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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,
Speaker 2: we look ahead to some key inflation data in the
Speaker 2: US and how it could impact FED policy. I'm Tom
Speaker 2: Busby in New York.
Speaker 3: I'm Caroline Hepgre in London. While we're examining the consequences
Speaker 3: of Europe's sweltering summer.
Speaker 1: I'm Dog Prisner looking at Japan's role in recent market
Speaker 1: volatility and where things may go from here.
Speaker 4: That's all straight ahead on Bloomberg Daybreak Weekend on Bloomberg
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Speaker 2: Good day to you. I'm Tom Busby. We begin today's
Speaker 2: program with some key economic data here in the US
Speaker 2: out this week, including the July Consumer price Index on Wednesday,
Speaker 2: retail sales for that same month on Thursday. Well, after
Speaker 2: some incredible volatility in the markets last week, how might
Speaker 2: this affect the next actions by the Federal Reserve, a
Speaker 2: policy meeting less than five weeks away. Now for more,
Speaker 2: we're joined by Stuart paul, Us, economist with Bloomberg Economics. Well, Stuart,
Speaker 2: let's start with inflation. What that July CPI number may bring.
Speaker 2: What do you expect to see.
Speaker 5: We're expecting to see headline inflation slowing to an annual
Speaker 5: pace of two point nine percent in July from three
Speaker 5: percent in June. The core is going to slow a
Speaker 5: little bit as well, to three point two percent from
Speaker 5: three point three percent in June. Now, consumers are looking
Speaker 5: for discounts, and they're finding them when they look online,
Speaker 5: when they go to auto dealerships. But some of the
Speaker 5: biggest ticket items, some of the items that take up
Speaker 5: the most space in budgets, like shelter for example, it's
Speaker 5: just going to be a slow disinflation process. And in fact,
Speaker 5: we're expecting to see a little bit of an uptick
Speaker 5: in the pace of rent and owner's equivalent of rent
Speaker 5: inflation in the July data. And the big swing factor
Speaker 5: when it comes to inflation has been hotels, surprisingly, which
Speaker 5: created a lot of drag in June. We think it's
Speaker 5: going to create a little bit less drag in the
Speaker 5: July data, and that's going to booy the core just
Speaker 5: a little bit.
Speaker 2: Well, the housing market, I mean, what an uneven You
Speaker 2: don't know what to expect month to month, but one
Speaker 2: thing is certain, it's more expensive than it's ever been.
Speaker 2: Rates are still elevated, although there's hope that they're going
Speaker 2: to go down. So travel demand, which lays right into
Speaker 2: what you said about hotels, I mean, we have seen
Speaker 2: signs that people are pulling back now fewer trip Advisor
Speaker 2: says fewer bookings, Airbnb says fewer bookings, so they're bracing
Speaker 2: for a pullback.
Speaker 5: That's right. So consumers are becoming quite a bit more
Speaker 5: discerning in their spending habits. When we look at things
Speaker 5: like you said Airbnb, or you look at some of
Speaker 5: the online travel booking agencies, you're definitely seeing some of
Speaker 5: the swings month to month. If you look at where
Speaker 5: consumers are really starting to tighten their belt, it's in
Speaker 5: things like food services also very similar to travel and accommodations.
Speaker 5: Consumers are looking to rein in on some of those
Speaker 5: discretionary services categories in addition to some of the more
Speaker 5: interest sensitive spending categories like autos.
Speaker 2: There's groceries, and there's food service, and there are all
Speaker 2: kinds of restaurants from fast food, quick service, sit down,
Speaker 2: white tablecloth. Where are you seeing the big changes in food?
Speaker 5: It's interesting. So when we listen into earnings calls, when
Speaker 5: we look at earnings reports, we see a lot of
Speaker 5: reports of dining services companies that are starting to offer
Speaker 5: discount meals and that are starting to order discount opportunities
Speaker 5: and they're actually seeing some more traction with consumers. When
Speaker 5: we look on the higher end, those sort of re
Speaker 5: tailers and those chains are facing a little bit more
Speaker 5: headwinds and consumers are rotating a bit more back to
Speaker 5: cooking at home, dining at home. We're expecting to see
Speaker 5: about zero point one percent inflation when it comes to
Speaker 5: groceries during the month. That might not sound like a lot,
Speaker 5: but when consumers are really pinching pennies and they're raining
Speaker 5: and they're spending on food services, that inflation in groceries
Speaker 5: is going to is going to weigh on consumers.
Speaker 2: Well, I want to go back to something you mentioned before,
Speaker 2: just briefly, and that is autos again very uneven what
Speaker 2: we've seen with used car prices, new car prices. Now
Speaker 2: we have all the ads are out there, it's August, now,
Speaker 2: all the twenty five models are coming in the twenty four.
Speaker 2: They want to get rid of what's different now on
Speaker 2: auto pricing.
Speaker 5: There are a few factors at play here, and one
Speaker 5: of them is still the cyber attack on auto dealers
Speaker 5: that we saw in June, and so far in July,
Speaker 5: we've seen a bit of a rebound, about a three
Speaker 5: point five percent rebound in the pace of auto sales
Speaker 5: in July. So as those computers, those computer systems came
Speaker 5: back online, we saw auto dealers starting to sell more vehicles.
Speaker 5: But it also looks like they are offering discounts in
Speaker 5: part to offset the effect of higher interest expense for
Speaker 5: folks who are financing their cars. So we are expecting
Speaker 5: to see about one and a half percent decline in
Speaker 5: the price of autos, in the price of used autos
Speaker 5: in particular in the CPI report, But again the increase
Speaker 5: in sales volumes will probably buoy retail sales. Headline retail
Speaker 5: sales in the July report.
Speaker 2: Also out this week. Retail sales for July, what do
Speaker 2: you expect to see?
Speaker 6: Overall?
Speaker 5: The headline number is going to look pretty good again
Speaker 5: because of that rebound in sales volumes of autos. We're
Speaker 5: expecting to see zero point four percent increase in nominal
Speaker 5: retail sales in July. That's up from zero growth in June.
Speaker 5: So the headline's going to look pretty good. When you
Speaker 5: strip out some of the more voluable categories though, like autos,
Speaker 5: like gasoline, like building materials and food services, I think
Speaker 5: we're actually going to see a decline. So that's what
Speaker 5: we call the control group for retail sales, and it's
Speaker 5: a pretty good indicator of consumer spending on goods within GDP.
Speaker 5: So that control group for retail sales, we think is
Speaker 5: going to decline about a quarter percentage point in the
Speaker 5: July data. And that's a material decline when you consider
Speaker 5: a June increase of nearly one percent. And that's because again,
Speaker 5: people are relying on their credit cards a little bit less,
Speaker 5: They have less access to credit. When they do look
Speaker 5: to take out their credit card, they're starting to pinch
Speaker 5: pennies quite a bit more, and again they're looking for
Speaker 5: discounts where they can get it, So they're not going
Speaker 5: to be spending lavishly on some big ticket items like
Speaker 5: washing machines. Instead, they're going to be looking for discounts.
Speaker 5: We think that'll show up in the control group sales
Speaker 5: boy our.
Speaker 2: Thanks to Stuart Paul, us economists with Bloomberg Economics. We
Speaker 2: continue with that discussion about the health of the US
Speaker 2: consumer with a look at head to some key earnings
Speaker 2: this Tuesday, second quarter earnings from the nation's biggest home
Speaker 2: improvement chain, home Depot. On Thursday, Q two earnings from
Speaker 2: the world's biggest retailer, Walmart. To help us break down
Speaker 2: what those results could tell us, we're joined by Bloomberg
Speaker 2: retail reporter Jaywon Kong. Jaywan, thank you for joining us.
Speaker 2: And Home Depot often seen as a proxy for the
Speaker 2: US housing market. So what do you expect to see
Speaker 2: from Home Depot's earnings.
Speaker 7: Yeah, with Home Depot, consumers just aren't buying dick ticket
Speaker 7: home products or projects right now, and we expect to
Speaker 7: see another challenging quarter. We also anticipate to hear that
Speaker 7: the business will remain challenging in the coming months, even
Speaker 7: if there are rate cuts, because there's typically a lag
Speaker 7: in consumer spending. You know, as you said, the housing
Speaker 7: market remains tough and people are staying on the sidelines
Speaker 7: because of you know, high interest rates. They're just spending
Speaker 7: less on larger descriptionary projects and instead spending on things
Speaker 7: that cost less, like you know, gardens, lawns.
Speaker 2: All right, So inflation, high borrowing costs a lot of
Speaker 2: economic uncertainty. Well, I guess when you're hiring a contractor,
Speaker 2: it involves all of that, and so maybe you're not
Speaker 2: going to redo the bathroom or the kitchen this year.
Speaker 7: Yeah, it's you know, spending you know, tens of thousands
Speaker 7: of dollars on a kitchen. People are either holding off
Speaker 7: or you know, they're choosing to do smaller at the
Speaker 7: II projects. And it's something that the company has talked
Speaker 7: about in recent quarters, and you know, we anticipate to
Speaker 7: hear that narrative again this quarter. You know, I think
Speaker 7: investors expect that there could be a pop in the
Speaker 7: stock whenever the said you know, decides to cut race.
Speaker 7: But you know, it's not like people start spending immediately
Speaker 7: after the rate cuts. So I think this quarter and
Speaker 7: the rest of the year it'll be pretty challenging.
Speaker 2: Now, combined with a lack of housing turnover. This you
Speaker 2: expect to see a bit of a pullback in home
Speaker 2: depot spending. What does it tell us about the housing market?
Speaker 2: And I know you're not the housing expert, you're a
Speaker 2: retail expert, but I mean with home depot with lows,
Speaker 2: with target with you know, it's really got to impact
Speaker 2: consumer spending overall.
Speaker 7: Yeah, what we've heard in recent quarters is that consumers
Speaker 7: are being selective. You know, they're choosing to prioritize what
Speaker 7: they need versus what they want. So that's you know,
Speaker 7: translated to pullback on discretionary you know, products projects, and
Speaker 7: you know, generally low to middle income consumers have been
Speaker 7: more stretched than under more pressure, and you know, upper
Speaker 7: income consumers are still spending. So you know, that's sort
Speaker 7: of the pick or that we've we've seen from these retailers,
Speaker 7: and it'll be pretty similar this this quarter as well.
Speaker 7: And you know, of course we'll be on the lookout
Speaker 7: for any youth signals about how people are spending. You know,
Speaker 7: what they're buying and you know how they're choosing to prioritize.
Speaker 2: Well, then let's move on because that's a great segue
Speaker 2: into Walmart, where it looks like it is all about
Speaker 2: value for customers and Walmart is providing it. So what
Speaker 2: do you expect to see from Walmart?
Speaker 7: Yeah? With Walmart, you know right now is sort of
Speaker 7: you know, their time, it's you know, most of their
Speaker 7: business is in essentials. You know, they are super focused
Speaker 7: on low prices, and we expect them to deliver another good,
Speaker 7: good quarter because of this. And with grocery at Walmart,
Speaker 7: you know, it goes back to what we were talking
Speaker 7: about a bit ago, which is that people are prioritizing
Speaker 7: what they needed. So grocery has been a bright spot
Speaker 7: for for Walmart on and you know in other categories,
Speaker 7: you know, like general merchandise have been have been softer,
Speaker 7: and you know, we're seeing consumers search for value, you know,
Speaker 7: buying things that are on sale or buying things that
Speaker 7: they think are you know, good deal.
Speaker 2: Who is raining and their spending and what do we
Speaker 2: continue to spend money on?
Speaker 7: Yeah, so with consumers, you know, they have been resilient
Speaker 7: in that they are still spending, you know, even with
Speaker 7: years of inflation. That being said, you know, they are
Speaker 7: being what a lot of these companies have called choiceful.
Speaker 7: You know, they are being selective. You know they're looking
Speaker 7: for areas to trade down, so to speak. So you know,
Speaker 7: instead of buying if you buy chicken or you know
Speaker 7: inspetifying name brands, you buy straw brands. So I think
Speaker 7: consumers are looking for areas to save money. And you know,
Speaker 7: we're seeing that comes through in grocery shopping and you
Speaker 7: know in other areas of merchandise.
Speaker 2: Well, we should learn a lot earnings this week from
Speaker 2: two of the biggies Home Depot and Walmart Our thanks
Speaker 2: to Jaywan Kong, Bloomberg retail reporter. Coming up on Bloomberg
Speaker 2: day Break weekend, we'll examine the consequences of Europe's sweltering summer.
Speaker 2: I'm Tom Busby, and this is Bloomberg. This is Bloomberg
Speaker 2: day Break Weekend, our global look ahead at the top
Speaker 2: stories for investors in the coming week. I'm Tom Busby
Speaker 2: in New York. Up later in our program, we'll look
Speaker 2: ahead to the latest reading of Japan's GDP. But first,
Speaker 2: Europe is heating up with high tempts and excess of
Speaker 2: forty degrees celsius this summer, a huge uptick from the norm,
Speaker 2: with climate chains a likely culprit of the Mediterranean's tropical makeover.
Speaker 2: Can the insurance industry keep up for more? Let's go
Speaker 2: to London and bring in Bloomberg daybreak, europe banker Caroline
Speaker 2: hepgar Tom.
Speaker 3: Climate change is increasing the frequency and intensity of heat waves,
Speaker 3: bringing extreme weather events from flooding to wildfires across Europe.
Speaker 3: Just last month, in Greece, wildfires were found by strong winds.
Speaker 3: In the Balkans, you saw burning forests and homes, which
Speaker 3: also forced the evacuation of a resort town in Albania.
Speaker 3: In North Macedonia, a blaze near the Greek border burned
Speaker 3: five houses and led to evacuations, and the damage spread
Speaker 3: to Croatia, a popular holiday destination, whilst in Bulgaria firefighters
Speaker 3: had to stop fighting a wildfire in the mountains near
Speaker 3: the Greek border because of land mines dating back to
Speaker 3: the Cold War era. The volatile weather condition in Europe
Speaker 3: really show no sign of abating in the northwest of Europe,
Speaker 3: in France, in Germany, in the UK we're expected to
Speaker 3: see the hottest temperatures of the summer in the next
Speaker 3: few days. Popular tourist destinations are on high alert for fires.
Speaker 3: The growing prevalence of extreme weather conditions is weighing heavily
Speaker 3: also on the insurance sector, often charged with the clear up.
Speaker 3: Navigating the consequences is something that we've been discussing with
Speaker 3: the Munich RECFO Christophe Jureka. He says that the unexpected
Speaker 3: conditions in Europe are affecting his company's bottom line.
Speaker 8: Indeed, we have very pleasing results again this quarter, and
Speaker 8: after six months we are now already at three point
Speaker 8: eight billion euros of a net result, by the way,
Speaker 8: the highest net result ever we had after six months,
Speaker 8: so very well on twek to achieve all for your guidance. Indeed,
Speaker 8: now the question is why didn't be increase it? Probably well,
Speaker 8: I would say that's the typical Munich conservativism. We are
Speaker 8: cautious until the very end, and you know, the third
Speaker 8: and the fourth quarter are very cut heavy in our planning.
Speaker 8: So therefore we thought, let's give it another quarter and
Speaker 8: see how the development goes and keep the guidance unchanged
Speaker 8: for now. But what is very clear, were likely good
Speaker 8: of it of overachieving our target has significantly increased?
Speaker 9: Okay, Well that's what it sounds like. Okay, so that's important.
Speaker 9: The likelihood of overachieving on that five billion europrofits target
Speaker 9: has increased. That's an important line I think for investors
Speaker 9: and talk to us about some of these extreme weather events.
Speaker 9: Then there are higher payment claims coming through for insurers
Speaker 9: and reinsurers. Are there some regions now that are becoming uninsurable?
Speaker 6: Well.
Speaker 8: Indeed, in the second quarter again we had a relatively
Speaker 8: high share of cut losses, slightly above our budget or
Speaker 8: average budget is fourteen percent per quarter this time, whilst
Speaker 8: it was fourteen point four, so slightly higher. And what
Speaker 8: actually happened was that there was not this one single
Speaker 8: headline event, you know, affecting us to that extent, but
Speaker 8: it was a number of smaller, mid sized events which
Speaker 8: then added up to that overall amount. The most significant
Speaker 8: fast disc quarter was a flood in southern Germany which
Speaker 8: which all together cost us in reinsurance around two hundred
Speaker 8: million euros. But then there were other events across the globe,
Speaker 8: all of them rather mid sized, which then finally added
Speaker 8: up to the to the number. So in a way
Speaker 8: busy quarter with with not this single so significant event
Speaker 8: that it would have made headline headlines in the in
Speaker 8: the neuse.
Speaker 9: Is it is it your assessment there is sufficient capacity
Speaker 9: within the insurance sector to be able to make up
Speaker 9: for what is expected to be the increased claims around
Speaker 9: climate change.
Speaker 8: So our clear answer is yes, there is enough capacity,
Speaker 8: So we are very happy to deploy capacity into cut risks,
Speaker 8: always under the precondition, of course that the prices in
Speaker 8: the terms and conditions have to have to be reasonable
Speaker 8: also from a rene insurance perspective. But under that precondition,
Speaker 8: absolutely there is that there's sufficient capacity in the market
Speaker 8: and and and we are very happy to deploying more cognacity.
Speaker 9: Your business men, Ray has been a leader in terms
Speaker 9: of cybersecurity solutions within the insurance space. How how big
Speaker 9: an impact was the crowd strike event within the industry
Speaker 9: and for.
Speaker 8: You, that's a very good question. I would very I
Speaker 8: would love to know myself, but it's very early days,
Speaker 8: so I cannot give you any any internal insights in
Speaker 8: any internal numbers. Yet we're still assessing what's was going on.
Speaker 8: I think the the the the industry estimates as for
Speaker 8: example just shown in the media, they have come down
Speaker 8: a bit recently. But any anyways, it's early days. We
Speaker 8: have to you know, really assess it, wait for the
Speaker 8: collect claim stotifications and from from our clients. And then
Speaker 8: we'll see that was.
Speaker 3: The munich ree CFO Christopherjureka. So are Europe's soaring temperature
Speaker 3: is here to stay? What does it mean for insurers
Speaker 3: on the one hand, but also for local people, for businesses,
Speaker 3: for holidaymakers, and so much more. I've been talking about
Speaker 3: that question with Bloomberg's energy reporter Aiman Farhat.
Speaker 6: I mean in the last few years, I mean definitely
Speaker 6: last summer and the summer before, we've been seeing these
Speaker 6: increasingly record temperatures. I mean, you know you talked about
Speaker 6: in excess of foy degrees. We actually reached even forty
Speaker 6: six degrees celsius in Spain. I think that was last week.
Speaker 6: And I think the important thing is it's not just
Speaker 6: the high temperatures, it's also the intense heat for longer periods,
Speaker 6: affecting people's health, as you said, affecting wildfires. So it's
Speaker 6: definitely getting more extreme, and we're seeing that that's kind
Speaker 6: of summer period. Start earlier. We were already seeing heat
Speaker 6: waves in Spain in April and finish even later. We're
Speaker 6: expecting this heat evening continue into October for some places.
Speaker 3: Okay, so the scorching weather is back then for another summer.
Speaker 3: How prepared are parts of Europe for this? I mean,
Speaker 3: some places in Europe are fairly accustomed to wildfires, but
Speaker 3: how ready are Greece and other places?
Speaker 6: Yeah, I mean Greece has definitely been the center of
Speaker 6: kind of our wildfire coverage this summer. You know, every
Speaker 6: single day we have new blazers, you know, on very
Speaker 6: popular tourist spots of popular islands as well, but also
Speaker 6: on the mainland. I mean, on the worst days in
Speaker 6: Greece you will have you know, maybe sixty new blazers,
Speaker 6: but they are quite responsive. One thing that's quite interesting
Speaker 6: is there's much more of a kind of shared approach
Speaker 6: in Europe, where you know, planes will be sent from
Speaker 6: France or Italy to Greece to help out with wildfires.
Speaker 6: But at the same time, you know, it is quite
Speaker 6: worrying when lots of countries in that area are under
Speaker 6: extreme risk of wildfire. Says, you know, something very small
Speaker 6: could tip it all over to the edge.
Speaker 3: Okay, So if it's a difficult wildfast season, then what
Speaker 3: sort of tactics have been developed? You say, sharing equipment
Speaker 3: is one. How else can countries in Europe try to
Speaker 3: curb the damage?
Speaker 6: Yeah, I mean I think it's definitely though the shard
Speaker 6: its equipment is a big factor, but also there's a
Speaker 6: lot more monitoring now. I mean, we have very advanced forecasts,
Speaker 6: you know. The one thing is that wildfires are kind
Speaker 6: of driven by dry conditions, by specific kinds of wind,
Speaker 6: and by quite advanced marching technique. You can really tell
Speaker 6: almost exactly where they're going to take place, and then
Speaker 6: using southline imagery, European kind of forecasters can also tell
Speaker 6: where the wildfires actually are, how they're doing with kind
Speaker 6: of controlling blazers, and especially for the bigger, bigger issues,
Speaker 6: that can really help to just a market situation and
Speaker 6: to make sure that races are being used efficiently.
Speaker 3: Do you think that there's a risk that wildfires could
Speaker 3: spread further north? I mean, let's say to the UK.
Speaker 3: Would we be equipped to deal with them, and would
Speaker 3: it get hot enough dry enough here for that to happen?
Speaker 6: Yeah, So, I mean I'm kind of checking these wildfire
Speaker 6: maps almost every single day to see what it's going
Speaker 6: to look like, and actually into next week there was
Speaker 6: an increased risk in the UK. We've seen that a
Speaker 6: few times a season where you kind of have this
Speaker 6: high or very high wildfire risk.
Speaker 9: Now.
Speaker 6: Back in twenty twenty two, you know, we had the
Speaker 6: hotest day ever and on that day we had some
Speaker 6: wildfires in London. About twenty homes are destroyed. And since
Speaker 6: then there's definitely been a much bigger concern about wildfires
Speaker 6: in London and in the UK, and there's been lots
Speaker 6: of consultations. There was kind of a whole kind of
Speaker 6: period this year where there was people from you know,
Speaker 6: from fire agencies and Spain, in France and Greece coming
Speaker 6: to London and giving their advice. In the end that
Speaker 6: did lead to some changes, you know, lots of the
Speaker 6: staff in ord and now being traded specifically for wildfires.
Speaker 6: They're even giving recommendations to local council to really reduce
Speaker 6: that kind of risk of you know, of having barbecues
Speaker 6: and parks and trying to reduce all those things that
Speaker 6: could create wildfires because it is increasingly becoming a problem
Speaker 6: in the UK. We are seeing hot of summers. We
Speaker 6: are seeing it's not just about hot of summer, it's
Speaker 6: about having those specific days where the heat really spiked.
Speaker 6: As you said, you know into next week there will
Speaker 6: be some days where it could reach thirty three degrees
Speaker 6: and although that doesn't seem too hot, that can be
Speaker 6: enough to course some wildfires.
Speaker 3: So then also the other big market that is involved
Speaker 3: in this is insurance in you know, the homes you
Speaker 3: talk about being destroyed, I mean, that's all of that
Speaker 3: has huge insurance implications. How are they dealing with the
Speaker 3: optic and the issues around climate change?
Speaker 6: Yeah, I mean definitely when when you take a step back,
Speaker 6: all of these kind of extreme weather events sometimes seem isolated,
Speaker 6: but as you said, there is a general trend about
Speaker 6: climate change making them more and more frequent, and insurers
Speaker 6: are definitely very aware of this, definitely warned about the
Speaker 6: risks of climate change. And although they're not kind of
Speaker 6: there yet, there are many insurances have said that some regions,
Speaker 6: some places will become unensurable in the future as these
Speaker 6: claims are getting bigger and more frequent. I mean this
Speaker 6: year that you know, the Costes event in Europe was
Speaker 6: actually a flooding event in southern Germany which kind of
Speaker 6: came to about five billion, of which two point two
Speaker 6: billion the US dollars was an insured loss. But you know,
Speaker 6: whether it's kind of you know, the rain, the fires,
Speaker 6: or just the extreme temperatures, those losses are becoming more
Speaker 6: and more and I said more and more frequent every year.
Speaker 6: So insurers are definitely kind of very aware of this
Speaker 6: this trend.
Speaker 3: And we have had warnings in recent years and numerous
Speaker 3: warnings of the risks of under insuring for climate change.
Speaker 3: That's been a real worry of the industry. I mean,
Speaker 3: why do you think aiming in particular the fars A
Speaker 3: spreading to such an extent this summer.
Speaker 6: The thing that the kind of fires is that it
Speaker 6: can even be a hangover from last year. You know,
Speaker 6: it's about drying us and the soil, It's about different winds,
Speaker 6: and you know, if you have multiple years of pretty
Speaker 6: extreme temperatures that can kind of compound that effect. You know,
Speaker 6: we've had about two three years of pretty hot summers,
Speaker 6: so in Greece that's really a problem. And it's also
Speaker 6: the fact that this can extend much later into the
Speaker 6: year than it would have. Otherwise we'd have seen a
Speaker 6: wildfire season really focused on July August this year, Earlie
Speaker 6: Junior are already seeing those wildfires expanding in parts of Europe,
Speaker 6: and it also puts countries on edge. I mean, Spain
Speaker 6: has been the focus of it For the last few weeks.
Speaker 6: There haven't been any major places, but you know, everyone's
Speaker 6: kind of unread alad it kind of causes some disruption
Speaker 6: as locally, and yeah, we have to be ready because
Speaker 6: it can expand. As I said, wildfires just in nature
Speaker 6: of them can mean that very quickly they can just
Speaker 6: kind of flare up and become a huge problem.
Speaker 3: Are the far authorities in various countries are they concerned
Speaker 3: about what may happen next summer? I mean, we have
Speaker 3: had kind of an optic and more close monitoring of
Speaker 3: these peak temperatures across different European countries over successive summers.
Speaker 3: Is a concern that this going to get worse next year?
Speaker 6: Yeah, I mean when it comes to extreme summers, I
Speaker 6: think it seems that different forecasters always say that you know,
Speaker 6: you know, they can't really tell the weather will be
Speaker 6: like next summer. It's obviously a long way away, but
Speaker 6: you know, more and more likely each summer we'll see
Speaker 6: records broken extreme heat and more and more kind of
Speaker 6: heat waves, which then leads to those fires. So that's
Speaker 6: kind of the general trend. I mean, we are having
Speaker 6: kind of an El Nino La Nina effect. You know,
Speaker 6: the Elino is kind of ending and Latini is coming in,
Speaker 6: which actually kind of reverses like that trend slightly and
Speaker 6: actually causes more increased risk of hurricanes in the Atlantic,
Speaker 6: which is a whole other, you know, other issue for insurers.
Speaker 6: But as far as temperatures go, you know, records are
Speaker 6: going to continue to be broken. I mean, that's one thing.
Speaker 6: We're kind of sure. We got the hottest day ever
Speaker 6: globally in July. That was two days in a row
Speaker 6: we got that. We've been having, you know, consecutive months
Speaker 6: of record temperatures every on Earth, so it just seems
Speaker 6: like things getting hot everywhere.
Speaker 3: That was Bloomberg's aim and far hat there as London,
Speaker 3: Paris and Berlin our brace to see yet more soaring
Speaker 3: temperatures and another summer of climate change impact. I'm Caroline
Speaker 3: Hepge here in London. You can catch us every weekday
Speaker 3: morning for Bloomberg Daybreak you at beginning at six am
Speaker 3: in London. That's one am on war Street, Tom.
Speaker 2: Thank you, Caroline, And coming up on Bloomberg day Break weekend,
Speaker 2: we'll look ahead to the latest reading on GDP from
Speaker 2: the world's third largest economy. I'm Tom Busby and this
Speaker 2: is Bloomberg. This is Bloomberg day Break weekend, our global
Speaker 2: look ahead at the top stories for investors in the
Speaker 2: coming week. I'm Tom Busby in New York. Last week,
Speaker 2: global expectations for the Japanese economy and its markets were
Speaker 2: completely upended, making the path for the Bank of Japan's
Speaker 2: monetary policy less clear. Ahead of the latest reading of
Speaker 2: Japan's GDP out this week, let's get to Bloomberg Daybreak
Speaker 2: Asia co host Doug Krisner for a closer look Tom.
Speaker 1: Before last week, the consensus view on Japan was that
Speaker 1: the economy was on the end. Wages were rising, prices
Speaker 1: were up, inflation had returned and was proving sustainable, and
Speaker 1: after many months of being above its two percent inflation target,
Speaker 1: the Bank of Japan tightened at its aligned meeting. BOJ
Speaker 1: Governor Kazuo Uwaita said the decision was based on data
Speaker 1: showing developments on the economy and inflation were in line
Speaker 1: with previous expectations. Earlier, I spoke with Stephanie Leung, chief
Speaker 1: investment officer at Stashaway based in Hong Kong, and I
Speaker 1: asked for her view on the boj's recent move.
Speaker 10: Given that Japan has gone through a deflation for the
Speaker 10: last thirty years, it is prudent for the BOJ to
Speaker 10: kind of be a bit more conservative in that move.
Speaker 10: I think the problem with the recent move is perhaps
Speaker 10: more in the timing of things. So they picked the summer.
Speaker 10: I think when liquidity is actually quite thin and a
Speaker 10: lot of people are on leave, they kind of wish
Speaker 10: that they could move the currency with this kind of
Speaker 10: thinner liquidity, and perhaps they got much more than what
Speaker 10: they wished for, and it says that it moved the
Speaker 10: currency in a very very valid way. At the same time,
Speaker 10: they stopped ETF purchases as well, and that I mean,
Speaker 10: let's remember the reason why BOJ is hiking is because,
Speaker 10: I mean, they are actually quite confident of the way
Speaker 10: the economy is going. So I think in terms of
Speaker 10: fundamental story, there's still a lot of progress, but I
Speaker 10: mean a lot of this is technical.
Speaker 1: Stephanie Leung there from Stashuay, Now, the point she made
Speaker 1: about Japan being in deflation for thirty years is important
Speaker 1: and not to be underestimated. You know, there's an entire
Speaker 1: generation in Japan that's known only deflation. Now, the other
Speaker 1: thing to consider in all of this, especially in the
Speaker 1: last several years, is the strength of the US dollar
Speaker 1: that has added to Japan's inflationary pressures. I also spoke
Speaker 1: earlier with Carlos Casanova, he is senior Asia economist at UBP.
Speaker 11: First half week yen triggering important inflation. As a result
Speaker 11: of that, you instigate changes in corporate behavior, including increasing wages.
Speaker 11: That increase was the highest than thirty years, So definitely
Speaker 11: that part of the cycle has materialized, and then down
Speaker 11: the line that should translate into stronger domestic consumption and
Speaker 11: endogenous inflation. The third part of that puzzle is what
Speaker 11: we haven't quite seni yet. Although data did show real
Speaker 11: wages increasing by one point one percent for the first
Speaker 11: time since twenty twenty one, but in none of itself,
Speaker 11: that is not sufficient to justify the hawkish piper.
Speaker 9: So I think.
Speaker 11: Inflation has been high, but it's predominantly driven by US
Speaker 11: dollar strength. And so Bank of Japan really really has
Speaker 11: taken a gamble here because the preliminary data does point
Speaker 11: towards this virtual cycle sort of taking hold in the
Speaker 11: second half of the year, but they moved ahead of
Speaker 11: having visibility on that front.
Speaker 1: Is Carlos Casanova, senior economist at UBP. Joining us now
Speaker 1: for some discussion on the Japanese economy and the BOJ
Speaker 1: is our own Paul Dobson. Paul is Bloomberg Executive editor
Speaker 1: for Asia Markets. He joins us from Singapore. Paul, the
Speaker 1: reaction in markets to the boj's tightening should really come
Speaker 1: as no surprise, especially directionally in terms of yen strengthening.
Speaker 1: I think it's fair to say that it was magnified
Speaker 1: by that unwinding of the carry trade. To be sure,
Speaker 1: how are you making sense of the ripple effects that
Speaker 1: we have seen in markets?
Speaker 12: So I think that the starting point has to be
Speaker 12: to think about that carry trade and how much of
Speaker 12: the world has been taking on these leveraged bets based
Speaker 12: on the yen being the last kind of funding currency
Speaker 12: at particularly low interest rates that's out there, and so
Speaker 12: that really has snowballed in recent years and become a
Speaker 12: very important theme. Now, on top of that, you've had
Speaker 12: further depreciation in the end for much of this year,
Speaker 12: and that's partly the boj's fault. So listening to some
Speaker 12: of what you've been saying already, just now, you know
Speaker 12: the Bank of Japan was very very slow and very
Speaker 12: very careful about when it's going to choose to raise
Speaker 12: interest rates. The market had been expecting it to come,
Speaker 12: you know, earlier in the year, and the BOJ chose
Speaker 12: not to move on a couple of occasions when the
Speaker 12: window was already open. It had kind of nurtured the market,
Speaker 12: but to such an extent that people had gotten very
Speaker 12: complacent about the idea that the BOJ wasn't going to
Speaker 12: move aggressively. So for them then to do this hike
Speaker 12: at a time when maybe the market wasn't quite so
Speaker 12: well prepared, did really cause something of a shock and
Speaker 12: start the sort of snowball rolling down the hill in
Speaker 12: terms of yen appreciation. What they couldn't have foreseen, and
Speaker 12: what was particularly bad luck was that two days later
Speaker 12: we'd have that really weak payrolls data out of the US,
Speaker 12: which led to a weaker dollar and increase beats that
Speaker 12: the Federal Reserve will need to start cutting interest rates soon.
Speaker 12: And that really was the second kind of push that
Speaker 12: really ignited that big unwind in the carry trade and
Speaker 12: then sent those ripples across the rest of the world's
Speaker 12: financial markets.
Speaker 1: So what have these developments done to the thinking on
Speaker 1: what the Bank of Japan may do next. Do you
Speaker 1: think they're going to be much more cautious now that
Speaker 1: they've become I don't want to say scared, but very
Speaker 1: concerned about the way in which markets have been trading
Speaker 1: in this volatile fashion. Or are they going to lean
Speaker 1: into solving the inflation problem in Japan? Which is it?
Speaker 12: So after two days are very volatile moves in financial markets.
Speaker 12: We heard from the Deputy Governor ochidah and he seemed
Speaker 12: to seek to calm those expectations somewhat. You might call
Speaker 12: it activating the BOJ put He said, hey, you know,
Speaker 12: if markets are very volatile like this, this isn't when
Speaker 12: the BOJ is going to continue to be hiking interest rates.
Speaker 12: That would be kind of counter productive. So he stilled
Speaker 12: some of the worst fears in the market about how
Speaker 12: fast the BOJ may move and what sort of circumstances
Speaker 12: it would be looking at for those moves, and that
Speaker 12: did do something to settle things down. The longer term
Speaker 12: expectations aren't exactly for the BOJ to be moving aggressively.
Speaker 12: A lot of the analysts are talking about December or
Speaker 12: January for the next hike, and the market is not
Speaker 12: pricing in a very aggressive part. What we'd had from
Speaker 12: the BOJ when it raised interest rates was a discourse
Speaker 12: that seemed to suggest that it could be moving much
Speaker 12: more quickly than that. Now the market is back to
Speaker 12: pricing a more gradual pace, and maybe there will be
Speaker 12: enough to help to assuage some of the worst fears
Speaker 12: in the market. But what we do know is that
Speaker 12: the BOJ is determined to continue with its hiking path
Speaker 12: or other things being equal, and so long the term,
Speaker 12: those people that have those long leverage positions based on
Speaker 12: the premise of very low interest rates in Japan will
Speaker 12: need to think twice about whether they want to hold
Speaker 12: onto them.
Speaker 1: As I mentioned earlier in the week ahead, we'll be
Speaker 1: getting the Japanese second quarter GDP print again. Here is
Speaker 1: Carlos Casanova, Senior Asia economist at UBP on what we
Speaker 1: are likely to see.
Speaker 11: It's a backward looking indicator, so I think it's going
Speaker 11: to disappoint. And remember that the economy was in a
Speaker 11: recession in the first quarter. Consumption and capital expenditure was
Speaker 11: contraction ay as a result of high inflation, squeezing purchasing
Speaker 11: power of households in Japan. Because all of their imports
Speaker 11: net importer and all of their imports are more expensive.
Speaker 11: But also companies have been adjusting to higher nominal wages
Speaker 11: by reducing the amount of that they spend on capital expenditures.
Speaker 11: So I think that trend is going to continue into
Speaker 11: the second quarter, and of course, if we see a
Speaker 11: disappointing GDP reading, that is going to be quite negative
Speaker 11: for markets.
Speaker 1: That is Carlos Casanova from UBP back to my colleague
Speaker 1: Paul Dobson in Singapore. What are we expecting here in
Speaker 1: quantitative terms on the GDP print? Do we have a number?
Speaker 12: We do, and it's not an unfavorable number based on
Speaker 12: analyst estimates. Expectations are the quarter on quarter GDP will
Speaker 12: increase point six percent. That's after minus point seven percent
Speaker 12: the previous quarter. So finally, some growth at least is
Speaker 12: what the street is looking for. I think it's interesting
Speaker 12: what what Carlos Ksenova was saying that I don't know
Speaker 12: whether good news or bad news is worse for the
Speaker 12: market right now. If the growth is too strong, then
Speaker 12: you know, the market might start to reprice the BHA
Speaker 12: expectations again for a more aggressive stance, and that might
Speaker 12: whip up the volatility that we've been seeing in recent days. Again,
Speaker 12: whereas you know, obviously two weaker number and people will
Speaker 12: be worried about the growth outlook and whether the BOJ
Speaker 12: will be able to hike at all from here, So
Speaker 12: you know, it will certainly be a number that there
Speaker 12: will be a lot of focus on and could cause
Speaker 12: quite a lot of volatility as well.
Speaker 1: I want to take a brief look at household spending
Speaker 1: in Japan because data that I looked at in the
Speaker 1: most recent week indicated a second month of decline during
Speaker 1: the month of June. And as I understand it, Paul,
Speaker 1: household spending in Japan accounts for more than half of
Speaker 1: overall domestic GDP. When you look at the state of
Speaker 1: the consumer in Japan, what do we see?
Speaker 12: So I think you know what we want to do
Speaker 12: is go right back to the start what you were
Speaker 12: saying earlier about how a whole generation has lived through
Speaker 12: this kind of deflationary environment and how we're finally at
Speaker 12: a point where we've got some wage growth coming through
Speaker 12: the economy, We've got companies feeling like they do have
Speaker 12: some ability to raise prices. We're getting back into an
Speaker 12: inflationary mindset. That's really what the BOJ wants. It's what
Speaker 12: the government has been pushing for as well for a
Speaker 12: long time, and that's why they've been so very careful
Speaker 12: to try to not disrupt things, to try to be
Speaker 12: able to raise interest rates without causing too much disruption,
Speaker 12: and probably why they're alarmed by what we've seen in
Speaker 12: the markets in reaction to that rate hike. So they
Speaker 12: will want to see continuing wage growth, and they will
Speaker 12: want to see continuing confidence among consumers to keep on spending,
Speaker 12: and they will want companies to be able to continue
Speaker 12: to raise prices as well, to have that pricing power
Speaker 12: which we hadn't seen for so long, and we have
Speaker 12: been seeing in Japan in recent years. That said, you know,
Speaker 12: we are seeing a little bit of a slow down,
Speaker 12: a little bit less confidence among consumers at this moment
Speaker 12: in time, and that will be troublesome for the BOJ,
Speaker 12: you know. So what I think the next really big
Speaker 12: kind of talking point will be for the policymakers comes
Speaker 12: around October time, when we'll get more wage negotiations, when
Speaker 12: we'll be able to see if pay growth continues, and
Speaker 12: if that does, then hopefully that will give the consumer
Speaker 12: the confidence to continue spending, and that will continue that
Speaker 12: inflationary cycle that has just about kind of been established,
Speaker 12: but it's still very fragile.
Speaker 1: I think it's important to point out at the same
Speaker 1: time that the week Japanese currency has played a very
Speaker 1: crucial role in supporting many major companies in Japan, especially
Speaker 1: those exporters. The value of their earnings overseas is boosted
Speaker 1: by that weakness. And if you look at a company,
Speaker 1: let's say Toyota recently reporting record profits. So this cuts
Speaker 1: both ways, does it not?
Speaker 12: Yeah? Absolutely, I mean so on the one hand, you
Speaker 12: do have the benefits for those exporters of a week yen.
Speaker 12: On the other hand, if the end does strengthen, then
Speaker 12: it should make things a little bit better for importers
Speaker 12: and therefore should make it a little bit easier for
Speaker 12: the consumer as well. So it does cut both ways.
Speaker 12: I think what we saw is that the yen weakness
Speaker 12: was just so pronounced that even those companies that have
Speaker 12: benefited from exporting in the past, even they were complaining
Speaker 12: the yen was too weak and that they would rather
Speaker 12: see it stabilize or strengthen a little bit. So from
Speaker 12: that perspective, at least, you know behind the idea that
Speaker 12: the boj should be hiking and should be pushing the
Speaker 12: currency stronger again, just not please very add these humongous
Speaker 12: the aggressive pace of change that we've seen over the
Speaker 12: past few days.
Speaker 1: Paul, thank you so much for joining us and helping
Speaker 1: us understand a little bit better what's been happening in
Speaker 1: Japan and where things may go from here. Paul Dobson
Speaker 1: is Bloomberg Executive Editor for Asia Markets. I'm Doug Prisner,
Speaker 1: and you can join Brian Curtis and myself weekdays here
Speaker 1: for Bloomberg Daybreak Asia, beginning at eight a m. In
Speaker 1: Hong Kong eight pm on Wall Street.
Speaker 2: Tom our thanks to Doug, and that does it for
Speaker 2: this edition of Bloomberg day Break Weekend. Join us again
Speaker 2: Monday morning at five am Wall Street Time for the
Speaker 2: latest on markets overseas and the news you need to
Speaker 2: start your day. I'm Tom Buzzby. Stay with us. Top
Speaker 2: stories and global business headlines are coming up right now.