Speaker 1: Bloomberg Audio Studios, Podcasts, radio news. This is Bloomberg day
Speaker 1: Break Weekend, our global look at the top stories in
Speaker 1: the coming week from our day Break anchors all around
Speaker 1: the world, and straight ahead on the program, we'll look
Speaker 1: towards next week's BED meeting and its monetary policy going forward.
Speaker 1: I'm Tom Busby in New York.
Speaker 2: I'm callin Hepget in London, where we're looking ahead to
Speaker 2: the UK's great decision.
Speaker 3: I'm Brian Curtis in Hong Kong. I'll take a look
Speaker 3: at the upcoming results from China's ten cent holdings and
Speaker 3: whether a little less regulation is producing dividends.
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Speaker 1: Good day to you. I'm Tom Busby, and we begin
Speaker 1: today's program with the Federal Reserve. This coming week, the
Speaker 1: FED hosts a two day meeting on interest rates and
Speaker 1: monetary policy, with a decision out on Wednesday. Will the
Speaker 1: Fed leave its benchmark lending rate unchanged for the fifth
Speaker 1: meeting in a row, and if so, why for more
Speaker 1: we're joined by Michael McKee. He's Bloomberg's international economics and
Speaker 1: policy correspondent. So Michael, what do you expect to see
Speaker 1: happen this week and what do you see in the
Speaker 1: Fed's dot plot forecast?
Speaker 5: Well, that's the right way to look at it, because
Speaker 5: the Fed's not going to do anything in terms of
Speaker 5: its policy rate. It'll leave it where it is a
Speaker 5: range of five and a quarter five and a half
Speaker 5: percent because they basically told us that for the last
Speaker 5: three weeks and they're not going to go back on
Speaker 5: that and surprise the markets. They also are looking for
Speaker 5: more data, but the dot plot is going to be
Speaker 5: the interesting one, along with the summary of economic projections,
Speaker 5: because are they going to raise their projection for inflation
Speaker 5: and how would that affect their view of rake cuts
Speaker 5: This year, since the last FED meeting on January thirty first,
Speaker 5: we have seen CPI inflation and PPI inflation come in
Speaker 5: stronger than expected, and so the question is do we
Speaker 5: think that this is the new trend, that we're going
Speaker 5: to be stuck with inflation that is stickier and harder
Speaker 5: to bring down than the Fed anticipated, or do they
Speaker 5: think this is kind of one off seasonal adjustment around
Speaker 5: the first of the year. That's going to be the
Speaker 5: real question now.
Speaker 1: But in fairness, June of twenty twenty two, inflation nine
Speaker 1: point one percent. Just last week we saw it down
Speaker 1: to three point two percent, So it has accelerated a
Speaker 1: little bit from the months prior, but and we still
Speaker 1: got a long way to go to its two percent target,
Speaker 1: but it is still sort of trending the right way.
Speaker 5: Well, it depends on what you're trying to accomplish. If
Speaker 5: j Powell were running for president, he could tout going
Speaker 5: from nine to three. But since he's got to get
Speaker 5: it down to the two percent target, the fact that
Speaker 5: it's going the wrong way now is not necessarily good
Speaker 5: news for them, and that will influence their views. If
Speaker 5: they think that we are going to see a stickier
Speaker 5: kind of inflation, then that might lead them to change
Speaker 5: the dot plot. The dot plot that came out in
Speaker 5: December the last time they did one, suggested three rate
Speaker 5: cuts this year between the meetings, we've had several FED
Speaker 5: officials suggest that if inflation proves to be a problem,
Speaker 5: that maybe there will be fewer It would only take
Speaker 5: two to move their dots up to change the consensus forecast.
Speaker 6: So we're going to be watching that very closely now.
Speaker 1: A few weeks ago, in testimony to Congress, FED Chair
Speaker 1: Jerome pal did say he thinks rates are at their
Speaker 1: peak right now, twenty three year high, and it would
Speaker 1: quote likely be appropriate to begin dialing back policy at
Speaker 1: some point this year.
Speaker 5: Yeah, and asked about what it would take to do that.
Speaker 5: He basically said, we need continued good news on inflation.
Speaker 5: He said, we didn't need to have it be better
Speaker 5: each month, go down significantly each month, as it did
Speaker 5: during most of twenty twenty three, but it had to
Speaker 5: be going in the right direction, and right now it's
Speaker 5: not going in the right direction. So I imagine we will
Speaker 5: get a caution from him that even if they don't
Speaker 5: change the dot pot, that they are aware and watching
Speaker 5: inflation right now, and that if they needed to do something,
Speaker 5: they would. I don't think that rate increases are on
Speaker 5: the table right now, but cutting back on the number
Speaker 5: of rate cuts are pushing them back later in the
Speaker 5: year is certainly a possibility now.
Speaker 1: Inflation obviously the headline measure, but there's also job creation,
Speaker 1: which has been unexpectedly robust. Housing and retail sales a
Speaker 1: little uneven here and there, sometimes up, sometimes down. So
Speaker 1: is it job creation that really has the Fed optimistic
Speaker 1: about the economy?
Speaker 5: It is, and also the idea that companies are spending
Speaker 5: money in a little more than they had been as
Speaker 5: they get perhaps some of the federal government's fiscal assistance
Speaker 5: in the Infrastructure Act and the Chips Act. There is
Speaker 5: a concern that maybe the economy gets too hot, but
Speaker 5: it's not proving out. We're seeing strong job creation, we're
Speaker 5: seeing weak jobless claims. They went down again this last week,
Speaker 5: but we are not seeing strong retail sales at this point. Now,
Speaker 5: retail sales are pretty much only goods, and so we'll
Speaker 5: have to wait till the end of the month after
Speaker 5: the FED meeting to see whether people are spending on
Speaker 5: services and how strong consumer spending overall is.
Speaker 6: But it doesn't suggest that the consumer.
Speaker 5: Spending, which is two thirds of the economy, is benefiting
Speaker 5: from any of this yet.
Speaker 3: Now.
Speaker 1: In housing, we've seen rates this past week go down
Speaker 1: below seven percent. If there was ever a time of
Speaker 1: the year right now March April May when we're going
Speaker 1: to see housing accelerate a little bit, This is it,
Speaker 1: So I imagine that is being very closely watched as well.
Speaker 6: It's being closely watched.
Speaker 5: But the general feeling is that people really won't come
Speaker 5: out to buy houses until you get mortgage rates down
Speaker 5: close to four percent. It's going to be a while
Speaker 5: until we get there. They aren't going to come down
Speaker 5: to where they were. You're not going to get a
Speaker 5: three percent mortgage anymore, but you might get one between
Speaker 5: four and five if inflation continues to fall, and.
Speaker 6: That's what we have to watch.
Speaker 5: There isn't expectation that we're going to see at Gangbuster's
Speaker 5: housing market this spring, even though it is the time
Speaker 5: of year when you normally do.
Speaker 1: Well our thanks to Michael McKee, Bloomberg inter National Economics
Speaker 1: and Policy Correspondent. Now we move next to the athletic
Speaker 1: footwear and apparel giant Nike, the Dow component, reporting third
Speaker 1: quarter results this coming Thursday. Many analysts are wondering whether
Speaker 1: economic headwinds in China will impact the company's sales and
Speaker 1: for more. We're joined by Poonam Goyle, senior US e
Speaker 1: commerce and retail analysts at Bloomberg Intelligence.
Speaker 6: Poonum, thanks for being here, Thanks for having me.
Speaker 1: Well, what are you expecting to see from the sneaker
Speaker 1: in sportswear giant and how big a role will sales
Speaker 1: in China play into that?
Speaker 7: Sure, the fiscal third quarter, which is largely in line
Speaker 7: with the fourth quarter for most other retailers, for Nike,
Speaker 7: we expect sales to fall slightly. That's largely a function
Speaker 7: of just lackluster consumer demand, largely on the apparel side.
Speaker 7: I would say, not as much on the footwaar side.
Speaker 7: And where we're seeing weakness is across the board. Really,
Speaker 7: we're expecting Emia to be weak. It's expected to be
Speaker 7: downlow single digits. North America as well, and these two
Speaker 7: markets collectively are the largest markets for Nike. That said,
Speaker 7: China is important, and you know you asked how important
Speaker 7: is China's about fifteen percent of their sales and we're
Speaker 7: only expecting to see a low single digit gain about
Speaker 7: two percent in China, So that's not as robust as
Speaker 7: you would have expected earlier last year, when you know
Speaker 7: China had ended at zero COVID policy. So things are
Speaker 7: a little markye, but I would say that that's all
Speaker 7: near term. I do think the Nike still remains a
Speaker 7: solid brand, fifty billion dollars plus in sales, the largest
Speaker 7: sportswear brand in the world, and we don't think its
Speaker 7: position is at risk at all.
Speaker 1: Well, let's talk about Nike's initiative on direct to consumer sales.
Speaker 1: Has it made a material impact and has the affected
Speaker 1: some of the retailers that it supplies.
Speaker 7: So Nike had a few years ago made a big
Speaker 7: push towards DTC, you know, pulling out a lot of
Speaker 7: key wholesale accounts, including moderating its exposure to some of
Speaker 7: the department stores as well as Footlocker. We saw that
Speaker 7: flip on its heels last year, right when they said
Speaker 7: that they're going back into Footlocker in a more strategic way.
Speaker 7: They're also entering thes W and they're pushing more so
Speaker 7: in wholesale. Now what does this mean? Right? You know,
Speaker 7: DTC has higher margins and therefore when they had announced
Speaker 7: this move a few years back, it was good for margin.
Speaker 7: And now as they're pulling away, I wouldn't say they're
Speaker 7: pulling away from DTC, but I would say they're leaning
Speaker 7: more into wholesale. The margins do have a headwind from
Speaker 7: that mixshift, kind of flip flopping, but I would say
Speaker 7: wholesale is important. Their partnership with foot Locker is important
Speaker 7: because if you live in the suburbs of New Jersey
Speaker 7: like I do, it's hard to get to a Nike store.
Speaker 7: Right The flagship store in New York City is great,
Speaker 7: but it's two hours to get there. So where do
Speaker 7: you buy good Nike product? The outlets have usually, you know,
Speaker 7: product that came out maybe a year ago or six
Speaker 7: months ago, or stuff that's left over. And the only
Speaker 7: place really that you can find compelling Nike product in
Speaker 7: a suburb is at Dick's Sporting Goods. So coming back
Speaker 7: to some of these wholesale accounts, I think is a
Speaker 7: good move for Nike as it will make it be
Speaker 7: available to all of America. Again.
Speaker 1: Now to that point you've written about Nike finally getting
Speaker 1: control of its pandemic era inventory and supply chain problems.
Speaker 1: Are things back where they should be and is it
Speaker 1: supplying all this new product for consumers?
Speaker 7: I think supply is back and where it should be,
Speaker 7: so we don't for see any supply chain disruptions at
Speaker 7: Nike this year. In terms of supply within the marketplace,
Speaker 7: I think that's a little next. There are still excess
Speaker 7: inventories in the wholesale channels, so in North America specifically,
Speaker 7: we do think that that headman will persist at least
Speaker 7: through the first half of this calendar year or for
Speaker 7: Nike's fiscal fourth quarter. But around the world, as inventories
Speaker 7: are stabilized and the supply chains are operating at i
Speaker 7: would say near normal levels, we do think that there
Speaker 7: are tailwinds from this to be had in the second
Speaker 7: half of the calendar year twenty twenty four.
Speaker 1: And Nike is already the biggest women's athletic apparel and
Speaker 1: shoe brands, So are they banking a lot of growth
Speaker 1: on women customers.
Speaker 7: Yeah, So women's is actually a very very important category,
Speaker 7: not just for Nike but really for all the at
Speaker 7: leisure brands. It's a growing category and Nike does have
Speaker 7: a lead there. But I would say when you look
Speaker 7: at women's versus total sports, where the lead that Nike has,
Speaker 7: the gap between that is very different. So Nike is
Speaker 7: by far the largest sportswear brand and it has a
Speaker 7: large lead to its competitors, but when you look at
Speaker 7: women's the lead isn't as wide, right, So to me,
Speaker 7: the woman's playing field is anyone's game. So Nike is
Speaker 7: a leader today, but that doesn't mean that it will
Speaker 7: stay a leader forever if others also step up their
Speaker 7: efforts because they don't have a wide margin lead versus
Speaker 7: the rest of the competition.
Speaker 1: And how is it compared to like Lulu Lemon, which
Speaker 1: you know here in New York you see on all
Speaker 1: over women wearing everything right, Lulu Lemon also some athleta
Speaker 1: that's the gap brand is Nike moving into those types
Speaker 1: of products, the yoga pants, the stuff you wear to
Speaker 1: the supermarket or wherever they are.
Speaker 7: So the push for lifestyle athleticware has been something that
Speaker 7: most at leisure brands, including Nike, have been going after.
Speaker 7: It's a little different of a customer still, you know,
Speaker 7: we think where Lululemon shines is that it understands the
Speaker 7: women custom and are probably better than any of the
Speaker 7: other brands because that is where they shine. They have
Speaker 7: the right fit, they have the right material, they have
Speaker 7: the right function, they know how it works and they
Speaker 7: understand it. Nike has performance built into its women's war,
Speaker 7: but I don't know if it has the fashion right.
Speaker 7: Not to say that it's wrong, but I think it
Speaker 7: leans more towards performance versus where you have a little
Speaker 7: lemon yoga pant. It's performance and fashion. So I think
Speaker 7: that intersection is where Nike is trying to go to
Speaker 7: as well with women's but I think that will take time.
Speaker 7: It's not something that they can do overnight.
Speaker 1: Well, we're going to find out a lot more on Thursday. Well,
Speaker 1: our thanks to Blunham Goyle. She's senior US e Commerce
Speaker 1: and retail analysts at Bloomberg Intelligence and coming up on
Speaker 1: Bloomberg day Break weekend, a big decision this week on
Speaker 1: interest rates from the Bank of England. I'm Tom Busby
Speaker 1: and this is Bloomberg. This is Bloomberg day Break Weekend,
Speaker 1: our global look ahead at the top stories for investors
Speaker 1: in the coming week. I'm Tom Busby in New York.
Speaker 1: Up later in our program, earnings from one of China's
Speaker 1: biggest names in technology, and a look ahead to the
Speaker 1: next move from Australia's Central Bank. But first, with UK
Speaker 1: interest rates at historic highs, pressure is mounting on the
Speaker 1: Bank of England. While recent economic data suggests the economy
Speaker 1: may be moving in the right direction, one wrong move
Speaker 1: could undo all the progress made to date. The situation
Speaker 1: makes for a difficult choice for central bank policymakers who
Speaker 1: will vote where to move rates in the coming days.
Speaker 1: And for more, let's go to London and bring in
Speaker 1: Bloomberg daybreak, europe Banker Caroline hepger Tom.
Speaker 2: The last time we heard from the Bank of England
Speaker 2: Governor Andrew Bailey, he told us that when it comes
Speaker 2: to cutting interest rates in the UK, it's a question
Speaker 2: of when, not if.
Speaker 8: I think we've now changed the question really from how
Speaker 8: restrictive do we need to be for how long do
Speaker 8: we need to be restricted? That's important. We've also tokened
Speaker 8: the upside bias off. We haven't cleared a risk, by
Speaker 8: the way, a new risk actually, which is we're really
Speaker 8: reflecting obviously tragic events of them at least and the
Speaker 8: impact that can have through the Red Sea effects. So
Speaker 8: I think now the question is for us as really
Speaker 8: is for how long do we need to maintain the
Speaker 8: stance going forwards? You know I've said a number of
Speaker 8: times going We're not making predictions at this point we're
Speaker 8: setting up the framework. The things that we think are
Speaker 8: important to look at really haven't changed. Actually, so services, inflation,
Speaker 8: aspects of the labor market, the domestic drivers of inflation.
Speaker 2: That was Andrew Bailey speaking to Bloomberg Television after the
Speaker 2: last rates decision. Now, in the meantime, recent economic data
Speaker 2: signals really a step in the right direction, the Rank
Speaker 2: of England having emphasized its data driven approach. The UK
Speaker 2: economy rebounded in January after falling into a technical recession
Speaker 2: in the second half of last year. In addition to that,
Speaker 2: Britain's jobs market, which fueled inflationary pay rises immediately after
Speaker 2: the pandemic, does seem to be cooling, and cooling pretty sharply,
Speaker 2: with the first increase in unemployment since July. Despite those signs, though,
Speaker 2: the recent communication has suggested that the Bank of England
Speaker 2: is really in no hurry to ease policy, and signs
Speaker 2: of a rebound give it cover to wait a little
Speaker 2: bit longer for confirmation that inflation is on course for
Speaker 2: the durabile return to the two percent target. Now, Northern
Speaker 2: Trust chief economist Carl Tannenbaum has told us that the
Speaker 2: Bank of England does now have a difficult choice to make.
Speaker 9: I think it's the most complicated of the Big three.
Speaker 9: Even the Bank of Japan, which you'll meet later this month,
Speaker 9: is right pleased with what they're seeing on their inflation numbers.
Speaker 9: Most of us think that rates will be in positive
Speaker 9: territory before long. But the Bank of England, certainly a
Speaker 9: last monetary policy committee was the first that I can
Speaker 9: ever remember. They had votes for a hike, voste to
Speaker 9: remain stable and votes to cut, signifying that within the
Speaker 9: group there is a lot of disagreement over the diagnosis
Speaker 9: of inflation. I can understand why, given the conflicting signals
Speaker 9: that we're getting from labor markets.
Speaker 2: How would you characterize the state of the UK economy now?
Speaker 9: Stand still at best, I would say the quarterlyase have
Speaker 9: barely been a positive effectslight negative, I believe, and certainly
Speaker 9: the momentum that we're seeing in the United States is
Speaker 9: not present here in Europe. Part of that is attributable
Speaker 9: to the massive amount of fiscal spending that has been
Speaker 9: done still in the United States, even past the pandemic.
Speaker 9: That is an option that has not been available to
Speaker 9: Europe where budget constraints. Certainly that's around Jeremy Hunt's budget
Speaker 9: proposal illustrate how hard it will be to achieve any
Speaker 9: kind of fiscal expansion in Europe.
Speaker 2: That was the chief economist at Northern Trust, Carl Tannembaum,
Speaker 2: speaking to me on Bloomberg Radio. It's also worth considering
Speaker 2: how the decisions of international central banks will affect the
Speaker 2: policy makers here in the UK. So recently, the US
Speaker 2: treasure Sexuary Janet Yellen said that it is unlikely that
Speaker 2: market interest rates will return to levels that prevailed before
Speaker 2: the COVID nineteen pandemic. Bloomberg's chief UK economist, Dan Hansen
Speaker 2: tells me that the UK could see a sustained raft
Speaker 2: of rate cuts to come, but probably not at the
Speaker 2: next meeting.
Speaker 6: Yeah.
Speaker 10: I mean, I think this one's going to be a
Speaker 10: relatively they're say, boring meeting in the sense that no
Speaker 10: one's expecting any action. There was quite a big shift
Speaker 10: I think between November December and then to February. You know,
Speaker 10: the bank dropped its tightening bias, we got to vote
Speaker 10: for a cut, So we've had quite a big had
Speaker 10: quite a big shift, and now they've made it very clear.
Speaker 10: I mean you mentioned they're the communication they've made it
Speaker 10: very clear that they're pretty patient about the timing of
Speaker 10: the first rate cut and they're looking to the data.
Speaker 10: And I think that that will continue to be the
Speaker 10: story at this meeting, that they're just waiting for more information.
Speaker 2: Yeah, we saw that three way split quite unusual, didn't
Speaker 2: we about of England hawks, doves and some in the middle.
Speaker 2: Is that likely to return in future meetings? How much
Speaker 2: do you think that these individuals are going to coalesce
Speaker 2: around the decision making.
Speaker 10: Yeah, I mean, I actually think that's the thing to
Speaker 10: watch at this meeting. So remember back in February we
Speaker 10: had two for a hike, so Catherine Mann and Jonathan Haskell,
Speaker 10: one for a cut, Swatidinger and the rest went for
Speaker 10: a hold. We thought in February Jonathan Haskell would go
Speaker 10: for a hold. I think with what's happened to the
Speaker 10: pay data, there's a chance that he'll move to a hold.
Speaker 10: He's been very focused on the labor market. We get
Speaker 10: a CPI print the day before the decision that will
Speaker 10: be very important, particularly what happens to service his inflation.
Speaker 10: So our base case for the meeting is that he
Speaker 10: does go for a hold, So we get a slight
Speaker 10: shift in the makeup of the vote split. But to
Speaker 10: sort of answer your question directly, there will still be
Speaker 10: this three way split where you've got Catherine Mann going
Speaker 10: for a hike, seven of them going for a hold,
Speaker 10: and Swortidinger continuing to call for a cup.
Speaker 2: But I mean that the labor market and the wage
Speaker 2: data is so important. The ECB has said similar also,
Speaker 2: the labor market in the UK does seem to be cooling.
Speaker 2: We notice, for example, redundancies have started to tick up,
Speaker 2: okay from a low base, but they have, but the
Speaker 2: wage pressure is still there. There's still you know, some
Speaker 2: sizeable wage gains being offered.
Speaker 6: Yeah, there are.
Speaker 10: And that's the combination of that and services inflation, of
Speaker 10: the two things that they're just looking for information on
Speaker 10: and some more to gain the confidence to cut. I
Speaker 10: actually think looking at the wage data that we had
Speaker 10: the most recent wage data, it came in pretty weak
Speaker 10: actually on an underlying basis. I know, on a headline
Speaker 10: basis we're still up at six percent, which is way
Speaker 10: too high for the Bank of England to tolerate. But
Speaker 10: actually if you look at sort of underlying measures of
Speaker 10: pay and more timely measures of pay within that data set,
Speaker 10: things are calling off pretty quickly, and I think we're
Speaker 10: heading for an undershoot. On the Bank's February forecast on
Speaker 10: private sector regular pay, quite a big undershoot. The big
Speaker 10: risk on the horizon is the h in the national
Speaker 10: minimum wage.
Speaker 2: April.
Speaker 10: Yeah, yeah, exactly, so that that will be something that
Speaker 10: they're going to have they're going to be focused on.
Speaker 10: I think they're going to want to see data on
Speaker 10: that before they go ahead and cut. So, but I
Speaker 10: think the news on pay has been actually since the
Speaker 10: start of the year, and on inflation generally has been
Speaker 10: been pretty good. Things are tracking their forecast, if anything,
Speaker 10: coming in slightly below it, so that's that's good news.
Speaker 2: In terms of cuts them for the rest of the year.
Speaker 2: You know, we're pricing in less for the Bank of
Speaker 2: England than for other major central backs. Do you think
Speaker 2: that that holds this year?
Speaker 10: That view, so we have a slightly different view on
Speaker 10: all of this. I think one interesting thing with market
Speaker 10: pricing is that you have to remember it's a mean
Speaker 10: or an average, so that that could potentially be reflecting
Speaker 10: two scenarios, one where they don't cut a tool and
Speaker 10: one where they actually cut quite a lot. And actually
Speaker 10: we're in that second camp. So we're in the view
Speaker 10: that once they start, at least for a time, they'll
Speaker 10: cut once a meeting, they'll probably get the base rate
Speaker 10: down to about four percent, and then they'll take stock.
Speaker 10: Because the question really with this easing cycle is where
Speaker 10: it's neutral, like where is the sort of long term rate,
Speaker 10: where long term level where rates will settle, And there's
Speaker 10: obviously an enormous amount of uncertainty about that. But I
Speaker 10: think the reason why they will be able to go
Speaker 10: one A meeting, one of the big reasons they'll be
Speaker 10: able to go one A meeting is that in the
Speaker 10: second half of or from the spring and into the
Speaker 10: second half of the year, inflation is likely to be
Speaker 10: below two percent because of what we're going to see
Speaker 10: with energy prices. Yes, there's going to be core inflation
Speaker 10: still going to be around three percent, but I think
Speaker 10: the sort of risk to inflation expectations has gone. Bailey
Speaker 10: sort of hinted at that in his recent comments that
Speaker 10: they're less worried about second round effects. So I think
Speaker 10: there is a case of taking away some of that restrictiveness,
Speaker 10: and in argue, even if you're at four percent, the
Speaker 10: monetary party would still be weighing on the economy, it
Speaker 10: would still be restrictive. So I think there is a
Speaker 10: case for bringing rates down relatively quickly and then taking stock.
Speaker 6: Yeah.
Speaker 2: Interesting, I mean that sort of reflected in what Janet
Speaker 2: Yellen and the US Treasury sectory has been talking about
Speaker 2: in recent days. You know that we would be unlikely
Speaker 2: to return to pre pandemic levels in terms of yields.
Speaker 2: US treasure yields in the twenty ten on average two
Speaker 2: point three nine percent, but we're not likely to get
Speaker 2: back to that. But interesting that you say, you know,
Speaker 2: for five and a quarter to come down to four
Speaker 2: is the expectation. Do you think that the Bank of
Speaker 2: England will be influenced decisively by the Federal Reserve? I mean,
Speaker 2: history surely would say yes.
Speaker 10: I don't know about that. So I think the market
Speaker 10: perception is that the Fed leads the way in this
Speaker 10: inflation cycle. You can see why that would be the
Speaker 10: case because inflation is about six months ahead in the US.
Speaker 10: The sort of pro the disinflationary process is about six
Speaker 10: months ahead. The challenge to it, I guess, would be
Speaker 10: what happened in at the end of twenty twenty one,
Speaker 10: where the Bank started its hiking cycle, and the FED
Speaker 10: didn't start until early twenty twenty two, so it's not
Speaker 10: completely bound either FED.
Speaker 6: I mean it can't.
Speaker 10: Obviously, it can't completely disconnect purely because of the sort
Speaker 10: of what might happen to the exchange rate as a result.
Speaker 10: But I think it the economic picture, the sort of
Speaker 10: growth picture is very different in the UK, and as
Speaker 10: I say, there's going to be this story around below
Speaker 10: two percent inflation here. Granted it's as a result of
Speaker 10: energy prices, but nonetheless that that changes the picture dramatically.
Speaker 10: And I think the other thing to play in. You've
Speaker 10: got the FED on one side, you've got the political
Speaker 10: picture of the domestic political picture on the other, and
Speaker 10: the noises coming from MPs. If inflation is below two
Speaker 10: percent and the Bank of England isn't seen to be
Speaker 10: sort of doing something about that and responding to it,
Speaker 10: the pressure is going to mount.
Speaker 2: I think, yeah, election general election expected in the coming months.
Speaker 2: Of course, do you think that it could be good
Speaker 2: news for UK equities if we get right cuts of
Speaker 2: the magnitude that you've talked about.
Speaker 10: I mean I would, I would differentiate between cyclical and
Speaker 10: structural here. So when you when you cut rates. It's
Speaker 10: a cyclical boost to the economy, and I guess it
Speaker 10: goes to the problem why UKs have underperformed even if
Speaker 10: it's one hundred basis points of rate cuts two hundred
Speaker 10: basis points of raightcuts. Are we going to get a
Speaker 10: cyclical boost to the economy. Does that change the underlying
Speaker 10: structural picture of wheat productivity growth? No, so, I don't
Speaker 10: think it's going to be a long term boost to
Speaker 10: the exity picture.
Speaker 7: Now.
Speaker 2: That was Bloomberg's chief for UK economist Dan Hanson discussing
Speaker 2: the path ahead for UK rates as we await the
Speaker 2: twenty first of March Bank of England decision. I'm Caroline
Speaker 2: Hepgar here in London. You can catch us every weekday
Speaker 2: morning for Bloomberg Daybreak. You're at beginning at five am
Speaker 2: in London and one am on Wall Street.
Speaker 7: Tom.
Speaker 1: Thank you, Caroline, and coming up on Bloomberg day Break weekend.
Speaker 1: What could be a big move from Australia's Central Bank
Speaker 1: this week and earnings from one of China's biggest tech companies.
Speaker 1: I'm Tom Busby and this is Bloomberg. I'm Tom Busby
Speaker 1: in New York with your global look ahead at the
Speaker 1: top stories for investors in the coming week. The Reserve
Speaker 1: Bank of Australia set to announce its next decision on
Speaker 1: interest rates. We'll have more shortly with Doug Chrisner, but
Speaker 1: first let's head to Hong Kong and Brian Curtis.
Speaker 3: Tom we look ahead to earnings from ten cent holdings.
Speaker 3: It might be a little early, but we want to
Speaker 3: see if a little less scrutiny on the regulatory front
Speaker 3: might grease the wheels a bit four ten cent In China,
Speaker 3: the NPC approved a ten percent increase in the budget
Speaker 3: for science and technology, and policymakers are desperate to unleash
Speaker 3: what's referred to as quality productive forces. Bloomberg Intelligence says
Speaker 3: that ten Cents should be able to increase revenues by
Speaker 3: double digits in twenty twenty four. To talk a little
Speaker 3: bit about the earnings, were joined by Robert Lee, Bloomberg.
Speaker 6: Intelligence Senior analyst.
Speaker 3: Thanks very much Robert for being with us. So ten
Speaker 3: Cents third quarter revenue was twenty one point five billion
Speaker 3: dollars and that was up ten percent year over a year.
Speaker 3: Let's start off with this, what are you expecting on
Speaker 3: revenue and profit in this latest reporting period.
Speaker 11: So I don't expect any major surprises from the results
Speaker 11: when we hear them next week. The company should have
Speaker 11: experienced a solid rebound driven by the reopening of China's economy,
Speaker 11: with earnings increasing in the thirty percent plus range, so
Speaker 11: that you know they're set to report strong figures. But
Speaker 11: clearly the stock market's always looking ahead into this year,
Speaker 11: and as you already said in your introduction, whilst the
Speaker 11: growth is likely to normalize this year, this is a
Speaker 11: company that's still capable of delivering solid double digit free
Speaker 11: cash flow growth for the next three years at least.
Speaker 3: So you're more constructive obviously on the company now than
Speaker 3: you have been over the past year. What's at the
Speaker 3: center of that.
Speaker 11: When we launched coverage on ten Cent approximately a year ago,
Speaker 11: I think there were very high expectations, driven by the
Speaker 11: optimism that came with the reopening of China's economy, and
Speaker 11: there was a view out there in the market that
Speaker 11: the company we'd be back to business as usual. We
Speaker 11: didn't believe that view, and core thesis focused on some
Speaker 11: medium term structural headwinds that the company's likely to experience.
Speaker 11: So we maintain that view. But since we launched coverage
Speaker 11: on them close.
Speaker 6: To a year ago.
Speaker 11: The stock prices as substantially underperformed. I mean it's down
Speaker 11: over thirty percent in absolute terms. And also there's been
Speaker 11: a rebalancing of expectations in the market, and I think
Speaker 11: the market is taking a more realistic view as to
Speaker 11: what level of growth this company can realistically deliver over
Speaker 11: as I said, the next few years. So to expect
Speaker 11: this company to deliver double digit cash growth in the
Speaker 11: low to mid teen rage is totally appropriate. And I
Speaker 11: think there's now you know, things are more imbalanced, which
Speaker 11: is why we recently added it to our focus list
Speaker 11: as an idea.
Speaker 3: I mentioned a possible lighter touch from regulators that might
Speaker 3: be coming.
Speaker 6: What are you hearing on that level?
Speaker 11: Okay, I think on that again. Winding the clock back
Speaker 11: to two three years ago, China's tech sectors dominated by
Speaker 11: these two internet LIFs so Tencent and Ali Baba, which
Speaker 11: have been arguably become too powerful. I mean they had
Speaker 11: fingers in a lot of pies. They dominated a lot
Speaker 11: of industries, with allegations that they potentially abuse their power
Speaker 11: in some way, you know, trying to shut out competition
Speaker 11: or whatever. So I think of a lot of regulation
Speaker 11: that we've seen come through in the last couple of
Speaker 11: years as being trying to level the playing field. That's
Speaker 11: one thing. I think the second focus that the regulator
Speaker 11: has been to protect the more vulnerable in society, particularly children, etc.
Speaker 11: So all of that has now worked through and I
Speaker 11: think we're you know, we're entering a period of more
Speaker 11: stability on the regulatory front, and particularly given the economic
Speaker 11: challenges that China faces, I think the Chinese government has
Speaker 11: now come to realize that actually we need the support
Speaker 11: of these two companies and you know, their core to
Speaker 11: the future direction of the tech sector and you know,
Speaker 11: major drivers of economic growth. So I think we've seen
Speaker 11: a more constructive tone from central government and expect that
Speaker 11: to continue over the next few years.
Speaker 3: What have we seen with game approvals by the authorities
Speaker 3: and also how tough are the curbs that are in
Speaker 3: place on trying to monetize from withinside these games.
Speaker 11: We've seen a normalization of the game approvals, having previously experienced,
Speaker 11: you know, a couple of hiatus where the approvals completely stopped.
Speaker 11: So we're now back to a run rate of around
Speaker 11: one hundred or so approvals a month, which is still
Speaker 11: well down on where we were two or three years ago.
Speaker 11: But as I said, I think we've hit a steady
Speaker 11: state on that front. Ten Cent and its closest competitive
Speaker 11: net Ease are picking up a reasonable number of approvals,
Speaker 11: which helps give you some confidence that this business can
Speaker 11: again achieve double digit earnings growth over the next few years. Now,
Speaker 11: again that does not match the strong twenty thirty percent
Speaker 11: growth they delivered two three years ago, and again tying
Speaker 11: in with the structural headwinds that I hinted at a
Speaker 11: few minutes ago, I think the business is entering a
Speaker 11: period of slower growth. But still I don't I think
Speaker 11: there's any major concern with a business that can grow
Speaker 11: double digit So I think, you know, we're seeing more
Speaker 11: stability on that front.
Speaker 3: Most companies are somewhat reliant on the general levels of
Speaker 3: growth in the country in which they operate. With ten Cent,
Speaker 3: it has so many irons in the fire, from cloud
Speaker 3: computing to gaming to fintech. I'm kind of curious when
Speaker 3: we look at the total pie. Does Tencent move and
Speaker 3: groove more on how the economy is doing, or do
Speaker 3: they have enough separate drivers that they can if they're
Speaker 3: relatively left alone by the regulators that they can make
Speaker 3: money even during difficult times. How do you see that balance.
Speaker 11: That's a great question. I mean, first observation is whilst
Speaker 11: again people often mentioned Ali Baba and Tenset and the
Speaker 11: same breadth breath, they're very different businesses. Ali Baba's far
Speaker 11: more focused on the e commerce side, which is a
Speaker 11: smaller element with intencent So I think relative to Ali
Speaker 11: Baba and some of the e commerce peers who are
Speaker 11: suffering from heightened competition from low cost new entrance, that's
Speaker 11: not an issue for ten Cents. It's a far more
Speaker 11: diversified business with the benefits from stronger technical barriers to
Speaker 11: entry in its core markets. So it's a much better,
Speaker 11: more diversified story. It is still tied to economic growth.
Speaker 11: But again if you look at their fintech business and
Speaker 11: you look at their waihin or we Chat super app,
Speaker 11: I mean, this is a ubiquitous part of life in China.
Speaker 11: If you look at the process that everyday payments, so
Speaker 11: buying coffees, buying taxis, you know, eating out restaurants, So
Speaker 11: it's sort of every day spend which is still sensitive
Speaker 11: to the overall economic outlook to some degree. But I
Speaker 11: would argue is less sensitive than the pure e commerce
Speaker 11: plays who are more dependent on larger purchases, which are
Speaker 11: things that people could cut back on if they're looking
Speaker 11: to tighten their belts.
Speaker 3: Robert, Thank you, Robert Lee, Bloomberg Intelligence Senior Analyst. Now
Speaker 3: let's get too Doug.
Speaker 12: Grisner, Thanks Brian. Australia's Central Bank will be meeting in
Speaker 12: the weak ahead, and policy makers down Under will consider
Speaker 12: whether now is the time to begin lowering interest rates.
Speaker 12: Let's preview the meeting with Bloomberg's James McIntyre, our economist
Speaker 12: covering Australia and New Zealand. I'm wondering, James, whether now
Speaker 12: is the time to talk about a rate cut or
Speaker 12: maybe it's too soon.
Speaker 13: Well, in our of you, we think it's too soon.
Speaker 13: So the RBA has received some data that they that
Speaker 13: they've liked. Over since their February meeting. We're on the
Speaker 13: new eight meetings a year, no longer monthly meeting schedule
Speaker 13: for the RBA, so our next meeting won't come before May,
Speaker 13: and they've had GDP data CPI data. They've said in
Speaker 13: comments that they've been broadly in line with what they
Speaker 13: are expecting and what their February forecast suggested, So there's
Speaker 13: likely to be nothing that's really going to give them
Speaker 13: any kind of burning platform or push them to do
Speaker 13: anything other than stay on hold of this meeting.
Speaker 12: Here in the US, one of the debates that we're
Speaker 12: having is whether or not there is a risk that
Speaker 12: the Fed may need to remain higher for longer because
Speaker 12: inflation is just too sticky, too stubborn. Is there the
Speaker 12: same risk in Australia.
Speaker 13: There has been that concern, and in fact, some of
Speaker 13: the narrative that we've seen around the RBA is that
Speaker 13: because they were late to the party on hiking rates
Speaker 13: and haven't lifted as much as the fair that they
Speaker 13: might be slow slow to begin easing as well, or
Speaker 13: might be one of the laggards when the using cycle
Speaker 13: eventually arises. Our viyw on that is that this pain
Speaker 13: that is actually much much more effective when it comes
Speaker 13: to monetary policy within the Australian economy is something that
Speaker 13: means that well, even though the RBA might be seeing
Speaker 13: inflation that they're not quite comfortable with, they know that
Speaker 13: the damage that's being done to households is extreme enough
Speaker 13: that will be guaranteeing inflation will be going where it
Speaker 13: wants to. There's nothing like a pretty weak demand environment
Speaker 13: to mean that some of that stickiness inflation actually becomes
Speaker 13: a lot less sticky, and some of those price rises
Speaker 13: or increases eroad a little bit fast than some are expecting.
Speaker 13: We think that's where the economy is likely to go
Speaker 13: down under the coming months.
Speaker 12: So we've talked about the mortgage market, touched on households.
Speaker 12: How are businesses feeling right now and what's showing up
Speaker 12: when you look at the labor market.
Speaker 13: Well, business confidence, it's okay, some of the conditions are soft.
Speaker 13: We did get a reading from businesses about their investment
Speaker 13: plans and they are actually indicating that things are very
Speaker 13: very strong, quite good, especially in the non mining sector,
Speaker 13: which is something that the RBA has been wanting to
Speaker 13: see for close to a decade now, since the mining
Speaker 13: of the previous mining boom peaked back in twenty twelve
Speaker 13: twenty thirteen, looking for those non mining firms to step up.
Speaker 13: A population boom has seen them step up, But we
Speaker 13: are still at this point where I think that you know,
Speaker 13: even though things are looking good, you can still have
Speaker 13: a good old fashioned demand downturn that could see those
Speaker 13: businesses decide that a prospective investment plan might not make sense,
Speaker 13: and if they all pull back on mass with the
Speaker 13: economy looking potentially a bit weaker than many might have suggested,
Speaker 13: that's that's the RBA could create by staying too high
Speaker 13: for too long, and it's one that we think that
Speaker 13: they'll want to avoid. And that's why we think that
Speaker 13: some of that softening on rates will come through, maybe
Speaker 13: not this month, but definitely when we see them meet
Speaker 13: again later in May.
Speaker 12: Well, that was my next question. If you could kind
Speaker 12: of lay out the pivoting. Let's accept your notion right
Speaker 12: now and the notion that Bloomberg Economics is operating under,
Speaker 12: which is that the cash rate will be held steady
Speaker 12: at four point three five percent in the coming week
Speaker 12: when it's time to pivot, can we talk about magnitude
Speaker 12: and trajectory. What might that look like?
Speaker 13: Look it really depends how the economy is shaping up.
Speaker 3: Right.
Speaker 13: We could have a scenario where if there is some
Speaker 13: sort of shock that comes out of left field, obviously
Speaker 13: not our base case, then we could see the RBA
Speaker 13: move quite sharply. That's what they've done before, even with
Speaker 13: inflation outcomes in the rear view mirror remaining quite high.
Speaker 13: They still cut and cut aggressively. But let's talk about
Speaker 13: not the kind of hypothetical risk case, but what is
Speaker 13: more our base case scenario. Well, we see the RBA
Speaker 13: beginning to deliver our more gradual twenty five basis points
Speaker 13: maybe once a quarter hikes as sorry cuts, I should say,
Speaker 13: as the easing cycle goes through. So we think that
Speaker 13: could begin in May. However, the next sort of set
Speaker 13: of opportunities we think would then be if they decide
Speaker 13: to stay on hold in May and see what's going
Speaker 13: on through the middle of the year in Australia, That
Speaker 13: around about August could be the next opportunity. That February, May,
Speaker 13: August and November they're those key meetings where the RBA
Speaker 13: does their big quarterly forecast reviews, and we think that
Speaker 13: once they do do the review this time around, it
Speaker 13: could be enough to justify a cut. If not, we'll
Speaker 13: see that cut coming in August and a steady stream
Speaker 13: of ongoing twenty five basis point cuts. If there's no
Speaker 13: emergency situation which suggesting that demand is really really weak
Speaker 13: and they need to do a lot more and a
Speaker 13: lot more in a hurry.
Speaker 12: Great insights. James, thanks for stopping by to help us
Speaker 12: set up the ring. In the coming week, Bloomberg's James McIntyre,
Speaker 12: our economist covering Australia and New Zealand. I'm Doug Prisner.
Speaker 12: You can join Brian Curtis and myself weekdays here from
Speaker 12: Bloomberg day Break Asia, beginning at eight am in Hong
Speaker 12: Kong eight pm on Wall Street.
Speaker 1: Tom, Thank you, Doug, and that does it for this
Speaker 1: edition of Bloomberg day Break Weekend. Join us again Monday
Speaker 1: morning at five am Wall Street time for the latest
Speaker 1: on markets overseas and the news you need to start
Speaker 1: your day. I'm Tom Buzzby. Stay with us. Top stories
Speaker 1: and global business headlines are coming up right now.