WEBVTT - Daybreak Weekend: US Housing, Europe Data, Yen Intervention 0:00:00.240 --> 0:00:07.720 Bloomberg Audio Studios, Podcasts, radio News. 0:00:10.240 --> 0:00:12.920 This is Bloomberg Daybreak Weekend, our global look at the 0:00:12.960 --> 0:00:15.520 top stories in the coming week from our Daybreak anchors 0:00:15.560 --> 0:00:18.040 all around the world. Straight Ahead on the program, we 0:00:18.079 --> 0:00:20.720 looked to some key housing data in the US. I'm 0:00:20.800 --> 0:00:22.360 Nathan Hager in Washington. 0:00:22.480 --> 0:00:24.599 I'm Stephen Caron and London, who are looking ahead the 0:00:24.640 --> 0:00:28.400 next economic indicators for Europe and what it signals about 0:00:28.400 --> 0:00:31.120 the trajectory for stocks on the economy for the rest 0:00:31.160 --> 0:00:31.600 of the year. 0:00:31.920 --> 0:00:34.480 I'm Doug Prisner looking at the fate of the Japanese 0:00:34.520 --> 0:00:37.520 yen and a reality check for Hong Kong. 0:00:38.360 --> 0:00:42.400 That's all straight ahead on Bloomberg Daybreak Weekend on Bloomberg 0:00:42.400 --> 0:00:46.120 eleven three year, New York, Bloomberg ninety nine to one, Washington, DC, 0:00:46.600 --> 0:00:51.760 Bloomberg ninety two nine, Boston, DAB Digital Radio, London, Syrias, 0:00:51.920 --> 0:00:55.440 XM one twenty one, and around the world on Bloomberg Radio, 0:00:55.480 --> 0:00:57.640 dot Com and the Bloomberg Business App. 0:01:02.760 --> 0:01:04.520 Good day to you. I'm Nathan Hager. 0:01:04.600 --> 0:01:07.080 We begin today's program with a look at the US 0:01:07.120 --> 0:01:09.880 housing market. This week, we get figures on housing starts 0:01:09.920 --> 0:01:12.319 and pending home sales for the month of July. For 0:01:12.400 --> 0:01:14.880 more on this and the latest in the home building sector, 0:01:14.920 --> 0:01:18.000 we are joined by Drew Redding, us homebuilding analyst for 0:01:18.080 --> 0:01:21.000 Bloomberg Intelligence. Great as always to speak with you, Drew, 0:01:21.040 --> 0:01:23.480 And of course it's been a pretty hot summer, so 0:01:23.800 --> 0:01:26.120 are we expecting many projects to have gotten off the 0:01:26.160 --> 0:01:27.440 ground in the last month. 0:01:28.160 --> 0:01:31.319 So when we think about housing starts, you know, we're 0:01:31.360 --> 0:01:33.800 down about five percent year to date on the single 0:01:33.840 --> 0:01:37.400 family side, and we expect to see further pressure from 0:01:37.400 --> 0:01:39.560 that side of the market. You know, we see builders 0:01:39.600 --> 0:01:44.200 that are continuing to scale back production, giving in an 0:01:44.240 --> 0:01:47.000 already elevated supply of speck home inventory that they still 0:01:47.040 --> 0:01:49.639 need to work through. And you know, we've got sales 0:01:49.640 --> 0:01:51.520 in the new home market that are up just about 0:01:51.560 --> 0:01:53.720 two percent year to date, so it's a little taken 0:01:53.760 --> 0:01:57.560 a little bit longer to clear that inventory. You know. Now, 0:01:57.760 --> 0:02:00.240 the large public homebuilders have done a pretty good job 0:02:00.280 --> 0:02:04.120 in drawing down their complete at home inventories. Of course, 0:02:04.320 --> 0:02:06.880 they've had to remain pretty aggressive in their use of 0:02:06.920 --> 0:02:10.160 incentives to do so. But we are starting to see 0:02:10.360 --> 0:02:13.240 more of a shift away from that spec production model, 0:02:13.280 --> 0:02:16.920 which is building the home before you have a buyer 0:02:18.040 --> 0:02:19.400 you know, many of the builders are looking for a 0:02:19.400 --> 0:02:21.640 better balance, so they're what they're trying to do is 0:02:21.680 --> 0:02:26.200 basically match production with the sales pace rather than you know, 0:02:26.240 --> 0:02:28.360 putting more specs into a slow market. 0:02:28.639 --> 0:02:31.320 Sounds like that speaks to an overall trend of the 0:02:31.800 --> 0:02:36.160 home market in general moving away from a buying toward renting. 0:02:36.400 --> 0:02:38.600 Is that kind of what you're pointing to as an 0:02:38.639 --> 0:02:39.640 overall trend here? 0:02:40.240 --> 0:02:42.120 Yeah, So I think when you look at the for 0:02:42.360 --> 0:02:46.239 sale market relative to rentals, when you think about affordability, 0:02:46.320 --> 0:02:49.640 the high price of the homes, mortgage rates back towards 0:02:49.680 --> 0:02:53.919 seven percent. You know, the math certainly does favor renting 0:02:54.000 --> 0:02:58.160 over over owning. We've done some survey work that shows 0:02:58.200 --> 0:03:01.640 the same. And it's not that it's that current renters 0:03:02.919 --> 0:03:05.240 don't want to own. We find a majority of them do. 0:03:05.400 --> 0:03:08.760 It's simply the economics of it don't make sense right now. 0:03:09.040 --> 0:03:11.680 So what does that do for the overall sentiment in 0:03:11.720 --> 0:03:15.560 the home building market when we're seeing a trend toward 0:03:16.200 --> 0:03:18.720 more of those multi family projects as opposed to the 0:03:18.760 --> 0:03:22.320 single families that you would think have better profit margins. 0:03:23.200 --> 0:03:26.080 Well, it's a good question, and you know I mentioned 0:03:26.120 --> 0:03:28.760 that in the new home market, we have sales paces, 0:03:29.919 --> 0:03:32.360 you know, they're down significantly from last year. The market 0:03:32.400 --> 0:03:34.639 as a whole is up only about two percent year 0:03:34.680 --> 0:03:37.680 to date. And really the way builders are having to 0:03:37.760 --> 0:03:40.680 grow is to expand their community count, so they're not 0:03:40.680 --> 0:03:44.000 seeing it on the pace side, but really by increasing 0:03:44.040 --> 0:03:48.040 the number of subdivisions that they're operating from. You know. 0:03:48.080 --> 0:03:51.600 So it's really a tough growth environment on the single 0:03:51.640 --> 0:03:55.000 family side. And you know, if you think about the market, 0:03:55.120 --> 0:03:58.640 certainly there are pockets of relative strength and relative weakness. 0:03:58.720 --> 0:04:01.880 When you think about you know, the entry level buyer, 0:04:01.960 --> 0:04:04.320 who is typically someone that may be coming out of 0:04:04.360 --> 0:04:07.720 a rental situation, we see more stress as you would 0:04:07.760 --> 0:04:10.080 expect to cross that part of the market because those 0:04:10.160 --> 0:04:13.920 tend to be the most priced sensitive home buyers. On 0:04:13.960 --> 0:04:17.000 a relative basis, we have seen more strength at the 0:04:17.120 --> 0:04:20.200 move up in luxury segments. These are typically the buyers 0:04:20.200 --> 0:04:23.560 that are coming out of an existing home, so they've 0:04:23.560 --> 0:04:27.040 built up equity over the last couple of years. In 0:04:27.080 --> 0:04:29.520 the luxury side, they're benefiting from the run up in 0:04:29.640 --> 0:04:33.000 equity markets. They tend to be less sensitive to mortgage rates. 0:04:33.240 --> 0:04:36.200 We're seeing relative strength on that side, but you know, 0:04:36.400 --> 0:04:38.560 there's really not a parket part of the market that 0:04:38.760 --> 0:04:42.200 is completely immune, you know, to what's happening in the 0:04:42.200 --> 0:04:47.880 broader economy, you know, affordability, economic and political uncertainty. So 0:04:48.440 --> 0:04:51.000 you know, there's broad challenges, but there are pockets of 0:04:51.040 --> 0:04:51.719 relative strength. 0:04:51.800 --> 0:04:53.560 Oh, we are going to hear from one of those 0:04:53.720 --> 0:04:57.240 luxury home builders when Toll Brothers reports earnings this week. 0:04:57.279 --> 0:05:01.400 Are we expecting some positive signs there in terms of 0:05:01.880 --> 0:05:03.760 a lot of the factors you've just been talking about. 0:05:04.440 --> 0:05:07.760 Yeah, so we like the relative position of Toll Brothers. 0:05:07.800 --> 0:05:10.520 You know, as you know, they cater to the luxury market, 0:05:10.839 --> 0:05:15.480 so their buyer is more affluent. You know, they're, as 0:05:15.520 --> 0:05:17.880 I said, the customers are less sensitive to interest rates 0:05:17.920 --> 0:05:19.840 compared to the entry level. About a quarter of their 0:05:19.880 --> 0:05:23.120 buyers pay cash. For those that do take out a mortgage, 0:05:23.160 --> 0:05:25.279 they put about thirty percent down, So the buyer is 0:05:25.400 --> 0:05:28.960 very strong. So they're certainly more insulated to the macro. 0:05:29.440 --> 0:05:32.039 In terms of the upcoming print, I think, you know, 0:05:32.080 --> 0:05:35.640 the the KPIs will be looking at our order growth 0:05:35.680 --> 0:05:39.120 and gross margin, and we particularly are interested in hearing 0:05:39.120 --> 0:05:42.640 how demand has trended intra quarter, you know, with mortgage 0:05:42.680 --> 0:05:46.080 rates climbing back up towards seven percent. But that being said, 0:05:46.080 --> 0:05:48.400 you know, we still expect Toll to report high single 0:05:48.400 --> 0:05:52.480 digit growth in orders, and importantly, you know, that's being driven, 0:05:52.600 --> 0:05:55.120 as we mentioned before, by community count growth, which is 0:05:55.160 --> 0:05:58.520 helping to offset muted sales absorptions. And that's really what 0:05:58.760 --> 0:06:02.600 sets Toll Brothers apart from a growth perspective, both for 0:06:02.760 --> 0:06:05.599 twenty twenty six and looking out into twenty twenty seven. Now, 0:06:06.120 --> 0:06:09.080 on the margin side, gross margins have been very strong. 0:06:09.160 --> 0:06:11.760 The outlook's really going to come down to how aggressive 0:06:12.320 --> 0:06:14.760 they've had to be on their use of sales incentives. 0:06:14.960 --> 0:06:19.520 Bull primarily prescribes to a price over paced strategy, so 0:06:19.760 --> 0:06:22.120 we do think that near term margins should hold pretty well. 0:06:22.400 --> 0:06:24.640 Thank you for this, Drew, great having you on with us. 0:06:24.720 --> 0:06:28.719 That's Drew Redding, us home building analyst for Bloomberg Intelligence. 0:06:29.400 --> 0:06:31.640 Let's take a look now add some stocks making news 0:06:31.640 --> 0:06:34.000 in the week ahead. I'm Nathan Hager, joined by Bloomberg 0:06:34.000 --> 0:06:37.919 Equities reporter Avalon Purnell. We're sort of winding down earning 0:06:37.960 --> 0:06:40.280 season here Avalon, but we're going to hear from some 0:06:40.320 --> 0:06:43.760 of the biggest names in big box retail this week, 0:06:43.839 --> 0:06:47.720 starting with Target on Wednesday. There has been a lot 0:06:47.720 --> 0:06:49.760 of drama around this stock. 0:06:49.880 --> 0:06:51.239 What are we expecting this week? 0:06:51.600 --> 0:06:53.919 Absolutely, We're definitely gonna get a lot of visibility on 0:06:53.960 --> 0:06:57.520 the state of the American shopper, sales trends, and progress 0:06:57.560 --> 0:07:00.320 on Target's broader recovery will definitely be tough top of 0:07:00.360 --> 0:07:03.120 mind for investors, especially as they head into their second 0:07:03.160 --> 0:07:06.120 quarter earnings next Wednesday. The company is still really trying 0:07:06.160 --> 0:07:09.400 to regain its sparkle and pinpoint what exactly made the 0:07:09.400 --> 0:07:14.040 company tarje as opposed to just Target. One thing of 0:07:14.080 --> 0:07:16.880 note though, is that definitely analysts remain remixed on the 0:07:16.880 --> 0:07:20.240 company's performance moving forward, especially giving guidance they had in 0:07:20.280 --> 0:07:23.040 their earnings call last quarter, noting that they did have 0:07:23.080 --> 0:07:26.200 a little bit of concerns about tougher comparisons moving forward. 0:07:26.560 --> 0:07:30.400 You have ubs as Michael Lasser remaining quite bullish expecting 0:07:30.400 --> 0:07:32.920 the results to provide the next proof point that broader 0:07:32.960 --> 0:07:36.480 recovery may actually be sticking around for the company, whereas 0:07:36.560 --> 0:07:40.560 Barclays Seth Sigmund saying that you know, meaningful upside to 0:07:40.600 --> 0:07:43.480 results will really be needed to push the stock from here. 0:07:43.800 --> 0:07:46.400 He notes also that he believes a big box store 0:07:46.560 --> 0:07:49.880 likely had a solid quarter. However, he still views improvement 0:07:49.880 --> 0:07:52.560 as just recovering from last year's issues as opposed to 0:07:53.120 --> 0:07:57.120 moving forward into the next chapter. So Worth noting that 0:07:57.160 --> 0:07:59.320 the options data that we're currently seeing at the moment 0:07:59.400 --> 0:08:02.160 is implying about a six point two percent move after 0:08:02.200 --> 0:08:02.840 those results. 0:08:03.200 --> 0:08:04.960 Well, you wonder if we're going to see something of 0:08:05.000 --> 0:08:09.520 a similar move from Walmart when they report on Thursday. 0:08:09.560 --> 0:08:13.440 If you think about some kind of indicator of the 0:08:13.480 --> 0:08:16.880 American consumer, it's hard to think of a company that's 0:08:16.960 --> 0:08:18.240 more of one than Walmart. 0:08:18.720 --> 0:08:21.880 Absolutely, and a similar story that we were seeing in 0:08:21.960 --> 0:08:25.200 Target definitely still playing a role here for Walmart as well. 0:08:25.440 --> 0:08:28.760 Analysts still quite mixed on how exactly this big box stores, 0:08:29.000 --> 0:08:32.880 e commerce and also delivery businesses will perform as they 0:08:32.880 --> 0:08:36.160 report second quarter earnings. Key Bank is expecting pretty healthy 0:08:36.200 --> 0:08:38.840 results from the store, noting that the company remains one 0:08:38.880 --> 0:08:42.320 of their top picks as growth initiatives and also further 0:08:42.440 --> 0:08:46.400 share gains continue to build momentum despite a fairly volatile 0:08:46.559 --> 0:08:50.200 macro and geopolitical environment. They also expect Walmart to be 0:08:50.240 --> 0:08:53.560 fairly vocal about how exactly they're using those tariff refunds 0:08:53.559 --> 0:08:58.000 to fund rollbacks and ultimately drive future business gains by 0:08:58.000 --> 0:09:00.719 bringing people back into the store with slightly lower prices. 0:09:01.200 --> 0:09:04.480 Others are not necessarily as rosy about the company's outlook, 0:09:04.760 --> 0:09:07.600 Barclay's noting that the optics don't look too great given 0:09:07.679 --> 0:09:11.839 expectations for sales moderation from the last quarter. Barclays, though 0:09:11.920 --> 0:09:14.199 still saying that they believe this could be the trough 0:09:14.559 --> 0:09:18.120 as price investments in other initiatives support accelerating share gains 0:09:18.160 --> 0:09:20.600 in the second half of the year. Worth noting, like 0:09:20.760 --> 0:09:23.480 retaillers are still expecting you know, back to school sales 0:09:23.559 --> 0:09:26.200 and Black Friday, which obviously won't be penciled in for 0:09:26.280 --> 0:09:27.360 the start of the year. 0:09:27.520 --> 0:09:30.640 Right, but definitely something to keep an eye on as 0:09:30.679 --> 0:09:33.200 we wait to see what the outlook is going to 0:09:33.240 --> 0:09:38.080 be from both Target and Walmart. Also on Thursday, we're 0:09:38.080 --> 0:09:39.839 going to hear from one of the biggest names in 0:09:39.880 --> 0:09:43.280 the AG sector. What are we expecting from Deer in company? 0:09:43.840 --> 0:09:47.840 Yes, investors will be looking for more data that reinforces 0:09:47.880 --> 0:09:50.640 Deer's view that twenty twenty six will be the trough, 0:09:50.920 --> 0:09:55.400 the bottom of this quite complicated situation for the company. 0:09:55.600 --> 0:09:58.839 The world's biggest farm machinery makers second quarter results are 0:09:58.880 --> 0:10:02.160 expected to be slightly mixed again this quarter, Bloomberg Intelligence 0:10:02.160 --> 0:10:05.240 expecting the results to still reinforce that expectation that twenty 0:10:05.280 --> 0:10:08.720 twenty six will mark a trough in large ag demand 0:10:09.040 --> 0:10:12.640 as attention shifts towards how fast will that recovery be 0:10:12.960 --> 0:10:15.800 next year. However, that analyst is also noting that they're 0:10:15.840 --> 0:10:20.080 still expecting large agriculture retail cells to remain quite soft, 0:10:20.400 --> 0:10:22.600 though they do appear to be tracking better than industry 0:10:22.640 --> 0:10:27.160 forecasts as inventories continue to normalize. RBC also highlighting that 0:10:27.200 --> 0:10:30.280 their big question is continuing to be what exactly does 0:10:30.280 --> 0:10:34.040 the pace of deer's recovery look like, especially as there 0:10:34.200 --> 0:10:36.920 continues to be a lot of holatility in the macro environment, 0:10:37.320 --> 0:10:40.560 and also the tariff situation that is somewhat improved but 0:10:41.120 --> 0:10:45.120 still kind of in the balance o previously kind of interesting, 0:10:45.200 --> 0:10:48.080 especially with the Iran war in the background, as to 0:10:48.280 --> 0:10:50.760 how exactly that's going to be impacting farmers who are 0:10:50.760 --> 0:10:55.360 continuing to struggle to manage prices, not necessarily keeping pace 0:10:55.400 --> 0:10:59.360 with very elevated cost in the options market, also continuing 0:10:59.360 --> 0:11:02.320 to price She'll move of nearly five percent after the 0:11:02.320 --> 0:11:03.679 company reports learnings. 0:11:03.840 --> 0:11:05.480 Yeah, still a lot of back and forth when it 0:11:05.520 --> 0:11:08.040 comes to that situation in the Middle East and of 0:11:08.080 --> 0:11:10.000 the post tariff. 0:11:09.679 --> 0:11:10.680 Situation as well. 0:11:11.400 --> 0:11:14.120 Just time to talk about another stock that's reporting this week, 0:11:14.360 --> 0:11:17.600 Esday Lotder. There is a lot more competition in the 0:11:17.600 --> 0:11:19.720 beauty space. How are we thinking Esday Lotter is going 0:11:19.800 --> 0:11:20.520 to be handling it? 0:11:20.800 --> 0:11:20.959 There? 0:11:21.040 --> 0:11:23.280 Sure is, And I mean to say the least, this 0:11:23.320 --> 0:11:27.400 company has had a rollercoaster ride of a quarter. I mean, 0:11:27.840 --> 0:11:30.120 just a couple of months ago they were talking about 0:11:30.160 --> 0:11:33.480 merger talks with the Spanish brand Pooch, which was on 0:11:33.520 --> 0:11:36.560 the table and then later scrapped after investors were quite 0:11:36.679 --> 0:11:39.959 negative on that idea. And like a lot of other 0:11:40.000 --> 0:11:42.120 companies that we've already mentioned, they are in the midst 0:11:42.160 --> 0:11:45.959 of a broader recovery as consumers are continuing to kind 0:11:45.960 --> 0:11:49.200 of pull back from spending on these various like luxury 0:11:49.240 --> 0:11:52.880 brands that are under the Stay Ltder umbrella. That being said, 0:11:53.040 --> 0:11:56.800 RBC does continue to favor their turnarounds, say noticing that 0:11:57.120 --> 0:12:01.560 potentially important brands continue to outperform, and they also noted 0:12:01.600 --> 0:12:05.200 that the broader turnaround at MAC continues to kind of 0:12:05.280 --> 0:12:07.839 bode well for the company, though they do still question 0:12:08.080 --> 0:12:11.559 how Esday Lauder will continue to fare with holding onto 0:12:11.760 --> 0:12:14.960 smash Box and two Face, which are fairly popular brands 0:12:15.000 --> 0:12:19.040 amongst maybe millennial crowds, and whether it still makes sense 0:12:19.080 --> 0:12:20.920 for es Day Lauder to hold on to them or 0:12:21.040 --> 0:12:23.679 maybe look for a play to sell them at some point. 0:12:23.960 --> 0:12:26.240 We'll see, Yeah, we'll see if a lot of those 0:12:26.240 --> 0:12:28.600 sales are happening in Tarjay as well. Thanks for Evlon, 0:12:28.760 --> 0:12:30.920 as always good to have you with this. That's Avlon Parnell, 0:12:31.320 --> 0:12:34.440 Equities reporter for Bloomberg News, and coming up on Bloomberg 0:12:34.480 --> 0:12:38.040 Daybreak weekend, we'll look at whether Europe's future economic data. 0:12:37.800 --> 0:12:40.679 Can live up to the promise of a bumper second. 0:12:40.480 --> 0:12:43.360 Quarter when it comes to Europe's earnings. I'm Nathan Hager 0:12:43.440 --> 0:12:57.800 and this is Bloomberg. This is Bloomberg Day Break Weekend, 0:12:57.880 --> 0:13:00.080 our global look ahead at the top stories for our 0:13:00.080 --> 0:13:02.760 investors in the coming week are Nathan Higer and Washington. 0:13:03.120 --> 0:13:04.480 Later in the program. 0:13:04.080 --> 0:13:05.760 Will take a closer look at the feet of the 0:13:05.840 --> 0:13:09.920 Japanese yen, plus how Hong Kong's competitiveness as a financial 0:13:09.960 --> 0:13:13.680 center is about to be tested. But first Europe's Biggest 0:13:13.679 --> 0:13:17.680 Economies report of inflation and Purchasing Managers Index data next 0:13:17.679 --> 0:13:22.000 week against a backdrop of geopolitical uncertainty and higher energy 0:13:22.000 --> 0:13:25.040 costs driven by the Warriner ran. Let's get more now 0:13:25.040 --> 0:13:28.280 from Bloomberg Daybreak europe banker Stephen Carroll Nathan. 0:13:28.559 --> 0:13:32.560 European economies and companies have defied the doom laden forecast 0:13:32.640 --> 0:13:35.760 that the Iran war would tip the continent into stagflation. 0:13:36.000 --> 0:13:38.640 We've seen the best earning season in nearly four years, 0:13:38.880 --> 0:13:42.400 pushing keystock indexes to new records, and the signals for 0:13:42.400 --> 0:13:44.800 the months ahead look strong too. In the coming days, 0:13:44.880 --> 0:13:47.800 PMIS and the Zew survey in Germany will give fresh 0:13:47.800 --> 0:13:50.600 insight into how the biggest economies are performing, along with 0:13:50.679 --> 0:13:54.480 updated readings on inflation. And investors seem bullish on European 0:13:54.559 --> 0:13:59.120 stocks too. Benedict's Low is equity derivative strategist at BMP Pariba. 0:13:59.280 --> 0:14:02.199 Here's what she tells Bloomberg's Tom McKenzie earlier this week. 0:14:02.520 --> 0:14:05.760 So it's undeniable that the macro story is speaking up 0:14:05.760 --> 0:14:06.200 in Europe. 0:14:06.320 --> 0:14:07.439 We've got growth that. 0:14:07.480 --> 0:14:10.520 Is surprising to the upside, activity on the right, and 0:14:10.640 --> 0:14:14.319 earnings that have been good actually, earnings have been exceptionally 0:14:14.360 --> 0:14:17.040 strong in the US but also very good in Europe. 0:14:17.040 --> 0:14:19.360 It's been one of the best earning seasons over the 0:14:19.400 --> 0:14:22.120 past few years. And all of this is happening in 0:14:22.160 --> 0:14:26.160 the context where positioning is low to neutral, So that 0:14:26.240 --> 0:14:29.120 points a positive picture of stocks. Now, the comfort point 0:14:29.120 --> 0:14:31.240 to that is that a lot of positive news is 0:14:31.320 --> 0:14:34.800 already in the price and with seasonality that is not 0:14:34.880 --> 0:14:37.400 supportive for higher stock price up until the end of 0:14:37.480 --> 0:14:40.880 September October. We like to position for what we call 0:14:41.000 --> 0:14:43.960 a grind higher in stocks, and we like to minimize 0:14:44.000 --> 0:14:47.000 the premiums that investor are spending on website positioning. 0:14:47.160 --> 0:14:49.400 How do you mitigate risks around inflation, whether it's soft 0:14:49.440 --> 0:14:52.080 commodities where there's these or where there's gas oil prices. 0:14:52.240 --> 0:14:55.000 If this is the status quo right now around Iran 0:14:55.120 --> 0:14:57.640 and that is prolonged, how do you hedge around that. 0:14:58.240 --> 0:15:00.920 So one of our top pick at the moment is 0:15:00.920 --> 0:15:04.160 the banking sectors. We think the banking sectors is one 0:15:04.200 --> 0:15:07.720 of the best sector position for end of your First 0:15:07.720 --> 0:15:09.600 of all, pmis are on the rise. As I mentioned 0:15:09.640 --> 0:15:12.680 activity speaking up, earnings that have been good, but also 0:15:12.800 --> 0:15:15.600 higher inflation mean higher rates. We're expecting the UCB to 0:15:15.720 --> 0:15:18.760 rise rates concept number meeting, and that is positive for 0:15:18.840 --> 0:15:22.240 the banking sector, a cyclical sector that has yes really 0:15:22.240 --> 0:15:24.320 performed well over the past few years. But we think 0:15:24.320 --> 0:15:26.120 this is some website poler sector. 0:15:26.440 --> 0:15:29.680 So Betexil from Bimpe Parriba optimistic there, but there are 0:15:29.760 --> 0:15:32.440 risks to the outlet, not least from oil and gas 0:15:32.480 --> 0:15:36.200 prices grinding higher. Let's discuss now with David Powell, Bloomberg's 0:15:36.240 --> 0:15:39.680 senior Euro Area economist, and Sagarika Jackson Ghani, who covers 0:15:39.920 --> 0:15:44.600 EMEA Equities, macro and investment strategy. David, let's start with you. 0:15:44.720 --> 0:15:48.000 We're looking ahead to these economic surveys coming in the 0:15:48.040 --> 0:15:50.560 next few days. What are we expecting to learn about 0:15:50.560 --> 0:15:52.120 the state of europe'svegas economies. 0:15:52.400 --> 0:15:55.560 Well, essentially, we're going to be focusing on the PMI 0:15:55.760 --> 0:15:58.160 survey and that's going to give us sy indications to 0:15:58.200 --> 0:16:01.880 whether the strong growth we saw the second quarter continued 0:16:01.920 --> 0:16:05.320 in the third quarter. Your area GDP spended by zero 0:16:05.360 --> 0:16:08.400 point four percent in the second quarter this year. That 0:16:08.520 --> 0:16:11.920 was basically double consensus. Part of that is because of 0:16:11.960 --> 0:16:17.000 a rebound in Ireland, but even without that distortion caused 0:16:17.000 --> 0:16:21.600 by iris GDP, the economy probably would have expanded by 0:16:21.600 --> 0:16:24.760 about zero point three, which is above expectations and is 0:16:24.800 --> 0:16:30.720 certainly defying the negative forecasts or the gloomy forecasts that 0:16:30.760 --> 0:16:34.400 were put out after the sharp rise and commodity prices 0:16:34.440 --> 0:16:35.280 earlier this year. 0:16:35.720 --> 0:16:38.600 Zagreca, we've just wrapped up, or just wrapping up rather 0:16:38.760 --> 0:16:41.640 a very strong earning season in Europe. But can you 0:16:41.640 --> 0:16:44.040 give us a sense of perspective on this. How good 0:16:44.040 --> 0:16:46.040 has it been when we look back at how European 0:16:46.040 --> 0:16:47.320 companies have reported. 0:16:47.280 --> 0:16:50.560 It's taken a lot of market participants, both investors and 0:16:50.800 --> 0:16:53.640 sell side strategists by surprise. And I want to put 0:16:53.640 --> 0:16:56.360 that in context a little bit, because European companies in 0:16:56.400 --> 0:16:59.520 the last two years have had essentially zero profit growth, 0:17:00.040 --> 0:17:03.280 and that was underpinned by poor economic growth, both a 0:17:03.320 --> 0:17:06.119 lot of it domestically. But this year what happened was 0:17:06.119 --> 0:17:09.520 European stock started off the year on a really solid footing. Right. 0:17:09.600 --> 0:17:12.679 You had the AI trade cracking in the US, but 0:17:12.800 --> 0:17:16.320 at that time Europe was turning attractive because it had 0:17:16.359 --> 0:17:18.800 these There was a new buzzword on Wall Street at 0:17:18.800 --> 0:17:22.280 the time. It was called halo heavy assets low obselescence. 0:17:22.600 --> 0:17:26.960 So suddenly the asset heavy old economy stuff was becoming attractive. 0:17:27.440 --> 0:17:30.720 But before that could really take off, you had the 0:17:30.960 --> 0:17:34.760 US Iran war, and that exposed a lot of European 0:17:34.800 --> 0:17:38.280 companies to the potential for higher oil prices. Would it 0:17:38.840 --> 0:17:42.240 there were worries that European economies would tip into stagflation, 0:17:42.760 --> 0:17:47.000 so expectations had on the macro front been tempered a bit. 0:17:47.480 --> 0:17:51.480 But coming into the second quarter earning season, unless expectations 0:17:51.480 --> 0:17:55.880 were incredibly strong, and as we're expecting MSCI Europe companies 0:17:55.880 --> 0:17:59.200 to post a twelve percent increase in profits versus a 0:17:59.280 --> 0:18:02.080 year earlier. As I said previously, after two years of 0:18:02.119 --> 0:18:05.400 no growth, that was already a high bar. What's been 0:18:05.480 --> 0:18:08.840 astounding is that not only have the companies met that bar, 0:18:08.920 --> 0:18:12.240 they've actually beaten it by quite a wide margin. So 0:18:12.280 --> 0:18:16.159 they've posted seventeen percent increase in profits, and that's the 0:18:16.200 --> 0:18:19.640 best since late twenty twenty two. Of course, the economy 0:18:19.680 --> 0:18:23.199 has been surprisingly resilient to the oil price shock. We 0:18:23.280 --> 0:18:26.480 haven't quite seen that feed through to inflation to a 0:18:26.560 --> 0:18:29.080 degree that had been feared, So that's been underpinning that. 0:18:30.080 --> 0:18:32.680 But the really big takeaway for US this season has 0:18:32.720 --> 0:18:35.440 been that. You know, the typical pattern in a year 0:18:35.960 --> 0:18:39.480 is generally that analysts start the year really bullish and 0:18:39.520 --> 0:18:43.520 then through the year they downgrade earnings expectations. This year, 0:18:43.560 --> 0:18:45.760 it's been the opposite. Not only have they come in bullish, 0:18:45.800 --> 0:18:49.400 but they've actually raised earnings expectations for twenty twenty six 0:18:49.440 --> 0:18:52.760 by five percent, which is really atypical. So that bodes 0:18:52.800 --> 0:18:54.120 well for further bullishness. 0:18:54.280 --> 0:18:57.640 Okay, I mean the inflation concerns, David, really are central 0:18:57.240 --> 0:19:00.200 to what things look like for the rest of the 0:19:00.280 --> 0:19:03.760 year as well. We've talked about the resilience in the 0:19:03.760 --> 0:19:06.880 European economies that we've seen so far, but given that 0:19:07.119 --> 0:19:10.440 energy prices still remain elevated, how big is the inflation 0:19:10.640 --> 0:19:13.760 risk when we're thinking about the picture for the coming months. 0:19:13.920 --> 0:19:16.439 There were these fears of stagflation. We haven't had the 0:19:16.480 --> 0:19:19.240 stag but we've had the flation. So if we look 0:19:19.320 --> 0:19:22.600 back at headline CPI in January, it was one point 0:19:22.680 --> 0:19:26.840 seven percent. Commodity prices started to rise in February and 0:19:26.880 --> 0:19:30.240 anticipation of a conflict in the Middle East, and then 0:19:30.280 --> 0:19:33.920 when it actually began at the very end of February, 0:19:34.040 --> 0:19:37.359 commodity price is shot up, and the latest inflation reading 0:19:37.440 --> 0:19:40.680 is two point nine percent, so well above the ECB's 0:19:41.280 --> 0:19:45.679 two percent target, and that is really what's driving the 0:19:45.720 --> 0:19:50.480 ECB's decisions right now. We expect another hike from the 0:19:50.480 --> 0:19:56.160 ECB in September, and that's universally expected by most economists 0:19:56.160 --> 0:19:59.080 and priced into the market. And really what's going to 0:19:59.200 --> 0:20:03.840 drive their decision after that is how commodity prices are 0:20:03.880 --> 0:20:07.600 affecting inflation, and that of course is tied up with 0:20:07.640 --> 0:20:10.240 the outcome of the conflict in the Middle East, and 0:20:10.280 --> 0:20:12.439 no one can say with exact certainty where we're going 0:20:12.480 --> 0:20:14.359 to be at the end of the year in terms 0:20:14.359 --> 0:20:18.960 of that, but on track for another hike, and if 0:20:19.000 --> 0:20:22.440 this persists, we could have more tightening as the ECB 0:20:22.640 --> 0:20:26.440 worries about worries about inflation. However, the good news is 0:20:26.440 --> 0:20:31.480 is that core inflation is unlikely to rise as much. 0:20:31.560 --> 0:20:37.280 We have had some increase things that are particularly vulnerable 0:20:37.320 --> 0:20:40.720 to commodity prices like airfares have gone up, but the 0:20:40.760 --> 0:20:45.760 weakness in the labor market is unlikely to allow workers 0:20:45.920 --> 0:20:49.160 to ask for huge increases in pay that we saw 0:20:49.200 --> 0:20:53.560 after the pandemic that really boosted inflation. Keeping underlying inflation 0:20:53.680 --> 0:20:55.879 pressures limited this year. 0:20:56.119 --> 0:20:58.240 Indeed, so that the risk of a wage price spiral 0:20:58.320 --> 0:21:01.840 not looking at looming large at the moment, Sagrico in 0:21:01.880 --> 0:21:04.680 the earnings pictures, did we hear much from companies about 0:21:04.680 --> 0:21:05.800 their inflation fears? 0:21:06.600 --> 0:21:10.600 I think in terms of inflation, the sentiment from management 0:21:10.600 --> 0:21:15.119 has been really positive. They have sounded really confident on 0:21:15.200 --> 0:21:17.600 profit margins and actually a really key part of that, 0:21:17.800 --> 0:21:20.080 and this goes back to the AI story in the US. 0:21:20.880 --> 0:21:24.000 One of the other fundamental reasons why this polishness toward 0:21:24.040 --> 0:21:27.440 European companies and the European stock market is that changing 0:21:27.560 --> 0:21:31.400 attitude from investors on who are the next AI winners? 0:21:31.840 --> 0:21:34.439 So that was a key focus for how are companies 0:21:34.520 --> 0:21:38.919 in Europe being able to monetize productivity efficiency from AI? 0:21:39.320 --> 0:21:42.560