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 the coming week from our Daybreak anchors
Speaker 2: all around the world, and straight ahead on the program,
Speaker 2: what's expected to be the latest confirmation of easing inflation,
Speaker 2: what it means for the Fed and for investors, Plus
Speaker 2: earnings from Coca Cola this week.
Speaker 3: I'm Tom Busby in New York.
Speaker 4: I'm Stephen, Carol and Lundon for We're looking ahead to
Speaker 4: the major international gathering of defense officials at the Munich
Speaker 4: Security Conference.
Speaker 5: I'm Brian Curtis in Hong Kong. We look ahead to
Speaker 5: a lot of economic data coming in Japan and what
Speaker 5: it means for the boj.
Speaker 1: That's all straight ahead on Bloomberg Daybreak Weekend, The business
Speaker 1: news you need to wrap up your week. Available on Apple, Spotify,
Speaker 1: the Bloomberg Business Appen everywhere you get your podcasts.
Speaker 3: Well, good day to you. I'm Tom Busby.
Speaker 2: We begin today's program with expectations that inflation continues to ease.
Speaker 2: That's ahead of the Consumer Price INDEXPERT January coming out
Speaker 2: this Tuesday, just ahead of Valentine's Day, and to talk.
Speaker 3: About whether Wall Street is gonna love what it hears.
Speaker 2: We welcome Bloomberg's International Economic and policy correspondent Michael McKee.
Speaker 3: Michael, what do we expect.
Speaker 6: Hearts and flowers for Valentine's Day? CBI is expected to
Speaker 6: continue the trend that we have seen of gradually slowing
Speaker 6: inflation rates. The month of a month number expected to
Speaker 6: go down from three tenths in December, which had been
Speaker 6: revised now down to two tenths and then stay at
Speaker 6: two tenths for the month of January, and that'll push
Speaker 6: the year over year number down to two point nine
Speaker 6: percent from three point four percent. Of course, that's the
Speaker 6: headline because that's pushed around by energy and food. Of
Speaker 6: course that we like to look at the core, and
Speaker 6: the core is expected to be up three tenths, which
Speaker 6: is basically where we were last month, but because the
Speaker 6: base effects higher inflation in January last year, the corps
Speaker 6: will fall to three point seven percent from three point
Speaker 6: nine percent. Now, those are forecasts, but economists have generally
Speaker 6: been pretty accurate in forecasting the CPI.
Speaker 2: Now let's go back to core consumer prices, because we
Speaker 2: got a reading last week or confirmation last week three
Speaker 2: point three percent in Q four of last year. That's
Speaker 2: year over year, and that matches an earlier reading. Good
Speaker 2: news though for the Fed, right, I mean, this is
Speaker 2: what they were hoping to see.
Speaker 6: It's what they were hoping to see, because it's not
Speaker 6: what they saw in twenty twenty two. The BLS every
Speaker 6: year readjusts its seasonal adjustment factors and revises them, and
Speaker 6: last year when they did that, it pushed inflation at
Speaker 6: the end of twenty twenty two up and made it
Speaker 6: look like a lot of progress that had been made
Speaker 6: was wiped out. So there was some focus on the
Speaker 6: revisions this year, worried that we might see something similar,
Speaker 6: but we did not. There was virtually no change in
Speaker 6: the seeds of adjustment factors, so we end up with,
Speaker 6: as you say, three point three percent as the three
Speaker 6: month annualized number for the end of the year and
Speaker 6: no change there. So in that case, we saw a
Speaker 6: positive market reaction because no news was good news.
Speaker 2: Yeah, we've seen a number of all time highs for
Speaker 2: the S and P five hundred, the Dow, not so
Speaker 2: much the Nasdaq yet, but things are definitely looking ahead.
Speaker 2: And for the Fed, I mean, all signs point to
Speaker 2: the kiwi they've been doing the raid hike schemes. We've
Speaker 2: avoided a recession, Inflation slowly but surely declining, the labor market, robust,
Speaker 2: consumer confidence is up. There are challenges, though.
Speaker 6: There are challenges. I don't know if you can say
Speaker 6: the words soft landing on a public you could say
Speaker 6: it here, stay here, but FED won't say it. But
Speaker 6: it appears we've basically gotten there. What they need to
Speaker 6: see now is not dramatic improvements in inflation, but just
Speaker 6: regular improvements similar to what we're forecast to see this month,
Speaker 6: with a broad number of categories disinflating, rising at a
Speaker 6: slower pace. If we get that for a couple of months,
Speaker 6: they indicate they'll start thinking about cutting rates now.
Speaker 2: Prices outside of core. We know energy, we know food,
Speaker 2: but one thing in core that has been stubbornly higher
Speaker 2: is housing. Yeah, the recovery we were all hoping for
Speaker 2: has been so uneven. Every month we seem to get
Speaker 2: good news, bad news, you know, troubled news about prices.
Speaker 3: How is that effect?
Speaker 6: It's just been stubbornly high. And that's not what the
Speaker 6: FED or economists expected. Because we did see a decline
Speaker 6: for a while in home prices and rents, part of
Speaker 6: it is methodological because of the way the BLS attempts
Speaker 6: to measure home price, because a lot goes into the
Speaker 6: price of your home. It's not just the monthly mortgage payment,
Speaker 6: but the monthly mortgage payment adjusted by the interest you
Speaker 6: have to pay and that sort of thing. So they
Speaker 6: look at rents and ask people what would your house
Speaker 6: rent for? And obviously if you don't sell your house
Speaker 6: regularly or rent your house regularly, you don't have a
Speaker 6: good answer for that. So it takes a while for
Speaker 6: a decline in rent prices to sort of make its
Speaker 6: way into the CPI. Now, the BLS has started experimenting
Speaker 6: with a new privately produced sort of data point on
Speaker 6: rent that measures current rent costs as new apartments and
Speaker 6: new homes are rented, and they're folding that data in.
Speaker 6: So there's some hope that we may see a more
Speaker 6: rapid decline in housing prices to match what we had
Speaker 6: been experiencing. Of course, with nobody buying houses, there's been
Speaker 6: a shortage of inventory and prices have started go back up.
Speaker 3: Again.
Speaker 6: In that case, if ed wants it to take a
Speaker 6: long time to.
Speaker 2: Get in and if it's not going to happen it's February.
Speaker 2: I mean, the heart of the season is coming up.
Speaker 6: Yeah, you want to see it now, because pretty soon
Speaker 6: we're going to be having a lot of people rushing
Speaker 6: out there. And I saw some analysis recently that said
Speaker 6: it's going to be a seller's market. They're going to
Speaker 6: be able to set higher prices because a lot of
Speaker 6: people want to move but haven't been able to afford it.
Speaker 6: If interest rates start coming down, then mortgage rates will
Speaker 6: come down and you will see a much busier housing market.
Speaker 2: Now, the FED meets again March nineteenth, twentieth. It's about
Speaker 2: five weeks away. Between that time. We get CPI PPI
Speaker 2: this week we also get another one for February. If
Speaker 2: the Fed were to meet right now, what do you
Speaker 2: think they would say?
Speaker 6: They would say, we haven't seen enough data, which is
Speaker 6: going to be their standard answer for a little while.
Speaker 6: They'll get one more CPI and one more of course,
Speaker 6: they look at the PCE index and they'll get one
Speaker 6: more of those before the March meeting, but they'd like
Speaker 6: to have two or three months worth. If they wait
Speaker 6: till May, they'll have three months worth of those numbers,
Speaker 6: and that in theory, if we continue to see this
Speaker 6: kind of improvement will get them to where they want
Speaker 6: to be and they can start talking about maybe we
Speaker 6: cut rates.
Speaker 2: So a long road to go before that March meeting. Well,
Speaker 2: our thanks to Bloomberg's International Economic and Policy correspondent Michael McKee.
Speaker 3: All Right, Wall.
Speaker 2: Street's earning cavalcade continues in the week ahead, including reports
Speaker 2: from Dow component Coca Cola, one of the best known
Speaker 2: brands anywhere, and with a lot more on what to expect,
Speaker 2: we welcome Bloomberg Intelligence Senior industry analyst Ken Shay, who
Speaker 2: covers consumer products including beverages, tobacco, and cannabis. Now, Ken,
Speaker 2: what do you expect to see in Coke's fourth quarter
Speaker 2: results this coming Tuesday?
Speaker 7: So Coca Cola on Tuesday is expected to put up
Speaker 7: pretty good numbers. You know, one of the key metrics
Speaker 7: that I look for is organic revenue growth because that's
Speaker 7: the underlying you know, top line, excluding acquisitions things like that.
Speaker 7: We're expecting a high single digit eight to nine percent
Speaker 7: kind of growth and that's pretty strong. Now, it's a
Speaker 7: little bit lower than the fifteen percent growth last year,
Speaker 7: so it's a tough comparison, but that's a pretty good
Speaker 7: number and We think they're going to achieve that to
Speaker 7: a combination of higher volume of some positive effects from
Speaker 7: channel mix to the on premise you know, stadiums, restaurants.
Speaker 7: People are on the go again and some carry over
Speaker 7: higher pricing from last year, and so that's the kind
Speaker 7: of growth that's very positive. However, there's we also expect
Speaker 7: some negative currency, most notably Argentine peso, you know, a
Speaker 7: few other things. Dollar has been strong. So a net
Speaker 7: of all that will look like a mid single digit
Speaker 7: kind of growth in net revenue, which is pretty strong.
Speaker 2: Oh, that's strong, and you wrote in a report that
Speaker 2: if there's an earning speed, this would be the seventeenth
Speaker 2: straight one. What does that tell you about Coca Cola?
Speaker 7: That's right, Well, the resilience of the product, coach ability
Speaker 7: to manage operations across you know, geographics that spans up
Speaker 7: two hundred countries around the world, you know, that kind
Speaker 7: of revenue growth. We think that the company is also
Speaker 7: enjoying some falling input costs, and so we think with
Speaker 7: some margin improvement they can get about ten percent of
Speaker 7: growth in earnings. And you know, without without that currency
Speaker 7: weighing on them, they could probably have mid team kind
Speaker 7: of growth. I think they're going to cite that as well.
Speaker 7: And as you say, you know, coca has an ability
Speaker 7: to exceed expectations, and the Coke comes through, it will
Speaker 7: be the seventeenth straight And not only do they have
Speaker 7: a string of beats, but the average beat over that
Speaker 7: span is about eight percent, so significant beats also. But
Speaker 7: I think things to look for in this particular quarter,
Speaker 7: A lot of investors have cited their concerns about you know,
Speaker 7: what can the impact be on the so called weight
Speaker 7: loss drugs? The GLP one drugs could just have an
Speaker 7: impact on the company's ability to continue to grow if
Speaker 7: consumers want to shy away from sugary drinks. Another area
Speaker 7: of concern is the spike in orange juice prices worldwide.
Speaker 7: We're up about forty percent over last year, and even
Speaker 7: though minute may it's simply account for only about ten
Speaker 7: percent of cokes overall sales. Nevertheless, a cost increase that high,
Speaker 7: one has to wonder what its strategy is to grow
Speaker 7: that orange juice business.
Speaker 2: Would that be the only category that that you see
Speaker 2: as a real challenge for Coke right now?
Speaker 7: A lot of categories, well, coffee is a competitive one,
Speaker 7: particularly because that's not only a finished product, but also
Speaker 7: a retail instead of retail operations a cost of coffee.
Speaker 7: Coca Cola has costs had come down. Now coffee prices
Speaker 7: are starting to move higher again. I would say it's problematic,
Speaker 7: but it's a more volatile business than a typical Coca
Speaker 7: Cola business, which is basically selling constant and traits to its,
Speaker 7: you know, bottling partners where you have consistently high margins
Speaker 7: and a steady demand, So that one's going to be
Speaker 7: worth taking an eye on. Also, I've also got interesting
Speaker 7: about some of the innovation Coca is up to. You know,
Speaker 7: I'm starting to branch out with some alcoholic beverage partners.
Speaker 7: Jack and Coke is now a product you can buy
Speaker 7: off the shelf, Absolute and Sprites another one, and so
Speaker 7: they have a lot of you know, coals in the fire,
Speaker 7: so to speak, in terms of what they're doing with
Speaker 7: alcoholic beverage partners. At this point, it's still a small business,
Speaker 7: but it's worth keeping an eye on.
Speaker 2: And they've got a new coke product coming out just
Speaker 2: the nineteenth of this month. What do you know about that?
Speaker 7: Well, I haven't tried it yet. It sounds interesting mostly
Speaker 7: it's like a Coke raspberry with some spicy flavors. I'll
Speaker 7: have to try that when I get a chance, because
Speaker 7: I do it with sweet tooth.
Speaker 2: Yeah, Coca Cola Spiced is the name of it. I
Speaker 2: think despite the name, it's not spicy, but it is
Speaker 2: different and unused. Well, I think is they're going to
Speaker 2: make this a permanent part of their lineup right away.
Speaker 7: Well, you know, it speaks the Cochs' willingness to innovate
Speaker 7: market and be relevant to younger generations. You know, Coke
Speaker 7: has been around for so long. I think the demographics
Speaker 7: may have skewed towards older I would say old, but
Speaker 7: older adult young the young, middle aged adults. I think
Speaker 7: this is an effort their creations line to tap into
Speaker 7: younger generation consumers and hopefully they can hang on for
Speaker 7: their lifestyle, their lifespan.
Speaker 3: Well, it's a lot to look forward.
Speaker 2: I'm looking forward to trying it and our thanks now
Speaker 2: to Bloomberg Intelligence Senior industry analyst Ken Shay coming up
Speaker 2: on Bloomberg Day Break weekend conflicts in the Middle East
Speaker 2: and in Ukraine raising concerns about security all around the globe,
Speaker 2: and had a special conference taking place this week in Germany.
Speaker 2: I'm Tom Busby 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 the program, a big
Speaker 2: change expected from the Bank of Japan. But first, geopolitical
Speaker 2: tensions are a risk that's been featured in companies earnings
Speaker 2: reports this season. With ongoing conflicts in the Middle East,
Speaker 2: Ukraine and elsewhere. Security issues will be at the heart
Speaker 2: of the gathering of world leaders for the Munich Security
Speaker 2: Conference in the coming days. For more, let's go to
Speaker 2: London and bring in Bloomberg day Break anchor Stephen Carroll.
Speaker 3: Tom.
Speaker 4: The disruption to shipping through the Red Sea and the
Speaker 4: implications for inflation have been a topic of discussion for
Speaker 4: many companies during this earning season. The CEO of Danish
Speaker 4: shipping Giant Mask telling Bloomberg they haven't seen a peak
Speaker 4: in the threat level in the Red Sea and they
Speaker 4: see disruption potentially lasting for up to two year. Now,
Speaker 4: that's just one issue that's going to be discussed at
Speaker 4: the Munich Security Conference in the coming days. It's an
Speaker 4: event that's been dubbed by some as the Davos of
Speaker 4: Defense and brings together officials and political leaders in the
Speaker 4: southern German city. The conversations this year more challenging than ever.
Speaker 4: Russia's invasion of Ukraine is close to entering its third year,
Speaker 4: and the Israel Hamas War that began more than four
Speaker 4: months ago has led to violence in several other parts
Speaker 4: of the Middle East. Ukraine's president, Vladimir Zelenski is expected
Speaker 4: to attend the conference, but Russian and Iranian officials haven't
Speaker 4: been invited. Geopolitical tensions from these conflicts are a major
Speaker 4: risk for markets, and we've been discussing that with some
Speaker 4: of our guests on Bloomberg Radio in recent days. Here
Speaker 4: are the thoughts of Wayley Global, Chief investment strategist at Blackrock.
Speaker 8: Yeah, so it's really quite incredible how fled geopolitical risk
Speaker 8: premier currently is as been priced by markets. We do
Speaker 8: think that there is room for that to be priced
Speaker 8: even more just given the fact that we're in a
Speaker 8: different geopolitical regime compared to before. Right, so this instinct
Speaker 8: to just automatically buy the deep across the board indiscriminately
Speaker 8: whenever something goes wrong on the geopolitical round. It works
Speaker 8: until it doesn't work. So we do think that it
Speaker 8: is very important to be selective in terms of positioning
Speaker 8: for geopolitical events, looking at, for example, where oil is
Speaker 8: trading specifically, also energy sector. We talked about earnings maybe
Speaker 8: not doing as well as some of the other sectors,
Speaker 8: but we like energy as a sector also as a
Speaker 8: geopolitical hatch, especially given how little it's responded to geopolitical
Speaker 8: events so far.
Speaker 4: That's black Rocks Wayley talking about how traders are positioning
Speaker 4: around geopolitical risks. Now, we also talked about this with
Speaker 4: Skyla Montgomery Coning. She's director of macro Strategy at TS Lombard,
Speaker 4: and she spoke about the economic risks of ongoing unrest.
Speaker 9: Markets really struggle to price geo political risk because the
Speaker 9: issue is it's an extreme event that's unlikely. And so
Speaker 9: in twenty twenty we had the extreme unlikely event and
Speaker 9: we had energy prices skyrocket and that had a big
Speaker 9: impact on inflation. But it's unlikely to repeat itself, and
Speaker 9: so because it's very hard to price that risk, markets
Speaker 9: just kind of ignore it. For policymakers, I think it's
Speaker 9: background noise. The disruptions we're having right now, we don't
Speaker 9: think will feed in significantly to inflation. I think the
Speaker 9: US in particular understands is a difference between supply side
Speaker 9: inflation and demand driven inflation, so we don't think it
Speaker 9: has a large impact on the inflation or it'll cause
Speaker 9: a reacceleration. I think I'm a bit more worried in
Speaker 9: Eurerope because they've traditionally looked at supply side inflation shocks
Speaker 9: not so much as a growth negative, but as an
Speaker 9: inflation positive. And for them, they're also looking at January HICP,
Speaker 9: which has the potential to upside surprise on seasonality effects,
Speaker 9: and they may use it as a reason to be
Speaker 9: more hawkish than they really should be given the growth
Speaker 9: back DRAP.
Speaker 4: That's Skyla Montgomery coning from TS Lombard there speaking to
Speaker 4: us on Bloomberg Radio. So that's the markets and the
Speaker 4: economic point of view on these security issues. How will
Speaker 4: government officials be addressing these problems at the Munich Security Conference.
Speaker 4: I've been discussing this with our EU politics reporter Ellen Milligan,
Speaker 4: and I started by asking her who's attending the event
Speaker 4: and what we should expect them to be focusing on.
Speaker 10: Well, this conference will be centered on maintaining both financial
Speaker 10: and military support for Ukraine. Often you get, as you said,
Speaker 10: world leaders attending foreign and defense secretaries, but also tons
Speaker 10: of defense officials, the real experts on both Ukraine, the
Speaker 10: Middle East, the Red Sea. They're likely to discuss the
Speaker 10: difficulties for Ukraine as this war drags on, in particular
Speaker 10: the industrial production challenges. Ukraine's grappling right now with depleting
Speaker 10: ammunition stocks. So we may hear more about joint procurement
Speaker 10: of military equipment between countries. There may well be some
Speaker 10: deals announced as well as perhaps more bilateral security commitments
Speaker 10: that each ally is designing for Ukraine. The UK has
Speaker 10: already announced theirs earlier this year. We might get more
Speaker 10: countries announce their security commitments to the Ukraine.
Speaker 4: Also, it'd be interesting to watch the discussions from an
Speaker 4: EU point of view, Ellen, because after we've had Hungary's
Speaker 4: wavering over the euaid package, how much support is there
Speaker 4: in Europe for Ukraine Now? Of course, we're still waiting
Speaker 4: for Hungary to approve Sweden as a new NATO member
Speaker 4: as well.
Speaker 10: Well. That moment last week when the EU agreed on
Speaker 10: its fifty billion package for Ukraine was a big sigh
Speaker 10: of relief, both in Europe but also in the US
Speaker 10: and around the world. The main focus now actually is
Speaker 10: on US Congress and whether they will pass that sixty
Speaker 10: billion in age there. This week, actually, US National Security
Speaker 10: Advisor Jake Sullivan came to Brussels and discussed at NATOGE.
Speaker 10: He said he was confident the Biden administration would get
Speaker 10: it passed, but at just hour's latest Senate Republicans blocked
Speaker 10: a package tied to that funding, and Polish Premier Donald
Speaker 10: Tusk has tweeted that they should be ashamed of themselves.
Speaker 10: So you're seeing those tensions emerged now that the EU's
Speaker 10: passed their package between the US and saying kind of
Speaker 10: you know, we've got our package pass now it's time
Speaker 10: for you to And as I said, Ukraine is facing
Speaker 10: some serious ammunition shortages which Russia is going to try
Speaker 10: and take advantage on. So it's a really critical point
Speaker 10: for that aid to come through.
Speaker 4: Of course, the Middle East is going to be a
Speaker 4: huge topic of discussion there as well. The latest proposals
Speaker 4: for a cease far deal reportedly being rejected by Benjaminetta
Speaker 4: and yah who how will countries who are going to
Speaker 4: be represented at the conference be talking about their approach
Speaker 4: to achieving peace in the region. And I suppose more broadly,
Speaker 4: how has the Israel hamas wore affected security ties?
Speaker 10: Yeah, I mean the EU continues to struggle to come
Speaker 10: to a unified stance on how to approach the situation
Speaker 10: in the Middle East. Some countries of reticent pressure Israel
Speaker 10: over its bombing of Gaza. They don't want to restrict
Speaker 10: what Israel views as a self defense of the following
Speaker 10: the harmass tax in October. Some are more keen to
Speaker 10: push them and pressure them to impose a ceasefire, for example.
Speaker 10: But I think there are some emerging conversations that will
Speaker 10: be a topic at Munich. So for example, recognizing a
Speaker 10: Palestinian state. I thought it was interesting that Foreign Secretary
Speaker 10: David Cameron in the UK said this week that it's
Speaker 10: something he'd like to explore. Countries like Ireland to Spain
Speaker 10: are also considering that. And there's also discussion of the
Speaker 10: sanctions against violent Israeli settlers, something the US has announced
Speaker 10: this week and many EU member states want to introduce also.
Speaker 10: So those are the points of discussion. I think we'll
Speaker 10: see next week.
Speaker 4: Those are also of course going to be focused more
Speaker 4: broadly from that too on the relationship between the United
Speaker 4: States and Europe on security issues. We know they haven't
Speaker 4: always seen io I, particularly when it's come to spending commitments.
Speaker 4: Where are we now in that balance of relationships, given
Speaker 4: the pressures that we have from both the conflicts in
Speaker 4: Ukraine and in the Middle East.
Speaker 10: We've had some quite strong language coming out of Charles
Speaker 10: Michelle Underline in the EU, as I said, Donald Tusk
Speaker 10: in Poland, kind of ramping up pressure on the US
Speaker 10: to pass this a package. So I think you're going
Speaker 10: to see more of that language, more lobbying from the EU,
Speaker 10: the UK, other allies at the Munich Security Conference. There's
Speaker 10: also been some concern in Europe about recent US strikes
Speaker 10: on Iranian backed groups in the Red Sea. There's worry
Speaker 10: it could provoke an escalation of the conflict. So I
Speaker 10: think we'll hear more about the differences in approach between
Speaker 10: the EU, who wants to take a more defensive mission
Speaker 10: to the Red See than an offensive one, and the
Speaker 10: different approaches to the who season dealing with that conflict
Speaker 10: in the Red Sea. So those are the areas of
Speaker 10: contention between the EU and the US. But I also
Speaker 10: think that they're incredibly keen to stress how united they are,
Speaker 10: and I think they'll be more kind of joint press conferences.
Speaker 10: For example. We saw that with Sullivan and Stoltenberg in
Speaker 10: Brussels this week, and I think they'll want to put
Speaker 10: on a unified position as well.
Speaker 4: It is, of course, Allen two, a year of big elections,
Speaker 4: notably the EU elections coming up in June, then the
Speaker 4: US presidential election in November as well. When attending to
Speaker 4: the conference, be thinking about this in their conversations, about
Speaker 4: what effects that might have on the international security landscape,
Speaker 4: particularly with Donald Trump in the frame in the United States.
Speaker 10: Yeah, I mean the potential win for Trump, which is
Speaker 10: looking increasingly likely when you look at US polls, is
Speaker 10: what is looming over European leaders. I mean, whether it
Speaker 10: comes to international security, but also in relation to trade
Speaker 10: between the blocks. We've had some great scoops this week
Speaker 10: from Bloomberg about Trump planning, you know, potential a potential
Speaker 10: trade standard with the EU if he enters office, and
Speaker 10: that you mapping out how they want to prepare for that.
Speaker 10: But when it comes to international security, the thing that's
Speaker 10: causing real concern in Europe is whether they're ready to
Speaker 10: defend itself if there's a Trump come back and if
Speaker 10: Putin could target NATO next. Trump has threatened to pull
Speaker 10: the US out of NATO when he was previously in
Speaker 10: the White House. He probably wouldn't be able to do
Speaker 10: that if he's president, but it is raising questions about
Speaker 10: whether Europe is capable of defending itself without the US.
Speaker 10: So You're going to have a lot of conversations next
Speaker 10: week about Europe's own defense industry.
Speaker 4: And I'm wondering too about the relationship between the UK
Speaker 4: and EU countries on the defense front. You, as someone
Speaker 4: who's reported extensively from Westminster and now based in Brussels,
Speaker 4: are very well placed to answer this question for US.
Speaker 3: Is that a.
Speaker 4: Relationship that has remained strong despite the other tensions that
Speaker 4: we've seen post Braxit.
Speaker 10: Yes, I mean something that I've had a lot since
Speaker 10: I've since I've come to Brussels is that the Ukraine
Speaker 10: War has actually united the UK and the EU a
Speaker 10: lot more. National security is one of their strongest areas
Speaker 10: in terms of allegiances and their relationship. We've obviously seen
Speaker 10: the UK take a leadership role when it comes to Ukraine,
Speaker 10: when it comes to the Middle East also, and they
Speaker 10: announced their two billion package earlier this year. That was
Speaker 10: followed by Germany's eight billion package. So you're seeing that
Speaker 10: that relationship kind of blossom in this sense, and I
Speaker 10: think I think you will see that a lot next week.
Speaker 10: I think the UK and the EU will jointly lobby
Speaker 10: the US over It's a package. You saw David Cameron
Speaker 10: go to Washington before Christmas. I think you'll see a
Speaker 10: lot more of that and them teaming up to get
Speaker 10: that passed.
Speaker 4: That's our Eupolitics reporter Ellen Melligan, and we will have
Speaker 4: coverage of the Munich Security Conference. I'm Bloomberg next week.
Speaker 4: I'm Stephen Caroll in London. You can catch us every
Speaker 4: weekday morning here for Bloomberg Daybreak here at beginning at
Speaker 4: six am in London and one am on Wall Street.
Speaker 2: Tom, Thank you, Stephen, And coming up on Bloomberg day
Speaker 2: Break weekend, are the world's only remaining negative interest rates
Speaker 2: about to go away? 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. Japan getting close to
Speaker 2: terminating it's interest rate policy, so the country's GDP and
Speaker 2: economic data will be the focus for the Bank of Japan.
Speaker 2: Let's get to Bloomberg Daybreak Asia co host Brian Curtis
Speaker 2: for more.
Speaker 5: Tom, we look ahead to a slew of Japanese data
Speaker 5: in the coming week to tease out what to expect
Speaker 5: next from the Bank of Japan. Among the numbers will
Speaker 5: get GDP for the fourth quarter and industrial production and
Speaker 5: capacity utilization for December. Now, Japanese wage growth strengthened less
Speaker 5: than expected in the month of December, but it still
Speaker 5: showed signs of momentum, and it's thought that that will
Speaker 5: keep the Bank of Japan on track to end its
Speaker 5: negative rate regime in the coming months. Joining us for
Speaker 5: some discussion now is Paul Jackson, Bloomberg Economy Editor. Well, first,
Speaker 5: let's talk a little bit about GDP before we get
Speaker 5: to that wholesome discussion about the BOJ and what it
Speaker 5: does next. Paul, thanks very much for joining us. So
Speaker 5: GDB numbers out next week. A return to growth? Is
Speaker 5: that expected?
Speaker 11: Yeah, we're expecting king a return to growth, And you
Speaker 11: mentioned the Bank of Japan. Well, look, which central bank
Speaker 11: in the world wants to be raising interest rates when
Speaker 11: the economy is contracting, And that was the situation over
Speaker 11: the summer. That was the biggest contraction since the summer
Speaker 11: of the pandemic. So you know, this GDP figure next
Speaker 11: week is a big checkbox for the Bank of Japan
Speaker 11: to firmly tick next week and say, right, okay, that's
Speaker 11: another hurdle out of the way on our March towards
Speaker 11: raising interest rates for the first time since two thousand
Speaker 11: and seven.
Speaker 5: And let's just talk a little bit about the wage negotiations,
Speaker 5: because we understand that they're key here for the BOJ
Speaker 5: in perhaps taking a more hawk as shift. What are
Speaker 5: we expecting there.
Speaker 11: Well, the wage negotiations between companies and unions is underway.
Speaker 11: I think all the expectations are that the de that
Speaker 11: they're going to reach are going to be higher than
Speaker 11: last year, which is about three point six percent last year,
Speaker 11: so a little bit harder than that. And as long
Speaker 11: as we get that kind of result in March, then
Speaker 11: that's seen as kind of the final thing that BLJ
Speaker 11: needs in place to have everything ready to scrap its
Speaker 11: negative interest rates. Now if you look at the GDP
Speaker 11: figures that are coming out next week, one important element
Speaker 11: in them is the consumption. Now, if you look at
Speaker 11: the private consumption in Japan, it fell in the summer
Speaker 11: and it's only expected to be around zero in the
Speaker 11: fourth quarter. So you know, it's kind of trade that's
Speaker 11: helping business investment to get this kind of one point
Speaker 11: three percent growth, which is what we're expecting in the
Speaker 11: fourth quarter. So that points there's something that consumers are
Speaker 11: not really spending that why aren't they spending much in
Speaker 11: real terms, it's because of inflation. And if you don't
Speaker 11: have the wages going up enough to counteract or be
Speaker 11: above inflation, and the consumption is going to be weak
Speaker 11: and you're not going to have this positive growth cycle
Speaker 11: that the BOJ needs. So these wage figures are really key,
Speaker 11: and we need this kind of growth to really give
Speaker 11: the BOJA confidence that it can go ahead with rate increases.
Speaker 5: Yeah, so the BOJ wants those wages to go up.
Speaker 5: The economy is not particularly hot, as you say, and
Speaker 5: we note that one of the deputy governors at the
Speaker 5: BOJ said that it's really kind of hard to imagine
Speaker 5: the bank raising its policy rate continuously and rapidly going forward.
Speaker 5: That deputy Governor's Shinichi Uchida, what is he getting at?
Speaker 11: Well, I think it's a simple idea really that you know,
Speaker 11: inflation at its peak in the US was well over
Speaker 11: eight percent, whereas in Japan, you know, we're to two
Speaker 11: point three something like that, depending on which measure you
Speaker 11: look at. So in terms of the aggressive moves that
Speaker 11: the FARED had to undertake to keep like expectations anchored
Speaker 11: about where prices would go, totally different to the dynamics
Speaker 11: in Japan, where we've had decades of falling prices. People
Speaker 11: are trying to get their head around prices going up,
Speaker 11: so they don't want to squash out these initial signs.
Speaker 11: The Japan's economy and growth cycle is becoming something that
Speaker 11: looks a bit more normal than it has done over
Speaker 11: past decades. So I think what he's hinting at is, Okay,
Speaker 11: we go to zero first, we see what it's like.
Speaker 11: If it's not looking to like it's upset too much
Speaker 11: of the economy or markets or companies, then we'll go
Speaker 11: ahead cautiously from that point on. But we are not
Speaker 11: going to see the kind of aggressive high after hike
Speaker 11: double hikes that we saw from the Fed happening in Japan.
Speaker 5: Yeah, we had some comments in this past week from
Speaker 5: Pimco saying that in their estimation, the BOJ would scrap
Speaker 5: its negative interest rate policy, perhaps as soon as March,
Speaker 5: and it would make multiple hikes, but they were talking
Speaker 5: about something like ten basis points. At one point fifteen
Speaker 5: basis points. It takes a long time then to really
Speaker 5: get measurable gains in that.
Speaker 11: Yeah, I think it's going to be a slow move.
Speaker 11: You mentioned March and April. April is our base case
Speaker 11: scenario for when the BOJ hikes. March is our risk scenario.
Speaker 11: If you look at overnight swaps, the risk is about
Speaker 11: twenty percent of an early move by the BOJ. And
Speaker 11: we've serve overed economists, the over fifty economists, and their
Speaker 11: view is that zero point five percent is probably about
Speaker 11: as high as the BOH is going to get as
Speaker 11: its terminal. Right, it gets that far by the end
Speaker 11: of next year or not is still an open question,
Speaker 11: but there is a chance they will.
Speaker 5: I'm curious, Paul, the outlook from companies versus individuals. Are
Speaker 5: individuals You mentioned that inflation really is an issue for
Speaker 5: mister and missus wattenabe and it is hurting spending companies
Speaker 5: presumably would like a little inflation.
Speaker 11: Well, you know, I think once you get into the
Speaker 11: dynamic that you can raise prices and people will still buy,
Speaker 11: then inflation can often be helpful for companies for raising
Speaker 11: their profits because in other countries, generally companies raise the
Speaker 11: prices a little bit more than they need to, kind
Speaker 11: of creating a margin of leeway if you like, whereas
Speaker 11: in Japan they're so reluctant to raise prices and they'll
Speaker 11: often raise prices by less than they need to, so
Speaker 11: it's not as a positive different profits as it could be.
Speaker 11: But I think once we get into this idea of
Speaker 11: inflation sticking, this is going to be good for companies
Speaker 11: to be able to increase profits through raising prices. And
Speaker 11: also if the Bank of Japan is right and we're
Speaker 11: in a cycle where wages are also part of the
Speaker 11: cycle and driving prices, then consumption should recover. But I think,
Speaker 11: you know, it's we're maybe a year or two years
Speaker 11: out before we can really draw the conclusion as hey,
Speaker 11: did they get it right?
Speaker 5: Sometimes we don't see some of the differences in policy
Speaker 5: play out in public. In places like China and Japan.
Speaker 5: I'm curious now the current relationship between the b J
Speaker 5: and the Kisha administration.
Speaker 11: Well, that's a good question. If you look at the
Speaker 11: whole campaign of generating two percent inflation and establishing that
Speaker 11: target that was out in a joint statement by the
Speaker 11: government and the Bank of Japan back in early twenty thirteen,
Speaker 11: so you know, the actual target itself stems from a
Speaker 11: collaboration working together. Now, if you look at how Kishita's
Speaker 11: administration has been working through this inflation cycle, it's been
Speaker 11: offering generous subsidies to the public on energy. It's been
Speaker 11: paying at one point it was paying twenty percent of
Speaker 11: people's electricity bills. Quite extraordinary help from a central government here.
Speaker 11: And some people were saying, well, hold on, if you
Speaker 11: want inflation, why are you actually lowering inflation by providing
Speaker 11: all these subsidies. But there is a kind of method
Speaker 11: in the apparent madness in that it's trying to generate
Speaker 11: some stability in this cycle by holding the inflation up
Speaker 11: for a little bit longer until it settles in around
Speaker 11: two percent, which is what the target is.
Speaker 3: Now.
Speaker 11: One other thing the administration is doing is very aware
Speaker 11: that inflation is eating into consumption, and that the wage
Speaker 11: growth still isn't high enough. So it's offered some tax
Speaker 11: rebates that are going to kick in in the summer,
Speaker 11: and so we should reach a point where real disposable
Speaker 11: income does actually increase. At that point, something that should
Speaker 11: help drive some spending. And hey, when a politician does that,
Speaker 11: as always the thought of the back of people's minds, Oh,
Speaker 11: is that some kind of gambit for an early election.
Speaker 5: Yeah, and presumably if we see more aggressive action from
Speaker 5: the BOJ not that it's expected, but if we do
Speaker 5: see it, that would be perhaps bad for the government
Speaker 5: bond market. And obviously it creates some interesting conditions for
Speaker 5: companies because if you get a big increase in the end,
Speaker 5: that could make it more difficult in some ways for
Speaker 5: Japanese companies. Right, So what are we expecting from the
Speaker 5: financial markets traversing through this next period.
Speaker 11: Well, you know, in terms of the companies, the big
Speaker 11: exporters with a large global presence, they're loving the cheap yen.
Speaker 11: It's great for them, expands all their profits, so they're happy.
Speaker 11: It's the it's the smaller, more domesticly focused companies that
Speaker 11: feel the squeeze. They have to maybe import some stuff.
Speaker 11: They reliant on energy as well, so you know this
Speaker 11: this kind of stuff is is bad for them. So
Speaker 11: if we if we head towards this new growth cycle
Speaker 11: with relatively stable inflation and the yen coming back to
Speaker 11: kind of stronger levels, there's going to be adjustment taking
Speaker 11: place and the b export is going to be a
Speaker 11: little bit hit, while the domesticly focused companies are going
Speaker 11: to be feeding a little bit of comfort in it.
Speaker 5: Is it a bit too general to say that if
Speaker 5: you get repatriation of the yen, that the consumers will
Speaker 5: benefit and they'll be happy because they'll have more buying
Speaker 5: power with a stronger yen, But the companies, like you said,
Speaker 5: there's a little bit of a bifurcation. But generally speaking,
Speaker 5: corporate sector not so happy, but consumers happy.
Speaker 3: Yeah.
Speaker 11: I mean, you know, there's so many dimensions to look
Speaker 11: at these questions on so many different levels that the
Speaker 11: implications are different. You know, you look at m NA.
Speaker 11: I mean, Japanese companies wanting to buy abroad. If ye
Speaker 11: any is strong, it makes it a lot cheaper to
Speaker 11: do that, and it makes it more difficult if the
Speaker 11: ends if the end's week.
Speaker 5: It is so fascinating. Paul, thanks so much for joining us.
Speaker 5: Paul Jackson, Bloomberg Economy Editor, I'm Brian Curtis along with you.
Speaker 5: Can catch us every weekday here for Bloomberg day Break Asia,
Speaker 5: beginning at nine am in Hong Kong and eight pm
Speaker 5: on Wall Street.
Speaker 2: Tom, Thank you, Brian, and that does it for this
Speaker 2: edition of Bloomberg day Break Weekend. Join us again Monday
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Speaker 3: I'm Tom Buzzby. Stay with us.
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