April 5, 2024 • 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 preview of U.S CPI data and bank earnings.
- In the UK – a look at next week’s ECB meeting and rate decision.
- In Asia - a preview of China inflation data.
See omnystudio.com/listener for privacy information.
Mark as Played
Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Speaker 1 (00:02):
Bloomberg Audio Studios, Podcasts, radio news.
Speaker 2 (00:11):
This is Bloomberg day Break Weekend, our global look at
the top stories in the coming week from our day
Break anchors all around the world. Straight ahead on the program,
Inflation and what it could mean for the Fed plus
earning season is right around the corner. We'll get a preview.
I'm Tom Busby in New York. I'm Stephen Carolyn London.
For We're looking ahead and beyond the upcoming European Central
(00:32):
Bank meeting, when and how fast interest rates may come down.
Speaker 3 (00:37):
I'm Doug Krisner looking at whether China's economy is bottomed
and if it's beginning to inflate.
Speaker 4 (00:43):
That's all straight ahead on Bloomberg Daybreak Weekend on Bloomberg
Ey look them free own New York, Bloomberg ninety nine
to one, Washington, DC, Bloomberg one O six one, Boston,
Bloomberg nine sixty, San Francisco, DAB Digital Radio, London, Sirius
XM one nineteen and around the world on Bloomberg Radio
dot Com and via the Bloomberg Business App.
Speaker 2 (01:08):
Good day to you. I'm Tom Busby, and we begin
today's program with inflation and the March consumer Price Index
coming out this Wednesday. With the fed's next policy meeting
kicking off later this month, what could that mean for
the central banks direction moving forward? And for more we're
joined by Edward Harrison, Bloomberg, team leader America's FX and Rates. Edward,
(01:30):
Thanks for being here. What are you expecting to see
in that CPI report?
Speaker 5 (01:34):
Hey, great to talk to you, Tom. The question really
is wide open in terms of what we can see.
There are a lot of things, and I think that
the way to think about this is that we had
a very high level of inflation as we came out
of the pandemic, and that's come down considerably, but we've
(01:54):
stalled at a level that is above the Fed's target.
And recently what we've seen is prices moving up in
places that people are sensitive to, you know, things like cocoa,
you know, for chocolate, things like oil, which affects your
gasoline prices in the US. And so, as a result,
(02:15):
after two readings in a row that were relatively high
above expectations, there's a lot of anticipation about this number,
and really it could be higher than expected given some
of those recent trends.
Speaker 2 (02:31):
Still a long way to go, though, to the fed's
two percent target, but like you said, not the nine
point one percent we saw just two summers ago. But
we had been heading in the right direction. Is this
recent pickup just an aberration you think, or are we
onto something more troubling.
Speaker 5 (02:47):
Well, you know, the FED really wants to get their
hands around that to figure out what's going on. And
that's why when you heard Jerome Powell talking last week,
he was talking about patients. And that's because of this
number in particular, and also the number that's embedded in
the Personal Consumption Expenditures Report, which is what the FED
(03:09):
looks at even more closely. When you look at this number,
you know, the last number without food and energy, which
are very viable. When you strip that out, you still
had three point eight percent. They're expecting three point seven percent,
which is almost double the fed's level now. Luckily, because
food and energy have been relatively benign of late. The
(03:33):
number was three point two percent last time, and we're
expecting three point five percent this time. So that gives
you an indication that there's a lot of work to
be done. And this is why j Powell last week
was talking about patients.
Speaker 2 (03:47):
Well, let's talk about some of those big drivers here.
You mentioned oil right now hovering around a five month high,
always very volucile, but we are seeing expectations gas is
going to hit four bucks a gallon here in the US,
that's for regular by the summer. I mean, that is
a real wildcard. Oil and gas prices.
Speaker 5 (04:07):
Without a doubt. And you know, as I was saying,
they had been positive in terms of the numbers food
and energy because the headline number is lower than the
number when you strip out food and energy. But now
that we have these prices going back up, then you
can expect them to have a negative contribution. They're sending
the CPI up higher. And there's nothing that people think
(04:30):
about more than gasoline prices. It has that anchor effect
in terms of how people think about inflation and where
it's headed. And so this is not what people want.
And I would add that, you know OPEK their meeting,
it will be interesting to see what kind of level
they're targeting for oil prices. If we're looking at ninety
(04:53):
dollars a barrel, then that's not a level that is
going to be pleasant for the inflation numbers.
Speaker 2 (05:00):
You know, food, oil, gasoline, housing. But there are some
green shoots, some glimmers of hope. Used car prices have
moved lower, new car prices have moved lower.
Speaker 5 (05:09):
Right, what we're looking for in particular is not just
in goods and things that were inflated coming down, but
that core beyond even goods in services, you know, takeout housing,
even looking at you know, the services sector and the
(05:31):
core within the services sector of minus housing to see
what the overall trend is. I think that that is
going to be the place that people are going to
be looking as they look at the CPI.
Speaker 2 (05:42):
Now, one last question. We're going to talk about the
fed's meeting, which is April thirtieth May. First, that's the
next one. A non starter for a rate cut, but
everybody's still thinking about that mid June meeting, and between
now and then, the FED is going to have three
CPI reports, two PCE reports, and that for a data
dependent FED is a lot to consider. Is there any
(06:03):
feeling that by then, by the June eleventh and twelfth
meeting we are going to see maybe some hope of
a rate cut.
Speaker 5 (06:11):
I think that these next ones are going to be
very important, because you know, the FED is looking for
a trend, and that trend needs to be lower. To
the degree that the next one or two of these
CPIPCE reports are not lower, it makes it more difficult
for the FED to cut in June. When we look
at some of the people at the FED, Atlanta FED
(06:34):
President raphae Albostik, he's been an individual who's at the
leading edge of where the Fed's going. He's actually talking
about waiting all the way into the fourth quarter. So
that's an indication of sort of the angst of the
Fed about how sticky inflation has been.
Speaker 4 (06:53):
Wow.
Speaker 2 (06:53):
Well, the next reading the March CPI data out there Wednesday,
and our thanks to Edward Harrison, Bloomberg team leader for
Americas FX and Rates. Well, we turn now to the
start of the new earning season on Wall Street. It
kicks off this Friday. We get the latest quarterly reports
from JP Morgan, Chase, Wells, Fargo, and City Group, some
of the biggest banks in the US. What will they
(07:15):
reveal about the health of the banking sector. Well for more,
We're joined by Alison Williams, Bloomberg Intelligence Senior Analyst, Global
Banks and Asset Managers. Now, Allison, I want to start
with where the US banking sector is right now compared
to the turmoil a year ago. We saw the failure
of Silicon Valley Bank in March of twenty three, Signature
Bank in April of that year, First Republic. Where are
(07:37):
we now?
Speaker 6 (07:37):
So, I think for the banks, that really kicked off
a lot of concerns about the higher interest rate environment,
and we saw a lot of deposit outflows and that
really has been a big focus for investors in terms
of the impact on net interest income. But for this quarter,
investors are really going to be focusing on the change
(08:01):
in interest rate expectations versus the last time we heard
from the banks, which was in January, and so at
that point in time, most of the banks gave their
guidance for net interest income looking for six rate cuts.
City Group more in the three to six cut region,
(08:21):
but the market implied rates at this point in time
are closer to three, and so we do expect that
there could be some change in the net interest income
outlook that really affects more of the back half and
the twenty twenty five expectations. But circling back to deposits again,
that was the sort of one of the big concerns
a year ago, deposit pricing. We have seen those deposit
(08:45):
prices increase, but we do think that this quarter they
could come in a little bit more muted than perhaps
had fears. We got some color around that from Bank
of America who said that they think that they're an
interestingcome guidance could come in a bit at the higher
end of their guidance because those costs have not been
(09:07):
as bad as.
Speaker 7 (09:08):
They had expected.
Speaker 6 (09:09):
What were they expecting, Well, deposit prices are increasing, right,
so as rates have come up, banks sort of got
an early benefit in terms of the repricing of their
loan books, but they held off a little bit in
terms of passing on those price increases to customers because
we were coming off of those zero percent levels. So
(09:31):
I think as things sort of adjusted to a normalized environment,
they were a bit slower to pass on some of
that benefit. But now that is happening, and so consumers
are demanding a little bit more yield. They're switching their
deposits into products that offer a higher yield, and that's
been happening over the past year. But perhaps that pace
(09:53):
is starting to slow down a bit.
Speaker 4 (09:54):
Yeah.
Speaker 2 (09:55):
Well, one thing that hasn't slowed down for banks trading.
We've seen IPO a little growth there, we've seen record
levels for all the major averages. What does that mean
for these banks?
Speaker 6 (10:06):
So healthier markets are definitely a boon to the asset
and wealth management businesses for all these big banks. They
are diversified banks, and so they are benefiting just from
the fees, just from the asset levels, but also they'll
be looking for better flows. That is a key measure
of health of the businesses. But on the trading and
(10:28):
fee outlook, trading continues to be relatively resilient, and so
that fixed income trading does face tougher comparisons, So it
could be a little bit down, especially for the rates
and currencies business for someone like City Group, but still
very healthy historically high levels. Equity trading getting some benefit.
(10:50):
As you pointed out that we have seen a little
bit more activity on the IPO front, perhaps not as
strong as some of the banks would expect, but definitely
in the US, the US underwriting business is going to
be helping those fees, the debt underwriting business helping those fees.
M and A announcements looking a little bit better, but
it'll take a little while for those fees to kick in.
(11:12):
But I think the highlight for this quarter for trading
and fees will be that investment banking feed growth both
versus a year ago and the fourth quarter.
Speaker 2 (11:20):
But let's talk about now the challenges, and probably the
biggest one we spoke about this is commercial real estate.
We just had a vacancy rate of offices last quarter
twenty percent, just under twenty percent across the US. That's
got to be devastated.
Speaker 6 (11:32):
And the office business is definitely something that investors are
focused on. It's something that we're focusing on. But Wells Fargo,
you know, for example, who has one of the biggest
exposures among our banks. At least they've already put up
a pretty healthy reserve against that business, so they've been
watching it as those trends have been deteriorating. And commercial
(11:55):
real estate, while it's a big thing I think to
focus on for the industry, it does tend to be
a relatively lower exposure across the banks. So even though
Wells Fargo and now JP Morgan two of the biggest
lenders out there to commercial real estate, Bank of America
as well, it is not as big of a share
of their loan book as it is perhaps for the
(12:16):
smaller banks. And so what we're really focusing on is
the credit card business, where we think that is going
to be the driver of provisions for the largest banks
because there is loan growth in that business, and that
loan growth does tend to have higher loss rates. So
we will see provisions increase because of the growth, because
credit is normalizing, and because this does tend to be
(12:38):
a seasonally higher quarter for those types of losses.
Speaker 2 (12:41):
Well, a lot to look forward to this week and
our thanks to Alison Williams, Bloomberg Intelligence Senior Analyst, Global
Banks and Asset Managers. And coming up on Bloomberg Daybreak weekend,
when will European policy makers start to ease monetary policy?
We look ahead to the next European Central Bank meeting.
I'm Tom Buzby and this is Bloomberg. This is Bloomberg
(13:13):
Day Break 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. Has China's
economy bottomed out? We look ahead to China inflation data.
But first in the global interest rate race, investors have
been working on the assumption that the Federal Reserve will
be the first to make a raid cut, but after
(13:35):
some encouraging economic data from the Eurozone, could the European
Central Bank beat the Fed to the punch with a
surprise cut as early as later this month. For more,
Let's go to London and bring in Bloomberg Daybreak anchor
Stephen Carroll.
Speaker 1 (13:48):
Tom Inflation in the euro Area may not be slowing
down as quickly as it was last year, but it's
still moving in the right direction for the ECB. The
latest reading shows consumer prices rising in March by two
point four percent year on year. That's down from a
pace of two point six percent in February. Spanish Governing
Council member Pablo Hernandez de cass is among the most
recent to earmark the June meeting as likely being for
(14:11):
the first cut in interest rates. Even the most hawkish
member of the Governing Council, Austria's Robert Holtzman, is warning
of the perils of holding rates at their current level
for too long, but could waiting until June risk harming
the economy. Boomberg opinion columnist Marcus Ashworth has joined those
calling instead for an April move at this upcoming meeting.
He points to Bank of France President Fransouovievoia the gallow
(14:34):
who's often the bell weather for ECB policy changes. De
Gallo says that a further slow down in growth means
that the time has come to take out an insurance
against this second risk by beginning rate cuts. But going
before the FED doesn't come without its risks, both in
Europe and globally. It's something we've been discussing with Aaron Captain,
(14:54):
who's chief economists at UBS Investment Bank.
Speaker 8 (14:57):
So if the FED doesn't cut in June, right, so
we basically then have less cuts for the FED, so
a bit more appreciation of the dollar, a bit more
euro depreciation. So at the margin it's going to add
a little bit to Eurozone inflation, but really not very much.
If all that we're doing is sort of a time
shift of the FED cuts, right, if they just go
a bit later and they catch up next year, then
(15:20):
you know, the overall rate differentials don't really move that much,
and it doesn't fundamentally I think alter sort of the
inflation outlook in the euro Zone.
Speaker 1 (15:28):
Is there any chance you think of fifty basis points
cuts from the ECB this year?
Speaker 7 (15:32):
Not now?
Speaker 8 (15:33):
It's difficult to see why. So I think the debates more,
you know, do you go once a quarter at the
forecast meetings or do you go every meeting. It looks
like they want to go once a quarter, although they
have been a little vague about sort of what the
speed of the sequences that they have in mind. In
my mind, you know, the easy bit is the first
one hundred and fifty basis points, and there's no real
(15:55):
reason why you want to sort of race through that
if there's uncertainty about the landing zone. Right, So the
way I think they think about it is that you know,
you're at four, you can probably safely cut to about
two and a half, and then once you get there,
you got to look around to see whether you're still
on track, and if, you know, if things are accelerating
too fast and profits are going up too fast, then
(16:15):
you stop cutting at that stage. So given sort of
that type of uncertainty, you don't need to go in fifties.
I think the debates really do you go in twenty fives?
And then you know, do you skip meetings or not?
Speaker 4 (16:26):
Yeah?
Speaker 1 (16:27):
I wonder you know, Kasina Guard and others have points
as the importance of wage data when it comes to
their decision making process at the ECB. Two is the
wage days is something that's a big concern for you
when you're thinking about the broader outlook for the year
Zone economy.
Speaker 8 (16:42):
No, so based on what we've there's not a lot
of year to date wage data out yet. But if
Italy doesn't repeat the big one off that they had
in December, then our current tracking of negotiated wages is
that it'll slip below four percent for the first time
in January. And so it really looks like, you know,
the negotiated wage track, which is going to be most inertial,
had been sort of going sideways, is now starting to
(17:04):
trend lower. The indeed wage tracker, which is sort of
temp marginal wages of temp agencies, that's already been heading lower.
And then they have a phone survey which they don't publish,
and so all indications really are that wages are moving
in line with their forecast and at this stage are
not concerning.
Speaker 1 (17:21):
That was Aaron Captain, chief economist at UBS Investment Bank,
speaking to us on Bloomberg Daybreak Europe. Now, the ECB
expects CPI to fall to two point two percent by August,
but it could happen as soon as this month, according
to estimates by Bloomberg Economics. Kicking off rate trimming is
one thing, but questions still remain about what comes next
for the ECB after the first cut, whether it comes
(17:41):
in April or in June. At the moment, money markets
are pricing in three quarter point reductions starting in June.
I've been discussing the path ahead with senior Euro Area
economist for Bloomberg Economics David Powell. Just how surprising would
an April cut be or how likely is it?
Speaker 7 (17:58):
An April cut is very unlikely at this stage. For example,
there's almost no probability of that being priced into the
markets right now. Some time ago, there was a debate
whether this was going to happen in April or in June.
That was back at the beginning of the year, and
that was fully priced in that April cuts. There has
been a big shift in market pricing we've seen, and
(18:19):
that's really been thanks to the communication we've seen from
the ECB who have started to rule out some time
ago the possibility of an April cut, Although there have
been some doves in the Governing Council who've continued to
speak about it from time to time. It's not of
you held by the consensus at all.
Speaker 1 (18:38):
Just mischievously hinting that perhaps there's something could happen, even
though there's no likelihood of it as you see it
as well. So what's the risk of waiting longer for
Christine Legard and colleagues or is there a risk in
them waiting to June.
Speaker 7 (18:53):
Well, the difference between April and June is not that huge.
Although the ECB cannot wait until is actually down to
two percent to start cutting because monetary policy works with
a lag somewhere between a year and a year and
a half. So if they don't, if they don't actually
cut until inflation is back to target, the full impact
(19:14):
of that cut won't be felt for some time later,
and the economy could already have suffered some significant damage
by them at a time when the economy has hardly grown.
In fact, the UR economy is not expanded at all
for nearly a year and a half, and if we
compare that flatlining that we saw last year in the
UR area, that's very different from the US where it
(19:34):
expanded by three percent. So they can't wait forever to cut,
but probably the difference between April and June is not huge,
and it looks like it's coming in June.
Speaker 1 (19:44):
The process of deflation has been reasonably steady in the
Euro Area. Are there worrying aspects within that? Are there
risk zones within the members of the Euro Area that
could actually bump inflation up in the wrong direction before
we get to right cuts?
Speaker 7 (20:01):
Yeah, well, inflation has come down, as you said, considerably
from where it was at its peak. In fact, it's
not very far from the target now, and we expect
headline inflation to actually drop below target this summer. But
there are still some bits of worry when you look
at the details of the report. In fact, we just
had the inflation report for March and both the headline
(20:22):
and core continue to come down. But services inflation, which
the ECB is watching very closely, has been sticky at
four percent for months now. That will probably come down
in the months ahead as wage growth decelerates, but that's
keeping the ECB worried and as part of the reason
they're moving cautiously delaying the first cut to June. They'll
probably pause after that and not cut again until September,
(20:45):
and they would like to see that come down before
they move more aggressively.
Speaker 1 (20:49):
And of course the flip side of they say is
and those who do want to see right cuts come
faster is the weakness in the euro Area economy. Late
interesting to see the latest round of pm I numbers
showing a little bit of strength returning the Eurozone composite
pi I number the final reading for March, seeing it
nudge back into expansion territory. How weak is the euros
(21:09):
and economy at this point, Well, the your area is
pretty weak.
Speaker 7 (21:13):
Like I said, it hasn't expanded for nearly a year
and a half. That stands in very stark contrast the
United States, which, as I already said, spend the three
percent last year. It just gives you a sense of
how weak it is in Europe. However, the economy will
probably gain some momentum this year is inflation comes down.
Real incomes are being boosted and that allows real consumption
(21:35):
to rise, so people have a bit more money to
spend with inflation coming in. We're seeing that in the numbers.
The services sector is once again recovering in Europe, but
that'll probably continue throughout the course of the year and
the economy will gain some momentum, but nothing like we're
seeing across the Atlantic.
Speaker 1 (21:52):
What about the question of wage data. This is something
that Christine Lagart has signaled and repeated occasions as being
absolutely key for the European Center Bank decision making. Do
we have any early indications of what the wage picture is?
Speaker 7 (22:05):
Well, wage growth has probably peaked the most comprehensive set
of data WEEGN, and that comes with the national accounts.
I mean know a couple of quarters ago that peaked
wage growth and is coming down. Specifically, it's the compensation
per employee they look at, and we'll get another round
of that in the early part of June and that
will cover the first quarter, and that's what the ECB
(22:26):
is waiting for to cut to confirm that wage growth
continues to come down, although before that we'll get some
data un negotiated wages towards the end of May. Christine
Legarda already has highlighted that in his speech in Frankfurt
a couple of weeks ago, that they'll be looking very
closely at that for some initial signs of wage growth
continuing to decelerate.
Speaker 1 (22:47):
So let's talk us through your expectations then for the
rest of the year. So no cut at the upcoming meeting.
We're looking towards the start of summer for things like
that to start moving. What does the rest of the
year look like for the EACYB from this point of view?
Speaker 7 (23:00):
Well, as I mentioned, the ECB is really focused on
this wage data and that comes in the national accounts,
so it only comes once a quarter. So we get
kind of batch of that for the first quarter in
the beginning of June, and then we have to wait
another three months of beinning of September until we get
data on that again. That'll be for the second quarter.
Conveniently for the ECB, that also aligns with their forecast months,
(23:23):
so they'll have fresh inflation forecasts and they own staff
economists in June as well as September. And if both
of those are going in the right direction, meaning of
that the staff forecast are inflation continuing to decelerate as
they have been forecasting for a while, that will allow
them to cut in June, probably pause in July as
(23:44):
they wait for that quarterly data again in September, and
then cut again in September. By then, headline inflation is
likely to be below target. In core inflation is not
going to be far behind it's going to be a
lot more difficult to justify restrictive policy stands when inflation
is actually below target. So from September we think that
they will cut it at each of the remaining meetings
(24:07):
of the year, and that equates to about one hundred
basis points and easing throughout the course of this year.
How much of a.
Speaker 1 (24:13):
Dilemma is it for the ECB to go before the FED.
I know the ECB of course will tell you that
they make their own decisions and they're not that conscious
of it, but surely one is reliant on the other.
Speaker 7 (24:24):
If we look back at this tightening cycle it's taken place,
the FED has kind of taken the lead on it,
the ECB followed, and the ECB probably wouldn't mind if
the FED took the lead again on cutting. And they
may not have that luxury though, of just kind of
following the FED, because, like I said, the UR economy
(24:45):
is much weaker than the US economy. So if things
remain strong, and most of the data coming out of
the US suggest they will, the FED may be able
to put off monetary easing, and that's not a luxury
that the ECB has at this stage. So it may
not have choice. It may have to go on its
own and then allow the FED to go later.
Speaker 1 (25:05):
How much of a risk would a weaker euro though
be to the inflation outlook if they we do If
as expected, the ECB does go before the Fed.
Speaker 7 (25:12):
Obviously the ECB is so he is looking at the
exchange rate, what it does to inflation, in growth and
other things. However, it's not really on the ECB's radar
at this stage. They're not talking about exchange rate volatility
or a weekier or strong or anything like that. So
I suspect that that's not too important for them at
(25:34):
this stage when they contemplate the path of interest rates.
Speaker 1 (25:38):
That was David Powell from Bloomberg Economics. I'm Stephen Carroll
in London. You can catch us every weekday morning here
for Bloomberg Daybreak. You're at beginning at six am in
London and one am on Wall Street. Tom, Thank you, Steven.
And coming up on Bloomberg Daybreak weekend. Has China's economy
bottomed out? We look ahead to China inflation data. I'm
Tom Busby and this is Bloomberg.
Speaker 2 (26:09):
This is Bloomberg day Break weekend, our global look ahead
at the top stories for investors in the coming week.
I'm Tom Busby in New York. The early indicators on
China's economy show there may have been a small improvement
during the first quarter. Even so, the majority of Chinese
financial institutions surveyed by Bloomberg Economics doubt the economy has
bottomed out, and a big question is whether it's stuck
(26:31):
in deflation. We'll get some insight in the week ahead.
Let's get to Doug Christner, co host of Daybreak Asia
for a closer look.
Speaker 3 (26:38):
Tom, I think we can say the big issue is confidence.
Speaker 7 (26:40):
Now.
Speaker 3 (26:41):
The latest PMI data show improvement, but so much about
the overall Chinese economy does remain fragile, especially where consumer
demand is concerned. We know that retail demand is weak.
Pricing power seems absent.
Speaker 7 (26:55):
Now.
Speaker 3 (26:55):
The readings on producer and consumer prices are due midweek.
We're going to preview the day and now and talk
about the current challenges for the Chinese economy with Bloomberg
reporters Jill Desis and Alan Wong. Jill is one of
our news desk editors, and Alan is an editor on
the China ECOGV team. Thanks to both of you, for
joining us, Jill, I want to begin with you when
(27:17):
I start with the story about prices, particularly at the
wholesale level, producer prices. I guess in China it's known
as factory gate prices. We saw numbers in February at
a decline that was pretty rapid, and that extended a
slide in kind of a deflationary trend to seventeen months.
What's the conversation like around what we might expect in
(27:39):
the week ahead.
Speaker 9 (27:40):
Yeah, Doug, I think that at this point, really those
factory gate prices continue to remain under pressure. We're still expecting,
or at least a economists are still expecting a continued
slide once we get those numbers for March survey estimate
is below two percent declines even I mean we're approaching
three percent declines. Think, so, there doesn't really seem to
(28:02):
be any kind of a meaningful turnaround in terms of
getting rid of these these issues around producer price deflation.
It's interesting because I think that at this point the
deflationary pressure story in China is just so much more
centered around consumer deflation, just because you know, from a
from a demand perspective, there's not a ton of concerns
(28:24):
around you know, China's ability to you know, making goods
and exporting them. I think it's much more about what
the domestics demand story says about China right now.
Speaker 3 (28:31):
So, Alan, assuming that the numbers do show further deflation
both at the wholesale and retail level, does that create
any kind of urgency for the government to step up support.
Speaker 10 (28:41):
Yeah, the urgency has always been there, and numbers, even
if they're not positive, will just only add to the
common consensus that there is a need for China to
ramp up its fiscal measures to stimulate demand.
Speaker 3 (28:56):
Jill, you were going to weigh in, Yeah.
Speaker 9 (28:58):
I think what's really interesting about the stimulus support story
when it comes to domestic demand is, look, we were
back at the NPC at the beginning of March really
sort of waiting on what kinds of stimulus support measures
would actually be announced, and I think, you know, economists
were generally disappointed. But I did think one thing that
was kind of interesting is that, at least when it
(29:18):
comes to trying to stimulate consumer demand, there's a lot
of talk about trading and old products for new ones
and stuff like that. I think what economists, you're really
waiting on is whether there's going to be a big
dollar amount put behind that in the future.
Speaker 3 (29:28):
So Alan, if we're really talking about depressed sentiment, I mean,
the property market seems to be the root cause. I
think we can agree on that much. I mean, or
maybe it's just such a big part of the story.
What is your sense based on Bloomberg reporting? Where are
things right now visa VI the housing market?
Speaker 10 (29:45):
Yeah, we're seeing a two track recovery in the Chinese economy.
On the industrial side, things has been we were seeing
green shoots on that front, but then in terms of
the property slum it's still very much in a sorry state.
We seeing that housing start a week, but housing completion
(30:05):
is stabilizing, so that means that new homes on being
built and that has some down with pressure on commodity
prices for example, and that also reflects on the weak
sentiment in China in general.
Speaker 9 (30:19):
The other thing too, I think it's a really interesting
stimular story when it comes to the housing market as well,
because the government has taken several steps to try to
prop up support there. I think most recently, Chinese lenders
slashed a key rate for mortgages in February and attempt
to stimulate demand into March didn't really seem to move
the needle there much. So that's just, you know, to
(30:39):
kind of put this in perspective. Another thing that analysts
are looking out for is whether these continued rate cuts
are actually going to help prop up the property market
as well, because they really haven't done much so far.
Speaker 3 (30:49):
And as both of you know, US Treasury Secretary Yellen
is in China. One of the things that she is
addressing is this issue of industrial overcapacity and how it's
having a negative impact not just on the Chinese economy,
but many economies around the world. I spoke earlier about
that with George Barboris, managing director at K two Asset Management.
Here's what he had to say.
Speaker 11 (31:10):
Some people would say there's some cognitive dissonance with some
of the policy coming out of Beijing, but in reality,
they're taking a step back from the grand to play
the long term. They will unload cheaper products to the
rest of the world that will allow it, and North
America will maintain them. They've obviously died up those tariffs
and the current administration from the previous one, they can
allow these cheap goods to come through which they won't,
(31:30):
and that would be very CPI will fall very quickly.
But China's just got a different playbook at the moment
to where we're were three years ago, and the middle
class of China going to pay that price.
Speaker 3 (31:40):
That is George Bevoris, they're from K two asset Management. Now,
Alan if we can agree that there is an overcapacity
problem in China, It's kind of curious, isn't it that
Beijing is still intent on using industrial policy as a
way of driving growth. What do you think?
Speaker 10 (31:54):
Yeah, there is a need for it to find ways
to grow its economy because of the persistent property slum.
China is pouring money into manufacturing and has designated three
new industries as its new Big Three industries, namely evs,
electric vehicles, solar cells, and batteries. So it's trying to
(32:16):
ramp up production on these things and then obviously that
creates more competition in China and drive down prices. But
the US is right in thinking that what if China
exports lots of cheap cars to the US, what's going
to happen to domestic makers of cars? And this is
going to be high on the agenda of Yellen's trip
to China.
Speaker 3 (32:36):
We know that the government will released the Work Report
back in March and with it this plan to unleash
new productive forces. High tech is a big part of
that story. Innovation another way of driving growth. Jill, do
you have a sense of what this may look like
if we take EV's, if we take solar panels out
of the equation, what does high tech and innovation look like?
Speaker 9 (32:57):
I don't really know that you can totally take EV's
and solar panels of the equation there, Doug, because I
think that is pretty central to this idea of what
China is trying to accomplish here, right. I mean, we
know that no matter what happens with the property sector,
even if Beijing is able to put a floor under
this crisis, we are not going to see real estate
contribute to GDP in the way that we have in
(33:17):
the years past. That's just absolutely done. So what China
really needs to do in terms of this long term
strategy for new productive forces is find ways to replace
bits of how the property sector contributed to GDP with
some of these other sectors. And so that does mean
investing a lot more into evs and solar panels, which
is of course obviously leading to some of these overcapacity
(33:39):
challenges that you're seeing out of the US when it
comes to China, the fact that they're subsidizing so much.
But I think that at this point, I mean, it's
still a fairly vague slogan, right, I mean, how else
do you really prescribe, you know, describe new productive forces?
Speaker 10 (33:53):
Yeah, And I think one thing i' added is that
the idea for this new new productive forces is China
wants to climb up the value chain in areas like Ai.
China also want to make I mean, wanted to play
a much bigger role in the Chinese economy because it
will make people more productive and then the workforce will
be a lot more skilled and this will make China
(34:14):
a lot more competitive in the longer term.
Speaker 3 (34:16):
Well, you mentioned workforce there, Alan Jill. I mean, where
are we right now when you look at the labor market,
particularly youth unemployment. Do we have a sense of where
the unemployment rate is these days?
Speaker 9 (34:26):
Oh? Gosh, Doug, Well, I think that with the youth
unemployment rate, there's just been so much chatter about that
one over the last year, right, I mean, we saw
that one just removed from the official database for several
months in twenty twenty three, as policymakers said that they
were retooling it. Ultimately, now they're still putting it out,
although they've stopped highlighting it in their big regular press conferences.
(34:47):
It does seem like it's ticked down a bit to
around fifteen percent or so rather than the north of
twenty percent that we were seeing in twenty twenty three,
though obviously still a major issue. I mean, look, young
people in China, these recent graduates have really been hit
tremendously over the past several years, not just because of
the economic slowdown and all the pandemic controls and all
(35:09):
of that, but also this whole realignment within China around
how the tech sector has handled this crackdown, this austerity campaign.
All of that has led to jobs drying up, and
I think, you know, some levels of dissatisfaction still, particularly
among China's use well.
Speaker 3 (35:22):
And if we can agree that consumers really have been
keeping a pretty tight leash on spending, is there a
way that the government might address this through means other
than just lowering interest rates. Are their ideas floating around,
maybe to issue some type of coupons directly that could
be used to purchase goods. Are people beginning to get
(35:43):
a little creative.
Speaker 10 (35:44):
I think they are on the China's top economic planet
and the RC actually recently met to just talk about
how they could implement this program. And some of those
people and the companies they met are a consumer goods
company and importantly recycling companies, because they're going to encourage
consumers to replace old goods, durable goods and cars and
(36:06):
factories to replace the equipment. So that's going to create
a lot more demand if implemented the way it wants
to for new equipment and appliances and what's that way
it's going to go. China's going to have to deal
with that in some way. Yeah.
Speaker 9 (36:21):
I think Alan did a really good job of summing
up the plans that are actually in consideration here. But
I think the really important thing to underscore is that
in terms of direct cash handouts, China's just absolutely not
going there. I think that it would take a tremendous
amount for China to actually consider something like that. They've
been incredibly critical of what Western governments in particular were
(36:43):
doing in terms of cash hand ats to households during
the pandemic and it seems like that's still a bridge
too far for China's government, right, But it was very interesting.
Speaker 3 (36:50):
There was a report just in the last week I
published where President she was considering a US style quantitative
easing as a way of providing a little bit more
liquidity into the market and may be a little bit
more risk taking. Can you imagine a world alan where
quantitative easing shows up in part of the pboc's playbook.
Speaker 10 (37:13):
I think so far talks of Chinese style q E
is still premature. The line that Cgpen said was taken
out of a new book published featuring his quotes from
months ago, and there's still no sign, no follow up
on whether the Chinese Central Bank will do something similar.
And you know, just generally speaking, China is trying to
(37:36):
prove that there is a way to grow its economy
without resorting to Western style stimulus measures that created problems
that we saw in the global financial crisis. So I
think it's still too early to say whether that's going
to happen.
Speaker 3 (37:53):
Joe Lisis Alan Wong, thank you so much for joining
us here to help us understand what's going on in
the Chinese economy and what we may see in the
week ahead with that inflation data. I'm Doug Krisner. You
can join Brian Curtis and myself weekdays here from Bloomberg
Daybreak Asia beginning at eight am in Hong Kong eight
pm on Wall Street.
Speaker 2 (38:11):
Tom, Thank you, Doug, 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
and global business headlines are coming up right now.
Bloomberg Audio Studios, Podcasts, radio news.
Speaker 2 (00:11):
This is Bloomberg day Break Weekend, our global look at
the top stories in the coming week from our day
Break anchors all around the world. Straight ahead on the program,
Inflation and what it could mean for the Fed plus
earning season is right around the corner. We'll get a preview.
I'm Tom Busby in New York. I'm Stephen Carolyn London.
For We're looking ahead and beyond the upcoming European Central
(00:32):
Bank meeting, when and how fast interest rates may come down.
Speaker 3 (00:37):
I'm Doug Krisner looking at whether China's economy is bottomed
and if it's beginning to inflate.
Speaker 4 (00:43):
That's all straight ahead on Bloomberg Daybreak Weekend on Bloomberg
Ey look them free own New York, Bloomberg ninety nine
to one, Washington, DC, Bloomberg one O six one, Boston,
Bloomberg nine sixty, San Francisco, DAB Digital Radio, London, Sirius
XM one nineteen and around the world on Bloomberg Radio
dot Com and via the Bloomberg Business App.
Speaker 2 (01:08):
Good day to you. I'm Tom Busby, and we begin
today's program with inflation and the March consumer Price Index
coming out this Wednesday. With the fed's next policy meeting
kicking off later this month, what could that mean for
the central banks direction moving forward? And for more we're
joined by Edward Harrison, Bloomberg, team leader America's FX and Rates. Edward,
(01:30):
Thanks for being here. What are you expecting to see
in that CPI report?
Speaker 5 (01:34):
Hey, great to talk to you, Tom. The question really
is wide open in terms of what we can see.
There are a lot of things, and I think that
the way to think about this is that we had
a very high level of inflation as we came out
of the pandemic, and that's come down considerably, but we've
(01:54):
stalled at a level that is above the Fed's target.
And recently what we've seen is prices moving up in
places that people are sensitive to, you know, things like cocoa,
you know, for chocolate, things like oil, which affects your
gasoline prices in the US. And so, as a result,
(02:15):
after two readings in a row that were relatively high
above expectations, there's a lot of anticipation about this number,
and really it could be higher than expected given some
of those recent trends.
Speaker 2 (02:31):
Still a long way to go, though, to the fed's
two percent target, but like you said, not the nine
point one percent we saw just two summers ago. But
we had been heading in the right direction. Is this
recent pickup just an aberration you think, or are we
onto something more troubling.
Speaker 5 (02:47):
Well, you know, the FED really wants to get their
hands around that to figure out what's going on. And
that's why when you heard Jerome Powell talking last week,
he was talking about patients. And that's because of this
number in particular, and also the number that's embedded in
the Personal Consumption Expenditures Report, which is what the FED
(03:09):
looks at even more closely. When you look at this number,
you know, the last number without food and energy, which
are very viable. When you strip that out, you still
had three point eight percent. They're expecting three point seven percent,
which is almost double the fed's level now. Luckily, because
food and energy have been relatively benign of late. The
(03:33):
number was three point two percent last time, and we're
expecting three point five percent this time. So that gives
you an indication that there's a lot of work to
be done. And this is why j Powell last week
was talking about patients.
Speaker 2 (03:47):
Well, let's talk about some of those big drivers here.
You mentioned oil right now hovering around a five month high,
always very volucile, but we are seeing expectations gas is
going to hit four bucks a gallon here in the US,
that's for regular by the summer. I mean, that is
a real wildcard. Oil and gas prices.
Speaker 5 (04:07):
Without a doubt. And you know, as I was saying,
they had been positive in terms of the numbers food
and energy because the headline number is lower than the
number when you strip out food and energy. But now
that we have these prices going back up, then you
can expect them to have a negative contribution. They're sending
the CPI up higher. And there's nothing that people think
(04:30):
about more than gasoline prices. It has that anchor effect
in terms of how people think about inflation and where
it's headed. And so this is not what people want.
And I would add that, you know OPEK their meeting,
it will be interesting to see what kind of level
they're targeting for oil prices. If we're looking at ninety
(04:53):
dollars a barrel, then that's not a level that is
going to be pleasant for the inflation numbers.
Speaker 2 (05:00):
You know, food, oil, gasoline, housing. But there are some
green shoots, some glimmers of hope. Used car prices have
moved lower, new car prices have moved lower.
Speaker 5 (05:09):
Right, what we're looking for in particular is not just
in goods and things that were inflated coming down, but
that core beyond even goods in services, you know, takeout housing,
even looking at you know, the services sector and the
(05:31):
core within the services sector of minus housing to see
what the overall trend is. I think that that is
going to be the place that people are going to
be looking as they look at the CPI.
Speaker 2 (05:42):
Now, one last question. We're going to talk about the
fed's meeting, which is April thirtieth May. First, that's the
next one. A non starter for a rate cut, but
everybody's still thinking about that mid June meeting, and between
now and then, the FED is going to have three
CPI reports, two PCE reports, and that for a data
dependent FED is a lot to consider. Is there any
(06:03):
feeling that by then, by the June eleventh and twelfth
meeting we are going to see maybe some hope of
a rate cut.
Speaker 5 (06:11):
I think that these next ones are going to be
very important, because you know, the FED is looking for
a trend, and that trend needs to be lower. To
the degree that the next one or two of these
CPIPCE reports are not lower, it makes it more difficult
for the FED to cut in June. When we look
at some of the people at the FED, Atlanta FED
(06:34):
President raphae Albostik, he's been an individual who's at the
leading edge of where the Fed's going. He's actually talking
about waiting all the way into the fourth quarter. So
that's an indication of sort of the angst of the
Fed about how sticky inflation has been.
Speaker 4 (06:53):
Wow.
Speaker 2 (06:53):
Well, the next reading the March CPI data out there Wednesday,
and our thanks to Edward Harrison, Bloomberg team leader for
Americas FX and Rates. Well, we turn now to the
start of the new earning season on Wall Street. It
kicks off this Friday. We get the latest quarterly reports
from JP Morgan, Chase, Wells, Fargo, and City Group, some
of the biggest banks in the US. What will they
(07:15):
reveal about the health of the banking sector. Well for more,
We're joined by Alison Williams, Bloomberg Intelligence Senior Analyst, Global
Banks and Asset Managers. Now, Allison, I want to start
with where the US banking sector is right now compared
to the turmoil a year ago. We saw the failure
of Silicon Valley Bank in March of twenty three, Signature
Bank in April of that year, First Republic. Where are
(07:37):
we now?
Speaker 6 (07:37):
So, I think for the banks, that really kicked off
a lot of concerns about the higher interest rate environment,
and we saw a lot of deposit outflows and that
really has been a big focus for investors in terms
of the impact on net interest income. But for this quarter,
investors are really going to be focusing on the change
(08:01):
in interest rate expectations versus the last time we heard
from the banks, which was in January, and so at
that point in time, most of the banks gave their
guidance for net interest income looking for six rate cuts.
City Group more in the three to six cut region,
(08:21):
but the market implied rates at this point in time
are closer to three, and so we do expect that
there could be some change in the net interest income
outlook that really affects more of the back half and
the twenty twenty five expectations. But circling back to deposits again,
that was the sort of one of the big concerns
a year ago, deposit pricing. We have seen those deposit
(08:45):
prices increase, but we do think that this quarter they
could come in a little bit more muted than perhaps
had fears. We got some color around that from Bank
of America who said that they think that they're an
interestingcome guidance could come in a bit at the higher
end of their guidance because those costs have not been
(09:07):
as bad as.
Speaker 7 (09:08):
They had expected.
Speaker 6 (09:09):
What were they expecting, Well, deposit prices are increasing, right,
so as rates have come up, banks sort of got
an early benefit in terms of the repricing of their
loan books, but they held off a little bit in
terms of passing on those price increases to customers because
we were coming off of those zero percent levels. So
(09:31):
I think as things sort of adjusted to a normalized environment,
they were a bit slower to pass on some of
that benefit. But now that is happening, and so consumers
are demanding a little bit more yield. They're switching their
deposits into products that offer a higher yield, and that's
been happening over the past year. But perhaps that pace
(09:53):
is starting to slow down a bit.
Speaker 4 (09:54):
Yeah.
Speaker 2 (09:55):
Well, one thing that hasn't slowed down for banks trading.
We've seen IPO a little growth there, we've seen record
levels for all the major averages. What does that mean
for these banks?
Speaker 6 (10:06):
So healthier markets are definitely a boon to the asset
and wealth management businesses for all these big banks. They
are diversified banks, and so they are benefiting just from
the fees, just from the asset levels, but also they'll
be looking for better flows. That is a key measure
of health of the businesses. But on the trading and
(10:28):
fee outlook, trading continues to be relatively resilient, and so
that fixed income trading does face tougher comparisons, So it
could be a little bit down, especially for the rates
and currencies business for someone like City Group, but still
very healthy historically high levels. Equity trading getting some benefit.
(10:50):
As you pointed out that we have seen a little
bit more activity on the IPO front, perhaps not as
strong as some of the banks would expect, but definitely
in the US, the US underwriting business is going to
be helping those fees, the debt underwriting business helping those fees.
M and A announcements looking a little bit better, but
it'll take a little while for those fees to kick in.
(11:12):
But I think the highlight for this quarter for trading
and fees will be that investment banking feed growth both
versus a year ago and the fourth quarter.
Speaker 2 (11:20):
But let's talk about now the challenges, and probably the
biggest one we spoke about this is commercial real estate.
We just had a vacancy rate of offices last quarter
twenty percent, just under twenty percent across the US. That's
got to be devastated.
Speaker 6 (11:32):
And the office business is definitely something that investors are
focused on. It's something that we're focusing on. But Wells Fargo,
you know, for example, who has one of the biggest
exposures among our banks. At least they've already put up
a pretty healthy reserve against that business, so they've been
watching it as those trends have been deteriorating. And commercial
(11:55):
real estate, while it's a big thing I think to
focus on for the industry, it does tend to be
a relatively lower exposure across the banks. So even though
Wells Fargo and now JP Morgan two of the biggest
lenders out there to commercial real estate, Bank of America
as well, it is not as big of a share
of their loan book as it is perhaps for the
(12:16):
smaller banks. And so what we're really focusing on is
the credit card business, where we think that is going
to be the driver of provisions for the largest banks
because there is loan growth in that business, and that
loan growth does tend to have higher loss rates. So
we will see provisions increase because of the growth, because
credit is normalizing, and because this does tend to be
(12:38):
a seasonally higher quarter for those types of losses.
Speaker 2 (12:41):
Well, a lot to look forward to this week and
our thanks to Alison Williams, Bloomberg Intelligence Senior Analyst, Global
Banks and Asset Managers. And coming up on Bloomberg Daybreak weekend,
when will European policy makers start to ease monetary policy?
We look ahead to the next European Central Bank meeting.
I'm Tom Buzby and this is Bloomberg. This is Bloomberg
(13:13):
Day Break 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. Has China's
economy bottomed out? We look ahead to China inflation data.
But first in the global interest rate race, investors have
been working on the assumption that the Federal Reserve will
be the first to make a raid cut, but after
(13:35):
some encouraging economic data from the Eurozone, could the European
Central Bank beat the Fed to the punch with a
surprise cut as early as later this month. For more,
Let's go to London and bring in Bloomberg Daybreak anchor
Stephen Carroll.
Speaker 1 (13:48):
Tom Inflation in the euro Area may not be slowing
down as quickly as it was last year, but it's
still moving in the right direction for the ECB. The
latest reading shows consumer prices rising in March by two
point four percent year on year. That's down from a
pace of two point six percent in February. Spanish Governing
Council member Pablo Hernandez de cass is among the most
recent to earmark the June meeting as likely being for
(14:11):
the first cut in interest rates. Even the most hawkish
member of the Governing Council, Austria's Robert Holtzman, is warning
of the perils of holding rates at their current level
for too long, but could waiting until June risk harming
the economy. Boomberg opinion columnist Marcus Ashworth has joined those
calling instead for an April move at this upcoming meeting.
He points to Bank of France President Fransouovievoia the gallow
(14:34):
who's often the bell weather for ECB policy changes. De
Gallo says that a further slow down in growth means
that the time has come to take out an insurance
against this second risk by beginning rate cuts. But going
before the FED doesn't come without its risks, both in
Europe and globally. It's something we've been discussing with Aaron Captain,
(14:54):
who's chief economists at UBS Investment Bank.
Speaker 8 (14:57):
So if the FED doesn't cut in June, right, so
we basically then have less cuts for the FED, so
a bit more appreciation of the dollar, a bit more
euro depreciation. So at the margin it's going to add
a little bit to Eurozone inflation, but really not very much.
If all that we're doing is sort of a time
shift of the FED cuts, right, if they just go
a bit later and they catch up next year, then
(15:20):
you know, the overall rate differentials don't really move that much,
and it doesn't fundamentally I think alter sort of the
inflation outlook in the euro Zone.
Speaker 1 (15:28):
Is there any chance you think of fifty basis points
cuts from the ECB this year?
Speaker 7 (15:32):
Not now?
Speaker 8 (15:33):
It's difficult to see why. So I think the debates more,
you know, do you go once a quarter at the
forecast meetings or do you go every meeting. It looks
like they want to go once a quarter, although they
have been a little vague about sort of what the
speed of the sequences that they have in mind. In
my mind, you know, the easy bit is the first
one hundred and fifty basis points, and there's no real
(15:55):
reason why you want to sort of race through that
if there's uncertainty about the landing zone. Right, So the
way I think they think about it is that you know,
you're at four, you can probably safely cut to about
two and a half, and then once you get there,
you got to look around to see whether you're still
on track, and if, you know, if things are accelerating
too fast and profits are going up too fast, then
(16:15):
you stop cutting at that stage. So given sort of
that type of uncertainty, you don't need to go in fifties.
I think the debates really do you go in twenty fives?
And then you know, do you skip meetings or not?
Speaker 4 (16:26):
Yeah?
Speaker 1 (16:27):
I wonder you know, Kasina Guard and others have points
as the importance of wage data when it comes to
their decision making process at the ECB. Two is the
wage days is something that's a big concern for you
when you're thinking about the broader outlook for the year
Zone economy.
Speaker 8 (16:42):
No, so based on what we've there's not a lot
of year to date wage data out yet. But if
Italy doesn't repeat the big one off that they had
in December, then our current tracking of negotiated wages is
that it'll slip below four percent for the first time
in January. And so it really looks like, you know,
the negotiated wage track, which is going to be most inertial,
had been sort of going sideways, is now starting to
(17:04):
trend lower. The indeed wage tracker, which is sort of
temp marginal wages of temp agencies, that's already been heading lower.
And then they have a phone survey which they don't publish,
and so all indications really are that wages are moving
in line with their forecast and at this stage are
not concerning.
Speaker 1 (17:21):
That was Aaron Captain, chief economist at UBS Investment Bank,
speaking to us on Bloomberg Daybreak Europe. Now, the ECB
expects CPI to fall to two point two percent by August,
but it could happen as soon as this month, according
to estimates by Bloomberg Economics. Kicking off rate trimming is
one thing, but questions still remain about what comes next
for the ECB after the first cut, whether it comes
(17:41):
in April or in June. At the moment, money markets
are pricing in three quarter point reductions starting in June.
I've been discussing the path ahead with senior Euro Area
economist for Bloomberg Economics David Powell. Just how surprising would
an April cut be or how likely is it?
Speaker 7 (17:58):
An April cut is very unlikely at this stage. For example,
there's almost no probability of that being priced into the
markets right now. Some time ago, there was a debate
whether this was going to happen in April or in June.
That was back at the beginning of the year, and
that was fully priced in that April cuts. There has
been a big shift in market pricing we've seen, and
(18:19):
that's really been thanks to the communication we've seen from
the ECB who have started to rule out some time
ago the possibility of an April cut, Although there have
been some doves in the Governing Council who've continued to
speak about it from time to time. It's not of
you held by the consensus at all.
Speaker 1 (18:38):
Just mischievously hinting that perhaps there's something could happen, even
though there's no likelihood of it as you see it
as well. So what's the risk of waiting longer for
Christine Legard and colleagues or is there a risk in
them waiting to June.
Speaker 7 (18:53):
Well, the difference between April and June is not that huge.
Although the ECB cannot wait until is actually down to
two percent to start cutting because monetary policy works with
a lag somewhere between a year and a year and
a half. So if they don't, if they don't actually
cut until inflation is back to target, the full impact
(19:14):
of that cut won't be felt for some time later,
and the economy could already have suffered some significant damage
by them at a time when the economy has hardly grown.
In fact, the UR economy is not expanded at all
for nearly a year and a half, and if we
compare that flatlining that we saw last year in the
UR area, that's very different from the US where it
(19:34):
expanded by three percent. So they can't wait forever to cut,
but probably the difference between April and June is not huge,
and it looks like it's coming in June.
Speaker 1 (19:44):
The process of deflation has been reasonably steady in the
Euro Area. Are there worrying aspects within that? Are there
risk zones within the members of the Euro Area that
could actually bump inflation up in the wrong direction before
we get to right cuts?
Speaker 7 (20:01):
Yeah, well, inflation has come down, as you said, considerably
from where it was at its peak. In fact, it's
not very far from the target now, and we expect
headline inflation to actually drop below target this summer. But
there are still some bits of worry when you look
at the details of the report. In fact, we just
had the inflation report for March and both the headline
(20:22):
and core continue to come down. But services inflation, which
the ECB is watching very closely, has been sticky at
four percent for months now. That will probably come down
in the months ahead as wage growth decelerates, but that's
keeping the ECB worried and as part of the reason
they're moving cautiously delaying the first cut to June. They'll
probably pause after that and not cut again until September,
(20:45):
and they would like to see that come down before
they move more aggressively.
Speaker 1 (20:49):
And of course the flip side of they say is
and those who do want to see right cuts come
faster is the weakness in the euro Area economy. Late
interesting to see the latest round of pm I numbers
showing a little bit of strength returning the Eurozone composite
pi I number the final reading for March, seeing it
nudge back into expansion territory. How weak is the euros
(21:09):
and economy at this point, Well, the your area is
pretty weak.
Speaker 7 (21:13):
Like I said, it hasn't expanded for nearly a year
and a half. That stands in very stark contrast the
United States, which, as I already said, spend the three
percent last year. It just gives you a sense of
how weak it is in Europe. However, the economy will
probably gain some momentum this year is inflation comes down.
Real incomes are being boosted and that allows real consumption
(21:35):
to rise, so people have a bit more money to
spend with inflation coming in. We're seeing that in the numbers.
The services sector is once again recovering in Europe, but
that'll probably continue throughout the course of the year and
the economy will gain some momentum, but nothing like we're
seeing across the Atlantic.
Speaker 1 (21:52):
What about the question of wage data. This is something
that Christine Lagart has signaled and repeated occasions as being
absolutely key for the European Center Bank decision making. Do
we have any early indications of what the wage picture is?
Speaker 7 (22:05):
Well, wage growth has probably peaked the most comprehensive set
of data WEEGN, and that comes with the national accounts.
I mean know a couple of quarters ago that peaked
wage growth and is coming down. Specifically, it's the compensation
per employee they look at, and we'll get another round
of that in the early part of June and that
will cover the first quarter, and that's what the ECB
(22:26):
is waiting for to cut to confirm that wage growth
continues to come down, although before that we'll get some
data un negotiated wages towards the end of May. Christine
Legarda already has highlighted that in his speech in Frankfurt
a couple of weeks ago, that they'll be looking very
closely at that for some initial signs of wage growth
continuing to decelerate.
Speaker 1 (22:47):
So let's talk us through your expectations then for the
rest of the year. So no cut at the upcoming meeting.
We're looking towards the start of summer for things like
that to start moving. What does the rest of the
year look like for the EACYB from this point of view?
Speaker 7 (23:00):
Well, as I mentioned, the ECB is really focused on
this wage data and that comes in the national accounts,
so it only comes once a quarter. So we get
kind of batch of that for the first quarter in
the beginning of June, and then we have to wait
another three months of beinning of September until we get
data on that again. That'll be for the second quarter.
Conveniently for the ECB, that also aligns with their forecast months,
(23:23):
so they'll have fresh inflation forecasts and they own staff
economists in June as well as September. And if both
of those are going in the right direction, meaning of
that the staff forecast are inflation continuing to decelerate as
they have been forecasting for a while, that will allow
them to cut in June, probably pause in July as
(23:44):
they wait for that quarterly data again in September, and
then cut again in September. By then, headline inflation is
likely to be below target. In core inflation is not
going to be far behind it's going to be a
lot more difficult to justify restrictive policy stands when inflation
is actually below target. So from September we think that
they will cut it at each of the remaining meetings
(24:07):
of the year, and that equates to about one hundred
basis points and easing throughout the course of this year.
How much of a.
Speaker 1 (24:13):
Dilemma is it for the ECB to go before the FED.
I know the ECB of course will tell you that
they make their own decisions and they're not that conscious
of it, but surely one is reliant on the other.
Speaker 7 (24:24):
If we look back at this tightening cycle it's taken place,
the FED has kind of taken the lead on it,
the ECB followed, and the ECB probably wouldn't mind if
the FED took the lead again on cutting. And they
may not have that luxury though, of just kind of
following the FED, because, like I said, the UR economy
(24:45):
is much weaker than the US economy. So if things
remain strong, and most of the data coming out of
the US suggest they will, the FED may be able
to put off monetary easing, and that's not a luxury
that the ECB has at this stage. So it may
not have choice. It may have to go on its
own and then allow the FED to go later.
Speaker 1 (25:05):
How much of a risk would a weaker euro though
be to the inflation outlook if they we do If
as expected, the ECB does go before the Fed.
Speaker 7 (25:12):
Obviously the ECB is so he is looking at the
exchange rate, what it does to inflation, in growth and
other things. However, it's not really on the ECB's radar
at this stage. They're not talking about exchange rate volatility
or a weekier or strong or anything like that. So
I suspect that that's not too important for them at
(25:34):
this stage when they contemplate the path of interest rates.
Speaker 1 (25:38):
That was David Powell from Bloomberg Economics. I'm Stephen Carroll
in London. You can catch us every weekday morning here
for Bloomberg Daybreak. You're at beginning at six am in
London and one am on Wall Street. Tom, Thank you, Steven.
And coming up on Bloomberg Daybreak weekend. Has China's economy
bottomed out? We look ahead to China inflation data. I'm
Tom Busby and this is Bloomberg.
Speaker 2 (26:09):
This is Bloomberg day Break weekend, our global look ahead
at the top stories for investors in the coming week.
I'm Tom Busby in New York. The early indicators on
China's economy show there may have been a small improvement
during the first quarter. Even so, the majority of Chinese
financial institutions surveyed by Bloomberg Economics doubt the economy has
bottomed out, and a big question is whether it's stuck
(26:31):
in deflation. We'll get some insight in the week ahead.
Let's get to Doug Christner, co host of Daybreak Asia
for a closer look.
Speaker 3 (26:38):
Tom, I think we can say the big issue is confidence.
Speaker 7 (26:40):
Now.
Speaker 3 (26:41):
The latest PMI data show improvement, but so much about
the overall Chinese economy does remain fragile, especially where consumer
demand is concerned. We know that retail demand is weak.
Pricing power seems absent.
Speaker 7 (26:55):
Now.
Speaker 3 (26:55):
The readings on producer and consumer prices are due midweek.
We're going to preview the day and now and talk
about the current challenges for the Chinese economy with Bloomberg
reporters Jill Desis and Alan Wong. Jill is one of
our news desk editors, and Alan is an editor on
the China ECOGV team. Thanks to both of you, for
joining us, Jill, I want to begin with you when
(27:17):
I start with the story about prices, particularly at the
wholesale level, producer prices. I guess in China it's known
as factory gate prices. We saw numbers in February at
a decline that was pretty rapid, and that extended a
slide in kind of a deflationary trend to seventeen months.
What's the conversation like around what we might expect in
(27:39):
the week ahead.
Speaker 9 (27:40):
Yeah, Doug, I think that at this point, really those
factory gate prices continue to remain under pressure. We're still expecting,
or at least a economists are still expecting a continued
slide once we get those numbers for March survey estimate
is below two percent declines even I mean we're approaching
three percent declines. Think, so, there doesn't really seem to
(28:02):
be any kind of a meaningful turnaround in terms of
getting rid of these these issues around producer price deflation.
It's interesting because I think that at this point the
deflationary pressure story in China is just so much more
centered around consumer deflation, just because you know, from a
from a demand perspective, there's not a ton of concerns
(28:24):
around you know, China's ability to you know, making goods
and exporting them. I think it's much more about what
the domestics demand story says about China right now.
Speaker 3 (28:31):
So, Alan, assuming that the numbers do show further deflation
both at the wholesale and retail level, does that create
any kind of urgency for the government to step up support.
Speaker 10 (28:41):
Yeah, the urgency has always been there, and numbers, even
if they're not positive, will just only add to the
common consensus that there is a need for China to
ramp up its fiscal measures to stimulate demand.
Speaker 3 (28:56):
Jill, you were going to weigh in, Yeah.
Speaker 9 (28:58):
I think what's really interesting about the stimulus support story
when it comes to domestic demand is, look, we were
back at the NPC at the beginning of March really
sort of waiting on what kinds of stimulus support measures
would actually be announced, and I think, you know, economists
were generally disappointed. But I did think one thing that
was kind of interesting is that, at least when it
(29:18):
comes to trying to stimulate consumer demand, there's a lot
of talk about trading and old products for new ones
and stuff like that. I think what economists, you're really
waiting on is whether there's going to be a big
dollar amount put behind that in the future.
Speaker 3 (29:28):
So Alan, if we're really talking about depressed sentiment, I mean,
the property market seems to be the root cause. I
think we can agree on that much. I mean, or
maybe it's just such a big part of the story.
What is your sense based on Bloomberg reporting? Where are
things right now visa VI the housing market?
Speaker 10 (29:45):
Yeah, we're seeing a two track recovery in the Chinese economy.
On the industrial side, things has been we were seeing
green shoots on that front, but then in terms of
the property slum it's still very much in a sorry state.
We seeing that housing start a week, but housing completion
(30:05):
is stabilizing, so that means that new homes on being
built and that has some down with pressure on commodity
prices for example, and that also reflects on the weak
sentiment in China in general.
Speaker 9 (30:19):
The other thing too, I think it's a really interesting
stimular story when it comes to the housing market as well,
because the government has taken several steps to try to
prop up support there. I think most recently, Chinese lenders
slashed a key rate for mortgages in February and attempt
to stimulate demand into March didn't really seem to move
the needle there much. So that's just, you know, to
(30:39):
kind of put this in perspective. Another thing that analysts
are looking out for is whether these continued rate cuts
are actually going to help prop up the property market
as well, because they really haven't done much so far.
Speaker 3 (30:49):
And as both of you know, US Treasury Secretary Yellen
is in China. One of the things that she is
addressing is this issue of industrial overcapacity and how it's
having a negative impact not just on the Chinese economy,
but many economies around the world. I spoke earlier about
that with George Barboris, managing director at K two Asset Management.
Here's what he had to say.
Speaker 11 (31:10):
Some people would say there's some cognitive dissonance with some
of the policy coming out of Beijing, but in reality,
they're taking a step back from the grand to play
the long term. They will unload cheaper products to the
rest of the world that will allow it, and North
America will maintain them. They've obviously died up those tariffs
and the current administration from the previous one, they can
allow these cheap goods to come through which they won't,
(31:30):
and that would be very CPI will fall very quickly.
But China's just got a different playbook at the moment
to where we're were three years ago, and the middle
class of China going to pay that price.
Speaker 3 (31:40):
That is George Bevoris, they're from K two asset Management. Now,
Alan if we can agree that there is an overcapacity
problem in China, It's kind of curious, isn't it that
Beijing is still intent on using industrial policy as a
way of driving growth. What do you think?
Speaker 10 (31:54):
Yeah, there is a need for it to find ways
to grow its economy because of the persistent property slum.
China is pouring money into manufacturing and has designated three
new industries as its new Big Three industries, namely evs,
electric vehicles, solar cells, and batteries. So it's trying to
(32:16):
ramp up production on these things and then obviously that
creates more competition in China and drive down prices. But
the US is right in thinking that what if China
exports lots of cheap cars to the US, what's going
to happen to domestic makers of cars? And this is
going to be high on the agenda of Yellen's trip
to China.
Speaker 3 (32:36):
We know that the government will released the Work Report
back in March and with it this plan to unleash
new productive forces. High tech is a big part of
that story. Innovation another way of driving growth. Jill, do
you have a sense of what this may look like
if we take EV's, if we take solar panels out
of the equation, what does high tech and innovation look like?
Speaker 9 (32:57):
I don't really know that you can totally take EV's
and solar panels of the equation there, Doug, because I
think that is pretty central to this idea of what
China is trying to accomplish here, right. I mean, we
know that no matter what happens with the property sector,
even if Beijing is able to put a floor under
this crisis, we are not going to see real estate
contribute to GDP in the way that we have in
(33:17):
the years past. That's just absolutely done. So what China
really needs to do in terms of this long term
strategy for new productive forces is find ways to replace
bits of how the property sector contributed to GDP with
some of these other sectors. And so that does mean
investing a lot more into evs and solar panels, which
is of course obviously leading to some of these overcapacity
(33:39):
challenges that you're seeing out of the US when it
comes to China, the fact that they're subsidizing so much.
But I think that at this point, I mean, it's
still a fairly vague slogan, right, I mean, how else
do you really prescribe, you know, describe new productive forces?
Speaker 10 (33:53):
Yeah, And I think one thing i' added is that
the idea for this new new productive forces is China
wants to climb up the value chain in areas like Ai.
China also want to make I mean, wanted to play
a much bigger role in the Chinese economy because it
will make people more productive and then the workforce will
be a lot more skilled and this will make China
(34:14):
a lot more competitive in the longer term.
Speaker 3 (34:16):
Well, you mentioned workforce there, Alan Jill. I mean, where
are we right now when you look at the labor market,
particularly youth unemployment. Do we have a sense of where
the unemployment rate is these days?
Speaker 9 (34:26):
Oh? Gosh, Doug, Well, I think that with the youth
unemployment rate, there's just been so much chatter about that
one over the last year, right, I mean, we saw
that one just removed from the official database for several
months in twenty twenty three, as policymakers said that they
were retooling it. Ultimately, now they're still putting it out,
although they've stopped highlighting it in their big regular press conferences.
(34:47):
It does seem like it's ticked down a bit to
around fifteen percent or so rather than the north of
twenty percent that we were seeing in twenty twenty three,
though obviously still a major issue. I mean, look, young
people in China, these recent graduates have really been hit
tremendously over the past several years, not just because of
the economic slowdown and all the pandemic controls and all
(35:09):
of that, but also this whole realignment within China around
how the tech sector has handled this crackdown, this austerity campaign.
All of that has led to jobs drying up, and
I think, you know, some levels of dissatisfaction still, particularly
among China's use well.
Speaker 3 (35:22):
And if we can agree that consumers really have been
keeping a pretty tight leash on spending, is there a
way that the government might address this through means other
than just lowering interest rates. Are their ideas floating around,
maybe to issue some type of coupons directly that could
be used to purchase goods. Are people beginning to get
(35:43):
a little creative.
Speaker 10 (35:44):
I think they are on the China's top economic planet
and the RC actually recently met to just talk about
how they could implement this program. And some of those
people and the companies they met are a consumer goods
company and importantly recycling companies, because they're going to encourage
consumers to replace old goods, durable goods and cars and
(36:06):
factories to replace the equipment. So that's going to create
a lot more demand if implemented the way it wants
to for new equipment and appliances and what's that way
it's going to go. China's going to have to deal
with that in some way. Yeah.
Speaker 9 (36:21):
I think Alan did a really good job of summing
up the plans that are actually in consideration here. But
I think the really important thing to underscore is that
in terms of direct cash handouts, China's just absolutely not
going there. I think that it would take a tremendous
amount for China to actually consider something like that. They've
been incredibly critical of what Western governments in particular were
(36:43):
doing in terms of cash hand ats to households during
the pandemic and it seems like that's still a bridge
too far for China's government, right, But it was very interesting.
Speaker 3 (36:50):
There was a report just in the last week I
published where President she was considering a US style quantitative
easing as a way of providing a little bit more
liquidity into the market and may be a little bit
more risk taking. Can you imagine a world alan where
quantitative easing shows up in part of the pboc's playbook.
Speaker 10 (37:13):
I think so far talks of Chinese style q E
is still premature. The line that Cgpen said was taken
out of a new book published featuring his quotes from
months ago, and there's still no sign, no follow up
on whether the Chinese Central Bank will do something similar.
And you know, just generally speaking, China is trying to
(37:36):
prove that there is a way to grow its economy
without resorting to Western style stimulus measures that created problems
that we saw in the global financial crisis. So I
think it's still too early to say whether that's going
to happen.
Speaker 3 (37:53):
Joe Lisis Alan Wong, thank you so much for joining
us here to help us understand what's going on in
the Chinese economy and what we may see in the
week ahead with that inflation data. I'm Doug Krisner. You
can join Brian Curtis and myself weekdays here from Bloomberg
Daybreak Asia beginning at eight am in Hong Kong eight
pm on Wall Street.
Speaker 2 (38:11):
Tom, Thank you, Doug, 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
and global business headlines are coming up right now.
Popular Podcasts
Dateline NBC
Current and classic episodes, featuring compelling true-crime mysteries, powerful documentaries and in-depth investigations.
Stuff You Should Know
If you've ever wanted to know about champagne, satanism, the Stonewall Uprising, chaos theory, LSD, El Nino, true crime and Rosa Parks, then look no further. Josh and Chuck have you covered.
The Nikki Glaser Podcast
Every week comedian and infamous roaster Nikki Glaser provides a fun, fast-paced, and brutally honest look into current pop-culture and her own personal life.