Speaker 1: Bloomberg Audio Studios, Podcasts, radio News.
Speaker 2: This is Bloomberg Daybreak Weekend, our global look at the
Speaker 2: top stories in the coming week from our Daybreak anchors
Speaker 2: all around the world. Straight Ahead on the program, a
Speaker 2: look ahead to earnings from Chip Giant, Nvidio in some
Speaker 2: of America's biggest retailers. I'm Nathan Hager in Washington.
Speaker 3: I'm Carolin headka Hey London. While we're looking ahead to
Speaker 3: the European Business Summit, I'm.
Speaker 4: Doug Prisner looking at an expected pivot in Japan's economic growth.
Speaker 1: That's all straight ahead on Bloomberg Daybreak Weekend on Bloomberg
Speaker 1: eleven three year, New York, Bloomberg ninety nine to one, Washington, DC,
Speaker 1: Bloomberg ninety two nine, Boston, Dad Digital Radio, London, Sirius
Speaker 1: XM one twenty one, and around the world on Bloomberg
Speaker 1: Radio dot Com and the Bloomberg Business Own.
Speaker 2: Good day to you. I'm Nathan Hager. We begin today's
Speaker 2: program with earnings. Third quarter reporting seasons coming close to
Speaker 2: an end, but before it does, we are about to
Speaker 2: hear from some heavyweights, including the most valuable company of
Speaker 2: all AI Chip Giant Nvidia wraps up results from the
Speaker 2: Magnificent seven after the close of trade this Wednesday for
Speaker 2: more and what we can expect, were joined by Kunjohn Sabani,
Speaker 2: senior semiconductor analysts for Bloomberg Intelligence. Kunjohn, it's great to
Speaker 2: have you with us on the weekend program. And it
Speaker 2: seems like every quarter the expectation is for Nvidia to
Speaker 2: more than beat expectations. How high is the bar this
Speaker 2: time around?
Speaker 5: Yeah, So, just to add some context, the last two
Speaker 5: quarters were the only quarters in which they did not
Speaker 5: beat and raise significantly, after having beating and raising for
Speaker 5: almost eight to twin quarters before that consistently in a row.
Speaker 5: The key factors last two quarters were the head from
Speaker 5: the China revenues. Also, not all the Street estimates had
Speaker 5: China removed, so the consensus was not really clean. However,
Speaker 5: looking into fiscal three Q, we now believe Street has
Speaker 5: most of the China revenues removed, so that's out of
Speaker 5: the way, and now we believe in Media's latest Blackwell
Speaker 5: three hundred is ramping stronger, so they could return to
Speaker 5: their normal race cadence of mid single digit beats and races,
Speaker 5: and anything above that or a low double digit would
Speaker 5: be a significant upside that could really help the sentiment.
Speaker 5: Another point to add here is most of the hyperscalers
Speaker 5: and cloud providers did raise their second half twenty twenty
Speaker 5: five CAPEX projections by about a total of twenty billion
Speaker 5: and their twenty twenty six projections by about one hundred billion.
Speaker 5: So that combined with the five hundred billion pipeline that
Speaker 5: Gentien shared during GDC last month for their black vel
Speaker 5: and Rubin ramps significantly sets it up for a massive
Speaker 5: upside in twenty six, to.
Speaker 2: The point of getting some of that China revenue off
Speaker 2: the books. We have seen the CEO Jensen Wang making
Speaker 2: moves like improving ties with Taiwan. He was just there
Speaker 2: doing the relationship with Taiwan Semiconductor. How do you see
Speaker 2: Jensen Wang building these relationships and how could that play
Speaker 2: into the results.
Speaker 5: I mean, Taiwan is a key, you know, manufacturing hub,
Speaker 5: not just for nd media but for most of this
Speaker 5: the semiconductor semis and media is also leading TSMC's move
Speaker 5: on shoring and building its products into the US in
Speaker 5: the Arizona Plan, So that's going to be significantly critical.
Speaker 5: On the China point, it doesn't seem like there is
Speaker 5: enough clearance yet of course they're going to try because
Speaker 5: there's the second largest market for them outside of the
Speaker 5: US and they would really like to capture that market.
Speaker 5: So far, we don't believe this quarter we'll see any
Speaker 5: material revenues though.
Speaker 2: Are those barriers in kinda a continued headwind beyond this
Speaker 2: quarter for Nvidia?
Speaker 5: They will, But on the good side, you know, most
Speaker 5: of the investors in the street now have sort of
Speaker 5: baked that in that you know, they're not adding this
Speaker 5: back anytime soon. Also, since the head wind has come up.
Speaker 5: You know, China right now is about fifty billion dollars
Speaker 5: accelerator market right there have been other larger and other
Speaker 5: large markets that have appeared in terms of SO and
Speaker 5: AI spendings. One is the Middle East region, other is Japan,
Speaker 5: and more and more countries like for example, in Europe
Speaker 5: are coming in which could easily offset that tam that China,
Speaker 5: that China had been took out of Invidia.
Speaker 2: I wonder what you're expecting to hear from the CEO
Speaker 2: himself after we heard in recent days from the CEO
Speaker 2: of Innvidia's maybe closest competitor, Advanced micro Devices, talking about
Speaker 2: a big revenue outlook for AMD over the next three
Speaker 2: to five years. What does Jensen Wong need to say
Speaker 2: in terms of in videos outline.
Speaker 5: Yeah, and you know, in his normal way, I think
Speaker 5: definitely is going to give more updates of how strong
Speaker 5: the demand is, how strong the use case and performance
Speaker 5: bench marks of the new Blackwell ramp is what we
Speaker 5: would like to ask if you know, we as key
Speaker 5: our investors should know is going to be more clarity
Speaker 5: on that five hundred billion dollar pipeline that could really
Speaker 5: set up the models and the estimates to go up.
Speaker 5: Another key point is getting clarity on the cross margin
Speaker 5: trajectory as these new products ramp and if they will
Speaker 5: be staying close to in twenty six to the mid
Speaker 5: seventies person gross margin range.
Speaker 2: In terms of those newer products. What are you expecting
Speaker 2: on the pipeline beyond Blackwell.
Speaker 5: Yeah, I mean they have clearly laid out their road maps.
Speaker 5: So the next product, the Rubin. We don't think they'll
Speaker 5: announce much details for this three cube, but we will
Speaker 5: get more clarity in the GDC early part of next year.
Speaker 5: That's when we'll get a lot more specs. But again,
Speaker 5: what we have seen from our channel checks is the
Speaker 5: Blackwell Ultra, the GB three hundred seems to have gotten
Speaker 5: much stronger traction when we had anticipated. And so unless
Speaker 5: we don't run into any transition paines going to Rubhin,
Speaker 5: we expect a similar stronger traction.
Speaker 2: Of course, one of the issues that has long been
Speaker 2: an issue for in video, something that's tried to meet
Speaker 2: the challenge of is just keeping up with this robust
Speaker 2: demand for chips and AI centers. Do you see in
Speaker 2: Vidia keeping up?
Speaker 5: They have been incrementally increasing supply every quarter, but we
Speaker 5: still think, you know, demand continues to stay ahead of supply,
Speaker 5: and we don't think supply will exceed demand anytime soon,
Speaker 5: not at least until twenty twenty six.
Speaker 2: En all right, coun John Sabani, thank you for this.
Speaker 2: That's Bloomberg Intelligence Senior Semiconductor analyst Konjohn Sabani. Again, we
Speaker 2: get those video results after the close of trading on Wednesday. Now,
Speaker 2: let's get to earnings from some of America's biggest retailers.
Speaker 2: Target opens up it's third quarter books before the opening
Speaker 2: bell on Wednesday. Then about twenty four hours after that,
Speaker 2: we hear from Walmart. Let's hear now from Jen Bartashis.
Speaker 2: She's a Senior analyst for retail staples and package Foods
Speaker 2: at Bloomberg Intelligence. It's great to have you with us
Speaker 2: on the program, Jen, And of course we look to
Speaker 2: both these companies for a read on the consumer. Of course,
Speaker 2: I'll look ahead to the holidays. What's the setup as
Speaker 2: we await these results from Target and Walmart.
Speaker 6: It's a very interesting time for these retailers because we
Speaker 6: hear about the disparity in consumer shopping behavior. On one hand,
Speaker 6: Walmart is pulling more hire income households into its ecosphere
Speaker 6: than ever before. And on the other hand, we have
Speaker 6: Target that's going through a huge your reset as it's
Speaker 6: trying to reconnect with its core customer base, and so
Speaker 6: it's a it's a very dynamic time for these companies.
Speaker 6: And it's the back to school season is what's really
Speaker 6: in this quarter. So it's a good read on how
Speaker 6: people are going to be entering into the holiday shopping period.
Speaker 2: Okay, so let's start off with Target. Of course, in
Speaker 2: your latest note, one of your latest notes, you make
Speaker 2: note of their goal to add fifteen billion dollars in
Speaker 2: revenue over the next five years. Could this be a
Speaker 2: quarter where we start to see them on their way there.
Speaker 6: I think it's going to be a little bit of
Speaker 6: a mixed quarter for Target, and that's really because they're
Speaker 6: still trying to find their footing and what's going to
Speaker 6: resonate with customers. Target is its best when people are
Speaker 6: willing to buy apparel and buy discretionary items, and that
Speaker 6: willingness is still a little bit dampened. They've done some
Speaker 6: good things this quarter to kind of help reset their business.
Speaker 6: If you remember they announced job cuts, if almost eighteen
Speaker 6: hundred positions that they were cutting, you know, that's the
Speaker 6: beginning of what should be a turnaround for Target.
Speaker 2: And it's interesting we just heard some reports earlier this
Speaker 2: week that Target is implementing a new greeting policy for
Speaker 2: those workers who are still on the job, basically telling
Speaker 2: them to smile more for the customers who come in.
Speaker 2: What's the balancing act for Target as it tries to
Speaker 2: navigate this turnaround.
Speaker 6: Yeah, I think it's a balance between not losing sight
Speaker 6: of your own core values that is what makes your
Speaker 6: customer base love you, and trying to chase other retailers.
Speaker 6: So you know, they keep doing price cuts. You know
Speaker 6: they want to stay priced competitive, but at the same time,
Speaker 6: Target has never been about being the low price leader.
Speaker 6: So there's a balance there between having the selection and
Speaker 6: the fun type of you know, offerings that they have
Speaker 6: while still offering values so that people feel like they're
Speaker 6: getting their money's worth. And that's that's what Targets really
Speaker 6: trying to focus on regaining its footing.
Speaker 2: Yeah, on the point of the price cuts, we just
Speaker 2: recently heard the Targets cut the prices on three thousand
Speaker 2: essential items. Is that the kind of thing that could
Speaker 2: eat into its margins?
Speaker 6: It could? It depends on what items they are. You know.
Speaker 6: For the most part, these are going to be more
Speaker 6: of your day to day household items, you know, and
Speaker 6: those items don't carry a whole lot of margin on
Speaker 6: them anyway, So you know, when you cut the prices
Speaker 6: on those, you become a little bit more competitive. The
Speaker 6: goal always is that you prompt people to buy greater
Speaker 6: volume and that makes up for any kind of discrepancy
Speaker 6: you might have from lowering your prices. But we'll see
Speaker 6: if that actually takes hold or not. And so the
Speaker 6: higher margin areas of the store are things like apparel,
Speaker 6: it's things like beauty, it's things like home decor, and
Speaker 6: those are the areas that just aren't selling as well
Speaker 6: right now.
Speaker 2: Of course, Walmart getting ready to report their earnings as well.
Speaker 2: They made their name on low prices. Is Target potentially
Speaker 2: eating in to what we could get from Walmart this quarter?
Speaker 6: I would say that usually on a price basis, Walmart
Speaker 6: is a clear winner and a clear leader. And for
Speaker 6: people who shop based only on price, I don't think
Speaker 6: you'll see a whole lot of shifting between Walmart and
Speaker 6: Target in terms of customer visits. It's really more about
Speaker 6: the overall perception and value perception of what you have.
Speaker 6: So for Walmart, it depends a lot of their success
Speaker 6: is the size of their grocery business because more than
Speaker 6: fifty percent of their revenue in the US comes from
Speaker 6: grocery type items, and so they when they keep prices
Speaker 6: low there, they bring people in, but then they're shopping
Speaker 6: the rest of the store, and so I think that's
Speaker 6: one of the tactics that we'll see, and it's it's
Speaker 6: part of what's bringing higher income households into Walmart as well.
Speaker 6: Because if you're going to buy a box of ceurios,
Speaker 6: you know, why wouldn't you buy that at the lowest
Speaker 6: price because it's the same box of curios no matter
Speaker 6: what retailer you go to.
Speaker 2: Well, there's certainly a lot to keep an eye on
Speaker 2: as we get ready for those big box retail earnings
Speaker 2: later this week. Thank you so much for this, Jen,
Speaker 2: really great having you on with us. That's Jen Bartashi's
Speaker 2: Bloomberg Intelligence senior analysts for retail, staples and packaged food,
Speaker 2: and coming up on Bloomberg day Break weekend, we'll look
Speaker 2: ahead to the European Business Summit. I'm Nathan Hager, and
Speaker 2: this is Bloomberg. This is Bloomberg day Break weekend, our
Speaker 2: global look ahead of the top stories for investors in
Speaker 2: the coming week. I'm Nathan Hager in Washington. Up later
Speaker 2: in our program we look ahead to some key economic
Speaker 2: data in Japan. But first, the challenges facing Europe are
Speaker 2: unprecedented but clear of belligerent Russia, frictions with China, and
Speaker 2: ongoing trade spats with the US. Even if the impact
Speaker 2: from Trump Tariff's faded faster than expected, the task is
Speaker 2: building Europe's resilience and competitiveness. That's the backdrop to the
Speaker 2: European Business Summit, which gathers Brussels top bureaucrats and policymakers
Speaker 2: every year. Let's get more from Bloomberg Daybreak Europe anchor
Speaker 2: Caroline Hepger in London, Nathan.
Speaker 3: The European Business Summit in the next few days in
Speaker 3: Brussels will play host to captains of European industry, Nobel
Speaker 3: Prize winning economists, and top bureaucrats, including the EU Commission
Speaker 3: president of Slavondaline. It comes as European firms grapple with
Speaker 3: high deck costs, energy reliance, strained relations with China and
Speaker 3: the US, and criticism ongoing of its regulatory environment. The
Speaker 3: EASE Justice Commissioner Michael McGrath says that Brussels needs more
Speaker 3: power to enforce consumer protection standards amid investigators into illegal
Speaker 3: products being sold by Chinese e commerce platform Shean. He
Speaker 3: says that relations with China can be challenging.
Speaker 7: We have a trading relationship at the moment that is
Speaker 7: quite unbalanced in favor of China. So that's why issues
Speaker 7: like market access barriers for European companies within the Chinese
Speaker 7: market is a key issue for US. China is a partner,
Speaker 7: but also a systemic rival and indeed a competitor of
Speaker 7: the European Union.
Speaker 3: That was Michael McGraw, EU Commissioner for Democracy, Justice and
Speaker 3: the rule of Law as well as consumer protection. Speaking
Speaker 3: there to Bloomberg Radio. Well joining us now as Bloomberg's
Speaker 3: Brussels bureau chief Susanne Lynch. Susan, great to speak to you.
Speaker 3: Just give us a sense of this gathering and what
Speaker 3: business and policy makers are focused on right now in Brussels.
Speaker 6: Yeah.
Speaker 8: Look, this is a significant moment for business representatives to
Speaker 8: come into close contact, if you like, with some of
Speaker 8: the big hitting EU policy makers and Brussels. The reality
Speaker 8: is the EU, everyone thinks politics in fact, you know,
Speaker 8: is one of the world's biggest regulators, does have impact
Speaker 8: on business. And I think this year in particular, people
Speaker 8: would be very interested to hear what's coming out of
Speaker 8: the European Commission because there is such a focus, particularly
Speaker 8: i'd say over the last year or so on the
Speaker 8: challenges facing the European economy and the whole issue of
Speaker 8: EU competitiveness.
Speaker 3: Yeah, indeed, and this summit talks about what choices Europe
Speaker 3: must make today to remain resilient and globally competitive tomorrow.
Speaker 3: I think that kind of neatly sums up the issues
Speaker 3: for Europe as well. Over a year since Mario Daghy's report,
Speaker 3: which exposed Europe's need for greater competitiveness, the discussion around
Speaker 3: high energy costs and reliance on bank loans, and the
Speaker 3: regulatory burden and so many other of the recommendations. But
Speaker 3: more than a year since since that report, and even
Speaker 3: his own up some that was quite negative about the
Speaker 3: progress that Europe had made. Where are we absolutely.
Speaker 8: And Mario DRAGLEI was speaking himself recently on the anniversary
Speaker 8: of this landmark report and made the point that there
Speaker 8: has been very little progress.
Speaker 6: Now.
Speaker 8: One reason is because the EU is this very unique institution.
Speaker 8: It includes twenty seven countries. It's not a sovereign body
Speaker 8: that can make decisions. It means that decision making is
Speaker 8: very laborious. You have to have people on board. You
Speaker 8: can't just plow through on different issues. And what the
Speaker 8: European Commission, which is the main executive arm of the EU,
Speaker 8: what you're hearing a bit from them is, look, we
Speaker 8: want to, for example, advance more cross border mergers, we
Speaker 8: want to develop the banking union. But when it comes
Speaker 8: to it and the negotiations starts, EU members says, EU
Speaker 8: countries sometimes just don't want to play the game. They
Speaker 8: are worried about their own national industries, their own national companies,
Speaker 8: and they are reluctant to take that step forward for
Speaker 8: more integration. So this has always been a bind for
Speaker 8: the EU. How do you advance, how do you integrate
Speaker 8: more when you've got all these different countries with different priorities.
Speaker 8: But I do think there is a real awareness that
Speaker 8: the Draggy Report is something that did impact, that did
Speaker 8: break through. I think a lot of the listeners may
Speaker 8: have been at Davos this year. I remember myself being
Speaker 8: there and hearing it. This report by a former ECB
Speaker 8: president had everyone talking and realizing that now something needs
Speaker 8: to be done. That the reality is that Europe has
Speaker 8: been diverging from the United States since the Great Financial Crisis.
Speaker 8: You can see that in the banking sector, you can
Speaker 8: see that in terms of innovation, you can see that
Speaker 8: in the number of startups, and in fact the real problem,
Speaker 8: which is scaling up European businesses, that is really an issue,
Speaker 8: and it does look like it continuing to lag behind
Speaker 8: on that.
Speaker 3: Do you get any sense that things are speeding up
Speaker 3: when there are so many pressures, namely, let's look to
Speaker 3: China first, managing that relationship supply chains and rare earths,
Speaker 3: which is from years and years of me movement by Beijing,
Speaker 3: has suddenly become so essential everywhere else.
Speaker 8: Yeah, I mean, I think the issue facing Europe now
Speaker 8: is that on the one hand, you've got this increasingly
Speaker 8: isolationist United States, and on the other hand you've got
Speaker 8: an increasingly belligerent some would say, China, and the EU
Speaker 8: is belatedly waking up to the fact that not only
Speaker 8: has it built up a dependency on the United States,
Speaker 8: particularly in terms of the defense sector, but it also
Speaker 8: has built up a dependency on China, particularly for the
Speaker 8: rare earth's material. Now this isn't just a europe wide problem,
Speaker 8: but you now can see the European Commission realizing this.
Speaker 8: So a couple of weeks ago at the Berlin Global Dialogue,
Speaker 8: we were there for Bloomberg and European Commission President earthl
Speaker 8: Of Underline gave a very strong speech where she directly
Speaker 8: addressed this issue about coming from Beijing, about the rare
Speaker 8: earth and she, you know, said that EU has has
Speaker 8: got options. But the reality is, you know how much
Speaker 8: leverages the EU have here, It really has more than
Speaker 8: ninety percent of these magnets that are going into everything
Speaker 8: from electric vehicles to the defense are coming from China.
Speaker 8: It's now scrambling elsewhere to try and find like minded partners.
Speaker 8: But so is the United States and everyone else. So
Speaker 8: will the EU have that urgency Like the EU does
Speaker 8: not move quick as an institution, that that's for sure.
Speaker 8: So you know, will it be able to garner its
Speaker 8: resources and make sure it's there at the table when
Speaker 8: countries across the world are trying to negotiate and trying
Speaker 8: to look at different alliances and different relationships. That's that's
Speaker 8: one of the key challenges.
Speaker 3: Yeah, indeed, and we know that kind of lack of
Speaker 3: minds that there are actually in Europe for those where
Speaker 3: earth in and of itself, and it takes years to
Speaker 3: kind of to deliver those sorts of minds. And then
Speaker 3: they're also quite polluting as well. So it's very very
Speaker 3: difficult challenges.
Speaker 8: And I mean we saw in the last few weeks
Speaker 8: that you know, German particularly German factories you know, were
Speaker 8: slowing down their production because they had these supply chain issues.
Speaker 8: But really what's worrying I think for the EU. We
Speaker 8: were reporting last week that there were some Chinese officials
Speaker 8: in Brussels for negotiations, but really the EU wasn't making
Speaker 8: that much progress, it seems. Now let's see how how
Speaker 8: this works out in the next few weeks. But with
Speaker 8: the big focus being on Trump and g where did
Speaker 8: the EU sit, it's kind of difficult for it to
Speaker 8: make its own voice heard.
Speaker 3: Yeah, indeed, and it's not just China, obviously the European
Speaker 3: businesses have to keep an eye on. It's also the
Speaker 3: White House's stance towards Europe and there too, there are
Speaker 3: lots of challenges. I mean, you mentioned Ivondeline and has
Speaker 3: strong speech a couple of weeks ago. But it was
Speaker 3: that meeting, wasn't it, between Trump and Vondeline, I mean,
Speaker 3: forgive me, I just remember the flowers that were between
Speaker 3: Trump and Vonderline that seemed to speak volumes of the
Speaker 3: kind of gap between the two and maybe the fact
Speaker 3: that they didn't want Vondallion and Trump to be right
Speaker 3: next to each other. And it was also a moment
Speaker 3: where there was some criticism for Vondalatin and how she
Speaker 3: handled it.
Speaker 8: There certainly was I myself actually was at term Breef
Speaker 8: for that event during the summer, Yes, because it happened
Speaker 8: very quickly. You know, we forget this with international diplomacy,
Speaker 8: that no one really expected this meeting to happen, and
Speaker 8: then it did. And even the optics of earthly vonder
Speaker 8: lynd flying to Donald Trump's golf course in Scotland and
Speaker 8: part of not in the EU and making that trip
Speaker 8: over especially to see him. So yes, the EU came
Speaker 8: under a lot of criticism from EU countries, in particular,
Speaker 8: saying it could have got a better deal. It locked
Speaker 8: in a fifteen percent tariff rate. It also not everything,
Speaker 8: but it also got some exemptions. For example, there were
Speaker 8: lots of worries about the pharmaceutical sector, a lot of
Speaker 8: exporters in Germany, Ireland, etc. GenMark, how would they be affected?
Speaker 8: They did get a deal on that, but again this
Speaker 8: is where the different bits of the EU kind of
Speaker 8: blame each other. Vanderline and the Commission we're saying privately,
Speaker 8: really well, hang on, you know, we did these negotiations
Speaker 8: with the backing of the EU countries and if they
Speaker 8: had an issue, they could a shouted stop. But I
Speaker 8: do think there is a kind of a wider statement
Speaker 8: to be made about this, and that is the fact
Speaker 8: that the EU has always prided itself on being, you know,
Speaker 8: this global trading power, that the single market, that market
Speaker 8: of four hundred and fifty million people, that integrated market
Speaker 8: is its big power, that it's a big caughting card.
Speaker 8: And yet when it came to it, it didn't have
Speaker 8: a stronghand with Trump, it felt like it had to
Speaker 8: really compromise there. And I think that's been a real
Speaker 8: worry for the EU already. As we know, there's been
Speaker 8: so much inward looking about the lack of strategic autonomy
Speaker 8: of the phrase goals when it comes to defense, spending.
Speaker 8: Your trade was something that thought this is what the
Speaker 8: EU does well, and yet it still had to kind
Speaker 8: of some people would say capitulate, others would say be pragmatic,
Speaker 8: but negotiate with Trump, where it did end up with
Speaker 8: extra terrists.
Speaker 3: And so where do you think that leaves the regulatory environment,
Speaker 3: because that, as you say, is what businesses are also
Speaker 3: focused on. Is there a watering down? Is there adjustment
Speaker 3: that is being made in the face of some quite
Speaker 3: pointed demands from the US.
Speaker 8: Yes, so I think there has been a change here. Actually,
Speaker 8: I mean it's one of the ironies of bregxush Britain
Speaker 8: was always one of the strongest voices criticizing over EU
Speaker 8: regulation and in fact that really did feed into the
Speaker 8: breaks of debate in London in the UK. But actually
Speaker 8: since they've left, since Britain has left the EU, actually
Speaker 8: in the last year or two, there has been an
Speaker 8: awareness and acceptance by the EU that it does need
Speaker 8: to do something about regulation. They're cutting it better regulation
Speaker 8: or simplification, but really what it means is changing some
Speaker 8: of the rules, watering down some of these regulations to
Speaker 8: be more business friendly. So the second Underline Commission she
Speaker 8: put this simplification at the top of her agenda. So
Speaker 8: we had again Brussels to is a great place for acronyms.
Speaker 8: But these omnibus builds that were brought in earlier in
Speaker 8: the year, now these things take time, They go through
Speaker 8: the EU system, difficult through the Parliament. There are changes
Speaker 8: in tweaks, but really they are about making sure that
Speaker 8: some of the reporting requirements are less ownerous. So we
Speaker 8: are going to see some kind of watering down of these,
Speaker 8: but it still has to be really negotiated, the fine tuning,
Speaker 8: and we are getting pushback from some of the more
Speaker 8: left cleaning groups in the European Parliament and MEPs who
Speaker 8: for example, feels strong about climate change and they're saying,
Speaker 8: hang on, we can't water down too much. So I
Speaker 8: think we are going to see this simplification agenda coming through.
Speaker 3: Thank you so much, is on Lynch for being with us.
Speaker 3: I'm Caroline Hepkee here in London. You can catch us
Speaker 3: every weekday morning for Bloomberg Daybak here at beginning at
Speaker 3: six am in London. That's one am on Wall Street. Nathan.
Speaker 2: Thanks Caroline, and coming up on Bloomberg day Break weekend,
Speaker 2: we'll take a look at Japan's economy and some key
Speaker 2: data ahead. I'm Nathan Hager, and this is Bloomberg. This
Speaker 2: is Bloomberg day Break Weekend, our global look ahead of
Speaker 2: the top stories for investors in the coming week. I'm
Speaker 2: Nathan Hager in Washington. We go to Japan next, where
Speaker 2: the economy likely shrink in the latest quarter. For more,
Speaker 2: let's get to the host of the Daybreak Gasia podcast,
Speaker 2: Doug Grisner Nathan.
Speaker 4: On Monday, in Japan, the government will report on third
Speaker 4: quarter economic growth. A contraction in GDP is expected for
Speaker 4: the first time in six quarters. Yes, there have been
Speaker 4: signs of positivity recently to suggest that Japan may have
Speaker 4: been able to shake off its lost decades. The stock
Speaker 4: market very near record highs. Inflation is firmly in place,
Speaker 4: and that will allow the Bank of Japan at some
Speaker 4: point to continue normalizing policy. But clearly something has gone missing,
Speaker 4: and now Japan's new Prime Minister is pushing for aggressive
Speaker 4: physical stimulus. To help us understand more about the state
Speaker 4: of the Japanese economy, I'm joined by Bloomberg's Paul Jackson.
Speaker 4: He covers the economies of both Japan and South Korea.
Speaker 4: He joins us from Tokyo. If you had to identify
Speaker 4: a single culprit responsible for this weakness, as difficult as
Speaker 4: it may be, where would you point.
Speaker 9: I think this is going to be a hefty fall
Speaker 9: in this third quarter. Of it is to do with
Speaker 9: Donald Trump and his tariffs. Now why is that. It's
Speaker 9: because in the previous quarter there was a lot of
Speaker 9: front loading of exports to try and beat the rising tariffs.
Speaker 9: Now we get into the following quarter, you know you've
Speaker 9: already used up some of that export power in the
Speaker 9: previous quarter. So that's going to be one of the
Speaker 9: key factors that explains this big drop that we're expecting
Speaker 9: in third quarter GDP. There are some other factors, though, Doug.
Speaker 9: We did have a technical element to do with housing.
Speaker 9: There was some environmental regulations brought in earlier in the
Speaker 9: year that's going to make a new housing more expensive.
Speaker 9: So there was a bit of a rush on house buying,
Speaker 9: and so that's also kind of stolen some of the
Speaker 9: later demand pulled the earlier in the year.
Speaker 4: Certain areas of the economy. I'm thinking of the manufacturers
Speaker 4: that do a lot of exporting to not only the
Speaker 4: United States but other parts of the world. Cars, automobile parts,
Speaker 4: steal other industries that have been severely impacted by these
Speaker 4: tariffs that are providing more of a drag on the
Speaker 4: export side.
Speaker 9: Well, I think you've mentioned the key ones there. Of course,
Speaker 9: with these reciprocal tariffs are affecting exports right across the board.
Speaker 9: The cars, obviously, that was the key part of the negotiations.
Speaker 9: They're down to fifteen percent, and what's interesting is that
Speaker 9: the car exporters are absorbing a lot of that tariff. Now,
Speaker 9: normally you would expect about a third from the exporters,
Speaker 9: a third from the importers, and then maybe a third
Speaker 9: from the consumers. But what we're seeing in the figures
Speaker 9: is that the japan car makers are lowering their prices
Speaker 9: by more than a third of what the tariff side
Speaker 9: would be. So that's you know, eating into their profits.
Speaker 9: But I don't think we need to quite sound the
Speaker 9: alarm bells now because of those those technical factors. So
Speaker 9: it's one of those contractions that maybe looks worse than
Speaker 9: it is. That's not to say there aren't ongoing problems
Speaker 9: with the economy. I think obviously we need to see
Speaker 9: how trade, you know, responds to these higher levels of tariffs,
Speaker 9: and also whether the US economy can can keep expanding.
Speaker 9: Obviously it's a huge engine for global growth, you know.
Speaker 9: Looking at Japan's economy more domestically, it's a case of,
Speaker 9: you know, whether consumption can can keep holding up in
Speaker 9: this new environment of inflation, which households haven't been used to.
Speaker 4: Indeed, this has been a remarkable shift after multiple decades
Speaker 4: of deflation. How a generation in Japan has not known
Speaker 4: upward pressure on prices. There's also been, as you know, Paul,
Speaker 4: a bit of skepticism that inflation will prove to be durable.
Speaker 4: Now you mentioned the upcoming meeting of the BOJ in December.
Speaker 4: A number of economists surveyed by Bloomberg have said the
Speaker 4: Bank of Japan should hike rate. So let me ask you, Paul,
Speaker 4: about the likelihood of an interest rate hike at the
Speaker 4: next meeting.
Speaker 9: Well, Doug, I mean, the usual response is, you've got
Speaker 9: inflation above target for more than three and a half years,
Speaker 9: I mean, you'd be raising interest rates. It'd be a
Speaker 9: bit of a no brainer But because of this kind
Speaker 9: of national goal of trying to generate inflation, they've been
Speaker 9: going very, very slowly. Given that the consumers are still
Speaker 9: kind of getting used to the idea of inflation and
Speaker 9: wrestling with rising prices, there's a bit of a fear
Speaker 9: that going too fast on raising the interest rates could
Speaker 9: upend the economy. Now we have a new prime minister
Speaker 9: in Sanai Takeichi. She's very much of the kind of
Speaker 9: abonomics reflationist mold. She wants to ramp up fiscal spending
Speaker 9: and provide support to consumers. So, in a sense, this
Speaker 9: contraction in GDP, although it might be slightly overstating, you know,
Speaker 9: the weakness in Japan's economy, it's very useful for a
Speaker 9: politician to have that figure come out just before you
Speaker 9: want to unleash your economic package as the new prime minister.
Speaker 9: And of course an economic package is a very tried
Speaker 9: and tested approach for new prime ministers to bump up
Speaker 9: their support when they come in.
Speaker 4: So there are a couple of things that I want
Speaker 4: to consider. One is the currency, because we know the yen,
Speaker 4: particularly weighted against the dollar, has been weak. I think
Speaker 4: right now we're trading around one fifty four. Obviously, in
Speaker 4: a scenario where you have a weak currency, you're importing
Speaker 4: inflation and energy I know is a big component of
Speaker 4: that where Japan is concerned. But the other thing that
Speaker 4: I'm curious about wages. Why do we deal with the
Speaker 4: yen portion first? Though? Help me understand if that is
Speaker 4: kind of getting a lot of the blame for this
Speaker 4: stubborn inflation story.
Speaker 9: It is getting a lot of the blame. Again, you
Speaker 9: could argue that if the BOJ raised interest rates, that
Speaker 9: would help lift the yen against the dollar and ease
Speaker 9: some of that pressure. The thing is is Takeichi being
Speaker 9: from the kind of ebinomics mold, she kind of wants
Speaker 9: the BOJ to go slow because she wants to emphasize
Speaker 9: growth in the economy before anything that might constrain growth,
Speaker 9: such as interest rate to hank. So really the difficulty
Speaker 9: here is wanting to expand growth, push on it, using
Speaker 9: a weekend to help those exporters. But you've got to
Speaker 9: rain it in at some point because if you have
Speaker 9: too much currency weakness, then you're going to have to
Speaker 9: intervene to prop up the end. And you mentioned that
Speaker 9: currency rate around you know, one five four, one five five.
Speaker 9: I mean, I think once we get into the one
Speaker 9: five five to one sixty range, then we really are
Speaker 9: stretching the limits of what's acceptable in terms of the
Speaker 9: weakness of the currency.
Speaker 4: Okay, so let's talk about the wage component right now,
Speaker 4: as it feeds into the inflation narrative there. How are
Speaker 4: wages right now relative, let's say, to where they were
Speaker 4: five years ago. I'm much appreciated.
Speaker 9: I think in terms of your full time worker in
Speaker 9: a regular job, discounting kind of all bonuses and over time,
Speaker 9: wages are going up around two point two two point
Speaker 9: three percent year on year.
Speaker 6: Now.
Speaker 9: That is actually pretty solid growth for Japan compared with
Speaker 9: the past. Don't forget in Japan there's been this kind
Speaker 9: of this social compact between workers and companies to sacrifice
Speaker 9: wage hikes in favor of job security, and unemployment is
Speaker 9: very low in Japan compared with other G seven economies.
Speaker 9: But obviously if you've got inflation, then people start to realize, hey,
Speaker 9: wait a minute, or two point two percent sounds pretty good.
Speaker 9: But if your inflation is higher than that which it is,
Speaker 9: then essentially your purchasing power is getting weaker and weaker
Speaker 9: and weaker. One of the factors that certainly is very
Speaker 9: important for the Bank of Japan and other policymakers is
Speaker 9: can these wage gains go above the inflation rates. If
Speaker 9: they do, then it's a no brainer for the Bank
Speaker 9: of Japan to keep going ahead with normalization and raising
Speaker 9: interest rates.
Speaker 4: Let's talk a little bit about what Prime Minister taka
Speaker 4: Ichu wants to do in terms of stimulating the economy.
Speaker 4: Has there been any discussion around the areas of focus
Speaker 4: positions that she would obviously take to try to stimulate activity.
Speaker 9: This feeds into this point. If she's got a player
Speaker 9: kind of careful line between providing helps so that consumers
Speaker 9: and voters think that she's listening to them about their
Speaker 9: cost of living crunch concerns, So that means probably she's
Speaker 9: going to be helping subsidize electricity bills, subsidizing natural gas bills,
Speaker 9: reducing taxes on gasoline, doing things that consumers can immediately recognize.
Speaker 9: There's also a talk of including in the package kind
Speaker 9: of shopping tokens that you can spend, which will help
Speaker 9: region economies of regional governments will be given quite a
Speaker 9: bit of leeway, by the looks of things to offer
Speaker 9: kind of incentives spending, spending tokens to consumers in their areas.
Speaker 9: So those are the things she can do. But you
Speaker 9: kind of offer too much stimulus to the economy, what
Speaker 9: are you going to get? What are you going to get?
Speaker 9: More inflation, which creates more of the more of the problems.
Speaker 9: So there's a fine balancing act she's got to do.
Speaker 9: There other things that we're expecting out of this package.
Speaker 9: She's wanting to spur long term growth, and she's identified
Speaker 9: seventeen areas that require more investment. So she's trying to
Speaker 9: give tax breaks to companies that invest in these areas.
Speaker 9: And these are kind of areas that you would expect
Speaker 9: are important for economic security. Chips, chip making, anything that
Speaker 9: goes into rare eers, this this kind of stuff Paul.
Speaker 4: I'm curious to get your take on the level of
Speaker 4: public debt in Japan and whether it's a concern. I mean,
Speaker 4: we know it remains more than twice the size of
Speaker 4: the economy. I'm curious as to how it's being viewed
Speaker 4: or perhaps there is a tendency now to ignore it entirely.
Speaker 9: Well, what I think we're seeing here, Doug, is a
Speaker 9: bit of a sea change in the way that Japan's
Speaker 9: fiscal policy needs to be weighed up against fiscal discipline.
Speaker 9: In recent days, the Prime Minister has essentially said that
Speaker 9: balancing the budget on an annual basis, this is after
Speaker 9: debt servicing sorted out, is no longer going to be
Speaker 9: their prime yardstick for a kind of fiscal discipline. And
Speaker 9: what she's saying is, we need to support the economy,
Speaker 9: we need to provide growth, we need an expensive policy,
Speaker 9: but we do need to be responsible on the fiscal side.
Speaker 9: But our yard stick should not be balancing the budget.
Speaker 9: Our yardsticks should be debt measured against GDP. Now, those
Speaker 9: figures do not look good, Dougging. You know, two hundred
Speaker 9: and thirty percent or more the size of the economy
Speaker 9: in terms of Japan's national debts. And so what she's
Speaker 9: doing is she's saying, no, no, no, don't look at
Speaker 9: the gross debt against GDP figure, look at the net
Speaker 9: debt against GDP figure. Because if you look at those,
Speaker 9: Japan's got a lot of assets, then the figures look
Speaker 9: a lot better. I mean, they're still not great. We're
Speaker 9: still talking like one hundred and thirty net debt against GDP,
Speaker 9: but you back much closer to the other G seven nations.
Speaker 9: If you use that yardstick.
Speaker 4: Paul will leave it there. Thank you so very much,
Speaker 4: Paul Jackson. He covers the economies of Japan and South
Speaker 4: Korea from our bureau in Tokyo. I'm Doug Prisner. You
Speaker 4: can catch us weekdays here for the Daybreak Asia podcast.
Speaker 4: It's available wherever you get your podcast. Nathan.
Speaker 2: Thanks Doug, and that does it for this edition of
Speaker 2: Bloomberg Daybreak Weekend. Join us again Monday morning at five
Speaker 2: am Wall Street Time for the latest don markets overseas
Speaker 2: and the news you need to start your day. I'm
Speaker 2: Nathan Hager. Stay with us. Top stories and global business
Speaker 2: headlines are coming up right now.