April 20, 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 core PCE and GDP data, and Tesla earnings.
- In the UK – A preview of European bank earnings.
- In Asia – A preview of Auto Show China
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Episode Transcript
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Speaker 1 (00:02):
Bloomberg Audio Studios, Podcasts, radio News. 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,
and straight ahead on the program, a preview of core
USPCE prices and GDP, also earnings from the US's biggest
(00:25):
ev maker. I'm Tom Busby in New York.
Speaker 2 (00:27):
I'm Stephen Carol in London, where we're discussing what's in
store for Europe's biggest banks as earning season gets underway.
Speaker 3 (00:34):
I'm Brian Curtis in Hong Kong. We look forward to
what's referred to as Auto Show China in the coming week.
Is it about the cars or the politics?
Speaker 4 (00:43):
That's all straight ahead on Bloomberg day Break Weekend on
Bloomberg Eleve Them three 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 1 (01:08):
Good day to you. I'm Tom Busby, and we begin
today's program with a look at key economic data here
in the US. On Thursday, we get core PCE for
March GDP data for the first quarter of this year.
What will this mean for the Fed's monetary policy going forward?
Well for more, we're joined by Stuart Paul Us economists
with Bloomberg Economics. Stuart, the PCE Price Index the preferred
(01:32):
measure of inflation for the FED. What do you expect
to see for March.
Speaker 5 (01:36):
We're expecting to see the headline PCE Price Index show
about zero point three percent growth month on month. The core,
which is more illustrative of what's going on in the
actual economy, strips out energy, strips out food. We're expecting
to see the core rise about the same zero point
three percent month on month, and that's going to allow
just a very slight moderation in the annual measure of
(01:59):
core pc inflation. We're expecting about two point seven percent
annual PCEE inflation. A big part of that inflation pressure
is coming from core services in particular, and if we
drill down and look underneath the hood of what's going on,
we see insurance products are really helping to drive that
inflationary pressure.
Speaker 1 (02:19):
Auto insurance, homeowners insurance.
Speaker 5 (02:21):
Everything that's right, So auto insurance, home insurance, and we're
seeing those prices rise in large part because of rising
prices that we saw for autos and homes post pandemic.
So when the replacement cost of autos and when construction
costs rise for homes, for example, so to do the
insurance premiums that people have to pay. So this is
(02:42):
sort of a residual effects from the inflation that we've
already seen in the past. But that's not the full story.
The fact that people can afford to pay those higher
premiums is again just downstreaming the fact that the economy
continues chugging long and if people are doing relatively well,
and we're going to see that exact same thing in
the person income data that we get at the same time,
we're going to see March personal income growth about zero
(03:04):
point six percent. Again, it's just too hot for the Fed.
It's too hot for the FED to have confidence that
inflation pressures are truly waning.
Speaker 1 (03:13):
Well, we've seen wage growth, and we've seen the labor
market to an upside surprise almost every month, well certainly
every month this year. How could it not, that's right, Yeah,
the labor market has been resilient. We saw it just
in the month of March, three hundred and three thousand
jobs added. We saw an increase in the number of
hours worked on average, We saw wages rising on an
hourly basis, and to our best estimate, employee compensation, so
(03:38):
that's both salaries and other additional benefits. Our best estimate
is that employee compensation rose about zero point eight percent
during the month. That is a hot labor market that
is really helping tabooy spending, and that PCE spending that
we're going to see is probably going to be on
the order about zero point seven percent. Retail sales was hot, and.
Speaker 5 (03:58):
We're expecting to see the same thing in March PCE spending.
Speaker 1 (04:01):
Let's talk about then, the other reading that we'll get
on Thursday, and that is economic growth. What do you
expect to see? This is an initial reading for the
first quarter of this year.
Speaker 5 (04:10):
We're very likely to see robust growth to start the air.
I'm estimating two and a half percent real GDP growth
that's on an annualized basis in the first quarter. That's
really supported again by consumer spending, which is creating that
inflationary impulse but about two point nine percent annualized consumer
spending growth on a real basis in the first quarter
(04:30):
is very impressive. Fixed investment a bit weak. Investment is
really coming from residential investment because of a bit of
a housing shortage because people are staying in their homes
they locked in low rates. So we have a little
bit of a housing shortage with very low inventories and
a lot of investment in intellectual property. Right, this is
all downstream of the AI boom and people really looking
(04:52):
to improve the software and intellectual property that they have
so that they could take advantage of that.
Speaker 1 (04:59):
Let's go back to housing and the challenges not just
home buying, but also rents surprisingly a little higher. I mean,
how is that affecting things for the overall GDP.
Speaker 5 (05:12):
So the fact that rent prices are up is not
directly pushing GDP one way or another, but the fact
that rents are up is encouraging additional investment in housing. Right,
there's clearly a shortage of a housing stock. People who
are homeowners are not listing their homes because the average
rate being paid on mortgages, not new originations, but existing
(05:35):
mortgages is still below four percent. Right, So the fact
that homes are not turning over encourages more construction of
rental units, which is providing growth in the form of
residential fixed investment, and so we are getting some of
those tailwinds again. You know, rent prices are a signal.
There are signal to builders that we need more construction,
(05:59):
and I think that that's going to show up a
bit in residential fixed investment in the Q one GDP numbers.
Speaker 1 (06:04):
Well, let's hope. So you have a rather upbeat out
look for the GDP PCE leveling off a little bit
two point seven percent on an annualized basis, which is
it's not two percent, but it's getting there. Add it
all up. The FEDS coming up a meeting later this month,
the thirtieth and May. First, what do you think is
going through their heads? What is the FOMC thinking with
all of this?
Speaker 5 (06:24):
I think here really the three items that the FED
is looking at that they need to synthesize into a
monetary policy view. Growth has remained robust and there is
a bit of momentum there. The labor market has been
tight and that's created upward pressure owned wages and inflation, yes,
ticking down a little bit. Certainly an out of the
two percent target, and it's that disinflation progress is stalling out.
(06:48):
So you have robust growth, tight labor market, and stalling
disinflation progress. That's going to allow the Fed to keep
their foot on the brakes a little bit longer. I
think that as we get to June, we might end
up seeing a revision to the famous FOMC dot plot,
which shows monetary policy makers forecast for where rates are
going to go. Right now, they're showing seventy five bases
(07:08):
points of cuts in this year. In twenty twenty four,
I think that the risk is really toward a revision
where even policymakers have to admit they're not going to
be able to cut rates as much as they once thought.
Speaker 1 (07:18):
Yeah, maybe not seventy five, but we may see something
by the end of this year.
Speaker 5 (07:22):
Fifty twenty five. It's possible. But then we're getting close
to the end of the year and we're getting close
to election season, and it gets really difficult to navigate
both political and economic conditions.
Speaker 1 (07:31):
Oh boy, a lot to look forward to. Well that
March pce Q one gdp out this coming Thursday in
our thanks to Stuart paul Us economist with Bloomberg Economics. Well,
we turn now to the first quarter earning season with
a ton of big reports this week. One company though
getting a lot of attention, the world's most valuable electric automaker, Tesla,
(07:51):
posting its latest results on Tuesday. And for more on
what we can expect and all the challenges that Tesla
is facing, we're joined by Steve Mann, Bloomberg and Intelligence,
Global Autos and Industrials Research Analyst. Now, Steve, let's start
with what you expect to see with the results, and
then we'll get into everything else with Tesla's So what
do you expect to see on Tuesday?
Speaker 6 (08:12):
Oh, it's not going to be pretty for Tesla. They've
announced a cut ten percent of their workforce, and you
know they announced it right beginning of the second quarterer,
so it may be signaling that things are a lot
worse than the street anticipated, maybe a lot worse than
what they anticipated. So, you know, first quarter earning, it's
(08:32):
not going to be pretty. You know, we're thinking it's,
you know, based on a scenario analysis, likely a miss
versus consensus.
Speaker 1 (08:39):
And we've seen a few misses from a Tesla lately.
We saw the deliveries missed. You know, there's a laundry
list of things we could talk about, and we'll also
talk about some of the good things. So well, let's
get more on those job cuts. Ten percent of its workforce,
fourteen thousand jobs worldwide. Like you said, not a good sign,
not a sign of confidence for employees or for investors,
(09:02):
is it?
Speaker 6 (09:03):
No? No? And and interestingly, they actually raise prices in
the US and they cut incentives in China. So you know,
I think journey earnings call, it's going to be a
huge earnings call for Tesla, and hopefully they're prepared for that.
They're going to have to set you know, real expectations
for the investors and how to move forward because you know,
(09:26):
they cut prices earlier this month. You know, the fear
is that they're going to reverse it. If they do,
you know, we're going to probably see more downgrades on
the stock, earnings downgrade and ratings down grade by the street.
Speaker 1 (09:39):
And that's about forty percent just a year to date
right on that stock.
Speaker 6 (09:43):
Yeah, forty percent. Now, they're not alone at this This
is an industry wide issue, particularly in the US, more
so in the US, but we're seeing it globally as well.
I think the early adopters for evs have pretty much
tapped out.
Speaker 4 (09:58):
Right.
Speaker 6 (09:59):
A lot of the evs today that are offered today,
especially in the West, in Europe and as well in
the US, they're well above fifty thousand dollars per vehicle.
Above fifty thousand, you're pretty much at the premium and
luxury segment, So the market for that segment is relatively small.
What we're also looking for Tesla to talk about in
(10:21):
their earnings it's their next model. It's dubbed the Model two.
It's a compact subcompact vehicle supposedly under thirty thousand dollars.
It's a critical product, not just for Tesla but for
the market because, like I said earlier, the luxury segment
is pretty much tapped out, so we need to bring
(10:43):
in new buyers for battery electric vehicles and more affordable
evs is really what the market needs right now.
Speaker 4 (10:50):
Now.
Speaker 1 (10:50):
There were reports that that Model too production had been delayed.
Tesla denied those reports. But where is it? They have
said the robotaxis comme August eighth, right, But I think,
like you said, most people want to see a more
affordable car.
Speaker 6 (11:05):
Yeah, that Model two is critical for tests up. It's interesting.
I'm still optimistic. I think, you know, they's already spent
a lot of money, made a lot of investment in
developing that model too, you know, and they were scheduled
to actually launch that at the end of twenty twenty five.
You know, it's not that far away, given that it
(11:28):
takes multi years to develop a new car, So for
them to scrap it pretty much almost the last minute,
it's kind of unheard of. So now you no elon
must it come out on Twitter or on x to
say that the reporting on cancellational Model two is false.
I hope that's that's the case. But in the fourth
(11:52):
quarter announcement earnings announcement, he did mention that this model
too will be launched at the end of time twenty
twenty five, and that the production actually will start in
the US and then expand into Mexico. Hopefully it's really
not a cancellation of the model to the subcompact compact vehicle.
(12:15):
Maybe there's some hurdles that they need to get through
in building that plant in Mexico, and that's probably hopefully,
that's probably what it is.
Speaker 1 (12:23):
Well, a lot to look forward to Tesla's first quarter
results coming out after the close this Tuesday, and our
thanks to Steve Man, Bloomberg Intelligence, Global Autos and Industrials
research analyst. Coming up on Bloomberg day Break weekend, we'll
look at what's in store for Europe's biggest banks as
earning season gets underway. There, I'm Tom Busby, and this
(12:43):
is Bloomberg. 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. Up later
in our program a look at the twenty twenty four
(13:05):
Beijing International Automotive Exhibition. But first, it's earning season for
Europe's biggest banks, and hotter than expected inflation in Europe
could put its central banks in a difficult position as
far as plans to lower interest rates higher for longer
may not be the mantra that the markets want to hear,
but for Europe's biggest lenders it could prove lucrative for more.
(13:25):
Let's go to London and bring in Bloomberg Daybreak europe
banker Steven Carroll.
Speaker 2 (13:29):
Tom High interest rates have been the key profit driver
for European banks over the past year. In twenty twenty three,
Elevated borrowing costs saw the combined net income of the
twenty biggest continental European banks exceed one hundred billion euros
for the first time. According to Bloomberg data, three quarters
of the lenders and the group achieved their highest profits ever.
(13:51):
Barkley's Deutche Bank and BMP Paribar are just some of
the names reporting results in the coming days. As markets
are staring down the barrel of an even longer period
of high interest rates, many will be hoping to emulate
last year's success, but that may be difficult as the
tailwinds attached to high rates begin to fade. Annaly survey
by Bloomberg expect the combined net income for eleven of
(14:12):
Europe's biggest banks to fall by six point three percent
this year, but that would still make twenty twenty four
the second most profitable year for more than two decades. Now,
JP Morgan's research team is reassessing it's initially wary outlook
on the sector, admitting their cautious approach was not the
right decision, but uncertainty over the right path is a
cloud on the horizon. Markets are expecting the European Central
(14:35):
Bank to cut rates for the first time in June,
but the trajectory after that looks more uncertain. We've been
discussing this with Klaus Badder, global chief economist at SUSSIA
to general he says that borrowing costs will start to
come down slowly.
Speaker 7 (14:49):
Well the easy B we see three intrastright cuts, which
is a pretty slow pace. So cut in June, a
cut in September, cut in December, which would coincide with
dates to the staff protections that the UCP has, So
it's certainly not it's a gradual cut. And by the way,
all of those reductions we expect them to be by
(15:10):
twenty five basis points, so it's certainly a much slower
place on the way down than on the way up.
And for the Bank of England it's it's fairly similar.
But one big difference between the Bank of England and
the ECP, of course, is that the Bank of England
has rates interest rates much more drastically then the ECB.
And the UK economy is really quite sensitive to interest
(15:34):
rates because of the structure of its mortgage market, where
even though now most mortgage rates are fixed, they're fixed
for a relatively short period of time. In drastic contrast
France to Germany or the Netherlands and other countries in
Europe where you have very long fixed rate deals and
so the sensitivity of interest rates they are small. So
(15:55):
I would say that the Bank of England is likely
and it's over considerable let's say six and nine months,
is likely to reduce interest rates as somewhat faster clip
than the ECB will.
Speaker 2 (16:07):
How worried do ECB policy bakers need to be about
a fact that may not be cutting rights as you
see as this year.
Speaker 7 (16:13):
You know, of course central banks will always tell you
you're not quite independent, and we have our brief, and
our brief is to do with our domestic economy. I
think that the connection between central bank policies first and
foremost comes to the exchange rate. Now, the US already
relatively weak. If you've got an inflation problem, that's not
a good thing. But if inflation in your area is
(16:36):
going too slow, then I think the UCB is going
to have a reasonably high degree of tolerance for a
weaker exchange rate, and therefore will not be particularly fast.
But now, clearly, if the FED was cutting interest rates quickly,
there would be more scope for the UCP to reduce
interest rates as well. I think that's that's clear. But
(16:58):
what I've been a bit surprised about is that the
ECB's portrayal of the inflation picture is not completely in
line the way I see. I have to say.
Speaker 8 (17:10):
So.
Speaker 2 (17:10):
That was Claud's Bader, Global Chief Economist Assaciaity General in London,
speaking to us on Bloomberg Radio. What does all of
this mean for those big European banking names reporting in
this earning season. I've been discussing that with Bloomberg Opinions
Global Banking Columbist Paul J. Davies.
Speaker 9 (17:27):
The really fascinating thing that we saw at four year
earnings that we didn't expect was the southern European banks,
you know, the Santander's UNI credit, especially those of Spain
and Italy really kind of outperformed. They did so much
better than people were expecting. Normally, these banks they have
kind of they have much shorter duration loans on their books,
They react much more quickly to interest rates, and people
(17:48):
were expecting them to sort of fall off quicker, but
in fact it was the other way around. Those with
the more new othern Europeans, some of the French BNP,
German Dutch banks didn't do so well at all. They
kind of missed their earnings and revenue expectations. So it's like,
and I think there's a sense that that's going to continue,
even though we're expecting rate cuts to come. Obviously, I
(18:09):
think the curves have remained relatively steep, and that's really
good for these these Southern European banks. So we'll see
we'll see a bit more of that, probably.
Speaker 2 (18:16):
Because I mean this is of course in the context
of when we're looking ahead to an expected cut from
the ECB in June. Are you suggesting that that's going
to kind of have quite diversion effects across the European
banking sector than when we're kind of listening out to
what banks are going to be telling us better out look.
Speaker 9 (18:32):
Yeah, I mean, when the cuts do start to come in,
then obviously it will affect those Southern European banks quickest
because their loans reset faster. Later on in the year,
we might see their earnings expectations start to drop away,
depending on exactly what cuts materialize and what the outlook
is for how many more cuts are going to come,
And then that's when the more defensive you know, the
(18:53):
northern Europeans with with much longer duration mortgage books and
things like this, who will have more of you know,
the recent sort of higher rates lasting for longer in
their lending. That's when they will look better. But it
obviously depends on why we're cutting rates and how far
we're cutting rates, And if we're moving into something that
looks a lot more recessionary, then that's obviously kind of
(19:14):
bad for banks in general, and we'll be starting to
worry about you know, bad debts and provisions and that
sort of thing creeping up.
Speaker 2 (19:20):
Yeah, because I mean, looking at the stocks bank Bank
index up over ten percent since the start of the
years that high borrowing costs have been you know, helping
to lift those as well is Gulb and Sachs rise.
And describing the future of European banks is better for longer.
Speaker 9 (19:34):
Well, again, it depends on what rate cuts we have
and what the outlook is for why they're happening. I mean,
I mean, if you look at European banks alone, if
you look at the eurostocks fifty the banks in there
so exclude the UK banks, then actually the performance has
been even better. And one of the drivers there has
been you know, some of the bigger banks. BNP has
sold businesses, UNI Credit has had years and years of
(19:55):
fixing its balance sheets, and the benefit of that has
been coming through. And what that meant is there's been
this wave of you know, much larger than normal, much
larger than anything in the last decade or so kind
of share buybacks coming through. So so investors have looked
at sort of, you know, reasonably good earnings, you know,
reasonable hopes for those earnings lasting a little bit longer,
and this wave of buybacks coming through, and that's what
(20:17):
supported a lot of the European banks, but probably even
more than some of the UK banks.
Speaker 2 (20:21):
To be honest, what about investment banking and all of
this as well? What are it sort of hopes that
these banks have in that sector.
Speaker 9 (20:27):
Yeah, well, this is where it's this is where they
are being kind of way more optimistic than is warranted,
I think. I mean, we've just had all of the
big US banks reporting there was a jump in investment
banking fees and a lot of this was driven by
kind of bond issuance and loan issuance by sort of
you know, the debt capital market side of things. The
M and a business is still really really struggling now.
(20:49):
So good debt market business is going to be good
for Deutsche Bank, is going to be good for Barkleys.
That's historically where they've where they've done well. But you know, Barklay's,
especially BNP also to some degree, Deutsche have like they
have like really quite bullish expectations for what investment banking
revenues are going to do over the next few years,
in terms of what they're promising shareholders, the returns they're
(21:10):
going to make, you know, for Barkley's, the capital returns
they're going to fund, and this sort of thing. And
really it's like the investment banking recovery isn't looking that
strong yet. It's looking like it's still going to be
quite a tricky, quite a bumpy year in many ways.
And where it is good is going to be much
more US focused. So I'm kind of very skeptical that
a lot of these Europeans are going to hit the
kind of targets that they're setting.
Speaker 2 (21:31):
So is it the banks that have a greater US
investment bank business then that are more likely to outperform
in this sector?
Speaker 4 (21:37):
Yeah?
Speaker 9 (21:38):
So, I mean, so Barkley is obviously with a lot
more US exposure, perhaps will do better than BNP or
Deutsch on that front. But again it's like the expectations
that they have involved taking market share from somebody else,
and the question is, well, who is that somebody else?
I mean, they're not going to take it from the Americans,
not that easily anyway. You know, obviously creditsueeze blew up
(21:58):
and is gone. You know, any market shared we had
from then has probably been already distributed. So then the
question is, you know, where do you get it from?
I mean, there's an argument that there are some smaller
European banks who are going to find it increasingly difficult
to maintain those investment banking services in any sort of
you know, cost effective or competitive fashion. But again, they
don't account for a lot of the business, so there's
(22:20):
not a lot of share to be taken from them,
even if they do give up and go away. So
it's really difficult to see, you know, how these big
Europeans really kind of do anything better than what the
market does.
Speaker 2 (22:32):
We've been discussing the differing outlooks for interest rates between
the US and Europe after the recent comments from Jerome
Powe signaling a later start to rate cuts in the US.
Does the currency diversions that could provoke, is that going
to have an impact on banks outlooks?
Speaker 9 (22:49):
I mean again, certainly. I mean I think it's like,
you know, for the US, we're almost certainly into a
world of you know, higher rates for longer, more upward
volatility in both rates and inflation rather and kind of
downward volatility, i e. You know, we're going to continue
to see if rates do move or if there is
questions over the path of rates, it's going to be
flat to up rather than suddenly down. In Europe, it's
(23:11):
a very different world. It's you know, it's lower growth generally,
it's lower productivity. There's like there's more kind of trade
and supply chain issues for Europe than there are for
the US. And there are some people and I kind
of hadn't decided quite whether I agree with them yet
or not, but there are some people who really think
that actually the volatility in Europe is going to be downwards.
It's going to be inflation undershooting expectations more quickly than
(23:32):
we might think, rates having to drop to below sort
of two percent again more quickly than we might think
as well, and that is bad for trading activity. You know,
we could be entering a stage where actually Europe and
the US start to diverge quite a bit, and again
that will favor the big US banks over the big
European banks when it comes to investment, banking and trading too.
Speaker 2 (23:52):
Quite about jobs and pay in all of this as well,
You've written extensively about ubs after the Credits Suite takeover.
We've reporting on the most recent round of job cuts
expected at ubs as well. What is the outlook for
those working in these banks in terms of both the
security of their jobs but also how much they should
be expecting in bonuses.
Speaker 9 (24:12):
Well, again, I mean, it depends a lot on what
happens with the economy. I think in the US it's
it's obviously looking better apart from I mean, if you're
an M and a banker, you know, you're still not
getting the kind of activity that you that will see
you earning you know, fabulous money. You know, the boutiques
who also pay their bankers a greater share of the
revenue they make so they don't have all of the
rest of the costs are also kind of taking away
(24:33):
bits of business. So we're talking me like, you know,
the ever cause, the pgats, the Lazards, you know, those
sorts of banks, those sorts of investment banks. It's a
much trickier world. But again it's sort of you know,
to the extent that there looks like there could be
a recovery, it's going to be more US based than
Europe based. So so those people will people focus on
the US will earn more. But I mean, I guess
(24:53):
and we've got a big, a big take about this
on Bloomberg about you know, the private equity industry and
the lack of activity there. This is a huge, huge
business for investment banking. They you know, historically supply up
to thirty percent of all investment banking fees across the
board in terms of M and A advice, their issuance
equitations and so on and so forth. And until that
industry can kind of find its mojo again, can find
(25:15):
reasons and value in doing deals, then investment banking is
going to disappoint. And so you know, the job requirements
and the bonus requirements for a lot of people may
well disappoint us well.
Speaker 2 (25:26):
Thanks to Bloomberg opinions, Paul J. Davies, we will bring
you those bank results on Bloomberg Radio as they're released
in the coming days. I'm Stephen Carroll in London. You
can catch us every weekday morning here for Bloomberg Daybreak Europe,
beginning at six am in London and one am on
Wall Streets.
Speaker 1 (25:42):
Tom, thank you, Steven, And coming up on Bloomberg day
Break weekend, I'll look at the twenty twenty four Beijing
International Automotive Exhibition. I'm Tom Busby, and this is Bloomberg.
(26:03):
I'm Tom Buzzby with your global look ahead at the
top stories for investors in the coming week. This week
is the Auto Show China, the twenty twenty four Beijing
International Automotive Exhibition. Bloomberg Daybreak Asia host Brian Curtis and
Doug Krisner take a look at China's electric vehicle market
and how international automakers are reacting to China's dominance in
(26:23):
that space.
Speaker 3 (26:24):
Tom, we look forward to Auto Show China, the twenty
twenty four Beijing International Automotive Exhibition. Legacy European automakers will
be revving up a last ditch offensive to win back
some of the EV market, and the Chinese brands will
be showing off their latest models.
Speaker 10 (26:41):
For sure, BMW is showcasing and unprecedented fifteen models. A
slew of BMW executives will be attending. Mercedes CEO is
attending as well, and Volkswagen will also bring a number
of its highest ranking executives. This show comes at a
time of heightened tensions between bay Jing and the West
over low cost manufacturing in China, and.
Speaker 3 (27:03):
We thought the Auto Show as a result would be
a good prism through which to look at some of
these issues. The still growing domestic auto market in China,
but also the global auto market EU tensions with China
over cheap Chinese autos US China issues as well some
of the travails that Tesla is facing, and what happens
(27:25):
if and when Chinese manufacturers set up shop in Mexico
as they eye the big US market joining us. In
our studios in Hong Kong, our Bloomberg Transport reporters Linda
lu and Danny Leeb and First German Chancellor Olaf Schultz
has been in China over the past week and has
drawn some attention to this issue that Doug mentioned, over
(27:45):
capacity of evs in China flooding European markets. We asked
Bloomberg correspondent Rebecca Chong Wilkins to characterize the Chinese response
to such criticism.
Speaker 11 (27:56):
EV is a part of this whole channel and plan
and to replace the old drivers of growth. If we
do see this kind of friction, this trade friction, that
does have the potential to significantly impact the ability for
these industry to continue developing, because exporting is a big
part of the plan.
Speaker 3 (28:14):
That's Rebecca Cheong Wilkins. So, Danny, this show, which you'll
be a ten thing and Linda will as well, is
about cars. Will it be about the cars or the politics?
Speaker 8 (28:25):
It will be about making sure that Germans or Germany's
auto production is not harmed by the rise of Chinese
evs ultimately as much as it is about the cars
automotive show on display. But there is still a sense
of cheer politics and economy as well, given how much
(28:46):
the automotive market really contributes to the German economy. And
you know, you've seen these successful brands over many, many decades.
You see them in China today. The fact that BM
Double Mercedes now they count they count China as being
their biggest markets in some shape or form, whether beyond
(29:07):
revenue or on sales. So it's very important. And when
you see the rise of Chinese evs in particular, what
you're seeing is them having to reposition themselves against the
rise of Chinese evs. But we've not necessarily necessarily seen
an impact yet of on revenues or on sales in particular,
(29:28):
but is bracing themselves for what is an interesting and
fascinating long term battle for supremacy and relevance in not
just China, but what will be the global market.
Speaker 10 (29:40):
When I think at the early days of the auto
industry in China, I think joint venture, both American and
European partners establishing these jvs, And clearly I think we
can agree that Chinese firms did benefit from being exposed
to that technology on the production side. You know, we've
heard about past disagreements when it comes to things like
intellectual proper. I'm curious, Linda, where is China now when
(30:03):
it comes to technology, particularly as it relates to EV's.
How sophisticated is that technology currently?
Speaker 12 (30:11):
As you mentioned, in the early days of China's automotive manufacturing,
they've relied on these foreign joint ventures a lot, where
international brands like Ford and GM went into the China
market and set up these production facilities together with the
Chinese partners. And really what's really interesting is that now
(30:33):
that China has really grown its domestic electric vehicle industry
and along with that, coming with the battery supply chain,
it's kind of leapfrog. Now you're seeing the foreign automakers
having to turn to China to try to get some
of that technological edge. We've seen Volkswagen tie up with Xpong,
which is an up and coming EV startup. We've also
(30:56):
seen Stilantis forming partnership with an EV make her called
leap Motor. So it's really interesting to see how the
tide has turned.
Speaker 3 (31:05):
So you've got Neo, you've got le Auto, you've got
x pun BYD the biggest name I suppose, and now
a new entrant, shall Me. I'm just curious, will we
see much at this auto show in the coming week
from shall Me?
Speaker 12 (31:18):
Yes, Shallmi will be exhibiting at the auto show. What's
really interesting about shell Me is they've already had a
major launch a couple of weeks ago, and after that launched,
the reception has been better than expected. Sales kind of
went through the roof, so I think at the Auto Show.
It would be kind of another chance for shell Me
(31:39):
to display its first EV, the SIU seven.
Speaker 10 (31:42):
Linda just mentioned the auto supply chain Danny. When it
comes to very critical technology lithium ion batteries, I'm thinking
of c at L in particular. We just heard from
the company recently with its earnings report to what extent
is China dominate the battery space? Is this a slam dunk?
I mean, nobody can compete against China right now when
it comes to EV batteries.
Speaker 8 (32:03):
I think China's always had that head start in the
battery space and doing it in a way in scale
and identifying what it thought would be the future technologies.
When you do look at the numbers, you do see
China in particular having a grip on many aspects of
the battery supply chain. And that's no coincidence thanks to
(32:26):
this response to what they thought was the future in
automotive being evs. When you see some like c ATL
you performing so strongly, and it seems to whether any
kind of market conditions, clearly there is a cause can
concern there, because when you want to have a level
(32:46):
playing field, when you want to have more players, more diversity,
and yet there is still more concentration. I think there's
a big question mark over how governments respond to maybe
even support their own kind of national champions in the
battery space.
Speaker 10 (33:00):
Linda, as you know, US Treasury Secretary Janet Yellen was
recently in China and one of the things that she
criticized the government for was the subsidy the role that
subsidies play in supporting the industry. What do we know
about how the government has supported the EV manufacturers and
whether or not that has been, to Yellen's point, maybe
(33:22):
a little excessive.
Speaker 12 (33:24):
Yes, that's right. When Jennet Yellen and China, the word
that kept coming up was over capacity. And you know
how the Chinese government subsidies have led to the situation.
In the early days of the electric vehicle industry in China,
the government has poured tens of billions of dollars into
growing and nurturing these companies. Now you've got success stories
(33:48):
like byd CTL that have come from this government support.
But in the past few years that support has been
phased out as China enters kind of its next stage
of EV adoption, which is more market driven.
Speaker 2 (34:04):
Now.
Speaker 12 (34:04):
I think critics may point to that as unfair competition
that these Chinese companies survived, so probably mostly due to
these subsidies. But on the other hand, you see US
and the EU also now investing into their domestic industry.
So it's kind of an interesting argument depending on which
(34:26):
way you spin it.
Speaker 3 (34:28):
And we haven't talked too much about BYD Lend, but BYD.
You know, we made a lot of the fact that
they were getting some mass market cars really out across
the country, but now we've just seen them double down
on their expansion into luxury SUVs and I'm wondering what
the impact that that might be and the competition that
(34:49):
might provide to Tesla.
Speaker 12 (34:52):
Yeah, last night BYD just launched more models from the
upscale function by brand, and they're doing a lot more
in the luxury space. And from the analysts that we've
spoken to, they think these brands are probably not going
to move a huge amount of volume, but what they
do bring to the table for BYD is prestige, and
(35:15):
having that prestige will just lift BYD's brand up and
help it to compete more in the kind of arena
where Tesla is at. You know, Tesla has super passionate
fans and they just really love the Tesla brand, and
BYD is trying to head that way.
Speaker 10 (35:31):
We've heard of the potential threat of tariffs, not only
from the US, but certainly from the European side too.
Workers very much, I think, for both parties are top
of mind when government officials try to defend their turf
and keeping people employed. Danny, take me into the shop floor.
(35:51):
If you look at the way some of these manufacturing
facilities are structured in China when you get into EV manufacturing,
are we talking about a great deal of workers or
as a lot of this already automated that we're using
a heavy amount of robotics.
Speaker 1 (36:07):
Is that right?
Speaker 8 (36:08):
There is a greater reliance on automation and robotics. And
you can see the way in which the likes of
BYD have some of the most efficient supply chains. And
it's you know, you're taking from the copybook of the
likes of Tesla, who's redefined the way in which EV's
cars are produced fundamentally. And you can see and it's
(36:31):
astonishing kind of perspective when you look at you go
on to these kind of production lines and you see
very few workers. You know, you go for up to
a mile or more and you'd see handfuls of workers
and all they're doing is fundamentally managing the machines, making
sure that production is smooth, it can run automatedly and
(36:53):
they'll just iron out any kinks. And so you know,
when you can get to that kind of level of efficiency,
it is, you know, clearly underscores your ability to be
a successful kind of company. And of course, when you
see in someone like Europe or even in the US
where working in the automotive industry is highly unionized, clearly
(37:15):
people will be concerned about their jobs, and how you
pivot away from that into something more automated is very difficult.
Outside of China.
Speaker 3 (37:24):
I mentioned in the intro about Chinese manufacturers looking to
set up shop in Mexico. I just ask you, in
a very short question, perhaps a short answer as well,
do you see Chinese manufacturers manufacturing in Mexico before the
end of this decade? Yes, all right, we'll finish on
that note. And that will definitely queue up a lot
(37:44):
of tensions with the United States. If you think that
those tensions are high with China and the EU, wait
till you see a BYD manufacturing cars in Mexico for
export to the United States. Danny, thanks so much for
joining us, and Linda Lewis as well. Transport reporters. Here
at Bloomberg, I'm Brian Curtis in Hong Kong along with
(38:04):
Doug Krisner. You can catch us every weekday for Bloomberg
day Break Asia, beginning at eight am in Hong Kong
and eight pm on Wall Street.
Speaker 1 (38:12):
Tom right, thanks to Brian, and thank you to 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. 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,
and straight ahead on the program, a preview of core
USPCE prices and GDP, also earnings from the US's biggest
(00:25):
ev maker. I'm Tom Busby in New York.
Speaker 2 (00:27):
I'm Stephen Carol in London, where we're discussing what's in
store for Europe's biggest banks as earning season gets underway.
Speaker 3 (00:34):
I'm Brian Curtis in Hong Kong. We look forward to
what's referred to as Auto Show China in the coming week.
Is it about the cars or the politics?
Speaker 4 (00:43):
That's all straight ahead on Bloomberg day Break Weekend on
Bloomberg Eleve Them three 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 1 (01:08):
Good day to you. I'm Tom Busby, and we begin
today's program with a look at key economic data here
in the US. On Thursday, we get core PCE for
March GDP data for the first quarter of this year.
What will this mean for the Fed's monetary policy going forward?
Well for more, we're joined by Stuart Paul Us economists
with Bloomberg Economics. Stuart, the PCE Price Index the preferred
(01:32):
measure of inflation for the FED. What do you expect
to see for March.
Speaker 5 (01:36):
We're expecting to see the headline PCE Price Index show
about zero point three percent growth month on month. The core,
which is more illustrative of what's going on in the
actual economy, strips out energy, strips out food. We're expecting
to see the core rise about the same zero point
three percent month on month, and that's going to allow
just a very slight moderation in the annual measure of
(01:59):
core pc inflation. We're expecting about two point seven percent
annual PCEE inflation. A big part of that inflation pressure
is coming from core services in particular, and if we
drill down and look underneath the hood of what's going on,
we see insurance products are really helping to drive that
inflationary pressure.
Speaker 1 (02:19):
Auto insurance, homeowners insurance.
Speaker 5 (02:21):
Everything that's right, So auto insurance, home insurance, and we're
seeing those prices rise in large part because of rising
prices that we saw for autos and homes post pandemic.
So when the replacement cost of autos and when construction
costs rise for homes, for example, so to do the
insurance premiums that people have to pay. So this is
(02:42):
sort of a residual effects from the inflation that we've
already seen in the past. But that's not the full story.
The fact that people can afford to pay those higher
premiums is again just downstreaming the fact that the economy
continues chugging long and if people are doing relatively well,
and we're going to see that exact same thing in
the person income data that we get at the same time,
we're going to see March personal income growth about zero
(03:04):
point six percent. Again, it's just too hot for the Fed.
It's too hot for the FED to have confidence that
inflation pressures are truly waning.
Speaker 1 (03:13):
Well, we've seen wage growth, and we've seen the labor
market to an upside surprise almost every month, well certainly
every month this year. How could it not, that's right, Yeah,
the labor market has been resilient. We saw it just
in the month of March, three hundred and three thousand
jobs added. We saw an increase in the number of
hours worked on average, We saw wages rising on an
hourly basis, and to our best estimate, employee compensation, so
(03:38):
that's both salaries and other additional benefits. Our best estimate
is that employee compensation rose about zero point eight percent
during the month. That is a hot labor market that
is really helping tabooy spending, and that PCE spending that
we're going to see is probably going to be on
the order about zero point seven percent. Retail sales was hot, and.
Speaker 5 (03:58):
We're expecting to see the same thing in March PCE spending.
Speaker 1 (04:01):
Let's talk about then, the other reading that we'll get
on Thursday, and that is economic growth. What do you
expect to see? This is an initial reading for the
first quarter of this year.
Speaker 5 (04:10):
We're very likely to see robust growth to start the air.
I'm estimating two and a half percent real GDP growth
that's on an annualized basis in the first quarter. That's
really supported again by consumer spending, which is creating that
inflationary impulse but about two point nine percent annualized consumer
spending growth on a real basis in the first quarter
(04:30):
is very impressive. Fixed investment a bit weak. Investment is
really coming from residential investment because of a bit of
a housing shortage because people are staying in their homes
they locked in low rates. So we have a little
bit of a housing shortage with very low inventories and
a lot of investment in intellectual property. Right, this is
all downstream of the AI boom and people really looking
(04:52):
to improve the software and intellectual property that they have
so that they could take advantage of that.
Speaker 1 (04:59):
Let's go back to housing and the challenges not just
home buying, but also rents surprisingly a little higher. I mean,
how is that affecting things for the overall GDP.
Speaker 5 (05:12):
So the fact that rent prices are up is not
directly pushing GDP one way or another, but the fact
that rents are up is encouraging additional investment in housing. Right,
there's clearly a shortage of a housing stock. People who
are homeowners are not listing their homes because the average
rate being paid on mortgages, not new originations, but existing
(05:35):
mortgages is still below four percent. Right, So the fact
that homes are not turning over encourages more construction of
rental units, which is providing growth in the form of
residential fixed investment, and so we are getting some of
those tailwinds again. You know, rent prices are a signal.
There are signal to builders that we need more construction,
(05:59):
and I think that that's going to show up a
bit in residential fixed investment in the Q one GDP numbers.
Speaker 1 (06:04):
Well, let's hope. So you have a rather upbeat out
look for the GDP PCE leveling off a little bit
two point seven percent on an annualized basis, which is
it's not two percent, but it's getting there. Add it
all up. The FEDS coming up a meeting later this month,
the thirtieth and May. First, what do you think is
going through their heads? What is the FOMC thinking with
all of this?
Speaker 5 (06:24):
I think here really the three items that the FED
is looking at that they need to synthesize into a
monetary policy view. Growth has remained robust and there is
a bit of momentum there. The labor market has been
tight and that's created upward pressure owned wages and inflation, yes,
ticking down a little bit. Certainly an out of the
two percent target, and it's that disinflation progress is stalling out.
(06:48):
So you have robust growth, tight labor market, and stalling
disinflation progress. That's going to allow the Fed to keep
their foot on the brakes a little bit longer. I
think that as we get to June, we might end
up seeing a revision to the famous FOMC dot plot,
which shows monetary policy makers forecast for where rates are
going to go. Right now, they're showing seventy five bases
(07:08):
points of cuts in this year. In twenty twenty four,
I think that the risk is really toward a revision
where even policymakers have to admit they're not going to
be able to cut rates as much as they once thought.
Speaker 1 (07:18):
Yeah, maybe not seventy five, but we may see something
by the end of this year.
Speaker 5 (07:22):
Fifty twenty five. It's possible. But then we're getting close
to the end of the year and we're getting close
to election season, and it gets really difficult to navigate
both political and economic conditions.
Speaker 1 (07:31):
Oh boy, a lot to look forward to. Well that
March pce Q one gdp out this coming Thursday in
our thanks to Stuart paul Us economist with Bloomberg Economics. Well,
we turn now to the first quarter earning season with
a ton of big reports this week. One company though
getting a lot of attention, the world's most valuable electric automaker, Tesla,
(07:51):
posting its latest results on Tuesday. And for more on
what we can expect and all the challenges that Tesla
is facing, we're joined by Steve Mann, Bloomberg and Intelligence,
Global Autos and Industrials Research Analyst. Now, Steve, let's start
with what you expect to see with the results, and
then we'll get into everything else with Tesla's So what
do you expect to see on Tuesday?
Speaker 6 (08:12):
Oh, it's not going to be pretty for Tesla. They've
announced a cut ten percent of their workforce, and you
know they announced it right beginning of the second quarterer,
so it may be signaling that things are a lot
worse than the street anticipated, maybe a lot worse than
what they anticipated. So, you know, first quarter earning, it's
(08:32):
not going to be pretty. You know, we're thinking it's,
you know, based on a scenario analysis, likely a miss
versus consensus.
Speaker 1 (08:39):
And we've seen a few misses from a Tesla lately.
We saw the deliveries missed. You know, there's a laundry
list of things we could talk about, and we'll also
talk about some of the good things. So well, let's
get more on those job cuts. Ten percent of its workforce,
fourteen thousand jobs worldwide. Like you said, not a good sign,
not a sign of confidence for employees or for investors,
(09:02):
is it?
Speaker 6 (09:03):
No? No? And and interestingly, they actually raise prices in
the US and they cut incentives in China. So you know,
I think journey earnings call, it's going to be a
huge earnings call for Tesla, and hopefully they're prepared for that.
They're going to have to set you know, real expectations
for the investors and how to move forward because you know,
(09:26):
they cut prices earlier this month. You know, the fear
is that they're going to reverse it. If they do,
you know, we're going to probably see more downgrades on
the stock, earnings downgrade and ratings down grade by the street.
Speaker 1 (09:39):
And that's about forty percent just a year to date
right on that stock.
Speaker 6 (09:43):
Yeah, forty percent. Now, they're not alone at this This
is an industry wide issue, particularly in the US, more
so in the US, but we're seeing it globally as well.
I think the early adopters for evs have pretty much
tapped out.
Speaker 4 (09:58):
Right.
Speaker 6 (09:59):
A lot of the evs today that are offered today,
especially in the West, in Europe and as well in
the US, they're well above fifty thousand dollars per vehicle.
Above fifty thousand, you're pretty much at the premium and
luxury segment, So the market for that segment is relatively small.
What we're also looking for Tesla to talk about in
(10:21):
their earnings it's their next model. It's dubbed the Model two.
It's a compact subcompact vehicle supposedly under thirty thousand dollars.
It's a critical product, not just for Tesla but for
the market because, like I said earlier, the luxury segment
is pretty much tapped out, so we need to bring
(10:43):
in new buyers for battery electric vehicles and more affordable
evs is really what the market needs right now.
Speaker 4 (10:50):
Now.
Speaker 1 (10:50):
There were reports that that Model too production had been delayed.
Tesla denied those reports. But where is it? They have
said the robotaxis comme August eighth, right, But I think,
like you said, most people want to see a more
affordable car.
Speaker 6 (11:05):
Yeah, that Model two is critical for tests up. It's interesting.
I'm still optimistic. I think, you know, they's already spent
a lot of money, made a lot of investment in
developing that model too, you know, and they were scheduled
to actually launch that at the end of twenty twenty five.
You know, it's not that far away, given that it
(11:28):
takes multi years to develop a new car, So for
them to scrap it pretty much almost the last minute,
it's kind of unheard of. So now you no elon
must it come out on Twitter or on x to
say that the reporting on cancellational Model two is false.
I hope that's that's the case. But in the fourth
(11:52):
quarter announcement earnings announcement, he did mention that this model
too will be launched at the end of time twenty
twenty five, and that the production actually will start in
the US and then expand into Mexico. Hopefully it's really
not a cancellation of the model to the subcompact compact vehicle.
(12:15):
Maybe there's some hurdles that they need to get through
in building that plant in Mexico, and that's probably hopefully,
that's probably what it is.
Speaker 1 (12:23):
Well, a lot to look forward to Tesla's first quarter
results coming out after the close this Tuesday, and our
thanks to Steve Man, Bloomberg Intelligence, Global Autos and Industrials
research analyst. Coming up on Bloomberg day Break weekend, we'll
look at what's in store for Europe's biggest banks as
earning season gets underway. There, I'm Tom Busby, and this
(12:43):
is Bloomberg. 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. Up later
in our program a look at the twenty twenty four
(13:05):
Beijing International Automotive Exhibition. But first, it's earning season for
Europe's biggest banks, and hotter than expected inflation in Europe
could put its central banks in a difficult position as
far as plans to lower interest rates higher for longer
may not be the mantra that the markets want to hear,
but for Europe's biggest lenders it could prove lucrative for more.
(13:25):
Let's go to London and bring in Bloomberg Daybreak europe
banker Steven Carroll.
Speaker 2 (13:29):
Tom High interest rates have been the key profit driver
for European banks over the past year. In twenty twenty three,
Elevated borrowing costs saw the combined net income of the
twenty biggest continental European banks exceed one hundred billion euros
for the first time. According to Bloomberg data, three quarters
of the lenders and the group achieved their highest profits ever.
(13:51):
Barkley's Deutche Bank and BMP Paribar are just some of
the names reporting results in the coming days. As markets
are staring down the barrel of an even longer period
of high interest rates, many will be hoping to emulate
last year's success, but that may be difficult as the
tailwinds attached to high rates begin to fade. Annaly survey
by Bloomberg expect the combined net income for eleven of
(14:12):
Europe's biggest banks to fall by six point three percent
this year, but that would still make twenty twenty four
the second most profitable year for more than two decades. Now,
JP Morgan's research team is reassessing it's initially wary outlook
on the sector, admitting their cautious approach was not the
right decision, but uncertainty over the right path is a
cloud on the horizon. Markets are expecting the European Central
(14:35):
Bank to cut rates for the first time in June,
but the trajectory after that looks more uncertain. We've been
discussing this with Klaus Badder, global chief economist at SUSSIA
to general he says that borrowing costs will start to
come down slowly.
Speaker 7 (14:49):
Well the easy B we see three intrastright cuts, which
is a pretty slow pace. So cut in June, a
cut in September, cut in December, which would coincide with
dates to the staff protections that the UCP has, So
it's certainly not it's a gradual cut. And by the way,
all of those reductions we expect them to be by
(15:10):
twenty five basis points, so it's certainly a much slower
place on the way down than on the way up.
And for the Bank of England it's it's fairly similar.
But one big difference between the Bank of England and
the ECP, of course, is that the Bank of England
has rates interest rates much more drastically then the ECB.
And the UK economy is really quite sensitive to interest
(15:34):
rates because of the structure of its mortgage market, where
even though now most mortgage rates are fixed, they're fixed
for a relatively short period of time. In drastic contrast
France to Germany or the Netherlands and other countries in
Europe where you have very long fixed rate deals and
so the sensitivity of interest rates they are small. So
(15:55):
I would say that the Bank of England is likely
and it's over considerable let's say six and nine months,
is likely to reduce interest rates as somewhat faster clip
than the ECB will.
Speaker 2 (16:07):
How worried do ECB policy bakers need to be about
a fact that may not be cutting rights as you
see as this year.
Speaker 7 (16:13):
You know, of course central banks will always tell you
you're not quite independent, and we have our brief, and
our brief is to do with our domestic economy. I
think that the connection between central bank policies first and
foremost comes to the exchange rate. Now, the US already
relatively weak. If you've got an inflation problem, that's not
a good thing. But if inflation in your area is
(16:36):
going too slow, then I think the UCB is going
to have a reasonably high degree of tolerance for a
weaker exchange rate, and therefore will not be particularly fast.
But now, clearly, if the FED was cutting interest rates quickly,
there would be more scope for the UCP to reduce
interest rates as well. I think that's that's clear. But
(16:58):
what I've been a bit surprised about is that the
ECB's portrayal of the inflation picture is not completely in
line the way I see. I have to say.
Speaker 8 (17:10):
So.
Speaker 2 (17:10):
That was Claud's Bader, Global Chief Economist Assaciaity General in London,
speaking to us on Bloomberg Radio. What does all of
this mean for those big European banking names reporting in
this earning season. I've been discussing that with Bloomberg Opinions
Global Banking Columbist Paul J. Davies.
Speaker 9 (17:27):
The really fascinating thing that we saw at four year
earnings that we didn't expect was the southern European banks,
you know, the Santander's UNI credit, especially those of Spain
and Italy really kind of outperformed. They did so much
better than people were expecting. Normally, these banks they have
kind of they have much shorter duration loans on their books,
They react much more quickly to interest rates, and people
(17:48):
were expecting them to sort of fall off quicker, but
in fact it was the other way around. Those with
the more new othern Europeans, some of the French BNP,
German Dutch banks didn't do so well at all. They
kind of missed their earnings and revenue expectations. So it's like,
and I think there's a sense that that's going to continue,
even though we're expecting rate cuts to come. Obviously, I
(18:09):
think the curves have remained relatively steep, and that's really
good for these these Southern European banks. So we'll see
we'll see a bit more of that, probably.
Speaker 2 (18:16):
Because I mean this is of course in the context
of when we're looking ahead to an expected cut from
the ECB in June. Are you suggesting that that's going
to kind of have quite diversion effects across the European
banking sector than when we're kind of listening out to
what banks are going to be telling us better out look.
Speaker 9 (18:32):
Yeah, I mean, when the cuts do start to come in,
then obviously it will affect those Southern European banks quickest
because their loans reset faster. Later on in the year,
we might see their earnings expectations start to drop away,
depending on exactly what cuts materialize and what the outlook
is for how many more cuts are going to come,
And then that's when the more defensive you know, the
(18:53):
northern Europeans with with much longer duration mortgage books and
things like this, who will have more of you know,
the recent sort of higher rates lasting for longer in
their lending. That's when they will look better. But it
obviously depends on why we're cutting rates and how far
we're cutting rates, And if we're moving into something that
looks a lot more recessionary, then that's obviously kind of
(19:14):
bad for banks in general, and we'll be starting to
worry about you know, bad debts and provisions and that
sort of thing creeping up.
Speaker 2 (19:20):
Yeah, because I mean, looking at the stocks bank Bank
index up over ten percent since the start of the
years that high borrowing costs have been you know, helping
to lift those as well is Gulb and Sachs rise.
And describing the future of European banks is better for longer.
Speaker 9 (19:34):
Well, again, it depends on what rate cuts we have
and what the outlook is for why they're happening. I mean,
I mean, if you look at European banks alone, if
you look at the eurostocks fifty the banks in there
so exclude the UK banks, then actually the performance has
been even better. And one of the drivers there has
been you know, some of the bigger banks. BNP has
sold businesses, UNI Credit has had years and years of
(19:55):
fixing its balance sheets, and the benefit of that has
been coming through. And what that meant is there's been
this wave of you know, much larger than normal, much
larger than anything in the last decade or so kind
of share buybacks coming through. So so investors have looked
at sort of, you know, reasonably good earnings, you know,
reasonable hopes for those earnings lasting a little bit longer,
and this wave of buybacks coming through, and that's what
(20:17):
supported a lot of the European banks, but probably even
more than some of the UK banks.
Speaker 2 (20:21):
To be honest, what about investment banking and all of
this as well? What are it sort of hopes that
these banks have in that sector.
Speaker 9 (20:27):
Yeah, well, this is where it's this is where they
are being kind of way more optimistic than is warranted,
I think. I mean, we've just had all of the
big US banks reporting there was a jump in investment
banking fees and a lot of this was driven by
kind of bond issuance and loan issuance by sort of
you know, the debt capital market side of things. The
M and a business is still really really struggling now.
(20:49):
So good debt market business is going to be good
for Deutsche Bank, is going to be good for Barkleys.
That's historically where they've where they've done well. But you know, Barklay's,
especially BNP also to some degree, Deutsche have like they
have like really quite bullish expectations for what investment banking
revenues are going to do over the next few years,
in terms of what they're promising shareholders, the returns they're
(21:10):
going to make, you know, for Barkley's, the capital returns
they're going to fund, and this sort of thing. And
really it's like the investment banking recovery isn't looking that
strong yet. It's looking like it's still going to be
quite a tricky, quite a bumpy year in many ways.
And where it is good is going to be much
more US focused. So I'm kind of very skeptical that
a lot of these Europeans are going to hit the
kind of targets that they're setting.
Speaker 2 (21:31):
So is it the banks that have a greater US
investment bank business then that are more likely to outperform
in this sector?
Speaker 4 (21:37):
Yeah?
Speaker 9 (21:38):
So, I mean, so Barkley is obviously with a lot
more US exposure, perhaps will do better than BNP or
Deutsch on that front. But again it's like the expectations
that they have involved taking market share from somebody else,
and the question is, well, who is that somebody else?
I mean, they're not going to take it from the Americans,
not that easily anyway. You know, obviously creditsueeze blew up
(21:58):
and is gone. You know, any market shared we had
from then has probably been already distributed. So then the
question is, you know, where do you get it from?
I mean, there's an argument that there are some smaller
European banks who are going to find it increasingly difficult
to maintain those investment banking services in any sort of
you know, cost effective or competitive fashion. But again, they
don't account for a lot of the business, so there's
(22:20):
not a lot of share to be taken from them,
even if they do give up and go away. So
it's really difficult to see, you know, how these big
Europeans really kind of do anything better than what the
market does.
Speaker 2 (22:32):
We've been discussing the differing outlooks for interest rates between
the US and Europe after the recent comments from Jerome
Powe signaling a later start to rate cuts in the US.
Does the currency diversions that could provoke, is that going
to have an impact on banks outlooks?
Speaker 9 (22:49):
I mean again, certainly. I mean I think it's like,
you know, for the US, we're almost certainly into a
world of you know, higher rates for longer, more upward
volatility in both rates and inflation rather and kind of
downward volatility, i e. You know, we're going to continue
to see if rates do move or if there is
questions over the path of rates, it's going to be
flat to up rather than suddenly down. In Europe, it's
(23:11):
a very different world. It's you know, it's lower growth generally,
it's lower productivity. There's like there's more kind of trade
and supply chain issues for Europe than there are for
the US. And there are some people and I kind
of hadn't decided quite whether I agree with them yet
or not, but there are some people who really think
that actually the volatility in Europe is going to be downwards.
It's going to be inflation undershooting expectations more quickly than
(23:32):
we might think, rates having to drop to below sort
of two percent again more quickly than we might think
as well, and that is bad for trading activity. You know,
we could be entering a stage where actually Europe and
the US start to diverge quite a bit, and again
that will favor the big US banks over the big
European banks when it comes to investment, banking and trading too.
Speaker 2 (23:52):
Quite about jobs and pay in all of this as well,
You've written extensively about ubs after the Credits Suite takeover.
We've reporting on the most recent round of job cuts
expected at ubs as well. What is the outlook for
those working in these banks in terms of both the
security of their jobs but also how much they should
be expecting in bonuses.
Speaker 9 (24:12):
Well, again, I mean, it depends a lot on what
happens with the economy. I think in the US it's
it's obviously looking better apart from I mean, if you're
an M and a banker, you know, you're still not
getting the kind of activity that you that will see
you earning you know, fabulous money. You know, the boutiques
who also pay their bankers a greater share of the
revenue they make so they don't have all of the
rest of the costs are also kind of taking away
(24:33):
bits of business. So we're talking me like, you know,
the ever cause, the pgats, the Lazards, you know, those
sorts of banks, those sorts of investment banks. It's a
much trickier world. But again it's sort of you know,
to the extent that there looks like there could be
a recovery, it's going to be more US based than
Europe based. So so those people will people focus on
the US will earn more. But I mean, I guess
(24:53):
and we've got a big, a big take about this
on Bloomberg about you know, the private equity industry and
the lack of activity there. This is a huge, huge
business for investment banking. They you know, historically supply up
to thirty percent of all investment banking fees across the
board in terms of M and A advice, their issuance
equitations and so on and so forth. And until that
industry can kind of find its mojo again, can find
(25:15):
reasons and value in doing deals, then investment banking is
going to disappoint. And so you know, the job requirements
and the bonus requirements for a lot of people may
well disappoint us well.
Speaker 2 (25:26):
Thanks to Bloomberg opinions, Paul J. Davies, we will bring
you those bank results on Bloomberg Radio as they're released
in the coming days. I'm Stephen Carroll in London. You
can catch us every weekday morning here for Bloomberg Daybreak Europe,
beginning at six am in London and one am on
Wall Streets.
Speaker 1 (25:42):
Tom, thank you, Steven, And coming up on Bloomberg day
Break weekend, I'll look at the twenty twenty four Beijing
International Automotive Exhibition. I'm Tom Busby, and this is Bloomberg.
(26:03):
I'm Tom Buzzby with your global look ahead at the
top stories for investors in the coming week. This week
is the Auto Show China, the twenty twenty four Beijing
International Automotive Exhibition. Bloomberg Daybreak Asia host Brian Curtis and
Doug Krisner take a look at China's electric vehicle market
and how international automakers are reacting to China's dominance in
(26:23):
that space.
Speaker 3 (26:24):
Tom, we look forward to Auto Show China, the twenty
twenty four Beijing International Automotive Exhibition. Legacy European automakers will
be revving up a last ditch offensive to win back
some of the EV market, and the Chinese brands will
be showing off their latest models.
Speaker 10 (26:41):
For sure, BMW is showcasing and unprecedented fifteen models. A
slew of BMW executives will be attending. Mercedes CEO is
attending as well, and Volkswagen will also bring a number
of its highest ranking executives. This show comes at a
time of heightened tensions between bay Jing and the West
over low cost manufacturing in China, and.
Speaker 3 (27:03):
We thought the Auto Show as a result would be
a good prism through which to look at some of
these issues. The still growing domestic auto market in China,
but also the global auto market EU tensions with China
over cheap Chinese autos US China issues as well some
of the travails that Tesla is facing, and what happens
(27:25):
if and when Chinese manufacturers set up shop in Mexico
as they eye the big US market joining us. In
our studios in Hong Kong, our Bloomberg Transport reporters Linda
lu and Danny Leeb and First German Chancellor Olaf Schultz
has been in China over the past week and has
drawn some attention to this issue that Doug mentioned, over
(27:45):
capacity of evs in China flooding European markets. We asked
Bloomberg correspondent Rebecca Chong Wilkins to characterize the Chinese response
to such criticism.
Speaker 11 (27:56):
EV is a part of this whole channel and plan
and to replace the old drivers of growth. If we
do see this kind of friction, this trade friction, that
does have the potential to significantly impact the ability for
these industry to continue developing, because exporting is a big
part of the plan.
Speaker 3 (28:14):
That's Rebecca Cheong Wilkins. So, Danny, this show, which you'll
be a ten thing and Linda will as well, is
about cars. Will it be about the cars or the politics?
Speaker 8 (28:25):
It will be about making sure that Germans or Germany's
auto production is not harmed by the rise of Chinese
evs ultimately as much as it is about the cars
automotive show on display. But there is still a sense
of cheer politics and economy as well, given how much
(28:46):
the automotive market really contributes to the German economy. And
you know, you've seen these successful brands over many, many decades.
You see them in China today. The fact that BM
Double Mercedes now they count they count China as being
their biggest markets in some shape or form, whether beyond
(29:07):
revenue or on sales. So it's very important. And when
you see the rise of Chinese evs in particular, what
you're seeing is them having to reposition themselves against the
rise of Chinese evs. But we've not necessarily necessarily seen
an impact yet of on revenues or on sales in particular,
(29:28):
but is bracing themselves for what is an interesting and
fascinating long term battle for supremacy and relevance in not
just China, but what will be the global market.
Speaker 10 (29:40):
When I think at the early days of the auto
industry in China, I think joint venture, both American and
European partners establishing these jvs, And clearly I think we
can agree that Chinese firms did benefit from being exposed
to that technology on the production side. You know, we've
heard about past disagreements when it comes to things like
intellectual proper. I'm curious, Linda, where is China now when
(30:03):
it comes to technology, particularly as it relates to EV's.
How sophisticated is that technology currently?
Speaker 12 (30:11):
As you mentioned, in the early days of China's automotive manufacturing,
they've relied on these foreign joint ventures a lot, where
international brands like Ford and GM went into the China
market and set up these production facilities together with the
Chinese partners. And really what's really interesting is that now
(30:33):
that China has really grown its domestic electric vehicle industry
and along with that, coming with the battery supply chain,
it's kind of leapfrog. Now you're seeing the foreign automakers
having to turn to China to try to get some
of that technological edge. We've seen Volkswagen tie up with Xpong,
which is an up and coming EV startup. We've also
(30:56):
seen Stilantis forming partnership with an EV make her called
leap Motor. So it's really interesting to see how the
tide has turned.
Speaker 3 (31:05):
So you've got Neo, you've got le Auto, you've got
x pun BYD the biggest name I suppose, and now
a new entrant, shall Me. I'm just curious, will we
see much at this auto show in the coming week
from shall Me?
Speaker 12 (31:18):
Yes, Shallmi will be exhibiting at the auto show. What's
really interesting about shell Me is they've already had a
major launch a couple of weeks ago, and after that launched,
the reception has been better than expected. Sales kind of
went through the roof, so I think at the Auto Show.
It would be kind of another chance for shell Me
(31:39):
to display its first EV, the SIU seven.
Speaker 10 (31:42):
Linda just mentioned the auto supply chain Danny. When it
comes to very critical technology lithium ion batteries, I'm thinking
of c at L in particular. We just heard from
the company recently with its earnings report to what extent
is China dominate the battery space? Is this a slam dunk?
I mean, nobody can compete against China right now when
it comes to EV batteries.
Speaker 8 (32:03):
I think China's always had that head start in the
battery space and doing it in a way in scale
and identifying what it thought would be the future technologies.
When you do look at the numbers, you do see
China in particular having a grip on many aspects of
the battery supply chain. And that's no coincidence thanks to
(32:26):
this response to what they thought was the future in
automotive being evs. When you see some like c ATL
you performing so strongly, and it seems to whether any
kind of market conditions, clearly there is a cause can
concern there, because when you want to have a level
(32:46):
playing field, when you want to have more players, more diversity,
and yet there is still more concentration. I think there's
a big question mark over how governments respond to maybe
even support their own kind of national champions in the
battery space.
Speaker 10 (33:00):
Linda, as you know, US Treasury Secretary Janet Yellen was
recently in China and one of the things that she
criticized the government for was the subsidy the role that
subsidies play in supporting the industry. What do we know
about how the government has supported the EV manufacturers and
whether or not that has been, to Yellen's point, maybe
(33:22):
a little excessive.
Speaker 12 (33:24):
Yes, that's right. When Jennet Yellen and China, the word
that kept coming up was over capacity. And you know
how the Chinese government subsidies have led to the situation.
In the early days of the electric vehicle industry in China,
the government has poured tens of billions of dollars into
growing and nurturing these companies. Now you've got success stories
(33:48):
like byd CTL that have come from this government support.
But in the past few years that support has been
phased out as China enters kind of its next stage
of EV adoption, which is more market driven.
Speaker 2 (34:04):
Now.
Speaker 12 (34:04):
I think critics may point to that as unfair competition
that these Chinese companies survived, so probably mostly due to
these subsidies. But on the other hand, you see US
and the EU also now investing into their domestic industry.
So it's kind of an interesting argument depending on which
(34:26):
way you spin it.
Speaker 3 (34:28):
And we haven't talked too much about BYD Lend, but BYD.
You know, we made a lot of the fact that
they were getting some mass market cars really out across
the country, but now we've just seen them double down
on their expansion into luxury SUVs and I'm wondering what
the impact that that might be and the competition that
(34:49):
might provide to Tesla.
Speaker 12 (34:52):
Yeah, last night BYD just launched more models from the
upscale function by brand, and they're doing a lot more
in the luxury space. And from the analysts that we've
spoken to, they think these brands are probably not going
to move a huge amount of volume, but what they
do bring to the table for BYD is prestige, and
(35:15):
having that prestige will just lift BYD's brand up and
help it to compete more in the kind of arena
where Tesla is at. You know, Tesla has super passionate
fans and they just really love the Tesla brand, and
BYD is trying to head that way.
Speaker 10 (35:31):
We've heard of the potential threat of tariffs, not only
from the US, but certainly from the European side too.
Workers very much, I think, for both parties are top
of mind when government officials try to defend their turf
and keeping people employed. Danny, take me into the shop floor.
(35:51):
If you look at the way some of these manufacturing
facilities are structured in China when you get into EV manufacturing,
are we talking about a great deal of workers or
as a lot of this already automated that we're using
a heavy amount of robotics.
Speaker 1 (36:07):
Is that right?
Speaker 8 (36:08):
There is a greater reliance on automation and robotics. And
you can see the way in which the likes of
BYD have some of the most efficient supply chains. And
it's you know, you're taking from the copybook of the
likes of Tesla, who's redefined the way in which EV's
cars are produced fundamentally. And you can see and it's
(36:31):
astonishing kind of perspective when you look at you go
on to these kind of production lines and you see
very few workers. You know, you go for up to
a mile or more and you'd see handfuls of workers
and all they're doing is fundamentally managing the machines, making
sure that production is smooth, it can run automatedly and
(36:53):
they'll just iron out any kinks. And so you know,
when you can get to that kind of level of efficiency,
it is, you know, clearly underscores your ability to be
a successful kind of company. And of course, when you
see in someone like Europe or even in the US
where working in the automotive industry is highly unionized, clearly
(37:15):
people will be concerned about their jobs, and how you
pivot away from that into something more automated is very difficult.
Outside of China.
Speaker 3 (37:24):
I mentioned in the intro about Chinese manufacturers looking to
set up shop in Mexico. I just ask you, in
a very short question, perhaps a short answer as well,
do you see Chinese manufacturers manufacturing in Mexico before the
end of this decade? Yes, all right, we'll finish on
that note. And that will definitely queue up a lot
(37:44):
of tensions with the United States. If you think that
those tensions are high with China and the EU, wait
till you see a BYD manufacturing cars in Mexico for
export to the United States. Danny, thanks so much for
joining us, and Linda Lewis as well. Transport reporters. Here
at Bloomberg, I'm Brian Curtis in Hong Kong along with
(38:04):
Doug Krisner. You can catch us every weekday for Bloomberg
day Break Asia, beginning at eight am in Hong Kong
and eight pm on Wall Street.
Speaker 1 (38:12):
Tom right, thanks to Brian, and thank you to 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.
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