Speaker 1: This is Bloomberg day Break Weekend, our global look at
Speaker 1: the top stories in the coming week from our day
Speaker 1: Break anchors all around the world. Straight ahead on the program,
Speaker 1: and look ahead to the January jobs report here in
Speaker 1: the US how that may impact FED policy moving forward.
Speaker 2: I'm Caroline Hebcker here in London, where we're looking ahead
Speaker 2: to the Bank of England great decision and what the
Speaker 2: Chancellor's plans for growth might mean for them.
Speaker 3: I'm Doug Chrisner looking at what lies ahead for China's
Speaker 3: deep seek.
Speaker 4: That's all straight ahead on Bloomberg Daybreak Weekend on Bloomberg
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Speaker 4: Bloomberg ninety two to nine, Boston, DAB Digital Radio, London,
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Speaker 1: Good day to you. We begin today's program with the
Speaker 1: January jobs report. We get non farm pay year old
Speaker 1: numbers this Friday, eight thirty am Wall Street Time, and
Speaker 1: for more. We're joined by Michael McKee, Bloomberg International Economics
Speaker 1: and Policy correspondent. Well Michael twenty twenty four ended with
Speaker 1: a blowout December jobs report two hundred and fifty six
Speaker 1: thousand added, ending the year four point one percent unemployment
Speaker 1: of five decade low. Did the good times continue to January?
Speaker 5: Well, that's the question, and we aren't exactly sure. There
Speaker 5: seems to be a division on Wall Street about how
Speaker 5: this is all going to work out. Reversion to the
Speaker 5: mean is a sort of a well known phrase in economics,
Speaker 5: and that's what economists surveyed by Bloomberg see for the
Speaker 5: private payrolls number itself two hundred twenty three thousand last month,
Speaker 5: but for January, they're only at the moment thinking about
Speaker 5: one hundred and thirty thousand, which would fit the pattern
Speaker 5: we saw before that big December number. So that would
Speaker 5: suggest that the economy or the labor market at least,
Speaker 5: is slowing down some. But that four point one percent
Speaker 5: unemployment rate isn't expected to change. So what we have
Speaker 5: seen sort of in all the ancillary data like jobless
Speaker 5: claims and things, are that people aren't losing their jobs,
Speaker 5: but they're not getting hired. It's taking longer to find
Speaker 5: new jobs. Business seems to be putting new employment on hold,
Speaker 5: but they're not getting rid of people yet, And the idea,
Speaker 5: I guess, is that this report will ratify that.
Speaker 1: Now seasonal holiday jobs, we always see it to a
Speaker 1: decrease in January. Correct, Well, that's the way it used
Speaker 1: to be.
Speaker 5: It's a little bit less that way now, and it's
Speaker 5: a little bit harder to figure out exactly what the
Speaker 5: seasonal impact is going to be. We know that the
Speaker 5: seasonal employees were hired later this year. They showed up
Speaker 5: in December instead of November. Do they stay on a
Speaker 5: little bit longer? Do they slowly go away? I think
Speaker 5: one of the reasons we're looking at the one hundred
Speaker 5: and thirty thousand is that economists are anticipating those people
Speaker 5: will have left the jobs. But it's really hard to tell.
Speaker 5: The other impact is going to be from the Los
Speaker 5: Angeles fires because they took place during the survey week
Speaker 5: for the January payrolls, and we don't know exactly how
Speaker 5: many businesses were destroyed, but we know a lot from
Speaker 5: looking at the video, and so there are probably going
Speaker 5: to be a number of job losses. Some analysts have
Speaker 5: said as many as twenty thousand that would show up
Speaker 5: in the report.
Speaker 1: And for the economy, we saw Hollywood suddenly stopped some
Speaker 1: production of TV shows, movies, so it really had an impact,
Speaker 1: which will lessen over time. Of course, I think things
Speaker 1: are now weeks later getting back to normal. Well, let's
Speaker 1: talk about the Federal Reserve. The labor market pretty solid.
Speaker 1: As you said, we were looking at no change at
Speaker 1: a four point one unemployment rate. Economic growth we just
Speaker 1: saw this past week GDP growth fourth quarter a little
Speaker 1: stronger than expected.
Speaker 5: But inflation, that's always the kind of the butt out there.
Speaker 5: You don't even have to say anything beyond that inflation
Speaker 5: has sort of stalled out. The PCE numbers that the
Speaker 5: Fed released on Friday basically show that in December inflation
Speaker 5: was unchanged on a year year basis, and that's not
Speaker 5: what they want to see. What it does suggest that
Speaker 5: as long as that continues, the Fed's going to remain
Speaker 5: on hold. There is the reason that Jay Powell cited
Speaker 5: for not moving at last week's meeting. So I think
Speaker 5: at this point we're watching to see any indications of
Speaker 5: whether inflation comes down, and all of a sudden we'll
Speaker 5: be looking at things like home prices and rents even
Speaker 5: more closely, because that's really where the stickiness is. The
Speaker 5: Fed needs that to happen. But also we're looking at
Speaker 5: our average early earnings in the employment report because the
Speaker 5: FED says right now the labor market is not inflationary,
Speaker 5: so they don't want to see any changes there either.
Speaker 1: Well, let's talk about the rate. Two point eight percent?
Speaker 1: Is this almost a new normal?
Speaker 6: This?
Speaker 1: It really hasn't changed much in months.
Speaker 5: Right, That's the key question is can the FED get
Speaker 5: it down to the two percent target?
Speaker 1: Or is the.
Speaker 5: Economy growing at a faster pace than it had been.
Speaker 5: Is potential growth higher, which would mean inflation would be higher.
Speaker 1: It could support a two point Does.
Speaker 5: That mean that we need higher interest rates on a
Speaker 5: regular basis? Not necessarily raise them from here, but don't
Speaker 5: cut them. That's the debate within the FED, and that's
Speaker 5: the thing that they have to figure out between now
Speaker 5: and their next meeting on March nineteenth. And that should
Speaker 5: be relatively easy except for Donald Trump and his tariffs
Speaker 5: and everything else that's going to happen between now and then.
Speaker 1: Well, speaking of those tariffs, how do you think the
Speaker 1: FED has prepared for the threat of those twenty five
Speaker 1: percent tariffs? I mean, Canada, Mexico buy more American products
Speaker 1: and anybody else, So we know this is you know,
Speaker 1: it could be challenging.
Speaker 5: Indeed, well I know a lot of FED officials around
Speaker 5: the country at the various FED banks and then down
Speaker 5: in Washington at the Board of Governors have tasked their
Speaker 5: researchers to come up with what if scenarios. The problem
Speaker 5: is is without a lot of detail, it's been hard
Speaker 5: for them to come up with what if scenarios, and
Speaker 5: so now if they get some details, it takes them
Speaker 5: time to put to work through it all because there's
Speaker 5: a lot that goes into it. It's not just what
Speaker 5: the tariff level is, it's how long it's imposed for
Speaker 5: and how it's imposed over time or immediately, and then
Speaker 5: what are the tariff countries do? Do they put teriffs
Speaker 5: back on the US. So all of that has to
Speaker 5: be accounted for. So it'll be a little while before
Speaker 5: the PET has a clear idea of what it would mean.
Speaker 1: The January jobs are out This Friday morning, eight thirty
Speaker 1: am Wall Street Time our thanks to Michael McKee, Bloomberg
Speaker 1: International Economics and Policy correspondent, we turned out to earnings
Speaker 1: with two more members of the tech sector, so called
Speaker 1: Magnificent seven, posting fourth quarter results this coming week Alphabet
Speaker 1: on Tuesday and on Thursday, Amazon, and we want to
Speaker 1: focus on Amazon to see about sales over the holidays
Speaker 1: and it's cash cow cloud computing, an AI services unit,
Speaker 1: and any impact at all from China's deep seek chat
Speaker 1: pot Now for more where all of that were joined
Speaker 1: by anirag Rana, Bloomberg Intelligence technology analyst anarag We'll start
Speaker 1: with the earnings. What are you expecting to see in
Speaker 1: Thursday's earnings report from Amazon?
Speaker 7: You know, my colleague Punum and I we re published
Speaker 7: a preview for Amazon, and we think that the four
Speaker 7: Q sales could be at the high end of their
Speaker 7: guidance of seven to eleven percent, driven by AWS advertising
Speaker 7: retail sales over the holiday quarter, which were very strong.
Speaker 6: Frankly, so those are the areas. We also think advertising
Speaker 6: revenue could be in the high teens given the addition
Speaker 6: of Prime Video ads.
Speaker 1: So sales good, the ons, signature site ad sales. What
Speaker 1: about its cash cow Amazon web services and what is
Speaker 1: Amazon investing now in AI and infrastructure?
Speaker 6: And that's you know, you're right, that's probably the most
Speaker 6: important question right now. We're looking at Amazon, you know,
Speaker 6: sales growth of somewhere around nineteen percent excluding ethics impact.
Speaker 6: That's slight better than I would say what would have
Speaker 6: anticipated just a year ago, and a lot of that
Speaker 6: is driven by the improvement in workload consumption or people
Speaker 6: running more things on the platform. AI will contribute as well,
Speaker 6: although they don't disclose contribution from AI sales similar to Microsoft,
Speaker 6: but that's because they do not have you know, you
Speaker 6: could say the workloads coming from conserhum apps like chat, GPT.
Speaker 6: Most of their businesses, enterprise and enterprise and corporate clients
Speaker 6: are just starting the implementation of AI related products, so
Speaker 6: it's not as you know, you could say, that is
Speaker 6: not a mature market as some of the consumer apps
Speaker 6: have been.
Speaker 1: So a lot of room to grow for Amazon in.
Speaker 6: AI, absolutely, and a lot of room for everybody to grow,
Speaker 6: including you know, Microsoft and Google. In this case, what
Speaker 6: Amazon has done is they have a strong relationship. They've
Speaker 6: invested in a company called Anthropic, which is one of
Speaker 6: their you could say, preferred large language model providers. They
Speaker 6: also have their own model. They also let people use
Speaker 6: models from Mecca called Lama, So it's it's up to
Speaker 6: the client what kind of model they want to use.
Speaker 6: Amazon Web Services is just going to provide the platform
Speaker 6: and and you know, the basically the infrastructure to run
Speaker 6: those products.
Speaker 1: Now, Wall Street got a real wake up call last
Speaker 1: week with that low cost chat from the Chinese startup
Speaker 1: Deep Seek. Boy did it rattle the markets and rattle
Speaker 1: a lot of AI companies. How did Amazon react well in.
Speaker 6: The long run? So, first and foremost, we are not
Speaker 6: even sure whether we should see that as in a way,
Speaker 6: there are two scenarios whether we can continue to see
Speaker 6: large amount of improvements in these models without the use
Speaker 6: of expensive chips. And that's where the argument is right now.
Speaker 6: If we were to take that aside, if in reality
Speaker 6: we can come up with models at a much cheaper cost,
Speaker 6: that's really good for somebody like an Amazon because they
Speaker 6: don't have to spend that much in capital expenditures and
Speaker 6: the growth curve or the adoption curve off AI goes up.
Speaker 6: These guys benefit from that because they're providing the infrastructure.
Speaker 6: So I think in the long run it's good for
Speaker 6: the cloud providers like Amazon. But again I think we
Speaker 6: still have to see whether that really is the case
Speaker 6: that you can build models that.
Speaker 1: Cheaply consumer spending. I want to go back to that
Speaker 1: in the in the final quarter of last year up
Speaker 1: better than expected about four percent. A lot of that
Speaker 1: from Amazon dot Com. Obviously, it's like most consumers can't
Speaker 1: live without it. But something I want to bring up
Speaker 1: ups in its earnings just said that they're going to
Speaker 1: slash deliveries they do for Amazon in half by next year.
Speaker 1: That's because of the home deliveries just too costly. FedEx
Speaker 1: made the same decision five years ago. FedEx doesn't even
Speaker 1: deliver for Amazon. What do you think it could mean
Speaker 1: for their e commerce unit?
Speaker 6: Yeah, I think you know, one of the most important
Speaker 6: part of their e commerce business is really their logistics
Speaker 6: at this point. Frankly speaking, you know, when you think
Speaker 6: about it, what they did in COVID, they've really invested
Speaker 6: so much to improve their logistics network. So frankly speaking,
Speaker 6: I think, you know, you could argue that these guys
Speaker 6: really don't need anybody else. Now that's not true. They
Speaker 6: will outsource when they need extra capacity, but you know,
Speaker 6: their logistics are pretty impressive at this point, and in fact,
Speaker 6: this whole promise of delivering products within a few hours
Speaker 6: is really changing the way people buy. What used to happen,
Speaker 6: Tom was I used to go to Amazon because it
Speaker 6: was the low cost provider. That's no longer the case.
Speaker 6: You can find goods outside and other websites that are cheaper,
Speaker 6: but the reason you go to Amazon dot Com is
Speaker 6: because as a Prime member, you can get those products
Speaker 6: pretty quickly. It's happened to me several times that you
Speaker 6: need something right away and they will deliver it in
Speaker 6: four to five hours. So that level of service is
Speaker 6: what I think is the biggest differentiator for Amazon, and
Speaker 6: it's not price.
Speaker 1: Amazon Q four earnings out this coming Thursday are thanks
Speaker 1: to anirog Rana, Bloomberg Intelligence technology analyst and coming up
Speaker 1: on Bloomberg day Break weekend, a rate decision this week
Speaker 1: from the Bank of England. I'm Tom Busby and this
Speaker 1: is Bloomberger. This is Bloomberg Daybreak Weekend, our global look
Speaker 1: ahead at the top stories for investors in the coming week.
Speaker 1: I'm Tom Busby in New York. Up later in our
Speaker 1: program Deep Seek Move Markets. This past week we see
Speaker 1: what's next for China's Ai startup. But first, policymakers at
Speaker 1: the Bank of England are preparing to make their first
Speaker 1: interest rate decision of the year. A slumping currency and
Speaker 1: stagnant growth will be on the minds of officials as
Speaker 1: they make their choice. Now for more, let's go to
Speaker 1: London and bring in Bloomberg Daybreak Europe Banker Caroline.
Speaker 2: Hepgar Tom week Sterling is just the latest factor that
Speaker 2: Bank of England officials will have to think about when
Speaker 2: plotting the path for interest rates in twenty twenty five.
Speaker 2: Investors are still expecting a quarter point cut, one of
Speaker 2: just two fully priced in for this year, but stagnant
Speaker 2: economic growth, alongside the threat of a global trade war,
Speaker 2: has loomed large over the Central Bank's forecasts and could
Speaker 2: dampen the Bank of England's inflation projections in years this
Speaker 2: as moves in guilt yields and rate expectations since the
Speaker 2: budget in October have tightened fiscal conditions, a real headwind
Speaker 2: for the British economy. Enter Chancellor Rachel Reeves she's on
Speaker 2: a mission to revitalize the nation's economic health by going
Speaker 2: further and faster, she puts it for growth and potentially
Speaker 2: lifting some of the pressure on Andrew Bailey's Monetary Policy Committee.
Speaker 2: She has been speaking to Bloomberg about her proposals.
Speaker 8: Well, look at the reaction from business to the speech
Speaker 8: I gave two thirds of businesses and the instant reaction
Speaker 8: has said they now feel more confident about the government's
Speaker 8: growth plans. I make no apologies for putting our country
Speaker 8: bag on the right's path, and because of the planning
Speaker 8: reforms that we're making alongside the big announcements yesterday, it
Speaker 8: means what we can crack on and get these projects
Speaker 8: delivered quicker because they won't get clogged up in courts
Speaker 8: because we're reforming the way that you build stuff in Britain.
Speaker 9: Do not feel, though, Chancellor, that you need to deliver
Speaker 9: something that will deliver now that will give an uptick
Speaker 9: to growth. Now we're looking at the labor market, data,
Speaker 9: messages from recruiters, the purchasing managers' surveys, all of those
Speaker 9: telling us quite negative things about the labor market, saying
Speaker 9: that businesses are shedding jobs at the rate we haven't
Speaker 9: seen since the financial crisis.
Speaker 10: Well, if you.
Speaker 8: Look at the IMF forecast for the UK, they've revised
Speaker 8: up the UK's growth prospects for this year. The PwC
Speaker 8: survey released at the beginning of last week of global
Speaker 8: CEOs who see Britain as the second best place in
Speaker 8: the world to invest outside of the United States. The
Speaker 8: first time in twenty eight years have been at that
Speaker 8: position in the League table, and yesterday business is coming
Speaker 8: out and backing Labour's plans to grow the economy and
Speaker 8: making them feel more confident about the future.
Speaker 10: Can you give me a growth number by the end
Speaker 10: of the year, then, if you are more positive about
Speaker 10: what growth is going to deliver in the UK, what
Speaker 10: growth numbers we can expect. Do you have a number
Speaker 10: in mind, do you have a target for this year
Speaker 10: and can you share it with us.
Speaker 8: I'm not going to do growth forecasts. That's up to
Speaker 8: the Independent Office, the Budget Responsibility, the IMF and others
Speaker 8: to forecast the UK's growth prospects. But what I did
Speaker 8: was to set out some ambitious plans and to get
Speaker 8: our economy growing, to get spades in the ground, to
Speaker 8: deliver these infrastructure projects that in many cases have been
Speaker 8: available for years now but the previous government balked at.
Speaker 8: So whether it's the Oxcam Growth Corridor to create Europe's
Speaker 8: Silicon Valley here in the UK, or the third Runway
Speaker 8: at Heathrow, a new stadium at Old Trafford, the TransPennine routes,
Speaker 8: upgrade a new airport at Doncaster. All of these things
Speaker 8: are about a confidence in Britain, saying to investors, look
Speaker 8: again at Britain. This is a great place to invest,
Speaker 8: to start and grow a business, and this government has
Speaker 8: your back.
Speaker 10: When does the first spade go in the ground and
Speaker 10: any of those projects, Well, let's.
Speaker 8: Take Heathrow with our key throw to come forward with
Speaker 8: plans by this summer and we hope to be able
Speaker 8: to grant a development consent order in this parliament. So
Speaker 8: spades in the ground in this parliament. But other projects
Speaker 8: can get going sooner. We've committed to build one and
Speaker 8: a half million homes in this Parliament and we've made
Speaker 8: it easier to build, for example, around commuter railway stations,
Speaker 8: with the default answer for planning applications now being yes.
Speaker 8: So spades in the ground this parliament. One and a
Speaker 8: half million homes in this parliament, because we want to
Speaker 8: go further and faster to kickstart economic growth and to
Speaker 8: make our economy more competitive, to be a more attractive
Speaker 8: place for businesses to invest, and ultimately to make working
Speaker 8: people better off.
Speaker 9: Chancellor, we've heard a lot about growth over reseas and
Speaker 9: that do you think to be still some divisions amongst
Speaker 9: your team around what all of these will mean for
Speaker 9: the environment. Of course, businesses might be a little bit
Speaker 9: confused about what kind of reaction function we can expect
Speaker 9: you to have around green issues. Do you think that
Speaker 9: the green policies of this government, or the push towards
Speaker 9: electrification for example, all of these things are they a
Speaker 9: little harder to predict for business now than they were?
Speaker 8: Well, look at the record of this government. We've ended
Speaker 8: the moratorium on onshore wind and indeed have signed off
Speaker 8: planning applications in just six months for new onshore wind farms,
Speaker 8: has signed off planning applications for solar farms that the
Speaker 8: previous governments blocked. But we've invested alongside with BP and
Speaker 8: Equanal in carbon capture and storage in te Side and Merseyside,
Speaker 8: so we know that there are huge industrial and investment
Speaker 8: opportunities for the private sector in these jobs and industries
Speaker 8: of the and has unique strengths in this area because
Speaker 8: of our industrial heritage and because of our geography to
Speaker 8: reap the benefits of that investment.
Speaker 9: Okay, Chancellor, can I ask you just about the US
Speaker 9: Treasury Secretary Besant, who is now going to be your
Speaker 9: counterparty in the United States. I wonder what you plan
Speaker 9: to discuss with him, and do you have plans for
Speaker 9: a conversation soon.
Speaker 8: I'm really pleased that Scott Bessont was confirmed earlier this
Speaker 8: week as the next to the US Treasury's Secretary. I
Speaker 8: have written to him and I look forward to talking
Speaker 8: to him soon about how our two countries can work
Speaker 8: together and to grow our respective economies. And I look
Speaker 8: forward to having a close relationship with Scott Bessant and
Speaker 8: his team at the US Treasury.
Speaker 2: That was the Chancellor Rachel Reeves speaking to Bloomberg's Anna Edwards,
Speaker 2: Christy Gupta and Guy Johnson. So the government is going
Speaker 2: for growth, but our businesses coming along for the ride.
Speaker 2: We've been getting reaction from the back to General of
Speaker 2: the British Chambers of Commerce, Chevron Haviland, who was one
Speaker 2: of the first to turn critical in the wake of
Speaker 2: the budget last year as growth flatlined and we saw
Speaker 2: a dip in both consumer and business confidence. We spoke
Speaker 2: to her just after Rachel Reeves's big announcement.
Speaker 11: It will deliver it in the short term and lots
Speaker 11: of different places. Remember this is a really difficult time
Speaker 11: for business. Natal insurance increases are going, you know, coming
Speaker 11: in place in just a few weeks, so tax rises
Speaker 11: for all businesses. So it was really good to see
Speaker 11: the Chancellor focus on economic growth, Airport expansion, Heathrow, Doncaster, Sheffield,
Speaker 11: new road, rail low attempts crossing East West rail and
Speaker 11: rebalancing the planning system as you were outlined. So those
Speaker 11: things will have not just a there are a great
Speaker 11: signifier global signify far of confidence and the direction we're
Speaker 11: traveling in. You know, big infrastructure projects, as you say,
Speaker 11: take a long time, so you need to start now.
Speaker 11: But remember that indicator for the small and medium sized
Speaker 11: businesses in those supply chains will already give them confidence
Speaker 11: to think about investing now and growing their businesses now
Speaker 11: so they can supply those into those infrastructure projects.
Speaker 1: But Trevon, is it going to be enough.
Speaker 12: Those businesses are worried about how they're going to pay
Speaker 12: for the national insurance rise coming in a couple of
Speaker 12: months time. The budget has been very difficult and we've
Speaker 12: seen that reflected in both business and consumer confidence figures.
Speaker 11: The budget has been very difficult. It has, and especially
Speaker 11: if you have a business with a large employee base.
Speaker 11: It is going to be very hard. Our businesses are
Speaker 11: telling us they're going to have to put up prices
Speaker 11: if they can. A lot of them have already put
Speaker 11: up their prices. That's going to be tricky. They're going
Speaker 11: to take it in their margin, which means lower investment,
Speaker 11: or they're going to slow down recruitment. And all of
Speaker 11: that is good. But you remember, at the same time
Speaker 11: in the budget, the Chancellor also said to mitigate against
Speaker 11: those issues, we need more opportunity for business, and she
Speaker 11: talked about getting britten back to building homes, hospitals, energy, infrastructure,
Speaker 11: and so you know, the announcements yesterday are a really
Speaker 11: good step in that direction. They're a really good indicator
Speaker 11: for that. Okay, things that infrastructure projects. It's not just
Speaker 11: local supply chains and local economic development. Often supply chains
Speaker 11: run all over the country. Connectivity, airport expansion. That's fantastic
Speaker 11: for trade, you know, moving our goods around the world,
Speaker 11: and it also global competitiveness.
Speaker 2: Okay, but she did not reverse the tax increases on
Speaker 2: business from the October budget. I mean, okay, you can
Speaker 2: understand why she might not do that, but she will
Speaker 2: be under pressure to do something in the spring statement. Potentially,
Speaker 2: if her fiscal head doom disappears, that's either going to
Speaker 2: be cuts to government or it's going to be more
Speaker 2: tax increases. Are you expecting more tax increases to come?
Speaker 2: Do you want her to do, let's say something that
Speaker 2: would be much more business positive, lower corporation tax in Britain.
Speaker 11: We well, I don't know what she's going to do
Speaker 11: in the spring, and we're definitely not expecting any tax
Speaker 11: increases for business. She's been pretty clear that that was
Speaker 11: a what did you call it yesterday?
Speaker 6: Once in a.
Speaker 11: Generation tax increase. However, there are other places where she
Speaker 11: can help business, so we've asked her to accelerate her
Speaker 11: review of business rates. Business rates are the tax that
Speaker 11: you pay on property, so really hard if you're on
Speaker 11: the high Street, you know, before you've even sold a
Speaker 11: single product, you're paying tens of thousands in tax. So
Speaker 11: how she can review business rates and change those more
Speaker 11: quickly to help our high streets? And actually, you know
Speaker 11: the other thing is the quickest way to grow our
Speaker 11: economy is through trade. Our biggest training partner, the EU,
Speaker 11: is still really hard to move goods over the border.
Speaker 6: There.
Speaker 11: What is the government doing more quickly to help businesses
Speaker 11: who are trading around the world.
Speaker 2: That was chevallne Havilan from the British Chambers of Commerce.
Speaker 2: She was sharing her reaction to chants of Rachel Reeves's
Speaker 2: proposals that came out in the past few days. Speaking
Speaker 2: to me and to Bloomberg's Stephen Carroll. Judging by her
Speaker 2: media blitz over the past couple of days, Reeves has
Speaker 2: a plan and she wants us to know about it.
Speaker 2: But just how long will it take for the results
Speaker 2: to materialize? And when can institutions like the Bank of
Speaker 2: England expect to see those improvements in real life. These
Speaker 2: are all questions that remain up in the air, some
Speaker 2: of which will likely be put to Bank of England
Speaker 2: Governor Andrew Bailey during his post Monetary Policy Committee press
Speaker 2: conference in the next few days, and of course we
Speaker 2: will have full coverage of the press conference and the
Speaker 2: interest rate decision on Bloomberg. I'm Caroline HEPCUN London. You
Speaker 2: can catch us every week day morning for Bloomberg Daybreak
Speaker 2: here at beginning at six am in London, that's one
Speaker 2: am on Wall Street.
Speaker 4: Tom.
Speaker 1: Thank you Caroline, and coming up on Bloomberg day Break weekend,
Speaker 1: we head to China to see how AI startup Deep
Speaker 1: seek as plans to take on US artificial intelligence giants.
Speaker 1: I'm Tom Busby and this is Bloomberg. This is Bloomberg
Speaker 1: day Break weekend, our global look ahead at the top
Speaker 1: stories for investors in the coming week. I'm Tom Busby
Speaker 1: in New York. It was a story that sent shock
Speaker 1: waves through global markets last week, a Chinese startup releasing
Speaker 1: an AI model set to rival open ais chat GPT
Speaker 1: and allegedly at just a fraction of the cost. For
Speaker 1: more on what's ahead for China's Deep Seek, let's get
Speaker 1: to the host of the Daybreak Asia podcast, Doug Krisner.
Speaker 3: Tom. The model is now own as R one, and
Speaker 3: the claim made by deep Seek was that R one
Speaker 3: rivaled or even outperformed leading Western chatbots on a range
Speaker 3: of AI industry benchmarks. I think the most shocking claim
Speaker 3: was R one was built for just a small fraction
Speaker 3: of the cost of its Western rivals. Well, this immediately
Speaker 3: sparked skepticism on the high valuation of US and Europe
Speaker 3: and AI related companies, but I think the eye of
Speaker 3: the storm was clearly in Nvidia. In the Monday session,
Speaker 3: it shares tumbled seventeen percent, and that drop erased five
Speaker 3: hundred eighty nine billion dollars from Nvidia's market cap in
Speaker 3: one single trading day. For more on the deep Seek story,
Speaker 3: I'm joined by Robert Lee He a senior software analyst
Speaker 3: for Bloomberg Intelligence. Robert joining us from our studios in
Speaker 3: Hong Kong. Robert, thank you for making time to chat
Speaker 3: with me about what's happening at the deep Seek. This
Speaker 3: Chinese artificial intelligence startup and the AI model that the
Speaker 3: company has apparently been working on for a while are one.
Speaker 3: What do we know about it exactly? Can you fill
Speaker 3: me in sure?
Speaker 13: Thanks very much for having me on. First of all,
Speaker 13: as you would expect, Bluemberg Intelligence likes to lead the way,
Speaker 13: this is actually Deep Seeker is a company we've been
Speaker 13: writing on for the best part of seven or eight months.
Speaker 13: I would say it's relatively well known to Asian investors
Speaker 13: at this point, or has been for some time, but
Speaker 13: obviously it's only its international profile has only risen more recently.
Speaker 13: So the main reason why, or which helps you understand
Speaker 13: why deep Seek is doing so well at the moment,
Speaker 13: really goes back to the earlier export controls on the
Speaker 13: semiconductor or chip side that we're put in place via
Speaker 13: the US. And one point I've consistently made over the
Speaker 13: last year or so is that, again not to trivialize
Speaker 13: software development, but the technological barriers to entry on software
Speaker 13: are significantly lower than on the chip side. It's far
Speaker 13: easier to develop these algorithms than it is to design
Speaker 13: a cutting edge tip at the atomic scale. So with
Speaker 13: these export controls put in place by the US, obviously
Speaker 13: any good engineer is going to try and work their
Speaker 13: way around the problem. Go round it, go under it,
Speaker 13: go over it.
Speaker 1: Whatever.
Speaker 13: So what the Chinese companies as a whole have done,
Speaker 13: with deep Seek being the leading one, is moved to
Speaker 13: more computationally efficient, smaller models that are more adept at
Speaker 13: utilizing and running on locally developed chips from the likes
Speaker 13: of Huawei, and that ultimately leads to models which are
Speaker 13: faster to develop and more importantly, lower cost to both
Speaker 13: develop and to train or inference, and that gives companies
Speaker 13: like deep Seek a significant cost and efficiency advantage over
Speaker 13: their domestic competitors in China. And also, as we've seen
Speaker 13: in recent headlines, some of the big US tech platforms,
Speaker 13: So it's really been a wake up call to the
Speaker 13: entire industry.
Speaker 3: How long have software programmers in China been working on this?
Speaker 13: So give you a metric to work with. I guess
Speaker 13: you know how many of us had heard of large
Speaker 13: language models in China when Chat GPT first launched, and
Speaker 13: they were next to none, So to quite a stat
Speaker 13: at you. In October twenty twenty three, so you know,
Speaker 13: roughly eighteen months ago or so, there were fourteen sanctioned
Speaker 13: officially sanctioned models available in China from the regulator, and
Speaker 13: then rolling forward to where we were at the end
Speaker 13: of last year, they were close to three hundred. So
Speaker 13: that highlights the very rapid progress that Chinese companies have made,
Speaker 13: and as I said, with increasing focus on smaller, more
Speaker 13: computationally efficient models in order to work their wear around
Speaker 13: this problem caused by the US chip controls. Consequence of
Speaker 13: that is their developments have remained on track and relatively unhindered,
Speaker 13: but that has given them some potential cost advantage versus
Speaker 13: the let me call it a more brute force approach
Speaker 13: taken by companies in other parts of the world, not
Speaker 13: just by the US. But again this is going back
Speaker 13: to basic principles and engineering. You know, you may have
Speaker 13: seen headlines at the end of last year given the
Speaker 13: very high energy costs of these very large models. There
Speaker 13: was even talk about restarting nuclear reactors, etc. I think,
Speaker 13: you know, just Gutville, It just doesn't make sense. There
Speaker 13: has to be an easier way to go about things.
Speaker 13: And I think, you know, prompted by these external restrictions
Speaker 13: placed on them, Like any good engineer, you know, the
Speaker 13: Chinese have focused gone back to their code and try
Speaker 13: to work around the problem, and that has developed them
Speaker 13: some you know, highly competitive models as a result.
Speaker 3: So it creates a big question mark over the bleeding
Speaker 3: edge market for that hardware that you're talking about, obviously
Speaker 3: on the GPU side, on the memory side as well,
Speaker 3: right with those high bandwidth memory chips.
Speaker 13: That remains in question. And in no way am I
Speaker 13: trying to evade that question, because if the cost of
Speaker 13: developing these models is decreasing, and on one hand, would
Speaker 13: that lead to a proliferation in the number of models,
Speaker 13: a proliferation more importantly in the number of applications out there,
Speaker 13: and in some way, you know, actually accelerate the uptake
Speaker 13: of these products within the wider market because of their
Speaker 13: increased availability. That's one way that things could get and
Speaker 13: I guess that would be a more positive way, you know.
Speaker 13: On the negative side, and again I think it really
Speaker 13: is up the debate and remains to be seen, you know,
Speaker 13: is a potential negative for the hardware suppliers and the
Speaker 13: likes of Nvideo, etc. Because again, this brute force approach
Speaker 13: that's been taken so far. You know, I don't think
Speaker 13: it's sustainable in the long run, both from a capital
Speaker 13: point of view and you know, an environmental point of
Speaker 13: view and an energy point of view. So I think
Speaker 13: that it genuinely is uncertain at the moment, but should
Speaker 13: become clearer in the coming months.
Speaker 3: So what do you expect the impact to be of
Speaker 3: the fact that are one, this AI model from deep
Speaker 3: Ceas is open source. How is that going to impact
Speaker 3: the industry?
Speaker 13: Well, again, you know, my job is to take a
Speaker 13: critical eye to thinks. But I think potentially there could
Speaker 13: be a positive from that because in open source and
Speaker 13: allowing external developers to really understand the nuts and bolts
Speaker 13: of how they've put this model together. It's potentially a
Speaker 13: positive for the industry and will help the industry as
Speaker 13: a whole move towards you know, more efficient, lower cost
Speaker 13: models overall. So again that is one potential direction of
Speaker 13: travel that the industry could go in as a result
Speaker 13: of this. Because, and again this may surprise some people
Speaker 13: out there, this innovative Chinese company has been pretty transparent
Speaker 13: about what it's done, so I think, you know, ultimately
Speaker 13: that could be to the benefit of the entire industry.
Speaker 13: But again its early days. It remains to be seen.
Speaker 3: What do we know about the way in which this
Speaker 3: R one model has been trained. When you hear stories
Speaker 3: of how US AI chat parts have been trained, I
Speaker 3: mean they're accumulating vast sums of data from the intranet
Speaker 3: and that is helping to train these models. It's a
Speaker 3: very different story in China though, where data is concerned,
Speaker 3: is it not and is there anything to read into
Speaker 3: kind of the context of a Chinese AI app being
Speaker 3: developed on the mainland.
Speaker 13: That's a very important point. And again when we've raised
Speaker 13: in our research one issue that the Chinese companies do have.
Speaker 13: First of all, there's the censorship rules, the Great Firewall,
Speaker 13: et cetera. So obviously their availability to data in Chinese
Speaker 13: language is relatively unrestricted within the confines of these censorship rules,
Speaker 13: so as being commented widely. Yeah, sure, if you're asking
Speaker 13: more sensitive, politically sensitive questions, for example, the model sort
Speaker 13: of clam up and unwilling to answer that. But I
Speaker 13: think the reality is the World Wide Web is dominated
Speaker 13: by the English language. Forget the exact stat off the
Speaker 13: top of my head, but you know it's like eighty
Speaker 13: to ninety percent of all information on the world Wide
Speaker 13: where globally is in English. And again, the Chinese aility
Speaker 13: or the ability of Chinese companies to access that training
Speaker 13: data is more limited versus companies in the US or Europe.
Speaker 13: So again I think that's another issue they need to
Speaker 13: work around in the long run. But you know, their models,
Speaker 13: as have said, are highly efficient, highly cost competitive. The
Speaker 13: fact that they're open sourcing this technology and making it
Speaker 13: effectively available to everybody should ultimately help the developments and models,
Speaker 13: you know, globally.
Speaker 3: So if the efficiency of the technology, which seems to
Speaker 3: have been demonstrated, is there, that will likely then I
Speaker 3: would imagine, lead to increased demand for the resource. Is
Speaker 3: this a pivotal moment for the adoption of chat bards
Speaker 3: because of what this company is doing?
Speaker 13: Right, One thing I have done repeatedly when I I
Speaker 13: meet new people, when I talk to my friends and
Speaker 13: family and colleagues, I normally will drop into conversation a
Speaker 13: question just asking about their AI usage to see whether
Speaker 13: they're using these spots, whether they're paying for bots. More importantly,
Speaker 13: and although this is completely anecdotal, I think the reality
Speaker 13: is the vast majority of us at the moment are
Speaker 13: not paying for these things.
Speaker 1: So why is that?
Speaker 13: Particularly in this part of the world. In China, many
Speaker 13: of these apps are free to use, and that's the
Speaker 13: culture of Chinese apps in general. They tend to monetize
Speaker 13: through advertising, But I think it reflects the level of
Speaker 13: value add that the average consumer currently sees in the
Speaker 13: current generation of bots and other AI tools. Whilst they're
Speaker 13: interesting to play around with and maybe there are applications
Speaker 13: in some areas, the vast majority of consumers are not
Speaker 13: putting their hands in the pocket and paying for these things.
Speaker 13: So the biggest challenge this industry faces at the moment
Speaker 13: is monetization and tying back to the US tech platform.
Speaker 13: Spending ten billion dollars plus per quarter in CAPEX, I
Speaker 13: would say largely driven by fear of missing out, you know,
Speaker 13: at some point we are going to hit a day
Speaker 13: of reckoning if these companies are not monetizing fast enough
Speaker 13: or in a in a more meaningful way. So whilst
Speaker 13: Deepseeker is a bit of a wake up call to
Speaker 13: show that, you know, Chinese obviously narrowing the gap and
Speaker 13: the technology front, the big challenge for all these companies,
Speaker 13: whatever region they operate in is monetization. In our view,
Speaker 13: and we've published as repeatedly this is not happening fast enough,
Speaker 13: and I think that is the major challenge this industry
Speaker 13: still faces.
Speaker 3: So what is the risk there? When I hear that,
Speaker 3: it seems to suggest a lot of caution.
Speaker 13: Well, there been so many bubbles and hype cycles in tech,
Speaker 13: not just in recent years, whether it's crypto or metaverse,
Speaker 13: and you know, going back to the year two thousand
Speaker 13: and the Internet bubble, and I think there are some
Speaker 13: parallels in all honesty with the Internet bubble. Ultimately, you know,
Speaker 13: we internet is an essential part of everybody's life these days.
Speaker 13: So I'm not in any way suggesting AI won't be
Speaker 13: or isn't a useful tool, but I you know, whether
Speaker 13: it goes back to the human psychology, human nature, there
Speaker 13: tends to be an overreaction either way. So, whilst AI
Speaker 13: is a very interesting and innovative technique that can drive
Speaker 13: efficiency and cost savings across many applications, I think the reality,
Speaker 13: as I've said, is the technology still at relatively immature phase,
Speaker 13: and therefore the companies are struggling to monetize at anywhere
Speaker 13: fast enough rate given the huge amounts, humongous amounts they're
Speaker 13: spending on CAPEX at the moment. So I think obviously
Speaker 13: it isn't such an issue for the very large tech platforms,
Speaker 13: given their very healthy balance sheets in free cash flow generations.
Speaker 13: But I think the more marginal players out there, you know,
Speaker 13: at some point we'll have to make a decision. Can
Speaker 13: they continue plowering such high amounts into CAPEX when there's
Speaker 13: no or very limited chance of making a near term
Speaker 13: return on this.
Speaker 3: Robert, great stuff, Thank you so much. Robert Lee, Senior
Speaker 3: analyst for Bloomberg Intelligence, joining us from Hong Kong. I'm
Speaker 3: Doug Prisner. You can catch us weekdays for the Daybreak
Speaker 3: Asia podcast. It's available wherever you get your podcast, Tom.
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