WEBVTT - A $10 Trillion Reckoning & Fed Officials Predict Cuts

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<v Speaker 1>Bloomberg Audio Studios, podcasts, radio news. This is the Bloomberg

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<v Speaker 1>Daybreak You podcast, available every morning on Apples, Spotify or

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

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<v Speaker 1>I'm Caroline Hepkea.

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

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<v Speaker 2>cast of the G seven increasing defense spending as Germany

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<v Speaker 2>orders more hardware.

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<v Speaker 1>Former Federal Reserve official James Bullard says he expects a

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<v Speaker 1>trio of rate cuts this year.

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<v Speaker 2>Plus computer says no technical difficulties hamper elon Musk's live

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

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<v Speaker 1>Let's start with a roundup of our top stories. Germany

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<v Speaker 1>is expected to order seven billion euros worth of ships

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<v Speaker 1>and armored vehicles this quarter. The purchases are part of

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<v Speaker 1>a sweeping overhaul of the country's armed forces. The news

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<v Speaker 1>comes amidst a global effort to rearm, with NATO officials

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<v Speaker 1>saying member states military spending they need to reach up

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<v Speaker 1>to four percent of GDP now. Bloomberg Economics has calculated

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<v Speaker 1>that that would mean ten trillion dollars of additional spending

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<v Speaker 1>for G seven countries. NATO Sexuary General Yen Stoltenberg says

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<v Speaker 1>allies are increasing their commitment to spending on defense.

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<v Speaker 3>We made a pledge in twenty fourteen, when percent Obama

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<v Speaker 3>was present of the United States, to ensure that all

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<v Speaker 3>allies spent two percent of GDP on defense.

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<v Speaker 4>At that time.

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<v Speaker 3>In twenty fourteen, only three allies spent two percent of

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<v Speaker 3>GDP on defense. This year, we expect around twenty allies

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<v Speaker 3>two thirds of the allies to spend two percent as

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<v Speaker 3>a huge difference.

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<v Speaker 1>That was the NATO Sexuty General Yen Stoltenberg speaking to

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<v Speaker 1>Bloomberg last week. With its latest commitments, Germany will meet

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<v Speaker 1>NATO's goal of spending two percent of GDP on defense

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<v Speaker 1>this year for the first time since it was agreed

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<v Speaker 1>in two thousand and six.

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<v Speaker 2>Former Federal Reserve policymaker James buller It says his base

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<v Speaker 2>case is three interest rate cuts this year. He cited

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<v Speaker 2>successful policy and a strong economy, but said more data

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<v Speaker 2>is needed before multiple cuts.

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<v Speaker 5>Some people are saying that the next report will lead

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<v Speaker 5>to core PC being only two point six percent on

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

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<v Speaker 5>I think you have enough data in hand right now

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<v Speaker 5>to justify the first rate cut. Maybe not a whole

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<v Speaker 5>string of rate cuts, but you could certainly justify the

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<v Speaker 5>first rate cut now based on the data that they have.

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<v Speaker 2>Former Saint Louis FED president James Bullard there speaking to Bloomberg.

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<v Speaker 2>His comments are in line with the current head of

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<v Speaker 2>the Minneapolis Fadnil Kashkari, who says he thinks US inflation

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<v Speaker 2>will continue to fold this year. That's ahead of the

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<v Speaker 2>latest CPI print you out tomorrow.

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<v Speaker 1>More UK firms are being tipped as take over targets

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<v Speaker 1>this year, according to a Bloomberg survey of risk arbitrage desks.

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<v Speaker 1>You imparts reports now on why rock bottom valuations could

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<v Speaker 1>be set to and M.

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<v Speaker 6>And A boom, Virgin money, packaging company D S. Smith

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<v Speaker 6>and house builder Red Road just some of the fourteen

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<v Speaker 6>UK firms that have received takeover offers so far this year.

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<v Speaker 6>Bloomberg's informal survey of traders, analysts and risk arbocharge desks

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<v Speaker 6>have found that British stocks account for seventy percent of

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<v Speaker 6>companies mentioned at least twice as possible takeover targets, and

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<v Speaker 6>with the foot C three fifty currently trading out of

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<v Speaker 6>forty five percent discounts to the MSCI Ward Index. It's

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<v Speaker 6>not hard to explain the interest together with a prospect

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<v Speaker 6>of easier money when the Bank of England starts to

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<v Speaker 6>cut rates and you have a juicy backdrop for private

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

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<v Speaker 2>Ryld Geigo, the bellionaire owner of Luxetan International, and Blackstone

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<v Speaker 2>are nearing a deal to take the skincare company private.

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<v Speaker 2>The asset manager may provide debt financing.

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<v Speaker 7>For the buyout.

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<v Speaker 2>People with an aledge of the matter of say an

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<v Speaker 2>announcement could come as soon as the coming days. Blackstone

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<v Speaker 2>has been considering a bid for a Luxit ten and

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<v Speaker 2>conducted preliminary due diligence in February. Represents of four black

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

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<v Speaker 2>respond to a request for comment.

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<v Speaker 1>Bloomberg has learned the Jeffreys and the law firm Akin

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<v Speaker 1>are representing Thames Waters investors in any restructuring talks. Lenders

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

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<v Speaker 1>Kember Water Finance, defaulted on a loan last week, James

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<v Speaker 1>Wilcock has more.

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<v Speaker 7>Last year, Thames made a thirty million pound loss on

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<v Speaker 7>two point two billion of income after paying seven hundred

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<v Speaker 7>million pounds financing costs. Yet it's now proposing to double

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<v Speaker 7>annual capex to three point seven billion. Oh and it's

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<v Speaker 7>in debt to the tune of fifteen point six billion.

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<v Speaker 7>This explains why no one wants to put money into

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<v Speaker 7>Britain's largest utility, not a shareholders or the government or

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<v Speaker 7>bill payers, and now its creditors are lawyering up for

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<v Speaker 7>a potential restructuring. All parties declined to comment when contacted

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

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<v Speaker 7>headlines in the UK prep Yes in London, James Wilcock

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<v Speaker 7>Blinder Radio.

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<v Speaker 2>Tesla's battered share price jumped by more than five percent

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<v Speaker 2>on Monday after Elon Musk promised that the electric automaker

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<v Speaker 2>would unveil a Robotaxi in the coming months. The stock

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<v Speaker 2>closed last week as the worst SMP performer of twenty

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<v Speaker 2>twenty four, but Musk batted away suggestions of market trouble

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<v Speaker 2>and a discussion with the head of Norgeous Bank Investment

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<v Speaker 2>Management one of Tesla's biggest shareholders, Musk took part in

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<v Speaker 2>a live streamed chat with CEO Nikolai Tangan on his

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

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<v Speaker 4>So we are super piece that that we have you

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<v Speaker 4>on and indeed on your X platform.

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<v Speaker 7>How cool.

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<v Speaker 8>Yeah, it's pretty cool. Yeah. I mean we have like

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<v Speaker 8>lots of people from all around the world simultaneously do

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<v Speaker 8>effectively a real time podcast and it works pretty well.

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<v Speaker 8>And the syvalogical computer old human brains that are thinking,

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

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<v Speaker 8>still there.

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<v Speaker 6>Elin.

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<v Speaker 2>This is the second high profile live stream and musks

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<v Speaker 2>platform to have tech issues after Rando Santas's campaign launch

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<v Speaker 2>flopped on the site.

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<v Speaker 1>And those are your top stories on the markets this morning.

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<v Speaker 1>Your socks fifty futures are sinking down by three tens

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<v Speaker 1>of one percent, the MSCI Asia Pacific Index currently is

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<v Speaker 1>up by eight tens of one percent, and tenure US

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<v Speaker 1>treasury yields this morning trading at four point four one percent,

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<v Speaker 1>down one and a half basis points.

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<v Speaker 2>Those are your top stories and the markets. In a moment,

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<v Speaker 2>we'll get more on our story on European defense spending

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<v Speaker 2>and how much an increase to four percent of GDP

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<v Speaker 2>could cost the G seven nations. But just to bring

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<v Speaker 2>you some breaking news from the Middle East, where Turkey

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<v Speaker 2>has announced restrictions on exports to Israel. It's going to

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<v Speaker 2>apply to fifty four products as of today, and that

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<v Speaker 2>includes things like construction materials. So that is the lates

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<v Speaker 2>announcement that we are here from Turkey. This is after

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<v Speaker 2>they had vowed yesterday to take measures against Israel over

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<v Speaker 2>Gaza aide drops.

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<v Speaker 1>Now let's turn our attention then to our investigation at Bloomberg.

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<v Speaker 1>Russia's invasion of Ukraine, war in the Middle East and

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<v Speaker 1>concerns about China's rise are spurring G seven countries to

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<v Speaker 1>invest more in their militaries. Bloomberg has calculated that if

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<v Speaker 1>they've raised defense spending to four percent of GDP, as

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<v Speaker 1>some are suggesting, that would add up to more than

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<v Speaker 1>a ten trillion dollars of additional drain on public finances

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<v Speaker 1>basically over the next decade. It is a huge number.

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<v Speaker 1>It underscores the difficult trade offs the countries are likely

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<v Speaker 1>to face between national security, other spending priorities, and debt sustainability.

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<v Speaker 1>Joining US now is Bloomberg's Global economists Berghavi Sakteville, who's

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<v Speaker 1>been key in doing some of this research. Good morning, Bugave,

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<v Speaker 1>thank you for being with us. I mean, firstly, I

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<v Speaker 1>suppose what's driving the increase in defense spending around the world.

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<v Speaker 1>It's been very pivotal.

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<v Speaker 9>Thanks Caroline. Well, while defense spending reached a record two

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<v Speaker 9>point two trillion dollars last year and lately in Europe,

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<v Speaker 9>Russia's aggression in Ukraine has been a wake up call

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<v Speaker 9>and after years of limited defense spending following the Cold War,

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<v Speaker 9>more European nations are stepping up in there, spending more.

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<v Speaker 9>Around twenty of NATO's thirty two allies are expected to

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<v Speaker 9>spend two percent of GDP on defense this year, and

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<v Speaker 9>that's up from like four the year before Russia's invasion.

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

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<v Speaker 9>which is gaining attention amid a looming square of paiging

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<v Speaker 9>potentially moving on Taiman. So all of this is indeed

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<v Speaker 9>driving the increase in defense spending.

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<v Speaker 2>So what scenarios could play out from here and how

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<v Speaker 2>will that impact debt around the world.

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<v Speaker 9>To statement, we at Bloomberg Economics, we examined two specific

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<v Speaker 9>scenarios for defense spending, one in which the US and

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<v Speaker 9>its partners spent at least two percent of their GDP

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<v Speaker 9>on defense, and we looked at a much more extreme

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<v Speaker 9>scenario where they raised defense spending to four percent, which

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<v Speaker 9>is the.

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<v Speaker 10>Cold War levels.

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<v Speaker 9>For countries like Germany and Canada with relatively low levels

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<v Speaker 9>of forecast the debt and fiscal headroom, this highest spending

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

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<v Speaker 9>especially Japan, Italy, and France, they would struggle to increase

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<v Speaker 9>defense spending substantially without taking additional spending cuts, borrowing more

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<v Speaker 9>or eraising taxes, or some combination of all of these.

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<v Speaker 9>More specifically, France, Italy and Spain would be particularly exposed

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<v Speaker 9>if the extra spending is funded by borrowing.

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<v Speaker 10>So we expect the US, which.

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<v Speaker 9>Is already spending three point three percent on defense, they

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<v Speaker 9>could see debt increase one hundred and thirty one percent

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<v Speaker 9>over the next decade from ninety nine percent this year.

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<v Speaker 1>Okay, but what about actually just reaching the two percent goal,

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

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<v Speaker 1>is to reach defense spending of at least two percent

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<v Speaker 1>of GDP.

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<v Speaker 10>Absolutely so for some people.

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<v Speaker 9>Some officials have been pointing to the Cold War levels

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<v Speaker 9>right when NATO allies spend about three to four percent

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<v Speaker 9>on defense. You are a particular they need to catch

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<v Speaker 9>up as an industry is shrunk after years of low

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<v Speaker 9>spending on defense.

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<v Speaker 10>In particular, there have been new styles of war that

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<v Speaker 10>have been.

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<v Speaker 9>Stained in Ukraine, especially in air defense and ammunition, and

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<v Speaker 9>allies will have to invest.

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<v Speaker 10>More on this in light of this.

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<v Speaker 9>Also, there have been plans for NATO to put as

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<v Speaker 9>many as three hundred thousand troops on higher readiness, and

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<v Speaker 9>all of this is going to cost a lot more money.

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<v Speaker 10>The two percent scenario.

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<v Speaker 9>Might not be sufficient to meet these challenges, and in

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<v Speaker 9>the four percent scenario, we calculated that this might actually

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<v Speaker 9>lead to more than ten trillion dollars of additional commitment

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<v Speaker 9>over the next decade.

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<v Speaker 2>What are the financing options for governments if they want

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<v Speaker 2>to try and increase this spending.

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<v Speaker 11>Well, policy makers, they actually they face difficult trade offs

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<v Speaker 11>between choosing whether they want to fund defense and other

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<v Speaker 11>priorities like social programs, because on the one hand, governments

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<v Speaker 11>have to do a major overhaul of the defense.

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<v Speaker 10>Sector while also maintaining a clee. But on the other hand,

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<v Speaker 10>they have other.

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<v Speaker 9>Priorities like social programs and economic growth, so spending cuts

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<v Speaker 9>and higher taxes may not be acceptable at this time,

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<v Speaker 9>especially when these countries are facing additional social spending demands.

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<v Speaker 9>These are driven by aging populations, pressure to spend more

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<v Speaker 9>to address climate change, and also people are interested in

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<v Speaker 9>reducing the tax burd but this just leads them with

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<v Speaker 9>more borrowing. And during this prolonged era of higher interest rates,

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<v Speaker 9>that's also very difficult because higher debt is going to

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<v Speaker 9>push up borrowing costs, suppress economic growth, and further squeeze

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<v Speaker 9>garment budgets.

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<v Speaker 10>Essentially does leaves garment in.

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<v Speaker 9>A difficult positions on what they need to prioritize and

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<v Speaker 9>which is more important for their countries.

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

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<v Speaker 1>Thank you so much for being with us. Sploomberg's global

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<v Speaker 1>economists Bargove Sakteville then on her research and this whole

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<v Speaker 1>issue around defense spending. You can read more on this story.

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<v Speaker 1>G seven faces a ten trillion dollar reckoning as the

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<v Speaker 1>world races to rearm. It's on the bloom terminal.

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<v Speaker 2>Well, the former Saint Louis FED President James Bullard has

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<v Speaker 2>told Bloomberg his base case is still three interest rate

0:12:07.480 --> 0:12:10.320
<v Speaker 2>cuts this year, but conviction in markets for three quarter

0:12:10.360 --> 0:12:13.920
<v Speaker 2>point rate cuts is quickly dissipating. Tenure Treasury yields are

0:12:13.920 --> 0:12:15.800
<v Speaker 2>a whisker from the four and a half percent level,

0:12:15.840 --> 0:12:18.000
<v Speaker 2>and the first fully priced in rate cut has been

0:12:18.000 --> 0:12:20.959
<v Speaker 2>pushed from June to September. Joining us now to discuss

0:12:21.120 --> 0:12:23.760
<v Speaker 2>is our executive editor for Asian Markets, Paul Dubs And Paul,

0:12:23.800 --> 0:12:26.600
<v Speaker 2>great to have you on treasury yields reaching their highest

0:12:26.640 --> 0:12:30.080
<v Speaker 2>level of the year in trading on Monday. What's driving it?

0:12:30.720 --> 0:12:33.360
<v Speaker 4>Yeah, Hi, good morning, And I think the driver is

0:12:33.400 --> 0:12:39.000
<v Speaker 4>still the follow through from the payrolls data that we

0:12:39.200 --> 0:12:42.720
<v Speaker 4>had at the back end of last week that you know,

0:12:42.960 --> 0:12:48.040
<v Speaker 4>was overwhelmingly positive for the economy, but also pointed to

0:12:48.240 --> 0:12:50.120
<v Speaker 4>the idea that the Federal Reserve is going to need

0:12:50.160 --> 0:12:53.640
<v Speaker 4>to keep those interest rates higher for longer, so driving

0:12:53.679 --> 0:12:56.040
<v Speaker 4>a little bit of setting and pushing those yields higher.

0:12:56.240 --> 0:12:59.320
<v Speaker 4>I think probably another question might be why didn't yields

0:12:59.360 --> 0:13:01.520
<v Speaker 4>go highest still? And I think that what's kind of

0:13:01.559 --> 0:13:04.120
<v Speaker 4>also interesting here is that we're starting to see more

0:13:04.160 --> 0:13:07.400
<v Speaker 4>buyer accumulation wanting to come in and pick up those

0:13:07.440 --> 0:13:10.400
<v Speaker 4>bonds when the yields get to these kinds of levels

0:13:10.440 --> 0:13:15.040
<v Speaker 4>to lock in those higher interest rates. So we're a

0:13:15.040 --> 0:13:18.320
<v Speaker 4>little bit of a sort of equilibrium perhaps in the

0:13:18.360 --> 0:13:20.760
<v Speaker 4>market at these levels where there's where there's more demand,

0:13:20.920 --> 0:13:24.880
<v Speaker 4>but also that continuing push the more positive economic data

0:13:24.880 --> 0:13:28.280
<v Speaker 4>we get and the more inflationary the outlook. Plus we

0:13:28.280 --> 0:13:30.720
<v Speaker 4>were just hearing about the outlook for government spending as well.

0:13:30.720 --> 0:13:33.600
<v Speaker 4>That's one more factor to consider all of those pushing

0:13:33.679 --> 0:13:34.880
<v Speaker 4>those yields up as well.

0:13:35.800 --> 0:13:40.440
<v Speaker 1>What is the expectation then for Wednesday CPI data. We've

0:13:40.480 --> 0:13:44.800
<v Speaker 1>seen some more inflationary pressures in the US. How significant

0:13:44.800 --> 0:13:45.320
<v Speaker 1>will they be?

0:13:46.760 --> 0:13:49.280
<v Speaker 4>I think I think that those are really good questions.

0:13:49.559 --> 0:13:52.400
<v Speaker 4>It's probably too early to say. The market is just

0:13:52.520 --> 0:13:54.880
<v Speaker 4>now waiting for the CPI figure, which isn't aunt all

0:13:55.760 --> 0:13:58.800
<v Speaker 4>tomorrow US time, but the market is really just waiting

0:13:58.840 --> 0:14:01.200
<v Speaker 4>for that CPI figure out. I'm very nervous about it

0:14:01.240 --> 0:14:02.920
<v Speaker 4>as well, and I think that it's not just because

0:14:02.960 --> 0:14:05.080
<v Speaker 4>the impact that it will have on treasury yields, but

0:14:05.120 --> 0:14:07.559
<v Speaker 4>the implications that it could have for currency markets as well,

0:14:07.559 --> 0:14:10.880
<v Speaker 4>which are at some very important sort of levels, particularly

0:14:10.880 --> 0:14:15.160
<v Speaker 4>the Japanese yen trading against the dollar just below that

0:14:15.200 --> 0:14:17.640
<v Speaker 4>one p fifty two level. If it weakens further and

0:14:17.679 --> 0:14:20.200
<v Speaker 4>goes through that, then it could create more market turbulence.

0:14:20.200 --> 0:14:22.640
<v Speaker 4>There's some big options expiries in the lights of the

0:14:22.680 --> 0:14:26.080
<v Speaker 4>Australian dollar as well, all pinned around that event. Now,

0:14:26.520 --> 0:14:29.360
<v Speaker 4>the data is supposed to show a slowdown in inflation,

0:14:29.560 --> 0:14:31.680
<v Speaker 4>but the question is, you know, given all of the

0:14:31.720 --> 0:14:34.640
<v Speaker 4>positive economic data that we've seen, particularly in terms of

0:14:34.680 --> 0:14:38.680
<v Speaker 4>industrial production, manufacturing, those kinds of things, will we actually,

0:14:38.960 --> 0:14:40.960
<v Speaker 4>you know, see that slow down, And even if we do,

0:14:41.120 --> 0:14:43.000
<v Speaker 4>is that going to be enough to persuade the market

0:14:43.120 --> 0:14:46.120
<v Speaker 4>that we're on that glide path to lower inflation? The

0:14:46.120 --> 0:14:48.360
<v Speaker 4>Federal Reserve wants us to believe in so that it

0:14:48.400 --> 0:14:50.640
<v Speaker 4>can begin to cut interest rates. So when you hear

0:14:50.680 --> 0:14:53.240
<v Speaker 4>the Lights of Blood talking about three cuts this year

0:14:53.280 --> 0:14:57.560
<v Speaker 4>is still the sort of benchmark the point that you

0:14:57.600 --> 0:14:59.760
<v Speaker 4>want to measure off. At the moment, the market is

0:15:00.080 --> 0:15:02.640
<v Speaker 4>icing in less cuts than that, and I think that's right.

0:15:02.680 --> 0:15:04.880
<v Speaker 4>The market is expecting that the Federal Reserve might have

0:15:04.920 --> 0:15:06.720
<v Speaker 4>to shift its view if we continue to get these

0:15:06.760 --> 0:15:07.800
<v Speaker 4>economic surprises.

0:15:08.680 --> 0:15:10.920
<v Speaker 2>Yeah, it's interesting to hear how how federal and rebserve

0:15:11.000 --> 0:15:15.320
<v Speaker 2>policymakers current ones as well have been slightly shifting their narrative.

0:15:15.480 --> 0:15:18.640
<v Speaker 2>Is there any indication that they're catching up with the

0:15:18.680 --> 0:15:20.880
<v Speaker 2>marcuts joining the market and their views.

0:15:21.320 --> 0:15:24.080
<v Speaker 4>It depends who you listen to. I think that some

0:15:24.120 --> 0:15:27.560
<v Speaker 4>of the core policy makers, the likes of Mary Daily,

0:15:28.120 --> 0:15:31.400
<v Speaker 4>the lakes of Lorettamester, have been on that same sort

0:15:31.400 --> 0:15:33.720
<v Speaker 4>of line that the Blood was talking about three cuts

0:15:33.800 --> 0:15:35.480
<v Speaker 4>is the baseline, which is right, you know, that's what

0:15:35.520 --> 0:15:39.040
<v Speaker 4>they said in the dot plot, just that they're they're

0:15:39.080 --> 0:15:41.800
<v Speaker 4>still counting in the possibility or the likelihood of three cuts.

0:15:41.800 --> 0:15:43.920
<v Speaker 4>And I think the Powell has been queuing to that

0:15:44.000 --> 0:15:46.720
<v Speaker 4>line quite closely as well. And I think that's why,

0:15:46.880 --> 0:15:49.560
<v Speaker 4>you know, this inflation number could be quite important in

0:15:49.680 --> 0:15:53.280
<v Speaker 4>change net. We do hear from, you know, others like

0:15:53.400 --> 0:15:55.320
<v Speaker 4>Nil Kashkari who was saying, maybe we don't need to

0:15:55.320 --> 0:15:58.920
<v Speaker 4>cut at all this year. So there is that sort

0:15:58.920 --> 0:16:01.800
<v Speaker 4>of background murmuring going on, if you light, but it

0:16:01.840 --> 0:16:04.040
<v Speaker 4>hasn't yet kind of come to the foreground in too

0:16:04.080 --> 0:16:05.800
<v Speaker 4>much of the Fed speak. And that's why this number

0:16:05.800 --> 0:16:06.560
<v Speaker 4>could be pivotal.

0:16:07.920 --> 0:16:10.640
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0:16:10.720 --> 0:16:13.760
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