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Speaker 1: Bloomberg Audio Studios, podcasts, radio news. This is the Bloomberg

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Speaker 1: Daybreak You podcast, available every morning on Apples, Spotify or

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Speaker 1: wherever you listen. It's Tuesday, the ninth of April in London.

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Speaker 1: I'm Caroline Hepkea.

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Speaker 2: And I'm Stephen Carroll. Coming up today, Bloomberg counts the

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Speaker 2: cast of the G seven increasing defense spending as Germany

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Speaker 2: orders more hardware.

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Speaker 1: Former Federal Reserve official James Bullard says he expects a

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Speaker 1: trio of rate cuts this year.

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Speaker 2: Plus computer says no technical difficulties hamper elon Musk's live

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Speaker 2: stream on x while he's saying how well the service works.

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Speaker 1: Let's start with a roundup of our top stories. Germany

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Speaker 1: is expected to order seven billion euros worth of ships

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Speaker 1: and armored vehicles this quarter. The purchases are part of

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Speaker 1: a sweeping overhaul of the country's armed forces. The news

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Speaker 1: comes amidst a global effort to rearm, with NATO officials

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Speaker 1: saying member states military spending they need to reach up

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Speaker 1: to four percent of GDP now. Bloomberg Economics has calculated

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Speaker 1: that that would mean ten trillion dollars of additional spending

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Speaker 1: for G seven countries. NATO Sexuary General Yen Stoltenberg says

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Speaker 1: allies are increasing their commitment to spending on defense.

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Speaker 3: We made a pledge in twenty fourteen, when percent Obama

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Speaker 3: was present of the United States, to ensure that all

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Speaker 3: allies spent two percent of GDP on defense.

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Speaker 4: At that time.

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Speaker 3: In twenty fourteen, only three allies spent two percent of

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Speaker 3: GDP on defense. This year, we expect around twenty allies

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Speaker 3: two thirds of the allies to spend two percent as

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Speaker 3: a huge difference.

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Speaker 1: That was the NATO Sexuty General Yen Stoltenberg speaking to

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Speaker 1: Bloomberg last week. With its latest commitments, Germany will meet

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Speaker 1: NATO's goal of spending two percent of GDP on defense

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Speaker 1: this year for the first time since it was agreed

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Speaker 1: in two thousand and six.

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Speaker 2: Former Federal Reserve policymaker James buller It says his base

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Speaker 2: case is three interest rate cuts this year. He cited

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Speaker 2: successful policy and a strong economy, but said more data

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Speaker 2: is needed before multiple cuts.

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Speaker 5: Some people are saying that the next report will lead

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Speaker 5: to core PC being only two point six percent on

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Speaker 5: a twelve month basis, So you're starting to get close enough.

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Speaker 5: I think you have enough data in hand right now

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Speaker 5: to justify the first rate cut. Maybe not a whole

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Speaker 5: string of rate cuts, but you could certainly justify the

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Speaker 5: first rate cut now based on the data that they have.

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Speaker 2: Former Saint Louis FED president James Bullard there speaking to Bloomberg.

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Speaker 2: His comments are in line with the current head of

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Speaker 2: the Minneapolis Fadnil Kashkari, who says he thinks US inflation

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Speaker 2: will continue to fold this year. That's ahead of the

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Speaker 2: latest CPI print you out tomorrow.

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Speaker 1: More UK firms are being tipped as take over targets

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Speaker 1: this year, according to a Bloomberg survey of risk arbitrage desks.

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Speaker 1: You imparts reports now on why rock bottom valuations could

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Speaker 1: be set to and M.

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Speaker 6: And A boom, Virgin money, packaging company D S. Smith

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Speaker 6: and house builder Red Road just some of the fourteen

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Speaker 6: UK firms that have received takeover offers so far this year.

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Speaker 6: Bloomberg's informal survey of traders, analysts and risk arbocharge desks

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Speaker 6: have found that British stocks account for seventy percent of

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Speaker 6: companies mentioned at least twice as possible takeover targets, and

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Speaker 6: with the foot C three fifty currently trading out of

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Speaker 6: forty five percent discounts to the MSCI Ward Index. It's

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Speaker 6: not hard to explain the interest together with a prospect

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Speaker 6: of easier money when the Bank of England starts to

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Speaker 6: cut rates and you have a juicy backdrop for private

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Speaker 6: equity firms on the prowl in London, you and Pots Sploomberg, Radio.

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Speaker 2: Ryld Geigo, the bellionaire owner of Luxetan International, and Blackstone

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Speaker 2: are nearing a deal to take the skincare company private.

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Speaker 2: The asset manager may provide debt financing.

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Speaker 7: For the buyout.

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Speaker 2: People with an aledge of the matter of say an

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Speaker 2: announcement could come as soon as the coming days. Blackstone

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Speaker 2: has been considering a bid for a Luxit ten and

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Speaker 2: conducted preliminary due diligence in February. Represents of four black

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Speaker 2: z Own declined to comment, while Luck's attend didn't immediately

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Speaker 2: respond to a request for comment.

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Speaker 1: Bloomberg has learned the Jeffreys and the law firm Akin

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Speaker 1: are representing Thames Waters investors in any restructuring talks. Lenders

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Speaker 1: and bondholders have started to coordinate after the utility Giant's owner,

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Speaker 1: Kember Water Finance, defaulted on a loan last week, James

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Speaker 1: Wilcock has more.

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Speaker 7: Last year, Thames made a thirty million pound loss on

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Speaker 7: two point two billion of income after paying seven hundred

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Speaker 7: million pounds financing costs. Yet it's now proposing to double

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Speaker 7: annual capex to three point seven billion. Oh and it's

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Speaker 7: in debt to the tune of fifteen point six billion.

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Speaker 7: This explains why no one wants to put money into

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Speaker 7: Britain's largest utility, not a shareholders or the government or

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Speaker 7: bill payers, and now its creditors are lawyering up for

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Speaker 7: a potential restructuring. All parties declined to comment when contacted

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Speaker 7: by Bloomberg, but that's not stopping the storm. At negative

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Speaker 7: headlines in the UK prep Yes in London, James Wilcock

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Speaker 7: Blinder Radio.

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Speaker 2: Tesla's battered share price jumped by more than five percent

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Speaker 2: on Monday after Elon Musk promised that the electric automaker

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Speaker 2: would unveil a Robotaxi in the coming months. The stock

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Speaker 2: closed last week as the worst SMP performer of twenty

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Speaker 2: twenty four, but Musk batted away suggestions of market trouble

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Speaker 2: and a discussion with the head of Norgeous Bank Investment

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Speaker 2: Management one of Tesla's biggest shareholders, Musk took part in

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Speaker 2: a live streamed chat with CEO Nikolai Tangan on his

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Speaker 2: social media platform X but it didn't exactly go to plan.

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Speaker 4: So we are super piece that that we have you

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Speaker 4: on and indeed on your X platform.

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Speaker 7: How cool.

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Speaker 8: Yeah, it's pretty cool. Yeah. I mean we have like

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Speaker 8: lots of people from all around the world simultaneously do

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Speaker 8: effectively a real time podcast and it works pretty well.

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Speaker 8: And the syvalogical computer old human brains that are thinking,

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Speaker 8: and that's a pretty static. That's not amina Ilini, You're

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Speaker 8: still there.

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Speaker 6: Elin.

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Speaker 2: This is the second high profile live stream and musks

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Speaker 2: platform to have tech issues after Rando Santas's campaign launch

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Speaker 2: flopped on the site.

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Speaker 1: And those are your top stories on the markets this morning.

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Speaker 1: Your socks fifty futures are sinking down by three tens

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Speaker 1: of one percent, the MSCI Asia Pacific Index currently is

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Speaker 1: up by eight tens of one percent, and tenure US

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Speaker 1: treasury yields this morning trading at four point four one percent,

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Speaker 1: down one and a half basis points.

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Speaker 2: Those are your top stories and the markets. In a moment,

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Speaker 2: we'll get more on our story on European defense spending

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Speaker 2: and how much an increase to four percent of GDP

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Speaker 2: could cost the G seven nations. But just to bring

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Speaker 2: you some breaking news from the Middle East, where Turkey

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Speaker 2: has announced restrictions on exports to Israel. It's going to

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Speaker 2: apply to fifty four products as of today, and that

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Speaker 2: includes things like construction materials. So that is the lates

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Speaker 2: announcement that we are here from Turkey. This is after

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Speaker 2: they had vowed yesterday to take measures against Israel over

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Speaker 2: Gaza aide drops.

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Speaker 1: Now let's turn our attention then to our investigation at Bloomberg.

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Speaker 1: Russia's invasion of Ukraine, war in the Middle East and

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Speaker 1: concerns about China's rise are spurring G seven countries to

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Speaker 1: invest more in their militaries. Bloomberg has calculated that if

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Speaker 1: they've raised defense spending to four percent of GDP, as

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Speaker 1: some are suggesting, that would add up to more than

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Speaker 1: a ten trillion dollars of additional drain on public finances

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Speaker 1: basically over the next decade. It is a huge number.

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Speaker 1: It underscores the difficult trade offs the countries are likely

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Speaker 1: to face between national security, other spending priorities, and debt sustainability.

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Speaker 1: Joining US now is Bloomberg's Global economists Berghavi Sakteville, who's

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Speaker 1: been key in doing some of this research. Good morning, Bugave,

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Speaker 1: thank you for being with us. I mean, firstly, I

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Speaker 1: suppose what's driving the increase in defense spending around the world.

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Speaker 1: It's been very pivotal.

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Speaker 9: Thanks Caroline. Well, while defense spending reached a record two

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Speaker 9: point two trillion dollars last year and lately in Europe,

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Speaker 9: Russia's aggression in Ukraine has been a wake up call

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Speaker 9: and after years of limited defense spending following the Cold War,

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Speaker 9: more European nations are stepping up in there, spending more.

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Speaker 9: Around twenty of NATO's thirty two allies are expected to

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Speaker 9: spend two percent of GDP on defense this year, and

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Speaker 9: that's up from like four the year before Russia's invasion.

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Speaker 9: On the other side, we've also got China's rising military might,

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Speaker 9: which is gaining attention amid a looming square of paiging

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Speaker 9: potentially moving on Taiman. So all of this is indeed

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Speaker 9: driving the increase in defense spending.

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Speaker 2: So what scenarios could play out from here and how

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Speaker 2: will that impact debt around the world.

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Speaker 9: To statement, we at Bloomberg Economics, we examined two specific

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Speaker 9: scenarios for defense spending, one in which the US and

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Speaker 9: its partners spent at least two percent of their GDP

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Speaker 9: on defense, and we looked at a much more extreme

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Speaker 9: scenario where they raised defense spending to four percent, which

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Speaker 9: is the.

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Speaker 10: Cold War levels.

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Speaker 9: For countries like Germany and Canada with relatively low levels

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Speaker 9: of forecast the debt and fiscal headroom, this highest spending

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Speaker 9: may be painful, but it's feasible. But for other governments,

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Speaker 9: especially Japan, Italy, and France, they would struggle to increase

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Speaker 9: defense spending substantially without taking additional spending cuts, borrowing more

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Speaker 9: or eraising taxes, or some combination of all of these.

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Speaker 9: More specifically, France, Italy and Spain would be particularly exposed

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Speaker 9: if the extra spending is funded by borrowing.

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Speaker 10: So we expect the US, which.

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Speaker 9: Is already spending three point three percent on defense, they

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Speaker 9: could see debt increase one hundred and thirty one percent

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Speaker 9: over the next decade from ninety nine percent this year.

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Speaker 1: Okay, but what about actually just reaching the two percent goal,

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Speaker 1: Because that's the main target, isn't it? For native countries

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Speaker 1: is to reach defense spending of at least two percent

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Speaker 1: of GDP.

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Speaker 10: Absolutely so for some people.

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Speaker 9: Some officials have been pointing to the Cold War levels

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Speaker 9: right when NATO allies spend about three to four percent

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Speaker 9: on defense. You are a particular they need to catch

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Speaker 9: up as an industry is shrunk after years of low

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Speaker 9: spending on defense.

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Speaker 10: In particular, there have been new styles of war that

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Speaker 10: have been.

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Speaker 9: Stained in Ukraine, especially in air defense and ammunition, and

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Speaker 9: allies will have to invest.

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Speaker 10: More on this in light of this.

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Speaker 9: Also, there have been plans for NATO to put as

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Speaker 9: many as three hundred thousand troops on higher readiness, and

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Speaker 9: all of this is going to cost a lot more money.

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Speaker 10: The two percent scenario.

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Speaker 9: Might not be sufficient to meet these challenges, and in

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Speaker 9: the four percent scenario, we calculated that this might actually

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Speaker 9: lead to more than ten trillion dollars of additional commitment

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Speaker 9: over the next decade.

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Speaker 2: What are the financing options for governments if they want

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Speaker 2: to try and increase this spending.

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Speaker 11: Well, policy makers, they actually they face difficult trade offs

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Speaker 11: between choosing whether they want to fund defense and other

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Speaker 11: priorities like social programs, because on the one hand, governments

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Speaker 11: have to do a major overhaul of the defense.

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Speaker 10: Sector while also maintaining a clee. But on the other hand,

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Speaker 10: they have other.

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Speaker 9: Priorities like social programs and economic growth, so spending cuts

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Speaker 9: and higher taxes may not be acceptable at this time,

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Speaker 9: especially when these countries are facing additional social spending demands.

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Speaker 9: These are driven by aging populations, pressure to spend more

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Speaker 9: to address climate change, and also people are interested in

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Speaker 9: reducing the tax burd but this just leads them with

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Speaker 9: more borrowing. And during this prolonged era of higher interest rates,

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Speaker 9: that's also very difficult because higher debt is going to

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Speaker 9: push up borrowing costs, suppress economic growth, and further squeeze

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Speaker 9: garment budgets.

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Speaker 10: Essentially does leaves garment in.

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Speaker 9: A difficult positions on what they need to prioritize and

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Speaker 9: which is more important for their countries.

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Speaker 1: Yeah. Absolutely, it's going to be faced with some difficult choices.

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Speaker 1: Thank you so much for being with us. Sploomberg's global

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Speaker 1: economists Bargove Sakteville then on her research and this whole

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Speaker 1: issue around defense spending. You can read more on this story.

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Speaker 1: G seven faces a ten trillion dollar reckoning as the

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Speaker 1: world races to rearm. It's on the bloom terminal.

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Speaker 2: Well, the former Saint Louis FED President James Bullard has

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Speaker 2: told Bloomberg his base case is still three interest rate

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Speaker 2: cuts this year, but conviction in markets for three quarter

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Speaker 2: point rate cuts is quickly dissipating. Tenure Treasury yields are

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Speaker 2: a whisker from the four and a half percent level,

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Speaker 2: and the first fully priced in rate cut has been

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Speaker 2: pushed from June to September. Joining us now to discuss

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Speaker 2: is our executive editor for Asian Markets, Paul Dubs And Paul,

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Speaker 2: great to have you on treasury yields reaching their highest

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Speaker 2: level of the year in trading on Monday. What's driving it?

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Speaker 4: Yeah, Hi, good morning, And I think the driver is

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Speaker 4: still the follow through from the payrolls data that we

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Speaker 4: had at the back end of last week that you know,

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Speaker 4: was overwhelmingly positive for the economy, but also pointed to

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Speaker 4: the idea that the Federal Reserve is going to need

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Speaker 4: to keep those interest rates higher for longer, so driving

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Speaker 4: a little bit of setting and pushing those yields higher.

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Speaker 4: I think probably another question might be why didn't yields

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Speaker 4: go highest still? And I think that what's kind of

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Speaker 4: also interesting here is that we're starting to see more

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Speaker 4: buyer accumulation wanting to come in and pick up those

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Speaker 4: bonds when the yields get to these kinds of levels

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Speaker 4: to lock in those higher interest rates. So we're a

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Speaker 4: little bit of a sort of equilibrium perhaps in the

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Speaker 4: market at these levels where there's where there's more demand,

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Speaker 4: but also that continuing push the more positive economic data

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Speaker 4: we get and the more inflationary the outlook. Plus we

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Speaker 4: were just hearing about the outlook for government spending as well.

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Speaker 4: That's one more factor to consider all of those pushing

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Speaker 4: those yields up as well.

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Speaker 1: What is the expectation then for Wednesday CPI data. We've

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Speaker 1: seen some more inflationary pressures in the US. How significant

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Speaker 1: will they be?

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Speaker 4: I think I think that those are really good questions.

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Speaker 4: It's probably too early to say. The market is just

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Speaker 4: now waiting for the CPI figure, which isn't aunt all

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Speaker 4: tomorrow US time, but the market is really just waiting

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Speaker 4: for that CPI figure out. I'm very nervous about it

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Speaker 4: as well, and I think that it's not just because

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Speaker 4: the impact that it will have on treasury yields, but

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Speaker 4: the implications that it could have for currency markets as well,

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Speaker 4: which are at some very important sort of levels, particularly

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Speaker 4: the Japanese yen trading against the dollar just below that

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Speaker 4: one p fifty two level. If it weakens further and

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Speaker 4: goes through that, then it could create more market turbulence.

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Speaker 4: There's some big options expiries in the lights of the

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Speaker 4: Australian dollar as well, all pinned around that event. Now,

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Speaker 4: the data is supposed to show a slowdown in inflation,

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Speaker 4: but the question is, you know, given all of the

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Speaker 4: positive economic data that we've seen, particularly in terms of

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Speaker 4: industrial production, manufacturing, those kinds of things, will we actually,

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Speaker 4: you know, see that slow down, And even if we do,

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Speaker 4: is that going to be enough to persuade the market

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Speaker 4: that we're on that glide path to lower inflation? The

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Speaker 4: Federal Reserve wants us to believe in so that it

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Speaker 4: can begin to cut interest rates. So when you hear

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Speaker 4: the Lights of Blood talking about three cuts this year

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Speaker 4: is still the sort of benchmark the point that you

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Speaker 4: want to measure off. At the moment, the market is

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Speaker 4: icing in less cuts than that, and I think that's right.

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Speaker 4: The market is expecting that the Federal Reserve might have

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Speaker 4: to shift its view if we continue to get these

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Speaker 4: economic surprises.

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Speaker 2: Yeah, it's interesting to hear how how federal and rebserve

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Speaker 2: policymakers current ones as well have been slightly shifting their narrative.

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Speaker 2: Is there any indication that they're catching up with the

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Speaker 2: marcuts joining the market and their views.

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Speaker 4: It depends who you listen to. I think that some

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Speaker 4: of the core policy makers, the likes of Mary Daily,

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Speaker 4: the lakes of Lorettamester, have been on that same sort

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Speaker 4: of line that the Blood was talking about three cuts

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Speaker 4: is the baseline, which is right, you know, that's what

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Speaker 4: they said in the dot plot, just that they're they're

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Speaker 4: still counting in the possibility or the likelihood of three cuts.

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Speaker 4: And I think the Powell has been queuing to that

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Speaker 4: line quite closely as well. And I think that's why,

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Speaker 4: you know, this inflation number could be quite important in

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Speaker 4: change net. We do hear from, you know, others like

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Speaker 4: Nil Kashkari who was saying, maybe we don't need to

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Speaker 4: cut at all this year. So there is that sort

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Speaker 4: of background murmuring going on, if you light, but it

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Speaker 4: hasn't yet kind of come to the foreground in too

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Speaker 4: much of the Fed speak. And that's why this number

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Speaker 4: could be pivotal.

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