busby. We begin today's program with the Federal Reserve,
the FED, concluding its latest two day meeting, issuing a
monetary policy decision on Wednesday, and for more on what
to expect, what policymakers are watching, we're joined by Michael McKee,
Bloomberg International Economics and Policy correspondent. Well, Michael, no change
in rates in three earlier FED meetings so far this year.
(01:25):
What are you expecting to hear from the Federal Open
Market Committee this Wednesday?
Speaker 6 (01:30):
The headline will be no change in race, and I
think we're going to see that for a little while
this meeting and then probably the July meeting. It probably
won't be until September that the Fed has enough of
a feel for the economy to know whether anything else
needs to be done. Right now, inflation is under control, basically,
(01:51):
we saw this last week CPI and PPI come in
lower than expected. There were some tariff related increases in
some categories, but nothing that screams problems for the Fed
at the moment. But all the tariffs haven't been put
on yet, so they're going to have to wait and
see the June inflation numbers and the July inflation numbers
(02:11):
before they might want to make any changes.
Speaker 2 (02:14):
Well, that's the wild card in all this, and we're
looking at a date right now, and of course this
is fluid and always changing. July ninth, when the president's
ninety day you know, pause on tariffs goes into effect.
I guess after that things could really change.
Speaker 6 (02:29):
They could really change if indeed the tariff's go into effect.
That's the problem for the FED is nobody has any
idea what Donald Trump is going to do, so it's
impossible to model what's going to happen. He raised steel
tariffs to twenty five percent, and then in the PPI
we saw that steel prices were up seven percent last month,
(02:52):
So there is a cause and effect there that will
probably feed into other categories in the CPI and PPI,
depending on what gets tarff when it gets tariffed, how
much the tariffs are, and when they take effect. So
it's really hard for the FED to think anything other
than we don't need to do anything because inflation is
under control and at this point the economy is hanging
(03:16):
in there.
Speaker 5 (03:16):
Now.
Speaker 6 (03:17):
Jobless claims are a little elevated, but it's a seasonal
adjustment time of year, so maybe they're not signaling a
terrible change in the labor market. But I Fed'll be
keeping an eye on those two things to see if
there is any move either direction needed.
Speaker 2 (03:33):
Another thing is economic growth, because the fear of these tariks,
the fear of inflation, really changed things in two earlier
readings on GDP in the first quarter, and we're going
to get a third reading pretty soon.
Speaker 6 (03:44):
Right, Yes, we'll get a third reading. That will be
the final reading for the month, and what we're going
to see is basically little change. But then we'll get
the second quarter numbers and we'll see a big change
because in the first quarter grow was held down by
the fact that we imported a lot of stuff as
people tried to front run the tariffs, and that is
(04:07):
basically comes out of GDP, so we had a negative print.
But in the current quarter, the second quarter, people are
not buying a lot of imports. Imports are way down,
so that will artificially add to GDP. So again for
the fat they'll probably average the two quarters, but it
isn't going to be a clean read on exactly what's
(04:29):
happening now.
Speaker 2 (04:30):
People, you say, are buying fewer of the imports, but
are we still seeing jittery consumers, especially lower end consumers
holding back on all purchases.
Speaker 6 (04:41):
We're seeing jittery consumers, but they don't seem to be
holding back on all purchases. Right now, consumers seem willing
to spend on what they need to spend on. Gasoline
prices have come down. That gives people a little bit
of a tailwind, little bit of extra money to spend
on other things, which food prices went up, so that
the other thing that they watch closely. But this is
(05:02):
also not a period of time when there is a
lot of what we would call extra spending because we're
past the holidays now, we're waiting for basically back to school,
which will start in July, and if people are going
to be spending a lot on that or whether they're
going to hold off. One thing that we are watching
(05:22):
these days is vacations. Airfares are way down because air
travel is way down. Hotels are down. These are the
time of years when you would think they would go up,
but the prices of those things have come down because
people aren't traveling as much, which is a sign of
some nervousness.
Speaker 2 (05:38):
Let's talk about the future of the FED, because this
has been a subject last week. Jerome Pal's eight year
tenure as FED chair will end in May of next year.
We know what President Trump says about him what's next
for the FED. And I know that there's one big
name out there.
Speaker 6 (05:55):
Well, there are a couple of big names out there,
because the President has made no secret of people that
he thinks could be FED chair. Along with Scott Besson,
whom you're referring to this last week Bloomberg reporting he's
on the list, Kevin Walsh, the former FED governor, has
been on the list twice. He was on the list
(06:15):
before Jay Powell was chosen, and then Kevin Hassett, who
is the director of the National Economic Council. So there
are a number of names out there. The question is
what does Trump really want. The feeling has been and
the impression you get from Donald Trump is that he
wants somebody who's going to cut interest rates. We don't
(06:38):
know a lot about what Scott Besson thinks about rates.
We do know that Kevin Walsh, as much as Trump
likes him, has been a hawk all his life on inflation.
So he's probably not going to be ready to cut
interest rates so right away. And the issue for the
President is he can fill one seat for a governor
whose term is expiring in January, Adriana Kugler, and then
(07:02):
he could fill the pole seat if j Powell resigns
as a governor when his term as FED chair is up,
so he's got one or two seats, and the FED
will not otherwise turn over during his term, so he
doesn't have an opportunity to pick enough people to influence
monetary policy. Even if he got somebody who walked in
(07:24):
the door and said, I want us all the cut raids,
the rest of the FED isn't going to go along
if they see inflation is still a danger.
Speaker 2 (07:31):
Well, a lot to look forward to, and we can
look for the Fed's next decision on interest rates this Wednesday,
two pm Wall Street Time and our thanks to Michael McKee,
Bloomberger International Economics and Policy correspondent. We moved now to
a closer look at the troubled US housing industry, which
has been stung by stubbornly high interest rates, sky high
home prices, and a lot of economic uncertainty. And this
(07:51):
week we get housing starts for the month of May
and the latest earnings from one of the nation's biggest
home builders. For more on what all this might tell
us about the state of the house sector, we're joined
by Drew Reading Bloomberg Intelligence US Home building analyst, Well, Drew,
let's start with those earnings I'm out on Monday from
the Miami based builder Lenar, because I think they may
(08:11):
illustrate a lot of the challenge the home building industry
is facing right now, a lot of those challenges. So
what do you expect to see?
Speaker 5 (08:19):
So, the two main things that investors focus on for
the builders are orders in gross margin. Now, among the
large publicly traded home builders, Lenars operating a somewhat unique
strategy in that they're focused primarily on driving pace, so
higher sales absorptions over price, and they've been willing to
sacrifice their gross margin to do so. So they'll give
(08:39):
us a good read on demand trends. We've heard from
some other builders. You know that the market softened in April.
We saw that in the data, but maybe improved a
little bit in May. So we think that any pickup
in demand is still likely the result of an elevated
use of sales and incentives. Builders have had to be
really aggressive. So we're looking for order growth of about
eight percent with a margin just under eighteen percent, But
(09:02):
we expect the company to communicate further pressure through the
remainder of the year. You know, during the first quarter
a number of builders actually reduced their full year guidance
for closings, but just given Lenar's business model, we think
there's probably less risk for this. So you know, they're
expecting to close eighty six to eighty eight thousand homes
this year, and really their primary objective is to turn
(09:24):
through their inventory to generate cash and drive shareholder friendly actions.
Speaker 2 (09:30):
Now, also this week we get housing starts for May.
So what do you expect to see there?
Speaker 5 (09:35):
Housing starts has been trending lower over the last several months.
I think we're down about seven percent year to date
on the single family side, and we expect builders to
maintain this more cautious approach to production. You've got the
combination of weak demand trends along with rapidly increasing inventory levels,
including one of the highest levels of completed new home
(09:55):
inventory since two thousand and nine. So you're going to
see builders continue to utilize incentives to work through the
existing inventory before putting new projects in the grounds.
Speaker 2 (10:04):
Well, let's talk about some of those incentives. What are
the more popular ones.
Speaker 5 (10:08):
So I think it's pretty well understood that builders have
been aggressive in the use of mortgage rate buydowns to
help with the affordability equation. Generally speaking, we think builders
like to maintain a spread of about one hundred to
one hundred and fifty basis points versus the headline mortgage rate,
which is just under seven percent right now. I mean,
we've seen some builders be even more aggressive getting rates
(10:31):
into the five percent range, But it's really dependent on
the buyer. So in addition to what they're doing on
the buydown side, you also have others who would rather
up for closing costs, assistance, or credits towards structural options
or design options. Typically you'll see the first time or
entry level buyer opt for the rate buydown because they're
more dependent on that monthly payment, while buyers you know
(10:53):
with a stronger profile in the move up or second
time move up market will typically look for, you know,
credits towards structural and design options.
Speaker 2 (11:03):
Are you seeing anything from the Trump administration that is,
any moves to help home buying, to help you know,
people secure loans. I know, some of the mortgage guarantee
those those you know Fanny made, Freddie mac There's a
lot of movement there, but what is being done out
of Washington?
Speaker 5 (11:22):
Yeah, so you know, there was a big topic of
discussion on the campaign trail. There hasn't been a whole
lot of movement right now. I mean the three biggest
things I think from the political spectrum. People are looking
at our tariffs, which you know, thankfully for the builders,
is less of a concern perhaps than it was, you know,
a month or so ago, as well as immigration and deregulation.
(11:44):
You know, I think there's more focus on immigration. You
mentioned that, you know, we're starting to see more ice rates.
It's certainly a headline risk to the industry. You've got
more than thirty percent of trade contractors are farm born,
and there's estimates you know that one and ten may
be undocumented. Now, most of the builders that we've talked
to have acknowledged that this is a risk, but I
think to this point there there hasn't been too much
(12:06):
of an impact on the actual job site. You know,
this is as you mentioned before, the lack of tree
labor has been an ongoing issue for the industry really
since the last downturn, because you have a lot of
people switch industries, You've had a lot of people age
out of the industries, so you know, that's really been
a focal point for the last several years. And to
the extent that you know that the labor market tightens
(12:29):
up further because we're we're losing some more of the workforce.
Now you're looking at the cost impact for the builders.
Speaker 2 (12:34):
Yeah, just another challenge for those builders.
Speaker 5 (12:36):
Well.
Speaker 2 (12:36):
Our thanks to Drew Redding, Bloomberg Intelligence US home building analyst.
Coming up on Bloomberg day Break weekend, we'll look at
whether the Bank of England will decide to hold steady
on interest rates. I'm Tom Busby and this is Bloomberg.
(12:59):
This is Bloomberg Daybreak weekend, our global look ahead at
the top stories for investors in the coming week. I'm
Tom Busby in New York. Up later in our program
a look ahead to the Bank of Japan meeting and
what that could mean for monetary policy moving forward. But first,
the Bank of England policymakers will once again gather on
Threadneedle Street to determine the country's interest rate path. How
(13:19):
will the Monetary Policy Committee deal with inflationary pressures as
the UK economy and the employment market soften. For more,
Let's go to London and bring in Bloomberg Daybreak. Euro
banker Caroline hepgar Tom.
Speaker 3 (13:32):
The Bank of England has been slowly cutting interest rates
since last year, lowering boring costs twice in twenty twenty
five to four and a quarter percent, but tax rises
in April, including on employers from higher national insurance contributions,
have pushed inflation up. There's a big question about how
the bank deals with this amid an economy in the
(13:55):
UK that appears to be losing some steam. So do
the nine member committee at the Bank of England opt
to skip a rate cut this month and what then
of the rest of the year? Economic growth began twenty
twenty five with a bang, it's now dealing with the
fallout of some US tariffs, and the Bank's decision comes
(14:16):
only a few days after the Chancellor set out the
government's spending plans for the next three to four years,
a record funding boost for the National Health Service but
tighter budgets for less favored government departments.
Speaker 5 (14:30):
Well.
Speaker 3 (14:30):
Joining me is Bloomberg's chief UK economist, Dan Hanson and
our senior economics reporter Phil Aldrich. Very good to have
both of you with me. What do you make of
the economic picture in the UK right now and whether
it means interest rate cuts coming. Has the inflation outlook improved?
Speaker 7 (14:49):
Yeah, obviously, as Dan said that there's been a there's
this temporary hump in inflation which is caused by a
holload of regulatory household bills which would uterize and that
increase has happened, and so we've seen that bump. So
the Bank is trying to look through it and that
and they're looking particularly at wages and the labor market.
I mean, you'd hear this from members of the committee
(15:12):
and that you know that the process is proceeding there,
they would like it to be proceeding faster, for them
to cut faster. There's this they have this quarterly trajectory
for interest rate cuts when they which is which is
communicated through the gradual and careful language, which remains in place.
So you don't think, I mean, it doesn't look like
(15:33):
the governor wants to move from that quarterly pace of cuts.
And you know, two of the internal members at the
bank are actually quite hawkish and they don't so Hugh
pill has already skipped one meeting, so he's voted not
to cut when when everyone is expecting him to. And
Clai Lombardelli, who's the Deputy Governor Hughes, the chief economist,
(15:55):
that they prepare the forecasts, and she and Hugh are
clearly quite concerned about the stickiness of inflation in the UK.
So there is that you've got to think about the
nine member committee when you're thinking about whether the bank
is going to cut, and you've got to think about
who you know, they've got to get five people doing it,
and I think that will be tricky in June. I
would have thought that in August it's pretty I mean
(16:17):
it is nailed on in the markets, it seems to
be completely nailed on, and the economic situation in the
UK it's it's kind of mixed. If you look at
if you look at some of the surveys, the business surveys,
they've been picking up people. Businesses seem more confident. You know,
there's there's strong profitability among or increasing profitability among small
businesses and households and businesses are both setting on huge
(16:38):
cash balances. But actually what's happening in the economy is
that you know, things things up there. Obviously labor market,
the employment has risen. There's been this these damaging tax
rises on business from the Chancellor which only came into
effect in April. Energy bills are still high and there's
genuine just just concerns about, you know, the policy outlook
(16:59):
and whether the more tax risers are going to be coming.
So you know, this is this is holding back the
animal spirits. But you can see like the potential for
a sort of a release of growth energy at some point.
It's just it's not quite happening yet.
Speaker 3 (17:13):
The backdrop to this Dan of course also in recent
days is actually is like cooling in terms of economic growth,
at least on a monthly basis. Though, so again I
guess the state of the UK economy from your perspective.
Speaker 8 (17:25):
Yeah, I mean I broadly agree with what Phil said there.
I think we've had a we've had a cooling in activity.
It was pretty expect widely expected. The fall was a
bit sharper than people thought, but most people thought there
was going to be a fall in GDP. And it
relates to this idea that the first quarter of the
year was exceptionally strong, partly to do with what's been
(17:46):
going on with tariffs and firms front loading in anticipation
of tariffs. And I think the broad picture is consistent
with what the Bank of England set out in its
May forecast, which is you had this wrong, starts the year,
and then the remainder of the year is going to
be significantly weaker. So I think on the growth side,
(18:06):
there's nothing that's going to push them one way or
the other in terms of speeding up or slowing down
how fast they cut interest rates. I think that's the
bit of information that is new to them relative to
well relative to what they knew in May, is on
the labor market. And it does look like the labor
market has called faster than they were expecting. So, you know,
(18:28):
all else equal, that is a that is a dubbish signal,
and the markets have responded to that. They've moved from
pricing one and a bit cuts for the remainder of
the year to fully pricing two and it's quite possible,
you know that there's more more to come there. But
I think that's that's the news. Isn't going to be
enough to push them to cut interest rates in June? No,
(18:49):
I don't think it will.
Speaker 2 (18:50):
Will it.
Speaker 8 (18:51):
If the trend continues, I think it will give them
the confidence to carry on cutting. As Phil said, at
this quarterly pace over the remainder of the year.
Speaker 2 (18:59):
Yeah.
Speaker 3 (19:00):
I remember speaking to Petra tag from a Manpower UK,
which is the big recruitment firm on Blueberg Radio and
she was saying that there is a lot of nervousness
for employers at the moment, or that they are feeling
very nervous currently. Look, the other issue is the kind
of ramifications of Bailey's decision when it comes to Chance
(19:22):
of Rachel Reeves, who has also recently set out her
spending plans for effectively the rest of her term or
the rest of this kind of parliamentary term. And so
have a listening now to Chief EMEA Market strash is
Karen Ward at JP Morgan talking about actually the government's
debt bill and the possibilities and the difficulties that the
(19:43):
government has with that. Have a listen.
Speaker 9 (19:46):
We have to get productivity going here in the UK.
I mean, if you look at the long term projections
the OBR do it. It's their lesser red report than
their sort of year ahead projections. But the trajectory over
the next fifty or so years for government and debt
is unpretty over two hundred and fifty percent. If a
rising productivity scenario, if there is not a recovery in
(20:08):
productivity that's headed more towards six hundred percent of GDP.
So we absolutely have to get growth going. We have
to get investment going. That's the reason we haven't got productivity.
Companies are not equipping their staff with better skills and
better equipment. And until we get that going, then we're
going to be in this perennial conversation about why there
isn't enough growth and why therefore we don't have money
(20:29):
to fund public services.
Speaker 3 (20:30):
So that was JP Morgan's Karen Ward there who was
speaking to us in the last few days. Phil, what's
the link then between you know, the cost of boring
and the UK's debt issues. I mean Karen was talking
about it in very long term horizons, but but how
do you thread that needle?
Speaker 7 (20:51):
Well, obviously, the faster the Bank of England brings down
interest rates, then the more that's going to send messages
through to the through the market and the whole curve
or potentially drop, and that will help the chancer because
their interest is one hundred and one hundred to one
hundred and ten billion pounds a year across the forecast,
which is you know virtually almost it is almost double
(21:12):
the defense budget. So you know that's that's an enormous cost,
so that that would help basically one of the problems actually,
I mean when the issues stems from Rachel Reeves's own
policies here, because she's it's these it's this tiny sliver
of headroom or the buffer against the fiscal rules that
she set herselves. Has just sort of embedded this uncertainty
(21:35):
about future policy into sort of the thinking of business
leaders and just generally into the economy because every time,
you know, there is a small shift in borrowing cost,
that can She's got ten billion of headroom and she
can lose all of that in just just minor movements
in the in the markets.
Speaker 3 (21:52):
In terms of the vote split, what we should be
watching out for, in terms of the language I mean,
and the comparison obviously between the bank of it consisting
between the ECB and the Fed. What are we thinking
about in the next few days.
Speaker 8 (22:04):
Yeah, So with so taking each of those in turns,
so with the vote split, I think you'll probably get
though the vote split has been very difficult to call,
and there have been a few volatile members of the
NPC in terms of their voting patterns, but as the
best guess I would say you would have a seven
to vote split, so you'd have Swatty Dingra and Alan
(22:27):
Taylor continuing to advocate more easing. I think there's a
risk that Sarah Breeden, who's one of the internal members,
votes for a rate cut, but I think a base case,
a reasonable base case is seven to two. I think
there's a question.
Speaker 7 (22:40):
We're learning for cut and the rest learning to hot exactly.
Speaker 8 (22:43):
Yeah, so we get we get a hold being interviewed
by two people now and there's a question mark I
think about whether that because so in May, both of
those members voted for a fifty basis point cut, so
there's a question mark. Do they go twenty five or
do they stick with fifty? You know, I think that
there's a question marked there. In terms of the guidance
(23:05):
going into the main meeting, there was a lot of
speculation that the bank would drop it. This commitment to
gradual and careful cuts, the worlding that Phil phil mentioned earlier.
I think they will stick with that that. I think
they're very comfortable with that because Fills also alluded to
the market perceives that as quarterly cuts, and I think
they're quite comfortable with quarterly cut, so I don't think
(23:26):
there's any reason for them to upset the apple cart
on that front. And then on where the bank sits,
between the FED and the ECB, the ECB inflations in
the EU area, inflation is sort of beaten. Yes, yeah,
and they've sort of, you know, close to declare victory.
They're basically now at a level they're very comfortable with.
They may do one more, that's our houseview. A lot
(23:49):
depends on what happens with tariffs, whether they go up
after this this ninety day pause, that will have a
big bearing on what's going on there. For the FED,
it's very difficult. The economy appears to just about beholding
up at the moment, but of course tariff's create a
trade off, creates higher inflation though we haven't seen it
(24:11):
yet in the data, and weaker growth, So there is
this there's a tough trade off. Whereas if you think
about tariffs in of themselves, for the ECB and the
Bank of England, I think most people majority I'm not
saying everyone, but most people would say they are not
growth friendly and disinflationary. So that's quite obvious. What you
(24:31):
do with interest rates against that backdrop, I think the
challenge for the bank is actually domestic and going to
what Phil said, this point about sticky inflation and the
point that I think in the UK inflation expectations are
probably inconsistent with target levels at the moment, and I
think the bank is worried about that. So the extent
(24:53):
to which they can look through this hump in inflation
is more limited than perhaps it was prior to the
big inflation shot. You know, remember Brexit, we had this
big increase in inflation, or a relatively large increase in inflation.
They eased policy despite of that. Same happened during the
financial crisis, So I think that the dynamics and the
trade off and the way they think about the trade
(25:13):
off has changed.
Speaker 3 (25:15):
Okay, some interesting points. Thank you so much for giving
us a heads up on what to expect, of course,
on the Bank of England rate decision in the next
few days. That is Bloomberg's chief UK economist Dan Hanson
and our senior economics reporter Phil Aldrick. Thank you so
much for being with me. I'm Caroline Hepgar in London.
You can catch us every weekday morning for Bloomberg Daybreak.
You at beginning at six am in London. That's one
(25:37):
am on Wall Street.
Speaker 2 (25:38):
Tom, Thank you Caroline. And coming up on Bloomberg day
Break weekend, we'll look ahead to a monetary policy decision
from the Bank of Japan. I'm Tom Busby and this
is Bloomberg. This is Bloomberg Break Weekend, our global look
(26:01):
ahead at the top stories for investors in the coming week.
I'm Tom Busby in New York. The Bank of Japan
is out with an interest rate decision this week, and
for more on what to expect, let's get to the
host of the Daybreak Asia podcast, Doug Krisner, for a.
Speaker 4 (26:14):
Preview, Tom, These are interesting times for Bank of Japan
Governor Kazu o Uweeda. Core inflation in Japan has been
above the boj's target for nearly three years now, and
in that time there has been constant worry over the
durability of higher prices. In the last week, Governor Uwada
said the BOJ is still some distance from its inflation goal.
(26:36):
Perhaps the bigger worry these days has to do with trade.
Joining me now for a closer look is Paul Jackson.
He is Asia Economy editor for Bloomberg News in Tokyo. Paul,
thank you for making time to chat with me. It's
always a pleasure. So we have a BOJ meeting on
tap in the week ahead, and from what I'm reading, Paul,
the BOJ is likely to maintain this kind of weight
(26:57):
and see approach. That's kind of surprising when you look
at the forcefulness that we have seen in inflation in Japan.
Why are they adopting this wag and sy approach? Do
you think?
Speaker 10 (27:08):
I think the answer is Donald Trump. I mean, we
have this wave of tariffs hitting the world. We still
don't have the final a view on what those levels
will be when this kind of temporary pause on the
reciprocal rates is lifted. We've seen a lot of kind
(27:31):
of conflicting reports about whether talks will continue or will
be wrapped up in the next couple of weeks. But
the long and the short of it is a bit
all this uncertainty. Would you want to be raising interest
rates aggressively even if you've got quite a bit of
inflation there? So I think it's the pause button is
(27:52):
going to be played next week. We've got economists and
analysts generally thinking that the Bank of Japan does face
a strong inflation trend here and it must act at
some point, but it's going to be later in the
year or even early next year. Of course, if we
do get clarity on tariffs and what the levels are
(28:16):
going to be for Japan going forward, then that could
change the thinking at the Central Bank, But for now,
rates on hold.
Speaker 4 (28:24):
So the policy rate we know is just one tool.
The boj has also been very very forceful about trying
to manage the yield curve, and from what I understand,
the pace of tapering bond purchases is going to be
a hot topic at this meeting right.
Speaker 10 (28:38):
Oh, yes, very much so. So as part of Governor
Uada's kind of drive to normalize policymaking at the Central
Bank and kind of help Japan to return to some
kind of normal status as a G seven economy rather
than an experimental outlier. He's been looking to pull back
(28:59):
from all the market interventions that the central Bank had
gotten into, and one of them is that is the
bond buying, and the Bank of Japan was buying incredible
amounts of bonds. Even now it holds around half of
all the outstanding Japanese central government debt, and it's wanting
to kind of like remove its status as a whale
(29:22):
in the pond and let market forces kind of take
over price setting in the market. Now, that all sounds great,
but how quickly can you actually do that without triggering
a lot of volatility in prices? And I think what's
happened amongst all the uncertainties going around in the world
(29:43):
the pace at which the Bank of Japan has been
cutting back its purchases. So it's still buying a lot,
but it's buying less with each quarter that it's maybe
going a bit too fast, and there's concerns about what
happens from this point forward.
Speaker 4 (29:58):
So our policymakers keeping a very close eye on the
currency right now, particularly the yen's relationship with the dollar,
at a time when people in the States are expecting
the Fed to lower rates sometime before the end of
the year, maybe we get two rate cuts and that
would be dollar negative. So talk to me a little
bit about how policymakers in Japan right now are viewing
(30:20):
the end, which has been a little choppy lately.
Speaker 5 (30:23):
Yeah.
Speaker 10 (30:23):
Absolutely, I mean, I think they're quite happy for a
bit of strength to come into the end, take it
well away from those levels that cause so much trouble
in recent years, and so much money spent on intervention.
So I don't think the moment that's like the key
(30:45):
hot topic concern for the central bank at this time
or the policy makers, really. I think the key point
here is what kind of deal can Japan cut with
the US on these trade tariffs. I mean, some of
these tariffs are really hitting key industries in Japan, you know,
(31:08):
regardless of the exchange rate. Obviously it's an important aspect
of it. But in terms of these tariffs, I mean
twenty five percent on Japan's auto sector, that's a huge
shadow hanging over Japan's economy going forward. That's around ten
percent of GDP, eight percent of the workforce employed by
(31:31):
the auto sector. You know, can they withstand that kind
of pressure.
Speaker 4 (31:36):
So we were talking a moment ago about the inflation
environment in Japan, and I'm wondering whether the government is
still considering cash handouts as a way to help consumers
deal with this sticky domestic inflation story.
Speaker 10 (31:50):
You know, this is a very good point because if
the central bank can't aggressively raise interest rates, that means
you're going to have inflation kicking around for long and
voters are are sick of hit. They want something to
be done. There have been subsidy measures for electricity bills
and gas bills and stuff over recent years, but they're
(32:12):
wanting more. And as you've got increasing tax revenue, people
are thinking, you know what's going on. You're getting all
this extra tax money and we've still got a high
levels of taxation. From a consumer's perspective, they're thinking, why
don't you lower the sales tax on a temporary basis,
give us some relief while this inflation trend is continuing.
(32:35):
And we've got a national election for the upper House
coming next month, and I think this is going to
be a key point with a lot of the opposition
parties saying, hey, look, lower the sales tax, give consumers
a break. For the central government that is problematic. You've
got debt that's more twice the size of the economy.
(32:58):
You've got this volatility in the long term super long
end of the bond market. Are you wanted to, you know,
pay your way with extra spending through more debt issuance? No,
you don't, So they're gonna have to come up with
some other measures.
Speaker 4 (33:15):
Let's talk about Prime Minister Ishiba's meeting in the coming
week with President Trump that will happen on the sidelines
of the G seven in Canada.
Speaker 10 (33:24):
What are we expecting, Well, first of all, you know
these meetings, you know, nothing's kind of set in stone.
If they don't meet, I think that would be a
setback for Ishuba. I think we're seeing a lot of
momentum going forward. This is we have negotiators. Japan's top
trade negotiator is on his sixth visit to DC this
(33:47):
this week to try and get closer to the line
on some kind of trade deal. I think that the
two leaders probably will meet and they probably will have
some kind of statement. Now, whether it's it's a deal
perhaps with nothing much fleshed out, but you know, grand
statements about we've done it, we've reached the deal, or
(34:08):
whether it's just a statement saying significant progress has been
made in trade talks. I think there probably will be
some kind of joint statement.
Speaker 4 (34:18):
So you were talking a moment ago about the tariff
story as it relates to the automobile industry in Japan,
which as we both know, is enormous. Let's not forget steel, right,
and we have those steel tariffs in place, and in
the last week, Commerce Secretary Howard Lutnik was saying that
the deal between Nippon Steel and US Steel will be
(34:38):
done reasonably soon. Do you have a sense of what
this possibly may entail, what it could look like.
Speaker 10 (34:46):
Well, I think there's been all all manner of question
marks about what this is and how much investment is
going to the US. The investment figure looked very similar
to the buyout figure. What we do see is, you know,
we've got this kind of golden share arrangement for the
(35:06):
US government essentially to have a veto on key decisions.
So this is something that Donald Trump is putting forward
as a great success for his administration. No matter how
much it looks like something close to a biout, I
think there are key provisos that have given the optics
a much better look for the US administration.
Speaker 4 (35:29):
So, if Prime Minister Ishibai he is really trying to
strike a favorable trade deal with the US right now,
is it in his best interest not to get too
involved with the China side of Japanese trade and perhaps
put that off for the moment and focus more on
the relationship with Washington.
Speaker 10 (35:46):
I think for Ishiba at the moment, it's got to
all be about the relationship with the US now. Of course,
for all the players in Asia, threading treading the difficult
path between how much you deal with these huge trading partners,
the United States and China is a real head scratcher.
(36:08):
You look at South Korea for example, I mean, you
know that reliant on both economiest heavily. You know, how
do they navigate that. Japan's in a similar position. But
I think at the moment that the big scary thing
standing in front of you is this wave of tariffs
and how you tran get concessions on that topic.
Speaker 4 (36:32):
We were talking a moment ago about the potential for
cash handouts to consumers in Japan. We've got an election
just around the corner, and I'm wondering how people are
feeling right now about the ishi A government.
Speaker 10 (36:45):
Well, he's got some shoring up to do of support.
He's had this minority government. He's been kind of, you know,
walking a very difficult tight rope since that election last
year where the general election where the results lost stripped
him of a majority in parliament. He's been having to
(37:08):
cooperate with the opposition parties to get legislation over the line.
So he's really in need of at least a better
outcome than he had last autumn in this election, and
this inflation dynamic that we've been talking about is you know,
(37:29):
acting against him in his face. We've also seen a
hot topic of the rice prices. Rice prices have pretty
much doubled in recent months, and for consumers this has
really been like your staple for meals every day is
twice the price. Are you kidding, mister Ishuiba. We want
(37:53):
to vote for you, Are you sure? So he's got
a somehow in the intervening month before that election convinced
vote is that they are getting assistance from the government.
The government does have a plan for growth. I've how
to deal with Donald Trump and they will bring rice
prices down.
Speaker 4 (38:11):
We'll leave it there, Paul, it's always a pleasure. Thank
you so much for taking the time to help us
understand the macro view of what's going on in Japan
as we look ahead to this meeting in the coming
week of the Bank of Japan. He's Paul Jackson, Bloomberg
Asia Economy Editor joining us from Tokyo, and I'm Doug Christner.
You can catch us weekdays for the Daybreak Asia podcast.
It's available wherever you get your podcast. Tom, thank you Doug.
Speaker 2 (38:35):
And that does it for this edition of Bloomberg day
Break Weekend. Join us again Monday morning at five am
Wall Street Time for the latest on markets overseas and
the news you need to start your day. I'm Tom Busby.
Stay with us. Top stories in global business. Headlines are
coming up right now
Bloomberg Audio Studios, Podcasts, radio news.
Speaker 2 (00:10):
This is Bloomberg day Break Weekend, our global look at
the top stories in the coming week from our Daybreak
anchors all around the world. Straight ahead on the program, Well,
look ahead to this week's monetary policy decision from the
Fed what it means for interest rates. I'm Tom Busby
in New York.
Speaker 3 (00:24):
I'm Caroline Hepkea in London, where we're looking at whether
the Bank of England does decide to hold steady on
interest rates.
Speaker 4 (00:30):
I'm Doug Prisner looking at the challenges for the Bank
of Japan as it faces a decision on interest rates
in the coming week.
Speaker 1 (00:38):
That's all straight ahead on Bloomberg Daybreak Weekend on Bloomberg
eleven three zero, New York, Bloomberg ninety nine to one, Washington, DC,
Bloomberg ninety two to nine, Boston, DAB Digital Radio, London,
Sirius XM one twenty one, and around the world on
Bloomberg Radio, dot Com and the Bloomberg Business App.
Speaker 5 (01:02):
Good day to you.
Speaker 2 (01:03):
I'm Tom Busby. We begin today's program with the Federal Reserve,
the FED, concluding its latest two day meeting, issuing a
monetary policy decision on Wednesday, and for more on what
to expect, what policymakers are watching, we're joined by Michael McKee,
Bloomberg International Economics and Policy correspondent. Well, Michael, no change
in rates in three earlier FED meetings so far this year.
(01:25):
What are you expecting to hear from the Federal Open
Market Committee this Wednesday?
Speaker 6 (01:30):
The headline will be no change in race, and I
think we're going to see that for a little while
this meeting and then probably the July meeting. It probably
won't be until September that the Fed has enough of
a feel for the economy to know whether anything else
needs to be done. Right now, inflation is under control, basically,
(01:51):
we saw this last week CPI and PPI come in
lower than expected. There were some tariff related increases in
some categories, but nothing that screams problems for the Fed
at the moment. But all the tariffs haven't been put
on yet, so they're going to have to wait and
see the June inflation numbers and the July inflation numbers
(02:11):
before they might want to make any changes.
Speaker 2 (02:14):
Well, that's the wild card in all this, and we're
looking at a date right now, and of course this
is fluid and always changing. July ninth, when the president's
ninety day you know, pause on tariffs goes into effect.
I guess after that things could really change.
Speaker 6 (02:29):
They could really change if indeed the tariff's go into effect.
That's the problem for the FED is nobody has any
idea what Donald Trump is going to do, so it's
impossible to model what's going to happen. He raised steel
tariffs to twenty five percent, and then in the PPI
we saw that steel prices were up seven percent last month,
(02:52):
So there is a cause and effect there that will
probably feed into other categories in the CPI and PPI,
depending on what gets tarff when it gets tariffed, how
much the tariffs are, and when they take effect. So
it's really hard for the FED to think anything other
than we don't need to do anything because inflation is
under control and at this point the economy is hanging
(03:16):
in there.
Speaker 5 (03:16):
Now.
Speaker 6 (03:17):
Jobless claims are a little elevated, but it's a seasonal
adjustment time of year, so maybe they're not signaling a
terrible change in the labor market. But I Fed'll be
keeping an eye on those two things to see if
there is any move either direction needed.
Speaker 2 (03:33):
Another thing is economic growth, because the fear of these tariks,
the fear of inflation, really changed things in two earlier
readings on GDP in the first quarter, and we're going
to get a third reading pretty soon.
Speaker 6 (03:44):
Right, Yes, we'll get a third reading. That will be
the final reading for the month, and what we're going
to see is basically little change. But then we'll get
the second quarter numbers and we'll see a big change
because in the first quarter grow was held down by
the fact that we imported a lot of stuff as
people tried to front run the tariffs, and that is
(04:07):
basically comes out of GDP, so we had a negative print.
But in the current quarter, the second quarter, people are
not buying a lot of imports. Imports are way down,
so that will artificially add to GDP. So again for
the fat they'll probably average the two quarters, but it
isn't going to be a clean read on exactly what's
(04:29):
happening now.
Speaker 2 (04:30):
People, you say, are buying fewer of the imports, but
are we still seeing jittery consumers, especially lower end consumers
holding back on all purchases.
Speaker 6 (04:41):
We're seeing jittery consumers, but they don't seem to be
holding back on all purchases. Right now, consumers seem willing
to spend on what they need to spend on. Gasoline
prices have come down. That gives people a little bit
of a tailwind, little bit of extra money to spend
on other things, which food prices went up, so that
the other thing that they watch closely. But this is
(05:02):
also not a period of time when there is a
lot of what we would call extra spending because we're
past the holidays now, we're waiting for basically back to school,
which will start in July, and if people are going
to be spending a lot on that or whether they're
going to hold off. One thing that we are watching
(05:22):
these days is vacations. Airfares are way down because air
travel is way down. Hotels are down. These are the
time of years when you would think they would go up,
but the prices of those things have come down because
people aren't traveling as much, which is a sign of
some nervousness.
Speaker 2 (05:38):
Let's talk about the future of the FED, because this
has been a subject last week. Jerome Pal's eight year
tenure as FED chair will end in May of next year.
We know what President Trump says about him what's next
for the FED. And I know that there's one big
name out there.
Speaker 6 (05:55):
Well, there are a couple of big names out there,
because the President has made no secret of people that
he thinks could be FED chair. Along with Scott Besson,
whom you're referring to this last week Bloomberg reporting he's
on the list, Kevin Walsh, the former FED governor, has
been on the list twice. He was on the list
(06:15):
before Jay Powell was chosen, and then Kevin Hassett, who
is the director of the National Economic Council. So there
are a number of names out there. The question is
what does Trump really want. The feeling has been and
the impression you get from Donald Trump is that he
wants somebody who's going to cut interest rates. We don't
(06:38):
know a lot about what Scott Besson thinks about rates.
We do know that Kevin Walsh, as much as Trump
likes him, has been a hawk all his life on inflation.
So he's probably not going to be ready to cut
interest rates so right away. And the issue for the
President is he can fill one seat for a governor
whose term is expiring in January, Adriana Kugler, and then
(07:02):
he could fill the pole seat if j Powell resigns
as a governor when his term as FED chair is up,
so he's got one or two seats, and the FED
will not otherwise turn over during his term, so he
doesn't have an opportunity to pick enough people to influence
monetary policy. Even if he got somebody who walked in
(07:24):
the door and said, I want us all the cut raids,
the rest of the FED isn't going to go along
if they see inflation is still a danger.
Speaker 2 (07:31):
Well, a lot to look forward to, and we can
look for the Fed's next decision on interest rates this Wednesday,
two pm Wall Street Time and our thanks to Michael McKee,
Bloomberger International Economics and Policy correspondent. We moved now to
a closer look at the troubled US housing industry, which
has been stung by stubbornly high interest rates, sky high
home prices, and a lot of economic uncertainty. And this
(07:51):
week we get housing starts for the month of May
and the latest earnings from one of the nation's biggest
home builders. For more on what all this might tell
us about the state of the house sector, we're joined
by Drew Reading Bloomberg Intelligence US Home building analyst, Well, Drew,
let's start with those earnings I'm out on Monday from
the Miami based builder Lenar, because I think they may
(08:11):
illustrate a lot of the challenge the home building industry
is facing right now, a lot of those challenges. So
what do you expect to see?
Speaker 5 (08:19):
So, the two main things that investors focus on for
the builders are orders in gross margin. Now, among the
large publicly traded home builders, Lenars operating a somewhat unique
strategy in that they're focused primarily on driving pace, so
higher sales absorptions over price, and they've been willing to
sacrifice their gross margin to do so. So they'll give
(08:39):
us a good read on demand trends. We've heard from
some other builders. You know that the market softened in April.
We saw that in the data, but maybe improved a
little bit in May. So we think that any pickup
in demand is still likely the result of an elevated
use of sales and incentives. Builders have had to be
really aggressive. So we're looking for order growth of about
eight percent with a margin just under eighteen percent, But
(09:02):
we expect the company to communicate further pressure through the
remainder of the year. You know, during the first quarter
a number of builders actually reduced their full year guidance
for closings, but just given Lenar's business model, we think
there's probably less risk for this. So you know, they're
expecting to close eighty six to eighty eight thousand homes
this year, and really their primary objective is to turn
(09:24):
through their inventory to generate cash and drive shareholder friendly actions.
Speaker 2 (09:30):
Now, also this week we get housing starts for May.
So what do you expect to see there?
Speaker 5 (09:35):
Housing starts has been trending lower over the last several months.
I think we're down about seven percent year to date
on the single family side, and we expect builders to
maintain this more cautious approach to production. You've got the
combination of weak demand trends along with rapidly increasing inventory levels,
including one of the highest levels of completed new home
(09:55):
inventory since two thousand and nine. So you're going to
see builders continue to utilize incentives to work through the
existing inventory before putting new projects in the grounds.
Speaker 2 (10:04):
Well, let's talk about some of those incentives. What are
the more popular ones.
Speaker 5 (10:08):
So I think it's pretty well understood that builders have
been aggressive in the use of mortgage rate buydowns to
help with the affordability equation. Generally speaking, we think builders
like to maintain a spread of about one hundred to
one hundred and fifty basis points versus the headline mortgage rate,
which is just under seven percent right now. I mean,
we've seen some builders be even more aggressive getting rates
(10:31):
into the five percent range, But it's really dependent on
the buyer. So in addition to what they're doing on
the buydown side, you also have others who would rather
up for closing costs, assistance, or credits towards structural options
or design options. Typically you'll see the first time or
entry level buyer opt for the rate buydown because they're
more dependent on that monthly payment, while buyers you know
(10:53):
with a stronger profile in the move up or second
time move up market will typically look for, you know,
credits towards structural and design options.
Speaker 2 (11:03):
Are you seeing anything from the Trump administration that is,
any moves to help home buying, to help you know,
people secure loans. I know, some of the mortgage guarantee
those those you know Fanny made, Freddie mac There's a
lot of movement there, but what is being done out
of Washington?
Speaker 5 (11:22):
Yeah, so you know, there was a big topic of
discussion on the campaign trail. There hasn't been a whole
lot of movement right now. I mean the three biggest
things I think from the political spectrum. People are looking
at our tariffs, which you know, thankfully for the builders,
is less of a concern perhaps than it was, you know,
a month or so ago, as well as immigration and deregulation.
(11:44):
You know, I think there's more focus on immigration. You
mentioned that, you know, we're starting to see more ice rates.
It's certainly a headline risk to the industry. You've got
more than thirty percent of trade contractors are farm born,
and there's estimates you know that one and ten may
be undocumented. Now, most of the builders that we've talked
to have acknowledged that this is a risk, but I
think to this point there there hasn't been too much
(12:06):
of an impact on the actual job site. You know,
this is as you mentioned before, the lack of tree
labor has been an ongoing issue for the industry really
since the last downturn, because you have a lot of
people switch industries, You've had a lot of people age
out of the industries, so you know, that's really been
a focal point for the last several years. And to
the extent that you know that the labor market tightens
(12:29):
up further because we're we're losing some more of the workforce.
Now you're looking at the cost impact for the builders.
Speaker 2 (12:34):
Yeah, just another challenge for those builders.
Speaker 5 (12:36):
Well.
Speaker 2 (12:36):
Our thanks to Drew Redding, Bloomberg Intelligence US home building analyst.
Coming up on Bloomberg day Break weekend, we'll look at
whether the Bank of England will decide to hold steady
on interest rates. I'm Tom Busby and this is Bloomberg.
(12:59):
This is Bloomberg Daybreak weekend, our global look ahead at
the top stories for investors in the coming week. I'm
Tom Busby in New York. Up later in our program
a look ahead to the Bank of Japan meeting and
what that could mean for monetary policy moving forward. But first,
the Bank of England policymakers will once again gather on
Threadneedle Street to determine the country's interest rate path. How
(13:19):
will the Monetary Policy Committee deal with inflationary pressures as
the UK economy and the employment market soften. For more,
Let's go to London and bring in Bloomberg Daybreak. Euro
banker Caroline hepgar Tom.
Speaker 3 (13:32):
The Bank of England has been slowly cutting interest rates
since last year, lowering boring costs twice in twenty twenty
five to four and a quarter percent, but tax rises
in April, including on employers from higher national insurance contributions,
have pushed inflation up. There's a big question about how
the bank deals with this amid an economy in the
(13:55):
UK that appears to be losing some steam. So do
the nine member committee at the Bank of England opt
to skip a rate cut this month and what then
of the rest of the year? Economic growth began twenty
twenty five with a bang, it's now dealing with the
fallout of some US tariffs, and the Bank's decision comes
(14:16):
only a few days after the Chancellor set out the
government's spending plans for the next three to four years,
a record funding boost for the National Health Service but
tighter budgets for less favored government departments.
Speaker 5 (14:30):
Well.
Speaker 3 (14:30):
Joining me is Bloomberg's chief UK economist, Dan Hanson and
our senior economics reporter Phil Aldrich. Very good to have
both of you with me. What do you make of
the economic picture in the UK right now and whether
it means interest rate cuts coming. Has the inflation outlook improved?
Speaker 7 (14:49):
Yeah, obviously, as Dan said that there's been a there's
this temporary hump in inflation which is caused by a
holload of regulatory household bills which would uterize and that
increase has happened, and so we've seen that bump. So
the Bank is trying to look through it and that
and they're looking particularly at wages and the labor market.
I mean, you'd hear this from members of the committee
(15:12):
and that you know that the process is proceeding there,
they would like it to be proceeding faster, for them
to cut faster. There's this they have this quarterly trajectory
for interest rate cuts when they which is which is
communicated through the gradual and careful language, which remains in place.
So you don't think, I mean, it doesn't look like
(15:33):
the governor wants to move from that quarterly pace of cuts.
And you know, two of the internal members at the
bank are actually quite hawkish and they don't so Hugh
pill has already skipped one meeting, so he's voted not
to cut when when everyone is expecting him to. And
Clai Lombardelli, who's the Deputy Governor Hughes, the chief economist,
(15:55):
that they prepare the forecasts, and she and Hugh are
clearly quite concerned about the stickiness of inflation in the UK.
So there is that you've got to think about the
nine member committee when you're thinking about whether the bank
is going to cut, and you've got to think about
who you know, they've got to get five people doing it,
and I think that will be tricky in June. I
would have thought that in August it's pretty I mean
(16:17):
it is nailed on in the markets, it seems to
be completely nailed on, and the economic situation in the
UK it's it's kind of mixed. If you look at
if you look at some of the surveys, the business surveys,
they've been picking up people. Businesses seem more confident. You know,
there's there's strong profitability among or increasing profitability among small
businesses and households and businesses are both setting on huge
(16:38):
cash balances. But actually what's happening in the economy is
that you know, things things up there. Obviously labor market,
the employment has risen. There's been this these damaging tax
rises on business from the Chancellor which only came into
effect in April. Energy bills are still high and there's
genuine just just concerns about, you know, the policy outlook
(16:59):
and whether the more tax risers are going to be coming.
So you know, this is this is holding back the
animal spirits. But you can see like the potential for
a sort of a release of growth energy at some point.
It's just it's not quite happening yet.
Speaker 3 (17:13):
The backdrop to this Dan of course also in recent
days is actually is like cooling in terms of economic growth,
at least on a monthly basis. Though, so again I
guess the state of the UK economy from your perspective.
Speaker 8 (17:25):
Yeah, I mean I broadly agree with what Phil said there.
I think we've had a we've had a cooling in activity.
It was pretty expect widely expected. The fall was a
bit sharper than people thought, but most people thought there
was going to be a fall in GDP. And it
relates to this idea that the first quarter of the
year was exceptionally strong, partly to do with what's been
(17:46):
going on with tariffs and firms front loading in anticipation
of tariffs. And I think the broad picture is consistent
with what the Bank of England set out in its
May forecast, which is you had this wrong, starts the year,
and then the remainder of the year is going to
be significantly weaker. So I think on the growth side,
(18:06):
there's nothing that's going to push them one way or
the other in terms of speeding up or slowing down
how fast they cut interest rates. I think that's the
bit of information that is new to them relative to
well relative to what they knew in May, is on
the labor market. And it does look like the labor
market has called faster than they were expecting. So, you know,
(18:28):
all else equal, that is a that is a dubbish signal,
and the markets have responded to that. They've moved from
pricing one and a bit cuts for the remainder of
the year to fully pricing two and it's quite possible,
you know that there's more more to come there. But
I think that's that's the news. Isn't going to be
enough to push them to cut interest rates in June? No,
(18:49):
I don't think it will.
Speaker 2 (18:50):
Will it.
Speaker 8 (18:51):
If the trend continues, I think it will give them
the confidence to carry on cutting. As Phil said, at
this quarterly pace over the remainder of the year.
Speaker 2 (18:59):
Yeah.
Speaker 3 (19:00):
I remember speaking to Petra tag from a Manpower UK,
which is the big recruitment firm on Blueberg Radio and
she was saying that there is a lot of nervousness
for employers at the moment, or that they are feeling
very nervous currently. Look, the other issue is the kind
of ramifications of Bailey's decision when it comes to Chance
(19:22):
of Rachel Reeves, who has also recently set out her
spending plans for effectively the rest of her term or
the rest of this kind of parliamentary term. And so
have a listening now to Chief EMEA Market strash is
Karen Ward at JP Morgan talking about actually the government's
debt bill and the possibilities and the difficulties that the
(19:43):
government has with that. Have a listen.
Speaker 9 (19:46):
We have to get productivity going here in the UK.
I mean, if you look at the long term projections
the OBR do it. It's their lesser red report than
their sort of year ahead projections. But the trajectory over
the next fifty or so years for government and debt
is unpretty over two hundred and fifty percent. If a
rising productivity scenario, if there is not a recovery in
(20:08):
productivity that's headed more towards six hundred percent of GDP.
So we absolutely have to get growth going. We have
to get investment going. That's the reason we haven't got productivity.
Companies are not equipping their staff with better skills and
better equipment. And until we get that going, then we're
going to be in this perennial conversation about why there
isn't enough growth and why therefore we don't have money
(20:29):
to fund public services.
Speaker 3 (20:30):
So that was JP Morgan's Karen Ward there who was
speaking to us in the last few days. Phil, what's
the link then between you know, the cost of boring
and the UK's debt issues. I mean Karen was talking
about it in very long term horizons, but but how
do you thread that needle?
Speaker 7 (20:51):
Well, obviously, the faster the Bank of England brings down
interest rates, then the more that's going to send messages
through to the through the market and the whole curve
or potentially drop, and that will help the chancer because
their interest is one hundred and one hundred to one
hundred and ten billion pounds a year across the forecast,
which is you know virtually almost it is almost double
(21:12):
the defense budget. So you know that's that's an enormous cost,
so that that would help basically one of the problems actually,
I mean when the issues stems from Rachel Reeves's own
policies here, because she's it's these it's this tiny sliver
of headroom or the buffer against the fiscal rules that
she set herselves. Has just sort of embedded this uncertainty
(21:35):
about future policy into sort of the thinking of business
leaders and just generally into the economy because every time,
you know, there is a small shift in borrowing cost,
that can She's got ten billion of headroom and she
can lose all of that in just just minor movements
in the in the markets.
Speaker 3 (21:52):
In terms of the vote split, what we should be
watching out for, in terms of the language I mean,
and the comparison obviously between the bank of it consisting
between the ECB and the Fed. What are we thinking
about in the next few days.
Speaker 8 (22:04):
Yeah, So with so taking each of those in turns,
so with the vote split, I think you'll probably get
though the vote split has been very difficult to call,
and there have been a few volatile members of the
NPC in terms of their voting patterns, but as the
best guess I would say you would have a seven
to vote split, so you'd have Swatty Dingra and Alan
(22:27):
Taylor continuing to advocate more easing. I think there's a
risk that Sarah Breeden, who's one of the internal members,
votes for a rate cut, but I think a base case,
a reasonable base case is seven to two. I think
there's a question.
Speaker 7 (22:40):
We're learning for cut and the rest learning to hot exactly.
Speaker 8 (22:43):
Yeah, so we get we get a hold being interviewed
by two people now and there's a question mark I
think about whether that because so in May, both of
those members voted for a fifty basis point cut, so
there's a question mark. Do they go twenty five or
do they stick with fifty? You know, I think that
there's a question marked there. In terms of the guidance
(23:05):
going into the main meeting, there was a lot of
speculation that the bank would drop it. This commitment to
gradual and careful cuts, the worlding that Phil phil mentioned earlier.
I think they will stick with that that. I think
they're very comfortable with that because Fills also alluded to
the market perceives that as quarterly cuts, and I think
they're quite comfortable with quarterly cut, so I don't think
(23:26):
there's any reason for them to upset the apple cart
on that front. And then on where the bank sits,
between the FED and the ECB, the ECB inflations in
the EU area, inflation is sort of beaten. Yes, yeah,
and they've sort of, you know, close to declare victory.
They're basically now at a level they're very comfortable with.
They may do one more, that's our houseview. A lot
(23:49):
depends on what happens with tariffs, whether they go up
after this this ninety day pause, that will have a
big bearing on what's going on there. For the FED,
it's very difficult. The economy appears to just about beholding
up at the moment, but of course tariff's create a
trade off, creates higher inflation though we haven't seen it
(24:11):
yet in the data, and weaker growth, So there is
this there's a tough trade off. Whereas if you think
about tariffs in of themselves, for the ECB and the
Bank of England, I think most people majority I'm not
saying everyone, but most people would say they are not
growth friendly and disinflationary. So that's quite obvious. What you
(24:31):
do with interest rates against that backdrop, I think the
challenge for the bank is actually domestic and going to
what Phil said, this point about sticky inflation and the
point that I think in the UK inflation expectations are
probably inconsistent with target levels at the moment, and I
think the bank is worried about that. So the extent
(24:53):
to which they can look through this hump in inflation
is more limited than perhaps it was prior to the
big inflation shot. You know, remember Brexit, we had this
big increase in inflation, or a relatively large increase in inflation.
They eased policy despite of that. Same happened during the
financial crisis, So I think that the dynamics and the
trade off and the way they think about the trade
(25:13):
off has changed.
Speaker 3 (25:15):
Okay, some interesting points. Thank you so much for giving
us a heads up on what to expect, of course,
on the Bank of England rate decision in the next
few days. That is Bloomberg's chief UK economist Dan Hanson
and our senior economics reporter Phil Aldrick. Thank you so
much for being with me. I'm Caroline Hepgar in London.
You can catch us every weekday morning for Bloomberg Daybreak.
You at beginning at six am in London. That's one
(25:37):
am on Wall Street.
Speaker 2 (25:38):
Tom, Thank you Caroline. And coming up on Bloomberg day
Break weekend, we'll look ahead to a monetary policy decision
from the Bank of Japan. I'm Tom Busby and this
is Bloomberg. This is Bloomberg Break Weekend, our global look
(26:01):
ahead at the top stories for investors in the coming week.
I'm Tom Busby in New York. The Bank of Japan
is out with an interest rate decision this week, and
for more on what to expect, let's get to the
host of the Daybreak Asia podcast, Doug Krisner, for a.
Speaker 4 (26:14):
Preview, Tom, These are interesting times for Bank of Japan
Governor Kazu o Uweeda. Core inflation in Japan has been
above the boj's target for nearly three years now, and
in that time there has been constant worry over the
durability of higher prices. In the last week, Governor Uwada
said the BOJ is still some distance from its inflation goal.
(26:36):
Perhaps the bigger worry these days has to do with trade.
Joining me now for a closer look is Paul Jackson.
He is Asia Economy editor for Bloomberg News in Tokyo. Paul,
thank you for making time to chat with me. It's
always a pleasure. So we have a BOJ meeting on
tap in the week ahead, and from what I'm reading, Paul,
the BOJ is likely to maintain this kind of weight
(26:57):
and see approach. That's kind of surprising when you look
at the forcefulness that we have seen in inflation in Japan.
Why are they adopting this wag and sy approach? Do
you think?
Speaker 10 (27:08):
I think the answer is Donald Trump. I mean, we
have this wave of tariffs hitting the world. We still
don't have the final a view on what those levels
will be when this kind of temporary pause on the
reciprocal rates is lifted. We've seen a lot of kind
(27:31):
of conflicting reports about whether talks will continue or will
be wrapped up in the next couple of weeks. But
the long and the short of it is a bit
all this uncertainty. Would you want to be raising interest
rates aggressively even if you've got quite a bit of
inflation there? So I think it's the pause button is
(27:52):
going to be played next week. We've got economists and
analysts generally thinking that the Bank of Japan does face
a strong inflation trend here and it must act at
some point, but it's going to be later in the
year or even early next year. Of course, if we
do get clarity on tariffs and what the levels are
(28:16):
going to be for Japan going forward, then that could
change the thinking at the Central Bank, But for now,
rates on hold.
Speaker 4 (28:24):
So the policy rate we know is just one tool.
The boj has also been very very forceful about trying
to manage the yield curve, and from what I understand,
the pace of tapering bond purchases is going to be
a hot topic at this meeting right.
Speaker 10 (28:38):
Oh, yes, very much so. So as part of Governor
Uada's kind of drive to normalize policymaking at the Central
Bank and kind of help Japan to return to some
kind of normal status as a G seven economy rather
than an experimental outlier. He's been looking to pull back
(28:59):
from all the market interventions that the central Bank had
gotten into, and one of them is that is the
bond buying, and the Bank of Japan was buying incredible
amounts of bonds. Even now it holds around half of
all the outstanding Japanese central government debt, and it's wanting
to kind of like remove its status as a whale
(29:22):
in the pond and let market forces kind of take
over price setting in the market. Now, that all sounds great,
but how quickly can you actually do that without triggering
a lot of volatility in prices? And I think what's
happened amongst all the uncertainties going around in the world
(29:43):
the pace at which the Bank of Japan has been
cutting back its purchases. So it's still buying a lot,
but it's buying less with each quarter that it's maybe
going a bit too fast, and there's concerns about what
happens from this point forward.
Speaker 4 (29:58):
So our policymakers keeping a very close eye on the
currency right now, particularly the yen's relationship with the dollar,
at a time when people in the States are expecting
the Fed to lower rates sometime before the end of
the year, maybe we get two rate cuts and that
would be dollar negative. So talk to me a little
bit about how policymakers in Japan right now are viewing
(30:20):
the end, which has been a little choppy lately.
Speaker 5 (30:23):
Yeah.
Speaker 10 (30:23):
Absolutely, I mean, I think they're quite happy for a
bit of strength to come into the end, take it
well away from those levels that cause so much trouble
in recent years, and so much money spent on intervention.
So I don't think the moment that's like the key
(30:45):
hot topic concern for the central bank at this time
or the policy makers, really. I think the key point
here is what kind of deal can Japan cut with
the US on these trade tariffs. I mean, some of
these tariffs are really hitting key industries in Japan, you know,
(31:08):
regardless of the exchange rate. Obviously it's an important aspect
of it. But in terms of these tariffs, I mean
twenty five percent on Japan's auto sector, that's a huge
shadow hanging over Japan's economy going forward. That's around ten
percent of GDP, eight percent of the workforce employed by
(31:31):
the auto sector. You know, can they withstand that kind
of pressure.
Speaker 4 (31:36):
So we were talking a moment ago about the inflation
environment in Japan, and I'm wondering whether the government is
still considering cash handouts as a way to help consumers
deal with this sticky domestic inflation story.
Speaker 10 (31:50):
You know, this is a very good point because if
the central bank can't aggressively raise interest rates, that means
you're going to have inflation kicking around for long and
voters are are sick of hit. They want something to
be done. There have been subsidy measures for electricity bills
and gas bills and stuff over recent years, but they're
(32:12):
wanting more. And as you've got increasing tax revenue, people
are thinking, you know what's going on. You're getting all
this extra tax money and we've still got a high
levels of taxation. From a consumer's perspective, they're thinking, why
don't you lower the sales tax on a temporary basis,
give us some relief while this inflation trend is continuing.
(32:35):
And we've got a national election for the upper House
coming next month, and I think this is going to
be a key point with a lot of the opposition
parties saying, hey, look, lower the sales tax, give consumers
a break. For the central government that is problematic. You've
got debt that's more twice the size of the economy.
(32:58):
You've got this volatility in the long term super long
end of the bond market. Are you wanted to, you know,
pay your way with extra spending through more debt issuance? No,
you don't, So they're gonna have to come up with
some other measures.
Speaker 4 (33:15):
Let's talk about Prime Minister Ishiba's meeting in the coming
week with President Trump that will happen on the sidelines
of the G seven in Canada.
Speaker 10 (33:24):
What are we expecting, Well, first of all, you know
these meetings, you know, nothing's kind of set in stone.
If they don't meet, I think that would be a
setback for Ishuba. I think we're seeing a lot of
momentum going forward. This is we have negotiators. Japan's top
trade negotiator is on his sixth visit to DC this
(33:47):
this week to try and get closer to the line
on some kind of trade deal. I think that the
two leaders probably will meet and they probably will have
some kind of statement. Now, whether it's it's a deal
perhaps with nothing much fleshed out, but you know, grand
statements about we've done it, we've reached the deal, or
(34:08):
whether it's just a statement saying significant progress has been
made in trade talks. I think there probably will be
some kind of joint statement.
Speaker 4 (34:18):
So you were talking a moment ago about the tariff
story as it relates to the automobile industry in Japan,
which as we both know, is enormous. Let's not forget steel, right,
and we have those steel tariffs in place, and in
the last week, Commerce Secretary Howard Lutnik was saying that
the deal between Nippon Steel and US Steel will be
(34:38):
done reasonably soon. Do you have a sense of what
this possibly may entail, what it could look like.
Speaker 10 (34:46):
Well, I think there's been all all manner of question
marks about what this is and how much investment is
going to the US. The investment figure looked very similar
to the buyout figure. What we do see is, you know,
we've got this kind of golden share arrangement for the
(35:06):
US government essentially to have a veto on key decisions.
So this is something that Donald Trump is putting forward
as a great success for his administration. No matter how
much it looks like something close to a biout, I
think there are key provisos that have given the optics
a much better look for the US administration.
Speaker 4 (35:29):
So, if Prime Minister Ishibai he is really trying to
strike a favorable trade deal with the US right now,
is it in his best interest not to get too
involved with the China side of Japanese trade and perhaps
put that off for the moment and focus more on
the relationship with Washington.
Speaker 10 (35:46):
I think for Ishiba at the moment, it's got to
all be about the relationship with the US now. Of course,
for all the players in Asia, threading treading the difficult
path between how much you deal with these huge trading partners,
the United States and China is a real head scratcher.
(36:08):
You look at South Korea for example, I mean, you
know that reliant on both economiest heavily. You know, how
do they navigate that. Japan's in a similar position. But
I think at the moment that the big scary thing
standing in front of you is this wave of tariffs
and how you tran get concessions on that topic.
Speaker 4 (36:32):
We were talking a moment ago about the potential for
cash handouts to consumers in Japan. We've got an election
just around the corner, and I'm wondering how people are
feeling right now about the ishi A government.
Speaker 10 (36:45):
Well, he's got some shoring up to do of support.
He's had this minority government. He's been kind of, you know,
walking a very difficult tight rope since that election last
year where the general election where the results lost stripped
him of a majority in parliament. He's been having to
(37:08):
cooperate with the opposition parties to get legislation over the line.
So he's really in need of at least a better
outcome than he had last autumn in this election, and
this inflation dynamic that we've been talking about is you know,
(37:29):
acting against him in his face. We've also seen a
hot topic of the rice prices. Rice prices have pretty
much doubled in recent months, and for consumers this has
really been like your staple for meals every day is
twice the price. Are you kidding, mister Ishuiba. We want
(37:53):
to vote for you, Are you sure? So he's got
a somehow in the intervening month before that election convinced
vote is that they are getting assistance from the government.
The government does have a plan for growth. I've how
to deal with Donald Trump and they will bring rice
prices down.
Speaker 4 (38:11):
We'll leave it there, Paul, it's always a pleasure. Thank
you so much for taking the time to help us
understand the macro view of what's going on in Japan
as we look ahead to this meeting in the coming
week of the Bank of Japan. He's Paul Jackson, Bloomberg
Asia Economy Editor joining us from Tokyo, and I'm Doug Christner.
You can catch us weekdays for the Daybreak Asia podcast.
It's available wherever you get your podcast. Tom, thank you Doug.
Speaker 2 (38:35):
And that does it for this edition of Bloomberg day
Break Weekend. Join us again Monday morning at five am
Wall Street Time for the latest on markets overseas and
the news you need to start your day. I'm Tom Busby.
Stay with us. Top stories in global business. Headlines are
coming up right now
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