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Speaker 2: This is Bloomberg day Break Weekend, our global look at
Speaker 2: the top stories in the coming week from our day
Speaker 2: Break anchors all around the world. Straight ahead on the program,
Speaker 2: Inflation and what it could mean for the Fed plus
Speaker 2: earning season is right around the corner. We'll get a preview.
Speaker 2: I'm Tom Busby in New York. I'm Stephen Carolyn London.
Speaker 2: For We're looking ahead and beyond the upcoming European Central
Speaker 2: Bank meeting, when and how fast interest rates may come down.
Speaker 3: I'm Doug Krisner looking at whether China's economy is bottomed
Speaker 3: and if it's beginning to inflate.
Speaker 4: That's all straight ahead on Bloomberg Daybreak Weekend on Bloomberg
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Speaker 2: Good day to you. I'm Tom Busby, and we begin
Speaker 2: today's program with inflation and the March consumer Price Index
Speaker 2: coming out this Wednesday. With the fed's next policy meeting
Speaker 2: kicking off later this month, what could that mean for
Speaker 2: the central banks direction moving forward? And for more we're
Speaker 2: joined by Edward Harrison, Bloomberg, team leader America's FX and Rates. Edward,
Speaker 2: Thanks for being here. What are you expecting to see
Speaker 2: in that CPI report?
Speaker 5: Hey, great to talk to you, Tom. The question really
Speaker 5: is wide open in terms of what we can see.
Speaker 5: There are a lot of things, and I think that
Speaker 5: the way to think about this is that we had
Speaker 5: a very high level of inflation as we came out
Speaker 5: of the pandemic, and that's come down considerably, but we've
Speaker 5: stalled at a level that is above the Fed's target.
Speaker 5: And recently what we've seen is prices moving up in
Speaker 5: places that people are sensitive to, you know, things like cocoa,
Speaker 5: you know, for chocolate, things like oil, which affects your
Speaker 5: gasoline prices in the US. And so, as a result,
Speaker 5: after two readings in a row that were relatively high
Speaker 5: above expectations, there's a lot of anticipation about this number,
Speaker 5: and really it could be higher than expected given some
Speaker 5: of those recent trends.
Speaker 2: Still a long way to go, though, to the fed's
Speaker 2: two percent target, but like you said, not the nine
Speaker 2: point one percent we saw just two summers ago. But
Speaker 2: we had been heading in the right direction. Is this
Speaker 2: recent pickup just an aberration you think, or are we
Speaker 2: onto something more troubling.
Speaker 5: Well, you know, the FED really wants to get their
Speaker 5: hands around that to figure out what's going on. And
Speaker 5: that's why when you heard Jerome Powell talking last week,
Speaker 5: he was talking about patients. And that's because of this
Speaker 5: number in particular, and also the number that's embedded in
Speaker 5: the Personal Consumption Expenditures Report, which is what the FED
Speaker 5: looks at even more closely. When you look at this number,
Speaker 5: you know, the last number without food and energy, which
Speaker 5: are very viable. When you strip that out, you still
Speaker 5: had three point eight percent. They're expecting three point seven percent,
Speaker 5: which is almost double the fed's level now. Luckily, because
Speaker 5: food and energy have been relatively benign of late. The
Speaker 5: number was three point two percent last time, and we're
Speaker 5: expecting three point five percent this time. So that gives
Speaker 5: you an indication that there's a lot of work to
Speaker 5: be done. And this is why j Powell last week
Speaker 5: was talking about patients.
Speaker 2: Well, let's talk about some of those big drivers here.
Speaker 2: You mentioned oil right now hovering around a five month high,
Speaker 2: always very volucile, but we are seeing expectations gas is
Speaker 2: going to hit four bucks a gallon here in the US,
Speaker 2: that's for regular by the summer. I mean, that is
Speaker 2: a real wildcard. Oil and gas prices.
Speaker 5: Without a doubt. And you know, as I was saying,
Speaker 5: they had been positive in terms of the numbers food
Speaker 5: and energy because the headline number is lower than the
Speaker 5: number when you strip out food and energy. But now
Speaker 5: that we have these prices going back up, then you
Speaker 5: can expect them to have a negative contribution. They're sending
Speaker 5: the CPI up higher. And there's nothing that people think
Speaker 5: about more than gasoline prices. It has that anchor effect
Speaker 5: in terms of how people think about inflation and where
Speaker 5: it's headed. And so this is not what people want.
Speaker 5: And I would add that, you know OPEK their meeting,
Speaker 5: it will be interesting to see what kind of level
Speaker 5: they're targeting for oil prices. If we're looking at ninety
Speaker 5: dollars a barrel, then that's not a level that is
Speaker 5: going to be pleasant for the inflation numbers.
Speaker 2: You know, food, oil, gasoline, housing. But there are some
Speaker 2: green shoots, some glimmers of hope. Used car prices have
Speaker 2: moved lower, new car prices have moved lower.
Speaker 5: Right, what we're looking for in particular is not just
Speaker 5: in goods and things that were inflated coming down, but
Speaker 5: that core beyond even goods in services, you know, takeout housing,
Speaker 5: even looking at you know, the services sector and the
Speaker 5: core within the services sector of minus housing to see
Speaker 5: what the overall trend is. I think that that is
Speaker 5: going to be the place that people are going to
Speaker 5: be looking as they look at the CPI.
Speaker 2: Now, one last question. We're going to talk about the
Speaker 2: fed's meeting, which is April thirtieth May. First, that's the
Speaker 2: next one. A non starter for a rate cut, but
Speaker 2: everybody's still thinking about that mid June meeting, and between
Speaker 2: now and then, the FED is going to have three
Speaker 2: CPI reports, two PCE reports, and that for a data
Speaker 2: dependent FED is a lot to consider. Is there any
Speaker 2: feeling that by then, by the June eleventh and twelfth
Speaker 2: meeting we are going to see maybe some hope of
Speaker 2: a rate cut.
Speaker 5: I think that these next ones are going to be
Speaker 5: very important, because you know, the FED is looking for
Speaker 5: a trend, and that trend needs to be lower. To
Speaker 5: the degree that the next one or two of these
Speaker 5: CPIPCE reports are not lower, it makes it more difficult
Speaker 5: for the FED to cut in June. When we look
Speaker 5: at some of the people at the FED, Atlanta FED
Speaker 5: President raphae Albostik, he's been an individual who's at the
Speaker 5: leading edge of where the Fed's going. He's actually talking
Speaker 5: about waiting all the way into the fourth quarter. So
Speaker 5: that's an indication of sort of the angst of the
Speaker 5: Fed about how sticky inflation has been.
Speaker 4: Wow.
Speaker 2: Well, the next reading the March CPI data out there Wednesday,
Speaker 2: and our thanks to Edward Harrison, Bloomberg team leader for
Speaker 2: Americas FX and Rates. Well, we turn now to the
Speaker 2: start of the new earning season on Wall Street. It
Speaker 2: kicks off this Friday. We get the latest quarterly reports
Speaker 2: from JP Morgan, Chase, Wells, Fargo, and City Group, some
Speaker 2: of the biggest banks in the US. What will they
Speaker 2: reveal about the health of the banking sector. Well for more,
Speaker 2: We're joined by Alison Williams, Bloomberg Intelligence Senior Analyst, Global
Speaker 2: Banks and Asset Managers. Now, Allison, I want to start
Speaker 2: with where the US banking sector is right now compared
Speaker 2: to the turmoil a year ago. We saw the failure
Speaker 2: of Silicon Valley Bank in March of twenty three, Signature
Speaker 2: Bank in April of that year, First Republic. Where are
Speaker 2: we now?
Speaker 6: So, I think for the banks, that really kicked off
Speaker 6: a lot of concerns about the higher interest rate environment,
Speaker 6: and we saw a lot of deposit outflows and that
Speaker 6: really has been a big focus for investors in terms
Speaker 6: of the impact on net interest income. But for this quarter,
Speaker 6: investors are really going to be focusing on the change
Speaker 6: in interest rate expectations versus the last time we heard
Speaker 6: from the banks, which was in January, and so at
Speaker 6: that point in time, most of the banks gave their
Speaker 6: guidance for net interest income looking for six rate cuts.
Speaker 6: City Group more in the three to six cut region,
Speaker 6: but the market implied rates at this point in time
Speaker 6: are closer to three, and so we do expect that
Speaker 6: there could be some change in the net interest income
Speaker 6: outlook that really affects more of the back half and
Speaker 6: the twenty twenty five expectations. But circling back to deposits again,
Speaker 6: that was the sort of one of the big concerns
Speaker 6: a year ago, deposit pricing. We have seen those deposit
Speaker 6: prices increase, but we do think that this quarter they
Speaker 6: could come in a little bit more muted than perhaps
Speaker 6: had fears. We got some color around that from Bank
Speaker 6: of America who said that they think that they're an
Speaker 6: interestingcome guidance could come in a bit at the higher
Speaker 6: end of their guidance because those costs have not been
Speaker 6: as bad as.
Speaker 7: They had expected.
Speaker 6: What were they expecting, Well, deposit prices are increasing, right,
Speaker 6: so as rates have come up, banks sort of got
Speaker 6: an early benefit in terms of the repricing of their
Speaker 6: loan books, but they held off a little bit in
Speaker 6: terms of passing on those price increases to customers because
Speaker 6: we were coming off of those zero percent levels. So
Speaker 6: I think as things sort of adjusted to a normalized environment,
Speaker 6: they were a bit slower to pass on some of
Speaker 6: that benefit. But now that is happening, and so consumers
Speaker 6: are demanding a little bit more yield. They're switching their
Speaker 6: deposits into products that offer a higher yield, and that's
Speaker 6: been happening over the past year. But perhaps that pace
Speaker 6: is starting to slow down a bit.
Speaker 4: Yeah.
Speaker 2: Well, one thing that hasn't slowed down for banks trading.
Speaker 2: We've seen IPO a little growth there, we've seen record
Speaker 2: levels for all the major averages. What does that mean
Speaker 2: for these banks?
Speaker 6: So healthier markets are definitely a boon to the asset
Speaker 6: and wealth management businesses for all these big banks. They
Speaker 6: are diversified banks, and so they are benefiting just from
Speaker 6: the fees, just from the asset levels, but also they'll
Speaker 6: be looking for better flows. That is a key measure
Speaker 6: of health of the businesses. But on the trading and
Speaker 6: fee outlook, trading continues to be relatively resilient, and so
Speaker 6: that fixed income trading does face tougher comparisons, So it
Speaker 6: could be a little bit down, especially for the rates
Speaker 6: and currencies business for someone like City Group, but still
Speaker 6: very healthy historically high levels. Equity trading getting some benefit.
Speaker 6: As you pointed out that we have seen a little
Speaker 6: bit more activity on the IPO front, perhaps not as
Speaker 6: strong as some of the banks would expect, but definitely
Speaker 6: in the US, the US underwriting business is going to
Speaker 6: be helping those fees, the debt underwriting business helping those fees.
Speaker 6: M and A announcements looking a little bit better, but
Speaker 6: it'll take a little while for those fees to kick in.
Speaker 6: But I think the highlight for this quarter for trading
Speaker 6: and fees will be that investment banking feed growth both
Speaker 6: versus a year ago and the fourth quarter.
Speaker 2: But let's talk about now the challenges, and probably the
Speaker 2: biggest one we spoke about this is commercial real estate.
Speaker 2: We just had a vacancy rate of offices last quarter
Speaker 2: twenty percent, just under twenty percent across the US. That's
Speaker 2: got to be devastated.
Speaker 6: And the office business is definitely something that investors are
Speaker 6: focused on. It's something that we're focusing on. But Wells Fargo,
Speaker 6: you know, for example, who has one of the biggest
Speaker 6: exposures among our banks. At least they've already put up
Speaker 6: a pretty healthy reserve against that business, so they've been
Speaker 6: watching it as those trends have been deteriorating. And commercial
Speaker 6: real estate, while it's a big thing I think to
Speaker 6: focus on for the industry, it does tend to be
Speaker 6: a relatively lower exposure across the banks. So even though
Speaker 6: Wells Fargo and now JP Morgan two of the biggest
Speaker 6: lenders out there to commercial real estate, Bank of America
Speaker 6: as well, it is not as big of a share
Speaker 6: of their loan book as it is perhaps for the
Speaker 6: smaller banks. And so what we're really focusing on is
Speaker 6: the credit card business, where we think that is going
Speaker 6: to be the driver of provisions for the largest banks
Speaker 6: because there is loan growth in that business, and that
Speaker 6: loan growth does tend to have higher loss rates. So
Speaker 6: we will see provisions increase because of the growth, because
Speaker 6: credit is normalizing, and because this does tend to be
Speaker 6: a seasonally higher quarter for those types of losses.
Speaker 2: Well, a lot to look forward to this week and
Speaker 2: our thanks to Alison Williams, Bloomberg Intelligence Senior Analyst, Global
Speaker 2: Banks and Asset Managers. And coming up on Bloomberg Daybreak weekend,
Speaker 2: when will European policy makers start to ease monetary policy?
Speaker 2: We look ahead to the next European Central Bank meeting.
Speaker 2: I'm Tom Buzby and this is Bloomberg. This is Bloomberg
Speaker 2: Day Break weekend, our global look ahead at the top
Speaker 2: stories for investors in the coming week. I'm Tom Busby
Speaker 2: in New York. Up later in our program. Has China's
Speaker 2: economy bottomed out? We look ahead to China inflation data.
Speaker 2: But first in the global interest rate race, investors have
Speaker 2: been working on the assumption that the Federal Reserve will
Speaker 2: be the first to make a raid cut, but after
Speaker 2: some encouraging economic data from the Eurozone, could the European
Speaker 2: Central Bank beat the Fed to the punch with a
Speaker 2: surprise cut as early as later this month. For more,
Speaker 2: Let's go to London and bring in Bloomberg Daybreak anchor
Speaker 2: Stephen Carroll.
Speaker 1: Tom Inflation in the euro Area may not be slowing
Speaker 1: down as quickly as it was last year, but it's
Speaker 1: still moving in the right direction for the ECB. The
Speaker 1: latest reading shows consumer prices rising in March by two
Speaker 1: point four percent year on year. That's down from a
Speaker 1: pace of two point six percent in February. Spanish Governing
Speaker 1: Council member Pablo Hernandez de cass is among the most
Speaker 1: recent to earmark the June meeting as likely being for
Speaker 1: the first cut in interest rates. Even the most hawkish
Speaker 1: member of the Governing Council, Austria's Robert Holtzman, is warning
Speaker 1: of the perils of holding rates at their current level
Speaker 1: for too long, but could waiting until June risk harming
Speaker 1: the economy. Boomberg opinion columnist Marcus Ashworth has joined those
Speaker 1: calling instead for an April move at this upcoming meeting.
Speaker 1: He points to Bank of France President Fransouovievoia the gallow
Speaker 1: who's often the bell weather for ECB policy changes. De
Speaker 1: Gallo says that a further slow down in growth means
Speaker 1: that the time has come to take out an insurance
Speaker 1: against this second risk by beginning rate cuts. But going
Speaker 1: before the FED doesn't come without its risks, both in
Speaker 1: Europe and globally. It's something we've been discussing with Aaron Captain,
Speaker 1: who's chief economists at UBS Investment Bank.
Speaker 8: So if the FED doesn't cut in June, right, so
Speaker 8: we basically then have less cuts for the FED, so
Speaker 8: a bit more appreciation of the dollar, a bit more
Speaker 8: euro depreciation. So at the margin it's going to add
Speaker 8: a little bit to Eurozone inflation, but really not very much.
Speaker 8: If all that we're doing is sort of a time
Speaker 8: shift of the FED cuts, right, if they just go
Speaker 8: a bit later and they catch up next year, then
Speaker 8: you know, the overall rate differentials don't really move that much,
Speaker 8: and it doesn't fundamentally I think alter sort of the
Speaker 8: inflation outlook in the euro Zone.
Speaker 1: Is there any chance you think of fifty basis points
Speaker 1: cuts from the ECB this year?
Speaker 7: Not now?
Speaker 8: It's difficult to see why. So I think the debates more,
Speaker 8: you know, do you go once a quarter at the
Speaker 8: forecast meetings or do you go every meeting. It looks
Speaker 8: like they want to go once a quarter, although they
Speaker 8: have been a little vague about sort of what the
Speaker 8: speed of the sequences that they have in mind. In
Speaker 8: my mind, you know, the easy bit is the first
Speaker 8: one hundred and fifty basis points, and there's no real
Speaker 8: reason why you want to sort of race through that
Speaker 8: if there's uncertainty about the landing zone. Right, So the
Speaker 8: way I think they think about it is that you know,
Speaker 8: you're at four, you can probably safely cut to about
Speaker 8: two and a half, and then once you get there,
Speaker 8: you got to look around to see whether you're still
Speaker 8: on track, and if, you know, if things are accelerating
Speaker 8: too fast and profits are going up too fast, then
Speaker 8: you stop cutting at that stage. So given sort of
Speaker 8: that type of uncertainty, you don't need to go in fifties.
Speaker 8: I think the debates really do you go in twenty fives?
Speaker 8: And then you know, do you skip meetings or not?
Speaker 4: Yeah?
Speaker 1: I wonder you know, Kasina Guard and others have points
Speaker 1: as the importance of wage data when it comes to
Speaker 1: their decision making process at the ECB. Two is the
Speaker 1: wage days is something that's a big concern for you
Speaker 1: when you're thinking about the broader outlook for the year
Speaker 1: Zone economy.
Speaker 8: No, so based on what we've there's not a lot
Speaker 8: of year to date wage data out yet. But if
Speaker 8: Italy doesn't repeat the big one off that they had
Speaker 8: in December, then our current tracking of negotiated wages is
Speaker 8: that it'll slip below four percent for the first time
Speaker 8: in January. And so it really looks like, you know,
Speaker 8: the negotiated wage track, which is going to be most inertial,
Speaker 8: had been sort of going sideways, is now starting to
Speaker 8: trend lower. The indeed wage tracker, which is sort of
Speaker 8: temp marginal wages of temp agencies, that's already been heading lower.
Speaker 8: And then they have a phone survey which they don't publish,
Speaker 8: and so all indications really are that wages are moving
Speaker 8: in line with their forecast and at this stage are
Speaker 8: not concerning.
Speaker 1: That was Aaron Captain, chief economist at UBS Investment Bank,
Speaker 1: speaking to us on Bloomberg Daybreak Europe. Now, the ECB
Speaker 1: expects CPI to fall to two point two percent by August,
Speaker 1: but it could happen as soon as this month, according
Speaker 1: to estimates by Bloomberg Economics. Kicking off rate trimming is
Speaker 1: one thing, but questions still remain about what comes next
Speaker 1: for the ECB after the first cut, whether it comes
Speaker 1: in April or in June. At the moment, money markets
Speaker 1: are pricing in three quarter point reductions starting in June.
Speaker 1: I've been discussing the path ahead with senior Euro Area
Speaker 1: economist for Bloomberg Economics David Powell. Just how surprising would
Speaker 1: an April cut be or how likely is it?
Speaker 7: An April cut is very unlikely at this stage. For example,
Speaker 7: there's almost no probability of that being priced into the
Speaker 7: markets right now. Some time ago, there was a debate
Speaker 7: whether this was going to happen in April or in June.
Speaker 7: That was back at the beginning of the year, and
Speaker 7: that was fully priced in that April cuts. There has
Speaker 7: been a big shift in market pricing we've seen, and
Speaker 7: that's really been thanks to the communication we've seen from
Speaker 7: the ECB who have started to rule out some time
Speaker 7: ago the possibility of an April cut, Although there have
Speaker 7: been some doves in the Governing Council who've continued to
Speaker 7: speak about it from time to time. It's not of
Speaker 7: you held by the consensus at all.
Speaker 1: Just mischievously hinting that perhaps there's something could happen, even
Speaker 1: though there's no likelihood of it as you see it
Speaker 1: as well. So what's the risk of waiting longer for
Speaker 1: Christine Legard and colleagues or is there a risk in
Speaker 1: them waiting to June.
Speaker 7: Well, the difference between April and June is not that huge.
Speaker 7: Although the ECB cannot wait until is actually down to
Speaker 7: two percent to start cutting because monetary policy works with
Speaker 7: a lag somewhere between a year and a year and
Speaker 7: a half. So if they don't, if they don't actually
Speaker 7: cut until inflation is back to target, the full impact
Speaker 7: of that cut won't be felt for some time later,
Speaker 7: and the economy could already have suffered some significant damage
Speaker 7: by them at a time when the economy has hardly grown.
Speaker 7: In fact, the UR economy is not expanded at all
Speaker 7: for nearly a year and a half, and if we
Speaker 7: compare that flatlining that we saw last year in the
Speaker 7: UR area, that's very different from the US where it
Speaker 7: expanded by three percent. So they can't wait forever to cut,
Speaker 7: but probably the difference between April and June is not huge,
Speaker 7: and it looks like it's coming in June.
Speaker 1: The process of deflation has been reasonably steady in the
Speaker 1: Euro Area. Are there worrying aspects within that? Are there
Speaker 1: risk zones within the members of the Euro Area that
Speaker 1: could actually bump inflation up in the wrong direction before
Speaker 1: we get to right cuts?
Speaker 7: Yeah, well, inflation has come down, as you said, considerably
Speaker 7: from where it was at its peak. In fact, it's
Speaker 7: not very far from the target now, and we expect
Speaker 7: headline inflation to actually drop below target this summer. But
Speaker 7: there are still some bits of worry when you look
Speaker 7: at the details of the report. In fact, we just
Speaker 7: had the inflation report for March and both the headline
Speaker 7: and core continue to come down. But services inflation, which
Speaker 7: the ECB is watching very closely, has been sticky at
Speaker 7: four percent for months now. That will probably come down
Speaker 7: in the months ahead as wage growth decelerates, but that's
Speaker 7: keeping the ECB worried and as part of the reason
Speaker 7: they're moving cautiously delaying the first cut to June. They'll
Speaker 7: probably pause after that and not cut again until September,
Speaker 7: and they would like to see that come down before
Speaker 7: they move more aggressively.
Speaker 1: And of course the flip side of they say is
Speaker 1: and those who do want to see right cuts come
Speaker 1: faster is the weakness in the euro Area economy. Late
Speaker 1: interesting to see the latest round of pm I numbers
Speaker 1: showing a little bit of strength returning the Eurozone composite
Speaker 1: pi I number the final reading for March, seeing it
Speaker 1: nudge back into expansion territory. How weak is the euros
Speaker 1: and economy at this point, Well, the your area is
Speaker 1: pretty weak.
Speaker 7: Like I said, it hasn't expanded for nearly a year
Speaker 7: and a half. That stands in very stark contrast the
Speaker 7: United States, which, as I already said, spend the three
Speaker 7: percent last year. It just gives you a sense of
Speaker 7: how weak it is in Europe. However, the economy will
Speaker 7: probably gain some momentum this year is inflation comes down.
Speaker 7: Real incomes are being boosted and that allows real consumption
Speaker 7: to rise, so people have a bit more money to
Speaker 7: spend with inflation coming in. We're seeing that in the numbers.
Speaker 7: The services sector is once again recovering in Europe, but
Speaker 7: that'll probably continue throughout the course of the year and
Speaker 7: the economy will gain some momentum, but nothing like we're
Speaker 7: seeing across the Atlantic.
Speaker 1: What about the question of wage data. This is something
Speaker 1: that Christine Lagart has signaled and repeated occasions as being
Speaker 1: absolutely key for the European Center Bank decision making. Do
Speaker 1: we have any early indications of what the wage picture is?
Speaker 7: Well, wage growth has probably peaked the most comprehensive set
Speaker 7: of data WEEGN, and that comes with the national accounts.
Speaker 7: I mean know a couple of quarters ago that peaked
Speaker 7: wage growth and is coming down. Specifically, it's the compensation
Speaker 7: per employee they look at, and we'll get another round
Speaker 7: of that in the early part of June and that
Speaker 7: will cover the first quarter, and that's what the ECB
Speaker 7: is waiting for to cut to confirm that wage growth
Speaker 7: continues to come down, although before that we'll get some
Speaker 7: data un negotiated wages towards the end of May. Christine
Speaker 7: Legarda already has highlighted that in his speech in Frankfurt
Speaker 7: a couple of weeks ago, that they'll be looking very
Speaker 7: closely at that for some initial signs of wage growth
Speaker 7: continuing to decelerate.
Speaker 1: So let's talk us through your expectations then for the
Speaker 1: rest of the year. So no cut at the upcoming meeting.
Speaker 1: We're looking towards the start of summer for things like
Speaker 1: that to start moving. What does the rest of the
Speaker 1: year look like for the EACYB from this point of view?
Speaker 7: Well, as I mentioned, the ECB is really focused on
Speaker 7: this wage data and that comes in the national accounts,
Speaker 7: so it only comes once a quarter. So we get
Speaker 7: kind of batch of that for the first quarter in
Speaker 7: the beginning of June, and then we have to wait
Speaker 7: another three months of beinning of September until we get
Speaker 7: data on that again. That'll be for the second quarter.
Speaker 7: Conveniently for the ECB, that also aligns with their forecast months,
Speaker 7: so they'll have fresh inflation forecasts and they own staff
Speaker 7: economists in June as well as September. And if both
Speaker 7: of those are going in the right direction, meaning of
Speaker 7: that the staff forecast are inflation continuing to decelerate as
Speaker 7: they have been forecasting for a while, that will allow
Speaker 7: them to cut in June, probably pause in July as
Speaker 7: they wait for that quarterly data again in September, and
Speaker 7: then cut again in September. By then, headline inflation is
Speaker 7: likely to be below target. In core inflation is not
Speaker 7: going to be far behind it's going to be a
Speaker 7: lot more difficult to justify restrictive policy stands when inflation
Speaker 7: is actually below target. So from September we think that
Speaker 7: they will cut it at each of the remaining meetings
Speaker 7: of the year, and that equates to about one hundred
Speaker 7: basis points and easing throughout the course of this year.
Speaker 7: How much of a.
Speaker 1: Dilemma is it for the ECB to go before the FED.
Speaker 1: I know the ECB of course will tell you that
Speaker 1: they make their own decisions and they're not that conscious
Speaker 1: of it, but surely one is reliant on the other.
Speaker 7: If we look back at this tightening cycle it's taken place,
Speaker 7: the FED has kind of taken the lead on it,
Speaker 7: the ECB followed, and the ECB probably wouldn't mind if
Speaker 7: the FED took the lead again on cutting. And they
Speaker 7: may not have that luxury though, of just kind of
Speaker 7: following the FED, because, like I said, the UR economy
Speaker 7: is much weaker than the US economy. So if things
Speaker 7: remain strong, and most of the data coming out of
Speaker 7: the US suggest they will, the FED may be able
Speaker 7: to put off monetary easing, and that's not a luxury
Speaker 7: that the ECB has at this stage. So it may
Speaker 7: not have choice. It may have to go on its
Speaker 7: own and then allow the FED to go later.
Speaker 1: How much of a risk would a weaker euro though
Speaker 1: be to the inflation outlook if they we do If
Speaker 1: as expected, the ECB does go before the Fed.
Speaker 7: Obviously the ECB is so he is looking at the
Speaker 7: exchange rate, what it does to inflation, in growth and
Speaker 7: other things. However, it's not really on the ECB's radar
Speaker 7: at this stage. They're not talking about exchange rate volatility
Speaker 7: or a weekier or strong or anything like that. So
Speaker 7: I suspect that that's not too important for them at
Speaker 7: this stage when they contemplate the path of interest rates.
Speaker 1: That was David Powell from Bloomberg Economics. I'm Stephen Carroll
Speaker 1: in London. You can catch us every weekday morning here
Speaker 1: for Bloomberg Daybreak. You're at beginning at six am in
Speaker 1: London and one am on Wall Street. Tom, Thank you, Steven.
Speaker 1: And coming up on Bloomberg Daybreak weekend. Has China's economy
Speaker 1: bottomed out? We look ahead to China inflation data. I'm
Speaker 1: Tom Busby and this is Bloomberg.
Speaker 2: This is Bloomberg day Break weekend, our global look ahead
Speaker 2: at the top stories for investors in the coming week.
Speaker 2: I'm Tom Busby in New York. The early indicators on
Speaker 2: China's economy show there may have been a small improvement
Speaker 2: during the first quarter. Even so, the majority of Chinese
Speaker 2: financial institutions surveyed by Bloomberg Economics doubt the economy has
Speaker 2: bottomed out, and a big question is whether it's stuck
Speaker 2: in deflation. We'll get some insight in the week ahead.
Speaker 2: Let's get to Doug Christner, co host of Daybreak Asia
Speaker 2: for a closer look.
Speaker 3: Tom, I think we can say the big issue is confidence.
Speaker 7: Now.
Speaker 3: The latest PMI data show improvement, but so much about
Speaker 3: the overall Chinese economy does remain fragile, especially where consumer
Speaker 3: demand is concerned. We know that retail demand is weak.
Speaker 3: Pricing power seems absent.
Speaker 7: Now.
Speaker 3: The readings on producer and consumer prices are due midweek.
Speaker 3: We're going to preview the day and now and talk
Speaker 3: about the current challenges for the Chinese economy with Bloomberg
Speaker 3: reporters Jill Desis and Alan Wong. Jill is one of
Speaker 3: our news desk editors, and Alan is an editor on
Speaker 3: the China ECOGV team. Thanks to both of you, for
Speaker 3: joining us, Jill, I want to begin with you when
Speaker 3: I start with the story about prices, particularly at the
Speaker 3: wholesale level, producer prices. I guess in China it's known
Speaker 3: as factory gate prices. We saw numbers in February at
Speaker 3: a decline that was pretty rapid, and that extended a
Speaker 3: slide in kind of a deflationary trend to seventeen months.
Speaker 3: What's the conversation like around what we might expect in
Speaker 3: the week ahead.
Speaker 9: Yeah, Doug, I think that at this point, really those
Speaker 9: factory gate prices continue to remain under pressure. We're still expecting,
Speaker 9: or at least a economists are still expecting a continued
Speaker 9: slide once we get those numbers for March survey estimate
Speaker 9: is below two percent declines even I mean we're approaching
Speaker 9: three percent declines. Think, so, there doesn't really seem to
Speaker 9: be any kind of a meaningful turnaround in terms of
Speaker 9: getting rid of these these issues around producer price deflation.
Speaker 9: It's interesting because I think that at this point the
Speaker 9: deflationary pressure story in China is just so much more
Speaker 9: centered around consumer deflation, just because you know, from a
Speaker 9: from a demand perspective, there's not a ton of concerns
Speaker 9: around you know, China's ability to you know, making goods
Speaker 9: and exporting them. I think it's much more about what
Speaker 9: the domestics demand story says about China right now.
Speaker 3: So, Alan, assuming that the numbers do show further deflation
Speaker 3: both at the wholesale and retail level, does that create
Speaker 3: any kind of urgency for the government to step up support.
Speaker 10: Yeah, the urgency has always been there, and numbers, even
Speaker 10: if they're not positive, will just only add to the
Speaker 10: common consensus that there is a need for China to
Speaker 10: ramp up its fiscal measures to stimulate demand.
Speaker 3: Jill, you were going to weigh in, Yeah.
Speaker 9: I think what's really interesting about the stimulus support story
Speaker 9: when it comes to domestic demand is, look, we were
Speaker 9: back at the NPC at the beginning of March really
Speaker 9: sort of waiting on what kinds of stimulus support measures
Speaker 9: would actually be announced, and I think, you know, economists
Speaker 9: were generally disappointed. But I did think one thing that
Speaker 9: was kind of interesting is that, at least when it
Speaker 9: comes to trying to stimulate consumer demand, there's a lot
Speaker 9: of talk about trading and old products for new ones
Speaker 9: and stuff like that. I think what economists, you're really
Speaker 9: waiting on is whether there's going to be a big
Speaker 9: dollar amount put behind that in the future.
Speaker 3: So Alan, if we're really talking about depressed sentiment, I mean,
Speaker 3: the property market seems to be the root cause. I
Speaker 3: think we can agree on that much. I mean, or
Speaker 3: maybe it's just such a big part of the story.
Speaker 3: What is your sense based on Bloomberg reporting? Where are
Speaker 3: things right now visa VI the housing market?
Speaker 10: Yeah, we're seeing a two track recovery in the Chinese economy.
Speaker 10: On the industrial side, things has been we were seeing
Speaker 10: green shoots on that front, but then in terms of
Speaker 10: the property slum it's still very much in a sorry state.
Speaker 10: We seeing that housing start a week, but housing completion
Speaker 10: is stabilizing, so that means that new homes on being
Speaker 10: built and that has some down with pressure on commodity
Speaker 10: prices for example, and that also reflects on the weak
Speaker 10: sentiment in China in general.
Speaker 9: The other thing too, I think it's a really interesting
Speaker 9: stimular story when it comes to the housing market as well,
Speaker 9: because the government has taken several steps to try to
Speaker 9: prop up support there. I think most recently, Chinese lenders
Speaker 9: slashed a key rate for mortgages in February and attempt
Speaker 9: to stimulate demand into March didn't really seem to move
Speaker 9: the needle there much. So that's just, you know, to
Speaker 9: kind of put this in perspective. Another thing that analysts
Speaker 9: are looking out for is whether these continued rate cuts
Speaker 9: are actually going to help prop up the property market
Speaker 9: as well, because they really haven't done much so far.
Speaker 3: And as both of you know, US Treasury Secretary Yellen
Speaker 3: is in China. One of the things that she is
Speaker 3: addressing is this issue of industrial overcapacity and how it's
Speaker 3: having a negative impact not just on the Chinese economy,
Speaker 3: but many economies around the world. I spoke earlier about
Speaker 3: that with George Barboris, managing director at K two Asset Management.
Speaker 3: Here's what he had to say.
Speaker 11: Some people would say there's some cognitive dissonance with some
Speaker 11: of the policy coming out of Beijing, but in reality,
Speaker 11: they're taking a step back from the grand to play
Speaker 11: the long term. They will unload cheaper products to the
Speaker 11: rest of the world that will allow it, and North
Speaker 11: America will maintain them. They've obviously died up those tariffs
Speaker 11: and the current administration from the previous one, they can
Speaker 11: allow these cheap goods to come through which they won't,
Speaker 11: and that would be very CPI will fall very quickly.
Speaker 11: But China's just got a different playbook at the moment
Speaker 11: to where we're were three years ago, and the middle
Speaker 11: class of China going to pay that price.
Speaker 3: That is George Bevoris, they're from K two asset Management. Now,
Speaker 3: Alan if we can agree that there is an overcapacity
Speaker 3: problem in China, It's kind of curious, isn't it that
Speaker 3: Beijing is still intent on using industrial policy as a
Speaker 3: way of driving growth. What do you think?
Speaker 10: Yeah, there is a need for it to find ways
Speaker 10: to grow its economy because of the persistent property slum.
Speaker 10: China is pouring money into manufacturing and has designated three
Speaker 10: new industries as its new Big Three industries, namely evs,
Speaker 10: electric vehicles, solar cells, and batteries. So it's trying to
Speaker 10: ramp up production on these things and then obviously that
Speaker 10: creates more competition in China and drive down prices. But
Speaker 10: the US is right in thinking that what if China
Speaker 10: exports lots of cheap cars to the US, what's going
Speaker 10: to happen to domestic makers of cars? And this is
Speaker 10: going to be high on the agenda of Yellen's trip
Speaker 10: to China.
Speaker 3: We know that the government will released the Work Report
Speaker 3: back in March and with it this plan to unleash
Speaker 3: new productive forces. High tech is a big part of
Speaker 3: that story. Innovation another way of driving growth. Jill, do
Speaker 3: you have a sense of what this may look like
Speaker 3: if we take EV's, if we take solar panels out
Speaker 3: of the equation, what does high tech and innovation look like?
Speaker 9: I don't really know that you can totally take EV's
Speaker 9: and solar panels of the equation there, Doug, because I
Speaker 9: think that is pretty central to this idea of what
Speaker 9: China is trying to accomplish here, right. I mean, we
Speaker 9: know that no matter what happens with the property sector,
Speaker 9: even if Beijing is able to put a floor under
Speaker 9: this crisis, we are not going to see real estate
Speaker 9: contribute to GDP in the way that we have in
Speaker 9: the years past. That's just absolutely done. So what China
Speaker 9: really needs to do in terms of this long term
Speaker 9: strategy for new productive forces is find ways to replace
Speaker 9: bits of how the property sector contributed to GDP with
Speaker 9: some of these other sectors. And so that does mean
Speaker 9: investing a lot more into evs and solar panels, which
Speaker 9: is of course obviously leading to some of these overcapacity
Speaker 9: challenges that you're seeing out of the US when it
Speaker 9: comes to China, the fact that they're subsidizing so much.
Speaker 9: But I think that at this point, I mean, it's
Speaker 9: still a fairly vague slogan, right, I mean, how else
Speaker 9: do you really prescribe, you know, describe new productive forces?
Speaker 10: Yeah, And I think one thing i' added is that
Speaker 10: the idea for this new new productive forces is China
Speaker 10: wants to climb up the value chain in areas like Ai.
Speaker 10: China also want to make I mean, wanted to play
Speaker 10: a much bigger role in the Chinese economy because it
Speaker 10: will make people more productive and then the workforce will
Speaker 10: be a lot more skilled and this will make China
Speaker 10: a lot more competitive in the longer term.
Speaker 3: Well, you mentioned workforce there, Alan Jill. I mean, where
Speaker 3: are we right now when you look at the labor market,
Speaker 3: particularly youth unemployment. Do we have a sense of where
Speaker 3: the unemployment rate is these days?
Speaker 9: Oh? Gosh, Doug, Well, I think that with the youth
Speaker 9: unemployment rate, there's just been so much chatter about that
Speaker 9: one over the last year, right, I mean, we saw
Speaker 9: that one just removed from the official database for several
Speaker 9: months in twenty twenty three, as policymakers said that they
Speaker 9: were retooling it. Ultimately, now they're still putting it out,
Speaker 9: although they've stopped highlighting it in their big regular press conferences.
Speaker 9: It does seem like it's ticked down a bit to
Speaker 9: around fifteen percent or so rather than the north of
Speaker 9: twenty percent that we were seeing in twenty twenty three,
Speaker 9: though obviously still a major issue. I mean, look, young
Speaker 9: people in China, these recent graduates have really been hit
Speaker 9: tremendously over the past several years, not just because of
Speaker 9: the economic slowdown and all the pandemic controls and all
Speaker 9: of that, but also this whole realignment within China around
Speaker 9: how the tech sector has handled this crackdown, this austerity campaign.
Speaker 9: All of that has led to jobs drying up, and
Speaker 9: I think, you know, some levels of dissatisfaction still, particularly
Speaker 9: among China's use well.
Speaker 3: And if we can agree that consumers really have been
Speaker 3: keeping a pretty tight leash on spending, is there a
Speaker 3: way that the government might address this through means other
Speaker 3: than just lowering interest rates. Are their ideas floating around,
Speaker 3: maybe to issue some type of coupons directly that could
Speaker 3: be used to purchase goods. Are people beginning to get
Speaker 3: a little creative.
Speaker 10: I think they are on the China's top economic planet
Speaker 10: and the RC actually recently met to just talk about
Speaker 10: how they could implement this program. And some of those
Speaker 10: people and the companies they met are a consumer goods
Speaker 10: company and importantly recycling companies, because they're going to encourage
Speaker 10: consumers to replace old goods, durable goods and cars and
Speaker 10: factories to replace the equipment. So that's going to create
Speaker 10: a lot more demand if implemented the way it wants
Speaker 10: to for new equipment and appliances and what's that way
Speaker 10: it's going to go. China's going to have to deal
Speaker 10: with that in some way. Yeah.
Speaker 9: I think Alan did a really good job of summing
Speaker 9: up the plans that are actually in consideration here. But
Speaker 9: I think the really important thing to underscore is that
Speaker 9: in terms of direct cash handouts, China's just absolutely not
Speaker 9: going there. I think that it would take a tremendous
Speaker 9: amount for China to actually consider something like that. They've
Speaker 9: been incredibly critical of what Western governments in particular were
Speaker 9: doing in terms of cash hand ats to households during
Speaker 9: the pandemic and it seems like that's still a bridge
Speaker 9: too far for China's government, right, But it was very interesting.
Speaker 3: There was a report just in the last week I
Speaker 3: published where President she was considering a US style quantitative
Speaker 3: easing as a way of providing a little bit more
Speaker 3: liquidity into the market and may be a little bit
Speaker 3: more risk taking. Can you imagine a world alan where
Speaker 3: quantitative easing shows up in part of the pboc's playbook.
Speaker 10: I think so far talks of Chinese style q E
Speaker 10: is still premature. The line that Cgpen said was taken
Speaker 10: out of a new book published featuring his quotes from
Speaker 10: months ago, and there's still no sign, no follow up
Speaker 10: on whether the Chinese Central Bank will do something similar.
Speaker 10: And you know, just generally speaking, China is trying to
Speaker 10: prove that there is a way to grow its economy
Speaker 10: without resorting to Western style stimulus measures that created problems
Speaker 10: that we saw in the global financial crisis. So I
Speaker 10: think it's still too early to say whether that's going
Speaker 10: to happen.
Speaker 3: Joe Lisis Alan Wong, thank you so much for joining
Speaker 3: us here to help us understand what's going on in
Speaker 3: the Chinese economy and what we may see in the
Speaker 3: week ahead with that inflation data. I'm Doug Krisner. You
Speaker 3: can join Brian Curtis and myself weekdays here from Bloomberg
Speaker 3: Daybreak Asia beginning at eight am in Hong Kong eight
Speaker 3: pm on Wall Street.
Speaker 2: Tom, Thank you, Doug, and that does it for this
Speaker 2: edition of Bloomberg day Break Weekend. Join us again Monday
Speaker 2: morning at five am Wall Street time for the latest
Speaker 2: on markets overseas and the news you need to start
Speaker 2: your day. I'm Tom Busby. Stay with us. Top stories
Speaker 2: and global business headlines are coming up right now.