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