WEBVTT - Daybreak Weekend: Retail Preview, UK Budget, China PMI 0:00:00.240 --> 0:00:07.720 Bloomberg Audio Studios, Podcasts, radio news. 0:00:10.960 --> 0:00:13.920 This is Bloomberg Daybreak Weekend, our global look at the 0:00:13.920 --> 0:00:16.800 top stories in the coming week from our Daybreak anchors 0:00:16.920 --> 0:00:19.479 all around the world. Straight Ahead on the program, we 0:00:19.480 --> 0:00:22.720 look ahead to earnings from IT Hardware, Giant Dell, and 0:00:22.880 --> 0:00:27.040 retail ahead of the Thanksgiving holiday. I'm Nathan Hager in Washington. 0:00:27.440 --> 0:00:29.760 I'm Carolin hepget here in London, where we're looking ahead 0:00:29.800 --> 0:00:32.640 to be a case highly anticipated or too budget. 0:00:32.800 --> 0:00:36.960 I'm det Prisner looking at why China's economy continues to struggle. 0:00:38.280 --> 0:00:42.320 That's all straight ahead on Bloomberg Daybreak Weekend on Bloomberg 0:00:42.360 --> 0:00:46.040 eleven three year, New York, Bloomberg ninety nine to one, Washington, DC, 0:00:46.560 --> 0:00:51.680 Bloomberg ninety two nine Boston, DAB Digital Radio, London, Syrias 0:00:51.840 --> 0:00:55.360 XM one one, and around the world on Bloomberg Radio, 0:00:55.440 --> 0:00:57.560 dot Com and the Bloomberg Business app. 0:01:02.640 --> 0:01:05.400 Good day to you. I'm Nathan Hager. We begin today's 0:01:05.400 --> 0:01:08.560 program with more tech earnings. Yep, we're not quite done 0:01:08.600 --> 0:01:12.040 with them just yet. Well here from IT Hardware Giant Dell. 0:01:12.360 --> 0:01:15.240 It opens it's third quarter books after the market close 0:01:15.400 --> 0:01:18.760 on Tuesday. Ahead of it We're joined by Wu jin Ho, 0:01:19.080 --> 0:01:23.160 senior technology analyst for Bloomberg Intelligence. Great to speak with you, 0:01:23.360 --> 0:01:25.520 and I guess we're sort of coming off the glow 0:01:25.680 --> 0:01:29.240 of Nvidia's earnings this past week, Right, does the AI 0:01:29.360 --> 0:01:32.240 chip giant inform how you're thinking about what we could 0:01:32.280 --> 0:01:33.520 get from Dell this week? 0:01:34.200 --> 0:01:36.760 Yeah, Hey, Nathan, thanks for having me on. You know, 0:01:36.920 --> 0:01:40.440 the Nvidia results are actually quite positive for Dell's AI story. 0:01:41.760 --> 0:01:44.680 You know, there's a twenty billion dollar sales outlook for 0:01:44.760 --> 0:01:48.800 fiscal twenty six. There is maybe a little bit rooper 0:01:48.920 --> 0:01:52.000 upside in the third quarter results and as well as 0:01:52.040 --> 0:01:56.720 the fourth quarter outlook and the twenty five The fiscal 0:01:56.720 --> 0:02:00.240 twenty five twenty seven outlook looks very promising as well, 0:02:00.280 --> 0:02:03.840 given the momentum. Now, the issue is its profitability, Right, 0:02:04.240 --> 0:02:08.200 the AI story AI service have not been the most 0:02:08.200 --> 0:02:12.160 profitable for the industry. Dell has actually done a fairly 0:02:12.160 --> 0:02:13.760 good job and we'll see where they are on the 0:02:13.760 --> 0:02:14.960 profit margin side. 0:02:15.160 --> 0:02:18.400 Well, does that tell you then that we could see 0:02:18.560 --> 0:02:22.000 the AI data center business for Dell overshadow it's more 0:02:22.120 --> 0:02:24.000 traditional PC business. 0:02:24.560 --> 0:02:26.679 Well, look, that's going to be one of the data 0:02:26.720 --> 0:02:29.079 points that investors are going to be pointing to there's 0:02:29.120 --> 0:02:32.400 actually a lot of controversy on Dell heading into the print. 0:02:33.120 --> 0:02:37.960 For the traditional businesses, memory pricing has come in focus. 0:02:39.080 --> 0:02:41.600 You know, the DRAM chips that goes into your PCs 0:02:41.639 --> 0:02:44.760 as well as the servers that's been up three hundred 0:02:44.800 --> 0:02:48.160 percent over the last month or so, and that could 0:02:48.200 --> 0:02:52.000 potentially not only affect margins in the near term, but 0:02:52.080 --> 0:02:57.079 also the pricing dynamics. And given how elastic in elastic 0:02:57.160 --> 0:02:59.920 that the PCs can be, that could affect the man. 0:03:00.480 --> 0:03:03.040 Well, how could Dell potentially get past some of the 0:03:03.160 --> 0:03:06.919 drag on its margins that you see from the AI servers. 0:03:07.600 --> 0:03:11.480 Yeah, it's really tough to say. It's probably going to 0:03:11.520 --> 0:03:13.560 be very, very tough. And they actually did a good 0:03:13.639 --> 0:03:18.320 job out of their recent analyst day on keeping their 0:03:18.320 --> 0:03:23.240 guidance on AI server margins low. They've guided to admit 0:03:23.320 --> 0:03:26.880 the high single digit AI server margin, which is a 0:03:27.040 --> 0:03:31.359 very sobering outlook and a realistic outlook. So if they 0:03:31.400 --> 0:03:35.400 do a better job on the AI server side, on 0:03:35.480 --> 0:03:39.000 the margin profitability side, there is room for upside, but 0:03:39.160 --> 0:03:43.600 it's already baked into expectations. So I'm comforted by that now. 0:03:43.640 --> 0:03:45.960 In your note leading up to these earnings. You say 0:03:46.000 --> 0:03:48.080 you're looking for signs of improvement from Dell when it 0:03:48.120 --> 0:03:51.120 comes to operational changes. Can you walk us through what 0:03:51.120 --> 0:03:51.920 you're thinking there. 0:03:52.560 --> 0:03:56.400 Yeah, absolutely so, a couple of things that Dell has 0:03:56.440 --> 0:03:59.640 been doing over the past couple of quarters of streamlining 0:03:59.720 --> 0:04:06.840 the operations, cutting costs, and they actually were on the 0:04:06.880 --> 0:04:10.800 forefront on some of the cost actions in terms of 0:04:11.440 --> 0:04:15.800 relative to the growing AI mix, And I do think 0:04:15.840 --> 0:04:20.000 there's scope for Dell to maintain a high single digit 0:04:21.360 --> 0:04:25.840 operating margin profile despite a growing AI mix. 0:04:26.320 --> 0:04:28.599 Now, of course, a lot of people who follow this 0:04:28.680 --> 0:04:32.200 company closely know that the federal government is a pretty 0:04:32.200 --> 0:04:35.839 important customer for Dell. Of course we've had a government 0:04:35.960 --> 0:04:40.120 shut down. Now that the government's back open, how could 0:04:40.120 --> 0:04:42.080 that feed into the outlook for Dell? 0:04:42.920 --> 0:04:47.520 Yeah, so, well, from from a results perspective, you know, 0:04:48.440 --> 0:04:50.320 there might be a chance that it might be a 0:04:50.400 --> 0:04:53.919 drag on earnings. Now, No, the outlook is going to 0:04:53.960 --> 0:04:58.240 be a little iffy in the sense that it may 0:04:58.279 --> 0:05:01.479 take a little bit, little bit or some time for 0:05:02.240 --> 0:05:06.240 the federal government to really start ramping up their spending engine, 0:05:07.000 --> 0:05:11.839 So there might be some headwind on the growth outlook. 0:05:12.080 --> 0:05:14.440 But it's going to be just a temporary blip in 0:05:14.520 --> 0:05:18.400 my mind, and should the focus will turn to fiscal 0:05:18.440 --> 0:05:20.200 twenty twenty seven guidance thereafter. 0:05:20.800 --> 0:05:25.040 And in terms of the AI business overall, does that 0:05:25.080 --> 0:05:28.400 point to opportunities for Dell? Or is the competition just 0:05:28.400 --> 0:05:29.400 too fierce out there? 0:05:30.440 --> 0:05:33.880 No, you know, I will tell you all the AI 0:05:33.960 --> 0:05:38.160 server vendors have been very aggressive in terms of winning 0:05:38.760 --> 0:05:45.200 the footprint. Among the AI server vendors to have stood out, 0:05:46.240 --> 0:05:49.719 super Micro and Dell being the other one. I do 0:05:49.760 --> 0:05:53.520 think that of you know, of the hardware vendors are 0:05:53.640 --> 0:05:55.320 that are out there, Dell is probably one of the 0:05:55.320 --> 0:05:59.720 better position to win more global global footprint sales. And 0:06:00.279 --> 0:06:02.320 you know, good back to you margin question that could 0:06:02.360 --> 0:06:05.560 help the margins as other players decide to back out. 0:06:05.960 --> 0:06:08.760 Appreciate this, Thank you so much. That is wou Jin Hoe, 0:06:08.880 --> 0:06:13.360 Senior technology analyst for Bloomberg Intelligence. We move next to 0:06:13.520 --> 0:06:16.120 the retail space. A couple names in that sector open 0:06:16.160 --> 0:06:18.760 their books on Tuesday as well. That would be Cohle's 0:06:18.839 --> 0:06:22.640 and Abercrombie and Fitch. We're also expecting overall retail sales 0:06:22.720 --> 0:06:24.479 numbers that would have come out sooner if not for 0:06:24.520 --> 0:06:28.160 the government shutdown September figures are due out Tuesday as well. 0:06:28.600 --> 0:06:32.960 Busy times for Mary Ross Gilbert of Bloomberg Intelligence. She's 0:06:32.960 --> 0:06:35.880 a senior equity analyst who covers retail. It is so 0:06:35.960 --> 0:06:38.200 great to have you with us as well. Of course, 0:06:38.240 --> 0:06:41.679 we've been hearing from so many of the retail giants lately. 0:06:41.760 --> 0:06:44.400 We got target results that were kind of different from 0:06:44.560 --> 0:06:47.719 Walmart's results. What does that tell us about what we 0:06:47.760 --> 0:06:51.799 could be getting this week? Mary, So, Nathan, it's. 0:06:51.600 --> 0:06:53.920 A great question, and I think what we're going to 0:06:53.960 --> 0:06:57.839 see come Tuesday, I think Abercrombie actually could have a 0:06:57.920 --> 0:07:00.640 miss and it's really going to be on their gamesake, 0:07:01.120 --> 0:07:03.200 and we might have you know, and this is based 0:07:03.240 --> 0:07:07.600 on Bloomberg Second Measure transaction data. We might have less 0:07:07.640 --> 0:07:10.120 of an increase on the Hollerster side of the brand, 0:07:10.560 --> 0:07:14.160 so that could also impact their results. But with regard 0:07:14.240 --> 0:07:18.200 to Coals, Coals, we think they probably need expectations. They're 0:07:18.240 --> 0:07:21.040 looking for a like a round of four or five 0:07:21.080 --> 0:07:23.640 percent decline in sales because they're still trying to get 0:07:23.640 --> 0:07:26.760 their assortments right. And then of course operating margin is 0:07:26.840 --> 0:07:29.360 expected to drop and it's pretty low as it is. 0:07:29.400 --> 0:07:32.440 It's already in the low single digits, so you know, 0:07:32.760 --> 0:07:37.200 Coals really has a lot of a lot to get right, 0:07:37.680 --> 0:07:39.960 and that's going to be a big focus how they're 0:07:40.000 --> 0:07:43.600 positioned for holiday and where their comp sales are on 0:07:43.640 --> 0:07:46.560 a monthly basis, because we did see in July that 0:07:46.600 --> 0:07:49.360 they were flat, so there was encouragement that maybe those 0:07:49.400 --> 0:07:52.600 sales could improve with the third quarter. So we'll see 0:07:52.640 --> 0:07:55.160 that when they go to report on Tuesday. 0:07:55.680 --> 0:07:57.720 Let's hone in a little bit more on Coals because 0:07:57.720 --> 0:08:00.120 this is one of those kind of departments store or 0:08:00.240 --> 0:08:03.640 is that sort of feeds to all ends of the 0:08:03.680 --> 0:08:07.880 retail spectrum, doesn't it whether you're a value conscious consumer 0:08:08.000 --> 0:08:10.200 or someone who's more willing to spend on the high end. 0:08:12.000 --> 0:08:16.280 Yeah, they do. They really skewed to the lower end consumer, 0:08:16.400 --> 0:08:19.320 you know, really on the value segment, as you pointed out, 0:08:19.680 --> 0:08:22.360 And one of the merchandising mistakes that they made last 0:08:22.440 --> 0:08:25.080 year is that they really they cut back on private 0:08:25.160 --> 0:08:29.440 label and that was really a good category for them. 0:08:29.720 --> 0:08:33.160 The brands that they have, the private brands like so Sonoma, 0:08:35.240 --> 0:08:38.680 really resonate with their customers and so bringing those back, 0:08:38.720 --> 0:08:41.160 they've already started to see a boost in their sales 0:08:41.200 --> 0:08:43.480 because of that. The other thing they did was they 0:08:43.520 --> 0:08:47.320 got rid of or honed back on petite sizing, and 0:08:47.360 --> 0:08:51.400 that was another very very important category for them having 0:08:51.480 --> 0:08:55.319 that exercising, So bringing all that back, they're already seeing 0:08:55.360 --> 0:08:58.959 a lift and it's also higher margins, so that's also 0:08:59.280 --> 0:09:01.800 helping them on the margin side. So we haven't seen 0:09:02.160 --> 0:09:05.200 the erosion that we thought we would with tariffs, so 0:09:05.240 --> 0:09:08.480 they've really made no comments on tariffs having an impact. 0:09:08.760 --> 0:09:11.240 So that's going to be, you know, a big focus. 0:09:11.280 --> 0:09:13.440 But really, you know, Macy's is going to come in 0:09:13.480 --> 0:09:15.680 the following week and we think we're going to see 0:09:15.679 --> 0:09:20.320 better trends there because we think their strategy going in 0:09:20.400 --> 0:09:24.760 and bringing back service of bringing in more relevant brands 0:09:25.600 --> 0:09:28.319 is really starting to show some traction there. And we 0:09:28.720 --> 0:09:33.679 should see potentially positive comp sales come out of Macy's 0:09:33.679 --> 0:09:36.400 for the go forward business, because that's really the focus there. 0:09:36.800 --> 0:09:41.880 Dillard's already reported and they came in with a very 0:09:41.960 --> 0:09:45.160 nice three percent increase in comp sales, So a good 0:09:45.240 --> 0:09:46.960 sign for department stores. 0:09:47.559 --> 0:09:50.079 And there are probably some investors who have memories of 0:09:50.200 --> 0:09:55.240 the scandal surrounding the previous CEO of Coles. Has the 0:09:55.320 --> 0:09:56.960 department store gotten past that. 0:09:58.920 --> 0:10:02.800 I think they have real The current interim CEO that 0:10:02.840 --> 0:10:06.079 they have seems to be doing a really good job 0:10:06.400 --> 0:10:10.439 very quickly getting things back into the store that matter. 0:10:10.520 --> 0:10:13.000 For example, they're going to have fine jewelry and over 0:10:13.120 --> 0:10:15.959 twenty five percent of the stores. I mean, yeah, they 0:10:16.000 --> 0:10:18.440 need to have it in the vast majority of the 0:10:18.440 --> 0:10:21.640 stores for the holiday season. But it's a big improvement 0:10:21.760 --> 0:10:24.840 from when they brought in so fora and they did 0:10:24.840 --> 0:10:27.360 it as a replacement of jewelry, not something you can 0:10:27.440 --> 0:10:31.400 really do because that's a key gifting category for consumers 0:10:31.480 --> 0:10:35.720 during the holidays and other key gifting seasons. So he's 0:10:36.160 --> 0:10:41.560 making some decisions very quickly that are showing green shoots 0:10:41.600 --> 0:10:46.040 of improvement there, and I think that is encouraging for Cohle's. 0:10:46.160 --> 0:10:47.880 And let's turn in the time we have left to 0:10:48.120 --> 0:10:51.400 Abercrombie and Fitch. You mentioned some of the challenges that 0:10:51.640 --> 0:10:54.520 some of its specific brands could be facing. Talk us 0:10:54.559 --> 0:10:56.600 a little bit more through that and how name brand 0:10:56.600 --> 0:11:00.480 apparel is faring overall in this current economic environment. 0:11:02.400 --> 0:11:05.680 Yeah, so, Nathan, Actually, overall, I would say apparel overall 0:11:06.080 --> 0:11:09.640 looks to be very strong, especially for those that are 0:11:09.679 --> 0:11:12.320 executing and if you look on let's say the off 0:11:12.360 --> 0:11:16.480 price because we had TJX report and they had great numbers, 0:11:16.920 --> 0:11:19.400 So that just goes to show you they're carrying all 0:11:19.440 --> 0:11:22.640 the name brands and the consumers love it, so they're 0:11:22.640 --> 0:11:27.439 flocking to off price. But going back to Abercrombie, Abercrombie, 0:11:27.600 --> 0:11:31.920 the namesake brand, has posted four years of double digit 0:11:32.040 --> 0:11:35.840 comp sales increases, so we're now cycling those four years 0:11:36.280 --> 0:11:39.280 and thus why their sales are coming in lower year 0:11:39.320 --> 0:11:42.120 over year on a comp sales basis. So it's really 0:11:42.240 --> 0:11:46.640 hard to keep bringing in more newness, more excitement to 0:11:46.760 --> 0:11:49.760 keep that going. And their core customer there are really 0:11:49.800 --> 0:11:54.520 the millennials. Their Hollister brand has really shows that that's 0:11:54.600 --> 0:11:58.760 still performing well. Now is it performing as good as 0:11:58.760 --> 0:12:02.560 analysts expect based on the data, We're not so sure, 0:12:02.800 --> 0:12:04.920 but that's something we're going to look for next Tuesday 0:12:04.920 --> 0:12:08.040 when they go to report their results. And Hollister really 0:12:08.080 --> 0:12:12.360 caters to the gen Z customer, and that customer, by 0:12:12.360 --> 0:12:15.200 the way, loves to shop in store. Seventy percent of 0:12:15.240 --> 0:12:19.960 their sales are generated in store, and Abercrombie sixty percent 0:12:20.000 --> 0:12:21.360 are generated online. 0:12:21.720 --> 0:12:24.360 Lots to think about in the retail space. Thank you 0:12:24.400 --> 0:12:27.480 for this, Mary really appreciate it. That's Mary Ross Gilbert, 0:12:27.520 --> 0:12:31.720 senior equity analyst covering retail for Bloomberg Intelligence, and coming 0:12:31.800 --> 0:12:34.240 up on Bloomberg day Break weekend, we'll look ahead to 0:12:34.400 --> 0:12:39.079 the UK's highly anticipated autumn budget. I'm Nathan Hager, and 0:12:39.200 --> 0:12:53.000 this is Bloomberg. This is Bloomberg day Break weekend, our 0:12:53.040 --> 0:12:55.680 global look ahead, the top stories for investors in the 0:12:55.679 --> 0:12:58.600 coming week. I'm Nathan Hager in Washington. Up later in 0:12:58.640 --> 0:13:01.320 our program, we'll look ahead to key economic data from 0:13:01.360 --> 0:13:04.640 the world's second largest economy. But first, in a few 0:13:04.720 --> 0:13:08.439 days time, UK Chancellor Rachel Reeves will deliver an autumn 0:13:08.440 --> 0:13:11.240 budget which she helps to lessen the debt burden plaguing 0:13:11.320 --> 0:13:14.480 the country's finances. The announcements become one of the most 0:13:14.480 --> 0:13:18.040 hotly debated fiscal events of the year among investors, economists, 0:13:18.080 --> 0:13:21.319 and business leaders. But will Reeves be able to balance 0:13:21.400 --> 0:13:25.240 party politics and prudence for more, Let's go to London 0:13:25.320 --> 0:13:28.560 and bring in Bloomberg Daybreak. You're a banker, Caroline Hepger. 0:13:28.679 --> 0:13:32.360 Nathan, The Labour government has endured a volatile period of 0:13:32.400 --> 0:13:36.360 pre budget u turns and a political crisis in recent weeks, 0:13:36.520 --> 0:13:40.520 yet one constant has been the Chancellor's indication that she 0:13:40.600 --> 0:13:43.959 plans to give herself more breathing space against her own 0:13:44.040 --> 0:13:48.080 fiscal rules. However, with an income tax hike appearing to 0:13:48.160 --> 0:13:52.960 be dropped and Reeves favoring multiple smaller tax increases instead, 0:13:53.320 --> 0:13:56.840 investors and economists are skeptical about how she can make 0:13:56.880 --> 0:14:00.600 the numbers out up now. Trade is embracing for volatility 0:14:00.679 --> 0:14:03.080 as the deadline to share her economic plans for the 0:14:03.120 --> 0:14:07.160 country looms large. The cost of one week options, which 0:14:07.200 --> 0:14:11.480 now spans the upcoming fiscal event, have climbed to multi 0:14:11.480 --> 0:14:15.440 month highs for major sterling pairs. This in recent days 0:14:15.600 --> 0:14:19.480 as traders pay to protect themselves against potential swings in 0:14:19.640 --> 0:14:23.680 the pound. According to Bloomberg strategists, the waters have also 0:14:23.760 --> 0:14:26.560 been muddied ahead of the announcement. There are worries that 0:14:26.600 --> 0:14:30.000 the government could wrong foot the markets. Reeves's bid to 0:14:30.160 --> 0:14:33.320 increase the fiscal headroom comes against the backdrop of a 0:14:33.440 --> 0:14:37.560 significant deterioration in the public finances since her last economic 0:14:37.600 --> 0:14:40.880 statement back in the spring. She left herself a slim 0:14:41.000 --> 0:14:45.520 nine point nine billion pound margin against her spending rules, 0:14:45.800 --> 0:14:49.840 a buffer near historic lows now. The latest forecast from 0:14:49.880 --> 0:14:53.400 the Office for Budget Responsibility showed that her position has 0:14:53.440 --> 0:14:57.480 worsened by about twenty billion pounds since then, driven lower 0:14:57.520 --> 0:15:01.880 by a productivity downgrade those policy u turns. I mentioned. 0:15:02.720 --> 0:15:05.000 That's as the foots you one hundred had its worst 0:15:05.000 --> 0:15:07.680 one since August in the lead up to the budget 0:15:07.760 --> 0:15:11.400 amidst worries about AI being a bubble and signs of 0:15:11.520 --> 0:15:15.160 corporate pain. With the somewhat erratic data in the UK 0:15:15.560 --> 0:15:20.560 showing unemployment rising, it all does raise the bar for 0:15:20.600 --> 0:15:25.160 the Chancellor as she tries to navigate Britain's finances without 0:15:25.200 --> 0:15:31.320 spooking investors or exacerbating the flight of global capital. Camickshire Trevedi, 0:15:31.480 --> 0:15:35.680 chief FX and Emerging Market Statues at Goldman Sachs, tells 0:15:35.720 --> 0:15:38.560 me there are a number of factors at play. 0:15:39.200 --> 0:15:42.560 Look, I think it's a really interesting juncture for the UK. 0:15:42.800 --> 0:15:46.320 I think the inflation released, the fact that it has start, 0:15:46.480 --> 0:15:49.360 you know, come down, alongside some of the weaker labor 0:15:49.440 --> 0:15:53.200 market data that you had in the last couple of weeks, 0:15:53.200 --> 0:15:55.960 I think those are important. I mean, there's obviously been 0:15:56.000 --> 0:15:58.440 a lot of back and forth, a lot of uncertainty 0:15:58.520 --> 0:16:00.880 around you know, exactly what he is and isn't going 0:16:00.920 --> 0:16:03.520 to be in the budget. I mean, if you take 0:16:03.560 --> 0:16:06.120 a step back and think about it from a macro standpoint, 0:16:06.320 --> 0:16:09.760 irrespective the exact tax and spending decisions that they make, 0:16:10.200 --> 0:16:11.880 it looks like this is going to be a budget 0:16:11.920 --> 0:16:14.200 that is going to be fiscally conservative. 0:16:14.880 --> 0:16:19.000 Camik Shire Trevedi, Chief FX and Emerging Market Strategists at 0:16:19.040 --> 0:16:22.120 Goldman Sachs speaking there to me and Stephen Coat on 0:16:22.120 --> 0:16:23.040 Bloomberg Radio. 0:16:23.760 --> 0:16:23.960 Well. 0:16:24.000 --> 0:16:27.680 Also part of the equation are the political pressures facing 0:16:27.720 --> 0:16:31.120 the Chancellor, who is attempting to unite what seems like 0:16:31.160 --> 0:16:36.720 a fragmented parliamentary Labor Party. The delicate balance between investors, 0:16:37.080 --> 0:16:41.000 voters and MPs is something I've been discussing with Bloomberg's 0:16:41.080 --> 0:16:45.480 Chief UK economist Dan Hanson and our UK politics reporter 0:16:45.840 --> 0:16:48.880 Joe Mays. Dan, can I start with you just on 0:16:48.920 --> 0:16:51.680 the economics. Firstly, there's been some back and forth about 0:16:51.720 --> 0:16:54.840 just how big of a fiscal whole Rachel Reeves is facing. 0:16:54.880 --> 0:16:56.920 Can you just give us an update on the latest 0:16:57.360 --> 0:17:00.720 expectations from the Office of Budget Response Stability and what 0:17:00.760 --> 0:17:01.360 that means. 0:17:02.320 --> 0:17:04.760 Sort of reading between the lines of everything we've heard 0:17:04.920 --> 0:17:09.919 and particularly from our Bloomberg News colleagues, the number seems 0:17:09.920 --> 0:17:14.240 to be around twenty billion pounds. The fiscal slippage, now, 0:17:14.400 --> 0:17:16.840 that's made up of quite a few things, and actually 0:17:16.920 --> 0:17:19.800 quite a few offsetting things. The biggest reason for the 0:17:19.840 --> 0:17:23.440 whole is that the OBR, which is the UK's fiscal watchdog, 0:17:23.680 --> 0:17:26.560 is going to reappraise how quickly it thinks the economy 0:17:26.920 --> 0:17:29.880 can grow in the medium term, in particular how quickly 0:17:30.600 --> 0:17:34.080 productivity in the UK economy is likely to rise over 0:17:34.119 --> 0:17:37.639 the next five years. That is the single biggest factor 0:17:37.720 --> 0:17:41.720 determining the fiscal forecast, the path of productivity growth. So 0:17:41.760 --> 0:17:44.800 if you change that, you play around with the numbers 0:17:44.880 --> 0:17:48.520 quite significantly, and we think that could blow a twenty 0:17:48.560 --> 0:17:52.520 billion pound hole in of itself. In the public finances, 0:17:52.920 --> 0:17:55.320 interest rates are a little bit higher, there have been 0:17:55.359 --> 0:17:58.120 some policy u turns that probably adds another ten billions. 0:17:58.160 --> 0:18:01.119 That gets you to thirty. The reason why you then 0:18:01.160 --> 0:18:04.480 come back to twenty is that the OBER looks like 0:18:04.520 --> 0:18:07.080 it will also take a look at its wage growth forecast, 0:18:07.160 --> 0:18:11.639 which is quite low compared to other forecasters, and obviously 0:18:11.680 --> 0:18:13.879 that gets some money back for the Chancellor. So I 0:18:13.920 --> 0:18:17.080 think a reasonable expectation is something in the region of 0:18:17.440 --> 0:18:18.640 twenty billion pounds. 0:18:18.800 --> 0:18:22.000 So that's the economics. What about the politics. We've heard 0:18:22.040 --> 0:18:25.440 a lot about the political pressure facing the Chancellor as 0:18:25.480 --> 0:18:29.040 she's preparing for the budget statement. Where is it coming from? 0:18:29.119 --> 0:18:32.600 Joe Well, I think the political pressure is really around 0:18:32.600 --> 0:18:36.120 this question of can Reeves afford to do a budget 0:18:36.160 --> 0:18:39.640 that really annoys labor, MPs and the public, And that 0:18:39.800 --> 0:18:42.680 really is what she is in line to do because 0:18:42.680 --> 0:18:45.960 she has to increase taxes, have spending restraints to fill 0:18:46.040 --> 0:18:49.399 the fiscal hole that Dan just described. And really the 0:18:49.480 --> 0:18:52.520 question of this budget has been for me, how aggressively 0:18:52.680 --> 0:18:55.480 can she fill that hole with things like tax increases, 0:18:55.840 --> 0:18:59.480 How large can she build her fiscal buffer to give 0:18:59.520 --> 0:19:02.120 her reading space for the rest of the Parliament. Now, 0:19:02.200 --> 0:19:05.160 my sense from the Treasury, you know, about a month ago, 0:19:05.280 --> 0:19:06.960 was that she was willing to go quite aggressive. She 0:19:07.040 --> 0:19:09.639 was really willing to build that fiscal headroom up perhaps 0:19:09.680 --> 0:19:13.560 up to twenty pounds twenty five and really impressed markets, 0:19:13.680 --> 0:19:16.240 show markets that she was a very strong, stable chancellor 0:19:16.359 --> 0:19:18.919 and she hoped she'd be rewarded with lower borrowing costs 0:19:19.000 --> 0:19:20.520 and that would help her for the rest of the Parliament. 0:19:20.600 --> 0:19:22.560 Then we saw this change in the last few weeks 0:19:22.560 --> 0:19:26.440 where it seemed like, especially with the briefing against where's 0:19:26.440 --> 0:19:29.000 streeting from number ten and how that immediately shone a 0:19:29.119 --> 0:19:32.159 light on the leadership of kir Starmer and raised questions 0:19:32.200 --> 0:19:34.680 about how stable he is, which in turn raises the 0:19:34.720 --> 0:19:35.680 question about how stable. 0:19:35.520 --> 0:19:36.119 Rachel Reeves is. 0:19:36.359 --> 0:19:38.919 It's such a partnership there that it seems like what 0:19:38.960 --> 0:19:41.679 happened was they've realized they couldn't go so aggressive with 0:19:41.720 --> 0:19:45.960 the tax increases, especially touching the manifesto promises around income tax, 0:19:46.080 --> 0:19:49.639 notsh insurance VAT. So they've rolled it back to a 0:19:49.640 --> 0:19:53.080 certain extent to ward off some of that threat from 0:19:53.200 --> 0:19:56.600 labor MPs. And that's why we've got this new position 0:19:56.640 --> 0:19:59.040 where it looks like the manifesto won't necessarily broken. She 0:19:59.119 --> 0:20:01.359 will still try and you know, restore her fiscal buffer, 0:20:01.359 --> 0:20:03.000 perhaps increase it a little bit, but I don't think 0:20:03.040 --> 0:20:05.400 as much as she might have done before that whole. 0:20:05.200 --> 0:20:09.520 Episode Dan do her plans add up though without major 0:20:10.119 --> 0:20:14.520 tax hikes increases to the headline rate of income tax. 0:20:15.600 --> 0:20:18.359 What was quite strange about what was being briefed is 0:20:18.400 --> 0:20:20.159 that they were going to do this too up two 0:20:20.240 --> 0:20:23.199 down policy where they'd raise income tax by two p 0:20:23.359 --> 0:20:26.240 but cut national insurance by two p And it seemed 0:20:26.240 --> 0:20:28.720 to me that if you're going to break the manifesto, 0:20:29.040 --> 0:20:31.760 you might as well break it big time and really 0:20:31.840 --> 0:20:34.000 raise some money, because six billion pounds is not a 0:20:34.040 --> 0:20:37.239 lot of money to raise. So it seemed like, I 0:20:37.320 --> 0:20:39.720 understand it was sort of there was an attempt to 0:20:39.760 --> 0:20:42.880 sort of go through that muddy path of not upsetting 0:20:42.920 --> 0:20:45.880 labor MPs too much, but it seems like the big 0:20:45.920 --> 0:20:49.639 revenue raisers are off the table, and that does make 0:20:49.680 --> 0:20:51.719 it a lot harder to raise the money. You know, 0:20:51.760 --> 0:20:53.479 you can look at it now and say, well, if 0:20:53.520 --> 0:20:56.000 I put capital gains tax, I put that up by 0:20:56.080 --> 0:21:00.200 one percentage point. You know that currently raises X, Well 0:21:00.280 --> 0:21:01.960 I could get a little bit more money. But what 0:21:02.040 --> 0:21:04.120 actually happens is that people look at that and move 0:21:04.200 --> 0:21:08.040 their money elsewhere. And the tax base is very mobile. 0:21:08.440 --> 0:21:10.040 So if you have a lot of small measures with 0:21:10.119 --> 0:21:12.280 that risk attached, you end up in a world where 0:21:12.320 --> 0:21:15.560 you struggle to raise you potentially, I should say struggle 0:21:15.600 --> 0:21:18.000 to raise the money. There's just a lot more uncertainty. 0:21:18.200 --> 0:21:20.399 You know, there's a sort of backloaded in sort of 0:21:20.400 --> 0:21:24.040 the parlance, the backloaded element to it, which isn't what 0:21:24.080 --> 0:21:26.520 market's like to see. They're not like an upfront down 0:21:26.520 --> 0:21:29.119 payment when it comes to fiscal when it comes to 0:21:29.119 --> 0:21:30.000 a fiscal adjustment. 0:21:30.560 --> 0:21:36.680 Yeah. Absolutely. In terms of the pre announcement that you mentioned, 0:21:36.720 --> 0:21:40.000 the big speech which laid out her economic thesis a 0:21:40.040 --> 0:21:43.320 couple of weeks ago, did that do more harm than good? 0:21:44.240 --> 0:21:47.879 I think the immediate harm we've seen is that it 0:21:47.960 --> 0:21:52.160 has created a sense of chaos and loss of control 0:21:52.280 --> 0:21:55.879 around narrative for this budget, because you've had Reeves clearly 0:21:56.000 --> 0:21:59.240 preparing the country for one thing and then moving away 0:21:59.280 --> 0:22:01.560 from that in the you know, the last couple of weeks, 0:22:01.600 --> 0:22:04.960 and that does give an air of lack of control 0:22:05.080 --> 0:22:09.840 and wayward government, and that is clearly harmful. But I 0:22:09.840 --> 0:22:12.399 think that the kind of counterbalancing point is that she 0:22:12.520 --> 0:22:15.919 did nevertheless prepare in the minds of voters the idea 0:22:15.920 --> 0:22:18.919 that the Manifesto could be broken, and now it's like 0:22:18.960 --> 0:22:21.679 we're heading for a budget where it isn't broken. And 0:22:21.760 --> 0:22:25.199 so you can see why the ultimate outcome is a 0:22:25.440 --> 0:22:28.200 kind of net positive for Reeves in that she can 0:22:28.280 --> 0:22:31.800 say I haven't broken the manifesto and we still have 0:22:31.840 --> 0:22:35.040 stable public finances because everything I've announced and we've kept 0:22:35.040 --> 0:22:38.200 our promises. So I think ultimately it's landed in a 0:22:38.240 --> 0:22:41.440 place that isn't awful for Reeves. And you can see 0:22:41.440 --> 0:22:44.480 why she did it in that they know the OBR 0:22:44.560 --> 0:22:50.280 productivity downgrade that Dan just described is very hard to explain, 0:22:50.720 --> 0:22:53.960 and if Reeves hadn't done that, it would have been 0:22:54.000 --> 0:22:56.520 lost pretty much entirely on budget day and in the 0:22:56.520 --> 0:22:59.280 post budget coverage, where all of the newspaper headlines would 0:22:59.280 --> 0:23:01.320 have been about the taxing increases. So I think Reas 0:23:01.359 --> 0:23:05.040