Speaker 1: Bloomberg Audio Studios, Podcasts, radio News.
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: and look ahead to this week's Fedroll Preserve policy meeting.
Speaker 2: I'm Tom Busby in New York.
Speaker 3: I'm callin Hetck in Lolton, where we're asking what is
Speaker 3: the place of Europe's financial services sector in an increasingly
Speaker 3: fragmented world.
Speaker 4: I'm dek Risner looking at what we may hear from
Speaker 4: China's ten Cent when the company reports earnings in the
Speaker 4: week ahead.
Speaker 1: 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 the Federal Reserve wrapping up a two
Speaker 2: day meeting on Wednesday with its latest decision on interest
Speaker 2: rates and for more on what this means and a
Speaker 2: new dot plot. We're joined by Michael McKee, Bloomberg International
Speaker 2: Economics and Policy correspondent. Well, Michael, A lot goes into
Speaker 2: the Fed's decision, inflation, jobs, egg prices, economic growth, A
Speaker 2: lot of moving parts right now, especially coming out of
Speaker 2: the White House. Is there just too much uncertainty for
Speaker 2: the Fed to make any moved this week?
Speaker 5: Exactly, They've all pretty much said Jay Powell said. John
Speaker 5: Williams told me in an interview on Bloomberg, we just
Speaker 5: can't move at this point, but we don't feel there's
Speaker 5: a need to because the economy is still growing well
Speaker 5: and inflation is under control, and so there's no point
Speaker 5: to moving if we don't have to.
Speaker 2: Now, let's talk about inflation, because we have seen still rising,
Speaker 2: but it's certainly moderating.
Speaker 6: Right.
Speaker 5: Well, we got mixed signals from CPI and from the
Speaker 5: PPI this week. CPI was a little stronger than people anticipated,
Speaker 5: and PPI was weaker than people anticipated, especially considering that
Speaker 5: both of them feed elements into the PCE, the Personal
Speaker 5: Consumption Expenditures Index, which is the fed's inflation target data point.
Speaker 5: And so it looks at this point unfortunately the CPI
Speaker 5: is going to overwhelm the PPI and it's going to
Speaker 5: maybe push the PCE higher, which would keep the FED
Speaker 5: on hold anyway, So we don't get that till the
Speaker 5: end of the month. But the Fed will be able
Speaker 5: to do the same math that all the Wall Street
Speaker 5: economists are doing, and they'll have a justification now besides uncertainty.
Speaker 2: Well, the last PCE we saw it did show the
Speaker 2: lowest level in seven months, right, so there was some
Speaker 2: progress made.
Speaker 5: There's been progress made, but it's been very, very slow.
Speaker 5: And now if we get a little bump up and
Speaker 5: it doesn't signal that inflation is going to break out again,
Speaker 5: but it does show that the Fed has more work
Speaker 5: to do.
Speaker 2: Let's talk about one thing I know is a favorite
Speaker 2: subject of yours, because egg prices.
Speaker 5: Well it's not me, it was. It was the President
Speaker 5: who made a big deal out of it during the campaign.
Speaker 5: He's that I was elected to bring down egg prices,
Speaker 5: and I'm sorry, but so far he's failed. In the CPI,
Speaker 5: egg prices were up in February by ten point four percent,
Speaker 5: and in the PPI you're ready for this, they were
Speaker 5: up fifty four percent for producers from the producers. I mean,
Speaker 5: that's what the chickens are charging at this point. So
Speaker 5: the egg crisis is not behind this yet.
Speaker 2: It's not going anywhere just yet until we figure this out,
Speaker 2: all right, So that's inflation. Let's talk about jobs, because
Speaker 2: we've seen of you know, not a spectacular number in
Speaker 2: February solid, but of course that doesn't include tens of thousands,
Speaker 2: tens of thousands of federal.
Speaker 5: Workers, right, and we don't yet have a good handle
Speaker 5: on how many. There are some estimates that maybe they've
Speaker 5: let go about twenty thousand people between the layoffs and
Speaker 5: the buyouts, but there's no good compilation of that. The
Speaker 5: job is claims figures we got last week showed fifteen
Speaker 5: hundred people filing because the federal workers are counted in
Speaker 5: a separate category, and eight thousand on continuing claims. So
Speaker 5: that's nowhere near the numbers. We expect those to go
Speaker 5: up a lot. But then on Friday was the deadline
Speaker 5: for all of the federal agencies under Trump to submit
Speaker 5: plans to cut like half their workforce. So we could
Speaker 5: see tens of thousands of people losing their jobs, but
Speaker 5: we just don't know. So the FED has to kind
Speaker 5: of stand by and see and then see what impact
Speaker 5: that has on the overall economy.
Speaker 2: Well, let's talk then about interest rates and how it
Speaker 2: affects housing, because I mean, rates have steadily declined, not
Speaker 2: by a whole lot, though still about six point seven
Speaker 2: percent on average for anyone buying a home. I mean,
Speaker 2: is there any any green shoots in sight? And we're
Speaker 2: coming into the all important spring housing season right now.
Speaker 5: There may be a stray dandelion here and there, but
Speaker 5: we've seen mortgage applications rise a little bit with the
Speaker 5: drop in rates, but on a percentage basis, it's from
Speaker 5: very low to still quite low. It isn't in terms
Speaker 5: of numbers, a lot of applications, and there's just not
Speaker 5: a lot on the market these days. And there's also
Speaker 5: a shortage of houses on the new home side, so
Speaker 5: prices are still staying high even though we see interest
Speaker 5: rates mortgage rates come down just a little bit. And
Speaker 5: it's a conundrum because we never had this situation before
Speaker 5: where interest rates had gotten so low that people are
Speaker 5: now locked into their houses because they don't want to
Speaker 5: buy up a mortgage that's four percentage points higher. And
Speaker 5: nobody's quite sure how to make this work yet, and
Speaker 5: the hope is that the FED can continue to bring
Speaker 5: down rates and eventually we'll get to a point where
Speaker 5: people want to move badly enough that they'll accept a
Speaker 5: higher interest rate, a higher mortgage rate, and that builders
Speaker 5: will be able to produce more homes. But a lot
Speaker 5: of what's happening with them is on the local level
Speaker 5: and zoning and things like that, So people in the
Speaker 5: housing industry are not very excited about this spring selling season.
Speaker 2: Oh boy, Yeah, Well, the Federal Open Market Committee meeting
Speaker 2: kicks off Tuesday, a decision expected two pm Wall Street
Speaker 2: time on Wednesday. Our thanks to Michael McKee, Bloomberg Into
Speaker 2: National Economics and Policy correspondent. We move next to corporate
Speaker 2: earnings from the logistics and shipping giant FedEx reporting third
Speaker 2: quarter results after the closing bill this Thursday, and for
Speaker 2: more on how a lot of economic uncertainty may have
Speaker 2: impact those results now President Trump's tariffs may impact the
Speaker 2: company in the future. We're joined by Lee Glasgow. He's
Speaker 2: Bloomberg Intelligence Senior Transport, Logistics and Shipping analysts. Well, Lee,
Speaker 2: thank you for joining us. What do you expect to
Speaker 2: see in this earnings report?
Speaker 6: Yeah? Hey, Tom, Well, earnings are going to be up.
Speaker 6: It's really going to be driven by some margin improvement,
Speaker 6: especially in their express business. You know, that's really just
Speaker 6: being fueled by a bunch of restructuring programs and productivity
Speaker 6: programs that they have in place, something they call Drive
Speaker 6: and Network two point zero. You know, what we're going
Speaker 6: to see though, is probably not the full benefit of
Speaker 6: these programs because volume is going to be relatively tepid.
Speaker 6: Could be you know, up one percent, down one percent
Speaker 6: in the quarter, really really don't know. But you know,
Speaker 6: when volumes start increasing with a better backdrop, you really
Speaker 6: show the best it fits from these cost cutting and
Speaker 6: productivity inducing initiatives that they've undergne. You know, FedEx is
Speaker 6: kind of going through somewhat of a transition. You know,
Speaker 6: they've walked away from less or lower margin business like
Speaker 6: from the US postal service. That will create somewhat of
Speaker 6: a tougher headwind starting in April for you know, when
Speaker 6: when comparing year every year volumes.
Speaker 2: Now, that's a reflection of consumers and businesses pulling back.
Speaker 6: If you look at or listen to a bunch of
Speaker 6: the large retailers their earnings call, they've been I guess
Speaker 6: a little more cautious in terms of the appetite for consumers, uh,
Speaker 6: you know, the e commerce while it's still growing. You know,
Speaker 6: if people have less money to spend and they're spending
Speaker 6: more money at the grocery store, you know, they're gonna
Speaker 6: they're gonna be buying less stuff, and therefore FedEx and
Speaker 6: ups are going to be shipping uh less freight to
Speaker 6: people's doors. And also, you know that trend of you know,
Speaker 6: e commerce and what we call B two C traffic
Speaker 6: is a lot less profitable than you know, an envelope
Speaker 6: going from one law firm to another, because that B
Speaker 6: to B traffic tends to have a lot more shipments
Speaker 6: associated with each of them. So, you know, if FedEx
Speaker 6: a driver would go to a law firm and deliver
Speaker 6: twenty packages and then probably pick up another twenty packages.
Speaker 6: Where when they come to our house to deliver you know,
Speaker 6: a shirt that you ordered, they're probably only delivering one
Speaker 6: or you know, if they're lucky, to packages at the
Speaker 6: same time. And those costs per packages are pretty high.
Speaker 6: And that's really why the company has been so actively
Speaker 6: looking to improve its overall productivity to kind of deal
Speaker 6: with the reality of this new normal for them.
Speaker 2: Well, let me ask you, if those costly home deliveries,
Speaker 2: and certainly people are buying more on the internet, who
Speaker 2: is making up that slack? Is it Amazon or are
Speaker 2: there other players in the field.
Speaker 6: Yeah, well, obviously Ison, you know, is doing a lot.
Speaker 6: If you know, there were some stats that there's that
Speaker 6: said that they're the leader deliverer, but you know, they
Speaker 6: are also delivering mostly their own stuff where FedEx and
Speaker 6: GPS are going after the businesses outside of Amazon, and
Speaker 6: that is still a large market that they can go after.
Speaker 6: So you know, they are delivering it, and so is
Speaker 6: the US Postal Service for that matter, So you know,
Speaker 6: you there is competition within the market. You know what
Speaker 6: I would also say, you know, not to pivot to
Speaker 6: too hard on this, but you know they're their freight business,
Speaker 6: which is their lesson truckload business. FedEx Freight is the
Speaker 6: largest lesson truckload carrier in North America. That business is
Speaker 6: under pressure too. The good news is that you know,
Speaker 6: uh tonnage might be down by mid single digits, rates
Speaker 6: will probably continue to increase by mid single digits. That's
Speaker 6: a very consolidated market that has a pretty long history
Speaker 6: of good price discipline, so it won't be too corrosive
Speaker 6: to margins. Maybe you know, too corrosive to margins this time.
Speaker 6: And what I would also say on the pricing front
Speaker 6: is that FedEx their express business, which is their parcel business.
Speaker 6: You know, they've been doing a lot of things to
Speaker 6: improve the pricing on that business as well.
Speaker 2: Well, let me ask you back to that freight business.
Speaker 2: Last time we spoke, they were talking about spinning that
Speaker 2: off into a separately traded company. What's the status on
Speaker 2: that and then how is that or will it help
Speaker 2: the signature parcel business.
Speaker 6: Yeah, a couple of months ago they said it is
Speaker 6: going to be an eighteen month process, so it probably
Speaker 6: won't happen until twenty twenty six. Not quite sure why
Speaker 6: it's going to take that long, but you know, that's
Speaker 6: the outlook that they provided. The management has said that
Speaker 6: they're looking to hire a number of salespeople for that division,
Speaker 6: so it looks like they're kind of getting prepared for
Speaker 6: when that becomes a standalone company. So you know, and
Speaker 6: the reason why they're doing that is probably twofold less
Speaker 6: than truckload carriers tend to have a higher multiple, so
Speaker 6: they're trying to unlock some value there with that asset,
Speaker 6: and then secondly, you know, it'll allow management to really
Speaker 6: focus on their parcel business, which is you know, can
Speaker 6: be a very good business. But like I mentioned earlier,
Speaker 6: it's an industry under transition, and you know, these companies,
Speaker 6: whether it's FedEx or ups are kind of doing a
Speaker 6: lot of things right now, whether it's investing in technologies,
Speaker 6: changing the way they deliver things, or even changing their
Speaker 6: air network will probably you know, help them down the road.
Speaker 2: FedEx Q three earnings out this Thursday are thanks to
Speaker 2: Lead Glasgow Bloomberg Intelligence Senior Transport, Logistics and Shipping analyst,
Speaker 2: And coming up on Bloomberg day Break weekend, we'll look
Speaker 2: at where Europe's financial services sector stands in an increasingly
Speaker 2: fragmented world. I'm Tom Busby and this is Bloomberg. This
Speaker 2: is Bloomberg day Break weekend, our global look ahead at
Speaker 2: the top stories for investors in the coming week. I'm
Speaker 2: Tom Busby in New York. Up later in our program
Speaker 2: a look ahead to a rate decision from the Bank
Speaker 2: of Japan and earnings from a top Chinese tech giant.
Speaker 2: But first, as the European Union prepares to square up
Speaker 2: to President Trump's tariffs, the future of the region's financial
Speaker 2: sector remains uncertain. This week in London, Morgan Stanley hosts
Speaker 2: the European Financials Conference, where international trade and geopolitics are
Speaker 2: likely to feature high on the agenda. Now for more,
Speaker 2: let's go to London and bring in Bloomberg Daybreak Europe
Speaker 2: anchor Caroline hepgar.
Speaker 3: Tom Trump tariff's economic growth and defense spending. There are
Speaker 3: some major issues that bankers must reckon with on tariff's
Speaker 3: European Commissioned President Ersina Vondelaine says the EU is not
Speaker 3: the problem. That message came as she delivered a firm
Speaker 3: response to the Trump Administration's tariffs. EU duties on up
Speaker 3: to twenty six billion eurosworth American goods after the US
Speaker 3: administration imposed twenty five percent tariffs on steel and aluminium imports.
Speaker 3: The EU is also targeting goods from Republican led states,
Speaker 3: according to a senior EU official, but it is also
Speaker 3: leading to downgrades in economic growth for major European economies
Speaker 3: such as France, and there may be further escalations with
Speaker 3: EU metals tariffs that had been put in place during
Speaker 3: Trump's first term and later suspended due to be reintroduced
Speaker 3: in full on the second of April, along with some
Speaker 3: levees that have never previously been in force. So all
Speaker 3: of this situation leaves Europe's economy in flux. Then there
Speaker 3: is the need for greater defense spending amidst renewed efforts
Speaker 3: to secure peace between Russia and Ukraine, and questions about
Speaker 3: how that surge in military spending will be funded on
Speaker 3: the continent. There are also more regular topics on the
Speaker 3: minds of the leaders in European five finance who are
Speaker 3: due to gather here in London for the upcoming Morgan
Speaker 3: Stanley European Financials Conference. Think inflation, interest rates, and deregulation,
Speaker 3: for example, how much will sweeping US rollbacks affect bankers here.
Speaker 3: In the past, this Morgan Stanley event has attracted CEOs,
Speaker 3: including UBS's Sergio Amoti. Remember he used the gathering last
Speaker 3: year to share part of the rationale behind his firm's
Speaker 3: acquisition of rival credit Sweese. So how are the giants
Speaker 3: of the financial sector thinking about the future. It's a
Speaker 3: conversation I've been having with Bloomberg's finance reporter Laura Noonan.
Speaker 7: Yeah, it's pretty much got all the big names. I mean,
Speaker 7: they have a superb lineup every year, and this year
Speaker 7: basically pretty much every important European bank CEO is going
Speaker 7: to be there and is going to be speaking. So
Speaker 7: you've got the likes of like Deutsche Bang CEO, Christian Sewing, Ubsser,
Speaker 7: is Imati Santanderra's Exeter and Beteen Unicredits, Andrea Ortchell, who's
Speaker 7: of course very interesting at the moment be in Pcos.
Speaker 7: Basically everybody is going so we're expecting lots of news
Speaker 7: out of this.
Speaker 3: Yeah, deregulation is surely going to be a big theme
Speaker 3: for the financial industry this year. Do you think it
Speaker 3: will come up doing the discussions?
Speaker 7: Yeah, I think the debate is really gaining pace here
Speaker 7: in Europe now, so I think obviously what's happening in
Speaker 7: the US is causing lots of banks to push quite
Speaker 7: hard on this, and we're definitely seeing early signs at
Speaker 7: the European Commission is listening and Europe at large is listening.
Speaker 7: So we had a story earlier this week or possibly
Speaker 7: late last week about them accelerating a review of the
Speaker 7: competitiveness of European banking, and that's going to now happen
Speaker 7: by the end of next year. They've also said that
Speaker 7: they will remain alert. They're looking at what they can
Speaker 7: do around the latest package of the bank capital rule.
Speaker 7: So I think there's a big push and there is
Speaker 7: some responsiveness. So I think now is probably the moment
Speaker 7: when we're going to see the European banks take the
Speaker 7: early signs indications that the EU is ready to act
Speaker 7: and really try to drive home as much change as
Speaker 7: they can. And certainly what's happening in the US is
Speaker 7: giving them a lot of power. The Europeans are big
Speaker 7: fans at the level playing field, and if the banks
Speaker 7: can argue that banks in the US are getting concessions
Speaker 7: and that they will be disadvantaged on the global stage
Speaker 7: if they don't get the same, then that is going
Speaker 7: to be a persuasive argument. And the one thing I
Speaker 7: will say as well as people often say this is
Speaker 7: only an issue for the big banks who compete internationally,
Speaker 7: but it's not. It's also an issue for the smaller
Speaker 7: banks who are listed, who are competing for investment internationally.
Speaker 7: So they can definitely inmit those arguments and they will.
Speaker 3: Okay, but how has Europe's financial services sector them reacted
Speaker 3: to the tariff news I mean, if there's so much
Speaker 3: of the influence of the US coming to the European
Speaker 3: banking space, what are they thinking about when it comes
Speaker 3: to Trump tariffs.
Speaker 7: I mean, tariffs are bad in that tariffs a bad
Speaker 7: for the overall economy, and banks are if you take aside,
Speaker 7: if you exclude the investment bank portion, which does do
Speaker 7: well on volatility, banks are mostly pure plays on the economy.
Speaker 7: And if you take the view the tariffs at a
Speaker 7: macro level hurt economic growth, then they are going to
Speaker 7: be bad for banks who are dependent on economic growth.
Speaker 7: They are especially bad for banks that do a lot
Speaker 7: across border business in areas that could be affected by tariffs.
Speaker 7: So I think tariffs are a net negative, but they're
Speaker 7: also you know, when you're in banks, you think about
Speaker 7: two things. There's the things that you can control and
Speaker 7: the things there's the things that you can't. And they're
Speaker 7: maybe at the very very senior level. Some of the
Speaker 7: most senior bankers think that if they make big statements
Speaker 7: they can help shape the narrative. But for most bankers
Speaker 7: this is something which is outside of their control and
Speaker 7: they'll just have to try to work around it as
Speaker 7: best they can.
Speaker 3: What about the geopolitics then obviously a big topic for us,
Speaker 3: for people in business in general. But again, do you
Speaker 3: think that's something that is driving trends or driving anythinking
Speaker 3: in the banking and financial services sector.
Speaker 7: So I think banking has become more balganized, and that's
Speaker 7: something we've seen from the two thousand and seven eight
Speaker 7: crisis onwards. Banks are less global than they were, and
Speaker 7: European banks in particular are a lot less global than
Speaker 7: they were, and in a sense that does lead them
Speaker 7: somewhat less exposed to geopolitical trends and they would have
Speaker 7: been two decades ago.
Speaker 6: Now.
Speaker 7: It's not to say it doesn't matter at all, but
Speaker 7: it doesn't matter as much. It will matter more to banks.
Speaker 7: You know, we've already seen some of the banks You've
Speaker 7: had exposures to Eastern Europe and that has been a
Speaker 7: challenging period for them as they've tried to navigate that.
Speaker 7: I think banks, you have, big US businesses will be
Speaker 7: waiting to see how they're positioned on that geopolitical tensions.
Speaker 7: Then that hit the overall macro picture again for banks.
Speaker 7: So much of this does come back to the macro picture,
Speaker 7: and if and if you have geopolitical tensions spiking, say
Speaker 7: oil prices, and if that leads to inflation and that
Speaker 7: takes economy to a certain place, that's the impact that
Speaker 7: they will you know, that will inevitably have an impact
Speaker 7: on lots of these businesses. So yes, they're definitely thinking
Speaker 7: very hard about this. But also the investment banks, the
Speaker 7: trade banks, they will also spy an opportunity here. They
Speaker 7: will say, oh, we can help clients to navigate these
Speaker 7: unprecented times, and they will try to use that to
Speaker 7: win advisory business. So probably a net negative, but with
Speaker 7: some positives built in there too, if that.
Speaker 3: Makes sense, Yes, absolutely. Meanwhile, of course factored into that
Speaker 3: may be lead into that thinking will be the expectation
Speaker 3: of increased defense spending. That's a huge issue for Europe.
Speaker 3: Will helping to meet the funding deficit be on the
Speaker 3: minds of financial services leaders in Europe?
Speaker 7: So I think yeah, absolutely. I mean one of the
Speaker 7: big questions is how much of this will be done
Speaker 7: through public money versus how much have we done through
Speaker 7: the private money? And then to the extent that it
Speaker 7: is not public money, will it be bank lending, will
Speaker 7: it be capital markets? As your listeners will know, the
Speaker 7: Capital Markets Union is very much tied into the strategic
Speaker 7: need to fund raise around these things. At the same time,
Speaker 7: we are seeing a sea change in terms of how
Speaker 7: investors and private equity funds and even banks themselves view
Speaker 7: defense assets. I mean, they have been assets that people
Speaker 7: have not really wanted to get too deep in previously
Speaker 7: because of ESG concerns, concerns that it looks bad. And
Speaker 7: I think we're definitely seeing a change in defense looking
Speaker 7: like something good to put money in versus something bad
Speaker 7: to put money. And I think that's something. And I
Speaker 7: was talking to someone about this yesterday who's in the market,
Speaker 7: and they were saying, you know how they have traditionally
Speaker 7: thought that, you know, they can't be seen to be
Speaker 7: doing this, but now there's quite a lot of money
Speaker 7: to be made here, and I think you will see
Speaker 7: these kind of pragmatic shifts take place. But also because
Speaker 7: there's such a clear public narrative around defense is a
Speaker 7: patriotic thing for Europe. But I think something that we
Speaker 7: are definitely seeing from the US trend is that there's
Speaker 7: more of a Europe first, America first, and having a
Speaker 7: common thing which we are different too. I mean, I'm
Speaker 7: not going to say enemy, but having Europe kind of
Speaker 7: galvanized as one. People are quite hopeful that could be
Speaker 7: positive for European banks, for European policy, for capital markets union,
Speaker 7: because it just makes everyone pull in the same direction.
Speaker 7: Often in Europe we suffer because people are all pulling
Speaker 7: in different You know, we have the EU, but it
Speaker 7: is essentially a lot of different member states and they
Speaker 7: all want different things, whereas in this case that you
Speaker 7: all want the same thing, and that can be a
Speaker 7: powerful galvanizing force for the sector.
Speaker 3: I think yes, well, defense being seen as far more
Speaker 3: existential obviously, but also maybe more ethical, more necessary. Look
Speaker 3: these major issues aside, then how do you think about
Speaker 3: the ECB ECB policy in all of this? In recent
Speaker 3: days we had the ECBN it watches an event in
Speaker 3: Frankfurt with Christine Legard talking about, you know, the idea
Speaker 3: of inflation, whether or not you know two percent is possible,
Speaker 3: the pressures that they're are on getting to that two
Speaker 3: percent goal. How does the European financial sector now think
Speaker 3: about ECB policy?
Speaker 7: So interest racist is always really interesting because there's this
Speaker 7: kind of hypothetical theory around banking, which is banks do
Speaker 7: better when interest rates they're high because the gap between
Speaker 7: what you charge for lending and what you pay for
Speaker 7: deposits increases, then the interest margin compression expansion. In theory,
Speaker 7: it plays out a little bit differently. And what we
Speaker 7: will have seen throughout the last cycle is that European
Speaker 7: banks didn't take the kind of loan losses people expected
Speaker 7: as interest rates rose, and there is hope. I think
Speaker 7: that if interest rates are now coming down in quite
Speaker 7: a systematic way, that means that the pain that some
Speaker 7: people thought was deferred will actually be just pushed out completely.
Speaker 7: Because people have managed to adjust to interest rates, they
Speaker 7: haven't begun defaulting on their loans. There's always a time lag,
Speaker 7: but if interest rates are now cruising down the way,
Speaker 7: maybe that lag default won't actually come through, which we'd
Speaker 7: be beneficial for a bank. So structurally, if we move
Speaker 7: to a lower interest rate environment, that is bad, but
Speaker 7: I think in this case there are reasons to see
Speaker 7: positives in it as well, because it does mean that
Speaker 7: those fears, because there's always been a fear about loan losses,
Speaker 7: and it goes back to the crisis as well. Even
Speaker 7: when loan losses are low, people are like, but are
Speaker 7: they actually that low? Are the banks hiding something? Are
Speaker 7: we just waiting for misery around the corner. And I
Speaker 7: think some of those concerns about unrealized loan losses, our
Speaker 7: loan losses we haven't actually recognized yet. I think some
Speaker 7: of those are going to start to fade as we
Speaker 7: see interest rates come down.
Speaker 3: My thanks to Bloomberg's Laura Noonan, and we will have
Speaker 3: full coverage of all the action for Morgan Stanley's twenty
Speaker 3: twenty five European Financials Conference here on Bloomberg. I'm Caroline
Speaker 3: Heapkeet in London. You can catch us every weekday morning
Speaker 3: for Bloomberg Daybreak here at beginning at six am in London.
Speaker 3: That's one am on Wall Street.
Speaker 2: Tom, Thank you, Caroline. And coming up on Bloomberg day
Speaker 2: Break weekend to look ahead to a rate decision from
Speaker 2: the Bank of Japan. I'm 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. We'll be following a
Speaker 2: couple of stories out of Asia this wee week, including
Speaker 2: a rate decision from the Bank of Japan and earnings
Speaker 2: from Chinese tech giant ten Cent. For more, let's get
Speaker 2: to the host of the Debreak Asia podcast, Doug Krisner.
Speaker 4: Tom. This report will come after ten Cent unveiled and
Speaker 4: AI model last month. The company claims it outdoes the
Speaker 4: chatbot from deep Seek. Now we know that China's AI
Speaker 4: sector has been seeing rapid development, especially since last year's
Speaker 4: splash from Deep Seek. So ten Cent will join Ali
Speaker 4: Baba and Byte Dance in this race to capture market
Speaker 4: share in artificial intelligence in China. For more, I'm joined
Speaker 4: by Robert Lee. He is a senior tech analyst for
Speaker 4: Bloomberg Intelligence. Robert joining from Hong Kong. Robert, It's always
Speaker 4: a pleasure. Thanks for making time. Can we talk about
Speaker 4: the hype right now that may be happening in certain
Speaker 4: pockets of high technology in China? Are you seeing a
Speaker 4: lot of it? And is ten Cent getting caught up
Speaker 4: in it?
Speaker 6: So?
Speaker 8: I think we need to divide this up into two
Speaker 8: questions really, you know, one is relating to the progress
Speaker 8: that China's making in high tech and AI particular, and
Speaker 8: I think the evidence is clearly there, as exemplified by Deepseek.
Speaker 8: You know, China is well positioned as the number two
Speaker 8: globally behind the US in AI, and if anything, they're
Speaker 8: actually narrowing the gap. It's perhaps a little bit meaningless
Speaker 8: to try and put you know, an actual time at
Speaker 8: a six months behind, a year behind.
Speaker 9: They're very closely behind.
Speaker 8: I think, you know, the evidence, there's more than enough
Speaker 8: evidence there to suggest that.
Speaker 9: And obviously here.
Speaker 8: In China we've had the so called Two Sessions or
Speaker 8: National People's Congress, where a lot of senior leaders stand
Speaker 8: up give their view, you know, where the future economic
Speaker 8: plans are developed, and high tech and AI in particular
Speaker 8: has been.
Speaker 9: The core focus of that.
Speaker 8: So if the weight of continued to state behind these companies,
Speaker 8: you know, China's well placed to continue narrowing the gap.
Speaker 9: So that's the first question. The second is how these
Speaker 9: companies going to monetize? So I think this is.
Speaker 8: A question that applies to all tech companies globally. At
Speaker 8: the moment, the hyperscalers and others are spending you know,
Speaker 8: humonger amounts on capex. I think the last number that
Speaker 8: was quoted for the big US tap platforms was around
Speaker 8: three hundred and fifty.
Speaker 9: Billion US dollars in capex. Monetization is beginning.
Speaker 8: To come through but it's at a very low level
Speaker 8: at the moment. So Tyna into ten Cent. Ten Cent
Speaker 8: has a foundational AI model and a lot of submodels,
Speaker 8: and as you said in your preview, you know, it's
Speaker 8: generating models almost week by week. There's a proliferation of
Speaker 8: models out there at the moment. It's using those to
Speaker 8: generate cost savings and synergies within its business, so that
Speaker 8: will help to support margins, etc. Going forward, But I
Speaker 8: would argue it's you know, it's unlikely at this point
Speaker 8: to have a transformational impact on their business.
Speaker 9: And then as the third question, or.
Speaker 8: Related to what I just said, what about the outside monetization,
Speaker 8: are there enterprise clients or consumer clients going to pay
Speaker 8: for these things? Well, I think is most of us
Speaker 8: understand at the moment the vast majority of AI tools
Speaker 8: available to a consumer at the moment are free to
Speaker 8: act us. So we need to overcome that in order
Speaker 8: to generate an ROI.
Speaker 4: So I'm wondering whether there's an important differentiation that we
Speaker 4: need to pursue. Here in the US, we have these
Speaker 4: advanced AI data centers that are being powered by the
Speaker 4: GPUs manufactured by Nvidia. China is restricted from access to that.
Speaker 4: Is that an important point to kind of tease out
Speaker 4: a little bit here.
Speaker 8: It absolutely is, but I think probably things have moved
Speaker 8: a bit beyond that now. So again, if we had
Speaker 8: this conversation twelve months or so ago, well, which we
Speaker 8: probably did, you know, there there were major worries on
Speaker 8: the China front at that point that these export controls,
Speaker 8: you know, would really forestall the AI developments you know,
Speaker 8: of Chinese companies, and as we've already established, that hasn't
Speaker 8: been the case. So why I think first of all,
Speaker 8: these big platforms preemptively built stock before the sanctions, if
Speaker 8: you like, came into place. Also that you know, there
Speaker 8: are still a large number of countries globally on friendly
Speaker 8: terms with China, so I think, you know, I think
Speaker 8: there's anecdotal evidence at the very least that China's pulled
Speaker 8: in favors from friends. You know, it's very, very hard
Speaker 8: to enforce these controls. And then thirdly, you've got an
Speaker 8: increasing supply of domestic supplied AI accelerators from the likes
Speaker 8: of Huawei. So combination of three factors have enabled Chinese
Speaker 8: companies on the software side to continue their developments relatively unhindered.
Speaker 8: So I think we're probably through the worst of the
Speaker 8: uncertainty on that point.
Speaker 9: You know, sure, Chinese AI.
Speaker 8: Accelerators are still probably two or three generations behind Nvidia.
Speaker 8: But again going back to the Deep Sea announcement, this
Speaker 8: technological challenge, the potential shortage on chips has forced Chinese
Speaker 8: engineers and developers to innovate more and they've moved towards
Speaker 8: lower cost, less computationally intensive models that are more adept
Speaker 8: at running on these lower spect local chips. So again
Speaker 8: that's a with them to continue their developments. But the
Speaker 8: main question I keep coming back to, how are they
Speaker 8: going to monetize.
Speaker 4: The ROI that we're all waiting for. Let's get back
Speaker 4: to ten Cent. Compare the company's cloud performance and the
Speaker 4: revenue that we're expecting on that front with some of
Speaker 4: the things that ten Cent is known for like e
Speaker 4: commerce and video games.
Speaker 8: Well, the numbers have been changing over the last two years,
Speaker 8: but ten Cent, over you know, the last two to
Speaker 8: three years, has been well positioned as China's second largest
Speaker 8: cloud computing company. However, Tencent and Ali Baba have progressively
Speaker 8: lost share over that period. The dynamics or competitive dynamics
Speaker 8: of the China cloud market are very different to the US.
Speaker 8: It's a far more fragmented market. And then obviously you've
Speaker 8: got a lot of state involvement in the market, a
Speaker 8: lot of state owned companies or so called soees. So
Speaker 8: what we've seen over the last two or three years
Speaker 8: is these state aligned companies again Huawei, the national telco companies,
Speaker 8: the big three China Telcom, China Mobile, China unicorm taking
Speaker 8: share progressively from Ali Barbera and ten Cent. Now with
Speaker 8: the new growth in AI, obviously that should help reignite
Speaker 8: growth or Ali Barbara and ten Cent. But the issue
Speaker 8: both of them have and there is incremental upside and
Speaker 8: out side of the business. You know, for Ali Barba
Speaker 8: the bulk of its earnings growth and earnings potential is
Speaker 8: driven by e commerce, not cloud. And for ten Cent
Speaker 8: again the bulk of their earnings is in social media,
Speaker 8: in video games and advertising. So the cloud business is
Speaker 8: a relatively small portion of the business. So AI demand
Speaker 8: and development should help drive incremental revenue on that, but
Speaker 8: I would argue it's not big enough portion of their
Speaker 8: overall group revenue to really move the needle to again
Speaker 8: to any significant degree.
Speaker 4: So when we hear from ten Cent this week, do
Speaker 4: you have a sense of how the company may guide
Speaker 4: us in terms of expectations on CAPEX spending.
Speaker 8: It's never a major feature for their business, and again
Speaker 8: the reason for that is they're a software business and
Speaker 8: they're not particularly capitally intensive, excluding.
Speaker 9: Their cloud business.
Speaker 8: But absolutely, I'm sure the cloud spending, as we saw
Speaker 8: Ali Barba is going to increase, whether it's going to
Speaker 8: increase to such a significant degree.
Speaker 9: And then, just briefly for people who are not familiar.
Speaker 8: With that, at Ali Baba's results three or four weeks ago,
Speaker 8: they disclosed they're going to spend over fifty billion US
Speaker 8: dollars on CAPEX and cloud related spend over the next
Speaker 8: three years.
Speaker 9: So that amount.
Speaker 8: Exceeds what they've spent in the last ten years. So
Speaker 8: that is a significant acceleration and investment there. So I'm
Speaker 8: sure we'll see something similar at ten Cent, but probably
Speaker 8: to a lesser degree. And that ties into who they
Speaker 8: are where they are. They're a very conservative company. They've
Speaker 8: been playing the long game in AI. They're not in
Speaker 8: a rush, you know, they're doing taking a slow and
Speaker 8: steady approach.
Speaker 4: Robert, thank you so much for helping us understand what
Speaker 4: the issues are for ten Cent As we look ahead
Speaker 4: to the company's earnings this week, Robert Lee, a senior
Speaker 4: tech analyst for Bloomberg Intelligence, we move from Hong Kong
Speaker 4: to Tokyo, where in the week ahead we'll get a
Speaker 4: rate decision from the Bank of Japan. Now, recent data
Speaker 4: show the Japanese economy expanded in the final quarter of
Speaker 4: last year at a slower pace than the preliminary report indicated.
Speaker 4: This may give the Bank of Japan reason to hold
Speaker 4: policy steady for more. Let's bring in Paul Jackson. He
Speaker 4: is Asia Economy editor for Bloomberg News. Paul joins us
Speaker 4: from our radio studio in Tokyo. Talk to me a
Speaker 4: little bit about any concern that may be there in
Speaker 4: the market right now in Japan given this move up
Speaker 4: that we have seen in JGB yields.
Speaker 10: Well, I think the market concerns largely reflect the reality
Speaker 10: that the boj has now pulled away a year ago
Speaker 10: from protecting these yields, being a lid on them, so
Speaker 10: they can kind of go up and up and up.
Speaker 10: Now there has been an optick to the highest levels
Speaker 10: in the benchmark yield, to the levels that we last
Speaker 10: saw during the global financial crisis before then. Even so,
Speaker 10: these our levels that are are much higher than they
Speaker 10: have been for a long time. That's causing some concern
Speaker 10: amongst market players and also for policymakers. Don't forget that
Speaker 10: Japan has the biggest debt load amongst advanced economies in
Speaker 10: the world, so rising yields on benchmark bonds is a
Speaker 10: problem for long term financing of the debt. And I
Speaker 10: think what we're seeing here from policymakers, not only from
Speaker 10: the Central Bank governor Uda, but also from the Finance
Speaker 10: Minister Kato, is that policymakers are trying to just reassure,
Speaker 10: just say, hey, look, this is kind of natural. We're
Speaker 10: back towards a kind of more market focused determination of
Speaker 10: yield pricing, and there's no need to get too overly
Speaker 10: concerned here. These market movements are normal.
Speaker 4: And it seems logical that it would also would reflect
Speaker 4: expectations that the boj is going to begin raising interest
Speaker 4: rates soon.
Speaker 10: Right, Yeah, I think we're going to continue seeing interest
Speaker 10: rate rises in Japan. We've still got inflation. Inflation is
Speaker 10: going to be above or in line with the boj's
Speaker 10: target for We're getting close to three years now, so
Speaker 10: those interest rates are going to keep going up now,
Speaker 10: They're not going to go nuts. It's not like every meeting.
Speaker 10: It's not back to back at rate hikes. We're not
Speaker 10: expecting anything at the March meeting. But I think we
Speaker 10: are seeing, you know, pretty hard baked team expectations that
Speaker 10: the Bank of Japan is going to be raising rates
Speaker 10: every six months or so.
Speaker 4: We had the February reading on producer prices. You and
Speaker 4: I were talking a moment ago. This is pretty much
Speaker 4: in line with what the market was expecting, right that
Speaker 4: four percent a year on year increase in PPI.
Speaker 10: Yeah, I think so. I think that the main takeaway
Speaker 10: from this is we've got high input prices coming in.
Speaker 10: That means that's going to feed into inflation going forward.
Speaker 10: So inflation isn't going to disappear anytime soon, and so
Speaker 10: that feeds into the idea that the Bank of Japan
Speaker 10: will keep raising interest rates. Now. Is inflation like six
Speaker 10: or seven percent requiring urgent attention? No, So I think
Speaker 10: we're going to see a continuation of gradual rate hikes.
Speaker 4: That is Paul Jackson, Asia Economy editor for Bloomberg News,
Speaker 4: and I'm Doug Krisner. You can catch US weekdays for
Speaker 4: the Daybreak Asia podcast. It's available wherever you get your podcast. Tom, Well,
Speaker 4: thank you Doug. And that does it for this edition
Speaker 4: of Bloomberg day Break Weekend. Join us again Monday morning.
Speaker 4: I am Wall Street Time for the latest on markets overseas,
Speaker 4: in the news you need to start your day. I'm
Speaker 4: Tom Buzby. Stay with us.
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