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day Break anchors all around the world. Straight

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ahead on the program, Inflation and

0:20

what it could mean for the Fed plus

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earning season is right around the corner.

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We'll get a preview. I'm Tom Busby

0:26

in New York. I'm Stephen Carolyn London.

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For We're looking ahead and beyond the upcoming

0:31

European Central Bank meeting, when

0:33

and how fast interest rates may

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come down.

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I'm Doug Krisner looking at whether China's

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economy is bottomed and if it's beginning

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to inflate.

0:43

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1:08

Good day to you. I'm Tom Busby, and we begin

1:10

today's program with inflation and

1:12

the March consumer Price Index coming

1:15

out this Wednesday. With the fed's next

1:17

policy meeting kicking off later this month, what

1:19

could that mean for the central banks direction

1:21

moving forward? And for more we're joined by Edward

1:24

Harrison, Bloomberg, team leader

1:26

America's FX and Rates.

1:29

Edward, Thanks for being here. What

1:31

are you expecting to see in that CPI report?

1:34

Hey, great to talk to you, Tom. The question

1:37

really is wide open in terms

1:39

of what we can see. There are a lot of things,

1:41

and I think that the way to think about this is

1:45

that we had a very high level of inflation

1:47

as we came out of the pandemic,

1:51

and that's come down considerably,

1:54

but we've stalled at a level that is

1:57

above the Fed's target. And recently

1:59

what we've seen is prices moving

2:02

up in places that people

2:04

are sensitive to, you know, things like

2:07

cocoa, you know, for chocolate, things

2:09

like oil, which affects

2:11

your gasoline prices in the US.

2:14

And so, as a result, after two

2:16

readings in a row that were relatively

2:19

high above expectations,

2:21

there's a lot of anticipation about this number,

2:24

and really it could be

2:26

higher than expected given

2:29

some of those recent trends.

2:31

Still a long way to go, though, to the fed's

2:33

two percent target, but like you said, not the

2:35

nine point one percent we saw just two

2:38

summers ago. But we had been heading

2:40

in the right direction. Is this recent pickup

2:43

just an aberration you think, or are we onto

2:45

something more troubling.

2:47

Well, you know, the FED really wants to get

2:49

their hands around that to figure

2:51

out what's going on. And that's

2:54

why when you heard Jerome Powell

2:56

talking last week, he was talking

2:58

about patients. And that's because

3:00

of this number in particular, and also

3:03

the number that's embedded in the Personal

3:06

Consumption Expenditures Report, which

3:08

is what the FED looks at even more

3:11

closely. When you look at this number,

3:13

you know, the last number without

3:16

food and energy, which are very viable. When

3:18

you strip that out, you still had

3:20

three point eight percent. They're expecting three

3:22

point seven percent, which is almost

3:24

double the fed's level now.

3:27

Luckily, because food and energy have

3:30

been relatively benign of

3:32

late. The number was three point two percent

3:34

last time, and we're expecting three point

3:37

five percent this time.

3:39

So that gives you an indication that

3:42

there's a lot of work to be done. And this is

3:44

why j Powell last week was talking

3:46

about patients.

3:47

Well, let's talk about some of those big drivers here.

3:50

You mentioned oil right now hovering around

3:52

a five month high, always very

3:54

volucile, but we are seeing expectations

3:57

gas is going to hit four bucks a gallon here

4:00

in the US, that's for regular by

4:02

the summer. I mean, that is a real wildcard.

4:05

Oil and gas prices.

4:07

Without a doubt. And you know, as I was saying,

4:09

they had been positive in terms of the numbers

4:11

food and energy because the headline

4:14

number is lower than

4:17

the number when you strip out food and energy. But

4:19

now that we have these prices going back

4:21

up, then you can expect them

4:23

to have a negative contribution. They're

4:26

sending the CPI up higher.

4:28

And there's nothing that people think about

4:30

more than gasoline prices. It

4:34

has that anchor effect in

4:36

terms of how people think about inflation and where

4:38

it's headed. And so this is not what people

4:41

want. And I would add that, you

4:43

know OPEK their meeting,

4:46

it will be interesting to see what

4:48

kind of level they're targeting for oil

4:51

prices. If we're looking at ninety dollars

4:53

a barrel, then that's not a level

4:56

that is going to be pleasant for the

4:58

inflation numbers.

5:00

You know, food, oil, gasoline,

5:02

housing. But there are some green

5:04

shoots, some glimmers of hope. Used

5:06

car prices have moved lower, new car prices

5:09

have moved lower.

5:09

Right, what we're looking for in

5:12

particular is not

5:15

just in goods and things

5:17

that were inflated coming down,

5:20

but that core beyond

5:23

even goods in services,

5:25

you know, takeout housing, even looking

5:28

at you know, the services sector

5:31

and the core within the services

5:33

sector of minus housing to see

5:35

what the overall trend is. I think that

5:37

that is going to be the place that

5:39

people are going to be looking as they look at the CPI.

5:42

Now, one last question. We're going to talk about the

5:44

fed's meeting, which is April thirtieth

5:47

May. First, that's the next one. A non starter

5:49

for a rate cut, but everybody's still thinking

5:51

about that mid June meeting, and between

5:54

now and then, the FED is going to have three

5:56

CPI reports, two PCE reports,

5:59

and that for a data dependent FED

6:02

is a lot to consider. Is there any feeling

6:04

that by then, by the June eleventh

6:06

and twelfth meeting we are going to see maybe

6:09

some hope of a rate cut.

6:11

I think that these next ones

6:13

are going to be very important, because

6:16

you know, the FED is looking for a trend,

6:18

and that trend needs to be lower. To

6:20

the degree that the next one or two of these

6:23

CPIPCE reports are

6:26

not lower, it makes it more

6:28

difficult for the FED to cut in June. When

6:30

we look at some of the people at

6:32

the FED, Atlanta FED President

6:34

raphae Albostik, he's been an

6:37

individual who's at the leading

6:39

edge of where the Fed's going. He's

6:42

actually talking about waiting all

6:44

the way into the fourth quarter. So that's

6:47

an indication of sort

6:49

of the angst of the Fed about how

6:51

sticky inflation has been.

6:53

Wow.

6:53

Well, the next reading the March CPI data

6:56

out there Wednesday, and our thanks to Edward

6:58

Harrison, Bloomberg team leader for Americas

7:00

FX and Rates. Well,

7:03

we turn now to the start of the new earning season

7:05

on Wall Street. It kicks off this Friday. We

7:07

get the latest quarterly reports from

7:09

JP Morgan, Chase, Wells, Fargo,

7:12

and City Group, some of the biggest banks in the

7:14

US. What will they reveal about

7:16

the health of the banking sector. Well for more, We're

7:18

joined by Alison Williams, Bloomberg Intelligence

7:20

Senior Analyst, Global Banks and

7:23

Asset Managers. Now, Allison, I

7:25

want to start with where the US banking sector

7:27

is right now compared to the turmoil

7:29

a year ago. We saw the failure of Silicon

7:31

Valley Bank in March of twenty three, Signature

7:34

Bank in April of that year, First Republic. Where

7:37

are we now?

7:37

So, I think for the

7:40

banks, that really kicked off a lot of concerns

7:43

about the higher interest rate environment,

7:46

and we saw a lot of deposit

7:49

outflows and that really has been a

7:51

big focus for investors in terms of

7:53

the impact on net interest income. But

7:56

for this quarter, investors are really

7:58

going to be focusing on the change

8:01

in interest rate expectations

8:04

versus the last time we heard from the banks, which

8:06

was in January, and so

8:08

at that point in time, most

8:10

of the banks gave their guidance for net interest income

8:13

looking for six rate

8:16

cuts. City Group more in the

8:19

three to six cut region, but

8:22

the market implied rates at this point

8:24

in time are closer to three, and so

8:27

we do expect that there could be some change in the net

8:29

interest income outlook that really affects

8:31

more of the back half and the twenty twenty five expectations.

8:35

But circling back to deposits again,

8:38

that was the sort of one of the big concerns a

8:40

year ago, deposit pricing.

8:43

We have seen those deposit

8:45

prices increase, but we

8:48

do think that this quarter they could

8:50

come in a little bit more

8:52

muted than perhaps had fears. We

8:54

got some color around that from Bank

8:57

of America who said that they

9:00

think that they're an interestingcome guidance could

9:02

come in a bit at the higher end of

9:04

their guidance because those costs

9:06

have not been as bad as.

9:08

They had expected.

9:09

What were they expecting, Well, deposit prices

9:11

are increasing, right, so as

9:14

rates have come up, banks sort

9:16

of got an early benefit in terms of the repricing

9:19

of their loan books, but they held off

9:21

a little bit in terms of passing

9:23

on those price increases to

9:26

customers because we were coming off

9:28

of those zero percent levels.

9:31

So I think as things sort of adjusted to

9:33

a normalized environment, they were

9:35

a bit slower to pass on some of that benefit.

9:38

But now that is happening, and

9:40

so consumers are demanding

9:43

a little bit more yield. They're switching their

9:46

deposits into products that offer

9:48

a higher yield, and that's been happening

9:50

over the past year. But perhaps that

9:52

pace is starting to slow down a bit.

9:54

Yeah.

9:55

Well, one thing that hasn't slowed down for banks

9:57

trading. We've seen IPO

10:00

a little growth there, we've seen record

10:02

levels for all the major averages. What does

10:05

that mean for these banks?

10:06

So healthier markets are

10:08

definitely a boon to the

10:10

asset and wealth management businesses for

10:13

all these big banks. They

10:15

are diversified banks, and so they are benefiting

10:18

just from the fees, just from

10:20

the asset levels, but also they'll

10:22

be looking for better flows. That is a key

10:25

measure of health of the businesses. But on the trading

10:27

and fee outlook, trading

10:30

continues to be relatively resilient,

10:33

and so that fixed income trading

10:35

does face tougher comparisons, So

10:37

it could be a little bit down, especially

10:39

for the rates and currencies business

10:41

for someone like City Group, but

10:44

still very healthy historically

10:46

high levels. Equity trading

10:49

getting some benefit. As you pointed out

10:51

that we have seen a little bit more activity

10:53

on the IPO front, perhaps

10:56

not as strong as some of the banks would

10:58

expect, but definitely in the US, the

11:00

US underwriting business is

11:03

going to be helping those fees, the debt underwriting

11:05

business helping those fees. M

11:07

and A announcements looking a little bit better,

11:10

but it'll take a little while for those fees to kick

11:12

in. But I think the highlight for this quarter for trading

11:14

and fees will be that investment banking

11:16

feed growth both versus a year ago and

11:19

the fourth quarter.

11:20

But let's talk about now the challenges, and probably

11:22

the biggest one we spoke about this is commercial

11:25

real estate. We just had a vacancy

11:27

rate of offices last quarter twenty percent,

11:29

just under twenty percent across the US. That's

11:31

got to be devastated.

11:32

And the office business is definitely something

11:35

that investors are focused

11:37

on. It's something that we're focusing on. But

11:40

Wells Fargo, you know, for example,

11:42

who has one of the biggest exposures

11:45

among our banks. At least they've

11:47

already put up a pretty healthy reserve against

11:49

that business, so they've been watching it as

11:52

those trends have been deteriorating. And

11:55

commercial real estate, while it's a big thing

11:57

I think to focus on for the industry, it

11:59

does tend to be a relatively

12:01

lower exposure across the banks. So even

12:04

though Wells Fargo and now JP Morgan

12:06

two of the biggest lenders out there to

12:09

commercial real estate, Bank of America

12:11

as well, it is not as big

12:14

of a share of their loan book as it is perhaps

12:16

for the smaller banks. And so what we're

12:18

really focusing on is the credit card

12:21

business, where we think that is going to be the driver

12:23

of provisions for the

12:25

largest banks because there

12:27

is loan growth in that business, and that loan growth

12:30

does tend to have higher loss rates. So we

12:32

will see provisions increase because of the growth,

12:35

because credit is normalizing, and because this

12:37

does tend to be a seasonally higher quarter

12:40

for those types of losses.

12:41

Well, a lot to look forward to this week and our thanks

12:44

to Alison Williams, Bloomberg Intelligence

12:46

Senior Analyst, Global Banks and Asset

12:49

Managers. And coming up on Bloomberg Daybreak

12:51

weekend, when will European policy

12:53

makers start to ease monetary

12:55

policy? We look ahead to the next European

12:58

Central Bank meeting. I'm Tom Buzby

13:00

and this is Bloomberg. This

13:13

is Bloomberg Day Break weekend, our global look ahead

13:15

at the top stories for investors in the coming week.

13:18

I'm Tom Busby in New York. Up later

13:20

in our program. Has China's economy

13:22

bottomed out? We look ahead to China

13:25

inflation data. But first in

13:27

the global interest rate race, investors

13:29

have been working on the assumption that the Federal

13:31

Reserve will be the first to make a raid

13:34

cut, but after some encouraging economic

13:36

data from the Eurozone, could the European Central

13:38

Bank beat the Fed to the punch with

13:41

a surprise cut as early as later this month.

13:43

For more, Let's go to London and bring in Bloomberg

13:46

Daybreak anchor Stephen Carroll.

13:48

Tom Inflation in the euro Area may not

13:50

be slowing down as quickly as it was

13:52

last year, but it's still moving in the right direction

13:55

for the ECB. The latest reading shows consumer

13:57

prices rising in March by two point

13:59

four percent year on year. That's down from

14:02

a pace of two point six percent in February.

14:04

Spanish Governing Council member Pablo Hernandez

14:06

de cass is among the most recent to earmark

14:09

the June meeting as likely being

14:11

for the first cut in interest rates.

14:13

Even the most hawkish member of the Governing Council,

14:15

Austria's Robert Holtzman, is warning

14:17

of the perils of holding rates at their current

14:20

level for too long, but could

14:22

waiting until June risk harming the economy.

14:24

Boomberg opinion columnist Marcus Ashworth has

14:26

joined those calling instead for an April

14:29

move at this upcoming meeting. He points

14:31

to Bank of France President Fransouovievoia the gallow

14:34

who's often the bell weather for ECB policy

14:36

changes. De Gallo says that a

14:38

further slow down in growth means

14:41

that the time has come to take out an

14:43

insurance against this second risk

14:45

by beginning rate cuts. But going

14:47

before the FED doesn't come without its

14:49

risks, both in Europe and globally. It's

14:52

something we've been discussing with Aaron Captain, who's

14:54

chief economists at UBS Investment Bank.

14:57

So if the FED doesn't cut in June,

14:59

right, so we basically then have less

15:02

cuts for the FED, so a bit more appreciation of

15:04

the dollar, a bit more euro depreciation.

15:06

So at the margin it's going to add a little

15:09

bit to Eurozone inflation, but really

15:11

not very much. If all that we're doing is

15:13

sort of a time shift of the FED cuts, right,

15:16

if they just go a bit later and they catch

15:18

up next year, then

15:20

you know, the overall rate differentials don't really

15:22

move that much, and it doesn't fundamentally

15:24

I think alter sort of the inflation outlook in the euro

15:26

Zone.

15:28

Is there any chance you think of fifty basis points

15:30

cuts from the ECB this year?

15:32

Not now?

15:33

It's difficult to see why. So

15:35

I think the debates more, you know, do you go once a quarter

15:37

at the forecast meetings or do you go every meeting.

15:40

It looks like they want to go once a quarter,

15:42

although they have been a little vague

15:45

about sort of what the speed of the sequences

15:47

that they have in mind. In

15:50

my mind, you know, the easy bit is the

15:52

first one hundred and fifty basis points, and

15:54

there's no real reason why you want to sort of

15:56

race through that if there's uncertainty

15:59

about the landing zone. Right, So the way I

16:01

think they think about it is that you know,

16:03

you're at four, you can probably safely

16:05

cut to about two and a half, and then once you get

16:07

there, you got to look around to see whether you're still

16:10

on track, and if, you know, if things

16:12

are accelerating too fast

16:14

and profits are going up too fast, then you stop cutting

16:16

at that stage. So given sort of

16:18

that type of uncertainty, you don't need to

16:20

go in fifties. I think the debates really

16:23

do you go in twenty fives? And then you know, do you

16:25

skip meetings or not?

16:26

Yeah?

16:27

I wonder you know, Kasina Guard and

16:29

others have points as the importance of wage

16:31

data when it comes to their decision making

16:34

process at the ECB. Two is

16:37

the wage days is something that's a big concern

16:39

for you when you're thinking about the broader outlook for the

16:41

year Zone economy.

16:42

No, so based on what we've there's not a lot

16:44

of year to date wage data out yet. But if

16:47

Italy doesn't repeat the big one off

16:49

that they had in December, then our current

16:51

tracking of negotiated wages is that it'll

16:53

slip below four percent for the first time in January.

16:56

And so it really looks like, you know, the

16:58

negotiated wage track, which is going to be most

17:01

inertial, had been sort of going sideways,

17:03

is now starting to trend lower. The indeed

17:05

wage tracker, which is sort of temp marginal

17:08

wages of temp agencies, that's already been heading

17:10

lower. And then they have a phone survey which they

17:12

don't publish, and so all indications

17:15

really are that wages are moving in

17:17

line with their forecast and at this stage are

17:19

not concerning.

17:21

That was Aaron Captain, chief economist at UBS Investment

17:23

Bank, speaking to us on Bloomberg Daybreak Europe.

17:26

Now, the ECB expects CPI to fall to

17:28

two point two percent by August, but it could

17:30

happen as soon as this month, according to estimates

17:32

by Bloomberg Economics. Kicking off

17:34

rate trimming is one thing, but questions still

17:37

remain about what comes next for the ECB

17:39

after the first cut, whether it comes in

17:41

April or in June. At

17:43

the moment, money markets are pricing in three

17:46

quarter point reductions starting in June.

17:48

I've been discussing the path ahead with senior Euro

17:50

Area economist for Bloomberg Economics David

17:53

Powell. Just how surprising would

17:55

an April cut be or how likely is

17:57

it?

17:58

An April cut is very unlikely at

18:00

this stage. For example, there's almost

18:02

no probability of that being priced into

18:04

the markets right now. Some time

18:06

ago, there was a debate whether

18:09

this was going to happen in April

18:11

or in June. That was back at the beginning of the year, and that was

18:14

fully priced in that April cuts.

18:16

There has been a big shift in market pricing we've

18:18

seen, and that's really been thanks to the

18:20

communication we've seen from the ECB

18:23

who have started to rule out some time

18:25

ago the possibility

18:27

of an April cut, Although

18:29

there have been some doves in the Governing

18:32

Council who've continued to speak about

18:34

it from time to time. It's not

18:36

of you held by the consensus at all.

18:38

Just mischievously hinting that perhaps

18:41

there's something could happen, even though there's

18:43

no likelihood of it as you see it as

18:45

well. So what's the risk of waiting

18:47

longer for Christine Legard and

18:49

colleagues or is there a risk in them

18:51

waiting to June.

18:53

Well, the difference between April and June

18:56

is not that huge. Although the

18:58

ECB cannot wait until is

19:00

actually down to two percent to start cutting

19:02

because monetary policy works with a lag

19:05

somewhere between a year and a year and a half. So

19:07

if they don't, if they don't actually cut

19:10

until inflation is back to target,

19:13

the full impact of that cut won't be felt for some

19:15

time later, and the economy could already have

19:17

suffered some significant damage

19:19

by them at a time when the economy has hardly

19:22

grown. In fact, the UR economy is not expanded

19:25

at all for nearly a year and a half, and if

19:27

we compare that flatlining that

19:29

we saw last year in the UR area,

19:32

that's very different from the US where it expanded

19:34

by three percent. So they can't wait forever

19:37

to cut, but probably the difference between April

19:40

and June is not huge, and

19:42

it looks like it's coming in June.

19:44

The process of deflation has been

19:46

reasonably steady in the Euro Area.

19:49

Are there worrying aspects

19:51

within that? Are there risk zones

19:53

within the members of the Euro

19:56

Area that could actually bump

19:58

inflation up in the wrong direction before

20:00

we get to right cuts?

20:01

Yeah, well, inflation has come down, as you said,

20:04

considerably from where it was

20:06

at its peak. In fact, it's not very far from

20:09

the target now, and we expect headline

20:11

inflation to actually drop below target this

20:14

summer. But there are still some bits of worry

20:16

when you look at the details of the report. In fact,

20:19

we just had the inflation report for March

20:21

and both the headline and core continue to come down.

20:23

But services inflation, which the ECB is

20:26

watching very closely, has been sticky

20:28

at four percent for months now. That

20:30

will probably come down in the months

20:33

ahead as wage growth decelerates,

20:35

but that's keeping the ECB worried

20:38

and as part of the reason they're moving cautiously

20:40

delaying the first cut to June. They'll

20:42

probably pause after that and not cut again

20:44

until September, and they would like to

20:46

see that come down before they move more aggressively.

20:49

And of course the flip side of they say is and

20:51

those who do want to see right cuts come faster

20:54

is the weakness in the euro Area economy.

20:56

Late interesting to see the latest round of pm

20:59

I numbers showing a little bit of strength

21:01

returning the Eurozone composite pi I

21:03

number the final reading for March, seeing

21:05

it nudge back into expansion territory.

21:08

How weak is the euros and economy at this point,

21:11

Well, the your area is pretty weak.

21:13

Like I said, it hasn't expanded for nearly a year

21:15

and a half. That stands in very stark

21:17

contrast the United States, which,

21:19

as I already said, spend the three percent last

21:22

year. It just gives you a sense of how

21:24

weak it is in Europe. However, the economy

21:26

will probably gain some momentum

21:29

this year is inflation comes down. Real

21:31

incomes are being boosted and that allows

21:33

real consumption to rise,

21:36

so people have a bit more money to spend

21:38

with inflation coming in. We're seeing that in the numbers.

21:41

The services sector is once again

21:43

recovering in Europe, but that'll

21:45

probably continue throughout the course of the year and

21:48

the economy will gain some momentum, but nothing

21:50

like we're seeing across the Atlantic.

21:52

What about the question of wage data. This is something that Christine

21:55

Lagart has signaled and repeated occasions as being

21:57

absolutely key for the European Center

21:59

Bank decision making. Do we have any early

22:01

indications of what the wage picture

22:04

is?

22:05

Well, wage growth has probably

22:07

peaked the most comprehensive

22:09

set of data WEEGN, and that comes with the national

22:12

accounts. I mean know a couple of quarters ago that

22:14

peaked wage growth and is coming

22:16

down. Specifically, it's the compensation

22:18

per employee they look at, and we'll get another

22:20

round of that in the early part

22:23

of June and that will cover the first

22:25

quarter, and that's what the ECB is waiting for

22:27

to cut to confirm that wage

22:30

growth continues to come down, although before

22:32

that we'll get some data un negotiated

22:34

wages towards the end of May. Christine

22:37

Legarda already has highlighted that in

22:39

his speech in Frankfurt a couple of weeks ago, that

22:41

they'll be looking very closely at that for some initial

22:44

signs of wage growth continuing

22:46

to decelerate.

22:47

So let's talk us through your expectations then

22:50

for the rest of the year. So no cut

22:52

at the upcoming meeting. We're looking towards

22:54

the start of summer for things like that to start moving.

22:57

What does the rest of the year look like for the EACYB from

22:59

this point of view?

23:00

Well, as I mentioned, the ECB

23:02

is really focused on this wage data

23:05

and that comes in the national accounts, so

23:07

it only comes once a quarter. So we get kind

23:09

of batch of that for the first quarter in

23:11

the beginning of June, and then we have

23:13

to wait another three months of beinning of September

23:15

until we get data on that again. That'll be for

23:17

the second quarter. Conveniently for the ECB,

23:20

that also aligns with their forecast months,

23:23

so they'll have fresh inflation forecasts

23:25

and they own staff economists in June

23:27

as well as September. And if

23:30

both of those are going in the right

23:32

direction, meaning of that the staff

23:34

forecast are inflation continuing to

23:36

decelerate as they have been forecasting

23:38

for a while, that will allow them to cut

23:41

in June, probably pause

23:43

in July as they wait for that quarterly data

23:45

again in September, and then cut again

23:47

in September. By then, headline

23:50

inflation is likely to be below

23:52

target. In core inflation is not going

23:54

to be far behind it's going to be a lot more

23:56

difficult to justify restrictive

23:59

policy stands when inflation is actually

24:01

below target. So from September

24:03

we think that they will cut it at

24:05

each of the remaining meetings of the year, and

24:08

that equates to about one hundred basis points

24:10

and easing throughout the course of this year.

24:12

How much of a.

24:13

Dilemma is it for the ECB to

24:15

go before the FED. I know the ECB

24:18

of course will tell you that they make their own decisions

24:20

and they're not that conscious of it, but surely

24:22

one is reliant on the other.

24:24

If we look back at this tightening

24:27

cycle it's taken place, the FED

24:29

has kind of taken the lead on it, the

24:31

ECB followed, and the

24:34

ECB probably wouldn't mind if the FED

24:36

took the lead again on cutting.

24:39

And they may not have that luxury

24:41

though, of just kind of following the FED, because,

24:43

like I said, the UR economy is much weaker

24:46

than the US economy. So if

24:48

things remain strong, and most

24:50

of the data coming out of the US suggest they will,

24:53

the FED may be able to put off monetary

24:55

easing, and that's not a luxury that the ECB

24:58

has at this stage. So it may not have choice.

25:00

It may have to go on its own and

25:02

then allow the FED to go later.

25:05

How much of a risk would a weaker euro though

25:07

be to the inflation outlook if they we

25:09

do If as expected, the ECB does go before the

25:11

Fed.

25:12

Obviously the ECB is

25:14

so he is looking at the exchange

25:17

rate, what it does to inflation, in

25:20

growth and other things. However, it's

25:22

not really on the ECB's radar at this stage.

25:24

They're not talking about exchange

25:27

rate volatility or a weekier or strong

25:29

or anything like that. So I

25:31

suspect that that's not too important

25:33

for them at this stage when they contemplate

25:35

the path of interest rates.

25:38

That was David Powell from Bloomberg Economics.

25:41

I'm Stephen Carroll in London. You can catch us

25:43

every weekday morning here for Bloomberg Daybreak. You're

25:45

at beginning at six am in London and one

25:47

am on Wall Street. Tom, Thank

25:50

you, Steven. And coming up on Bloomberg Daybreak

25:52

weekend. Has China's economy bottomed

25:54

out? We look ahead to China inflation

25:56

data. I'm Tom Busby and this is

25:59

Bloomberg.

26:09

This is Bloomberg day Break weekend, our global look

26:11

ahead at the top stories for investors in the coming

26:14

week. I'm Tom Busby in New York.

26:16

The early indicators on China's economy show

26:18

there may have been a small improvement during

26:21

the first quarter. Even so, the majority of

26:23

Chinese financial institutions surveyed

26:25

by Bloomberg Economics doubt the

26:27

economy has bottomed out, and a big question

26:29

is whether it's stuck in deflation. We'll

26:32

get some insight in the week ahead. Let's get

26:34

to Doug Christner, co host of Daybreak

26:36

Asia for a closer look.

26:38

Tom, I think we can say the big issue is confidence.

26:40

Now.

26:41

The latest PMI data show improvement,

26:44

but so much about the overall Chinese

26:46

economy does remain fragile, especially

26:48

where consumer demand is concerned.

26:50

We know that retail demand is weak. Pricing

26:53

power seems absent.

26:55

Now.

26:55

The readings on producer and consumer prices

26:57

are due midweek. We're going to preview the

26:59

day and now and talk about the current challenges

27:02

for the Chinese economy with Bloomberg

27:04

reporters Jill Desis and Alan Wong.

27:07

Jill is one of our news desk editors, and

27:09

Alan is an editor on the China

27:12

ECOGV team. Thanks to both of you, for

27:15

joining us, Jill, I want to begin with you when

27:17

I start with the story about prices,

27:19

particularly at the wholesale level, producer

27:22

prices. I guess in China it's known as factory

27:24

gate prices. We saw numbers

27:27

in February at a decline that was pretty

27:29

rapid, and that extended a slide

27:31

in kind of a deflationary trend

27:34

to seventeen months. What's the conversation

27:36

like around what we might expect

27:38

in the week ahead.

27:40

Yeah, Doug, I think that at this point, really

27:42

those factory gate prices continue

27:45

to remain under pressure. We're

27:47

still expecting, or at least a economists

27:50

are still expecting a continued slide

27:52

once we get those numbers for March survey

27:55

estimate is below two percent declines

27:57

even I mean we're approaching three percent declines. Think,

28:00

so, there doesn't really seem to be any

28:02

kind of a meaningful turnaround in terms of getting

28:05

rid of these these issues around producer

28:08

price deflation. It's interesting because

28:10

I think that at this point the deflationary pressure

28:13

story in China is just so much more

28:15

centered around consumer

28:18

deflation, just because you know, from

28:20

a from a demand perspective, there's not a

28:22

ton of concerns around you know, China's

28:25

ability to you know, making goods and exporting

28:27

them. I think it's much more about what the domestics

28:29

demand story says about China right now.

28:31

So, Alan, assuming that the numbers do

28:33

show further deflation both at the wholesale

28:36

and retail level, does that create any

28:38

kind of urgency for the government to step up

28:40

support.

28:41

Yeah, the urgency has always been there, and numbers,

28:44

even if they're not positive,

28:46

will just only add to the

28:50

common consensus that there is a need

28:52

for China to ramp up its fiscal measures

28:55

to stimulate demand.

28:56

Jill, you were going to weigh in, Yeah.

28:58

I think what's really interesting about

29:00

the stimulus support story

29:02

when it comes to domestic demand is, look,

29:06

we were back at the NPC at the beginning

29:08

of March really sort of waiting on what kinds

29:10

of stimulus support measures would actually be announced,

29:12

and I think, you know, economists were generally

29:14

disappointed. But I did think one thing that was kind of interesting

29:17

is that, at least when it comes to trying to stimulate

29:19

consumer demand, there's a lot of talk about

29:21

trading and old products for new ones and stuff

29:23

like that. I think what economists, you're really waiting on is

29:26

whether there's going to be a big dollar amount put behind that

29:28

in the future.

29:28

So Alan, if we're really talking about depressed

29:31

sentiment, I mean, the property market seems to be

29:33

the root cause. I think we can agree on that

29:36

much. I mean, or maybe it's just such

29:38

a big part of the story. What is your sense based

29:40

on Bloomberg reporting? Where are things right

29:43

now visa VI the housing market?

29:45

Yeah, we're seeing a two track recovery in

29:47

the Chinese economy. On the industrial side,

29:50

things has been we were seeing

29:52

green shoots on that front, but then

29:54

in terms of the property slum it's

29:56

still very much in a

29:58

sorry state. We seeing

30:01

that housing start a week,

30:04

but housing completion is stabilizing,

30:07

so that means that new homes

30:09

on being built and that has some down

30:12

with pressure on commodity prices for example,

30:15

and that also reflects on

30:17

the weak sentiment in China in general.

30:19

The other thing too, I think it's a really interesting

30:21

stimular story when it comes to the housing market as

30:23

well, because the government has taken several

30:25

steps to try to prop up support there. I

30:27

think most recently, Chinese lenders

30:29

slashed a key rate for mortgages

30:32

in February and attempt to stimulate demand

30:34

into March didn't really seem to move

30:37

the needle there much. So that's just, you

30:39

know, to kind of put this in perspective. Another thing that analysts

30:41

are looking out for is whether these continued

30:43

rate cuts are actually going to help prop

30:46

up the property market as well, because they really haven't done

30:48

much so far.

30:49

And as both of you know, US Treasury

30:51

Secretary Yellen is in China. One of the things

30:53

that she is addressing is this issue of industrial

30:55

overcapacity and how it's having

30:58

a negative impact not just on the Chinese

31:00

economy, but many economies around the

31:02

world. I spoke earlier about that with

31:05

George Barboris, managing director at

31:07

K two Asset Management. Here's what he had

31:09

to say.

31:10

Some people would say there's some cognitive dissonance with some

31:12

of the policy coming out of Beijing, but in reality,

31:14

they're taking a step back from the grand to play the

31:16

long term. They will unload cheaper

31:19

products to the rest of the world that will

31:21

allow it, and North America will maintain

31:23

them. They've obviously died up those tariffs and the current administration

31:26

from the previous one, they can allow these

31:28

cheap goods to come through which they won't, and that

31:30

would be very CPI will fall very

31:32

quickly. But China's just got a different

31:35

playbook at the moment to where we're were three years ago,

31:37

and the middle class of China going to pay that price.

31:40

That is George Bevoris, they're from K

31:42

two asset Management. Now, Alan if we

31:44

can agree that there is an overcapacity

31:46

problem in China, It's kind of curious, isn't it

31:48

that Beijing is still intent on

31:50

using industrial policy as a way of driving

31:53

growth. What do you think?

31:54

Yeah, there is a need for it to find

31:56

ways to grow its economy because of the persistent

32:00

property slum. China is pouring

32:02

money into manufacturing and has designated

32:05

three new industries

32:07

as its new Big Three industries,

32:10

namely evs, electric vehicles,

32:12

solar cells, and batteries. So it's

32:15

trying to ramp up production on these things and then

32:17

obviously that creates more competition

32:20

in China and drive down prices. But

32:22

the US is right in thinking that what if

32:25

China exports lots of cheap

32:27

cars to the US, what's going to happen

32:29

to domestic makers of cars? And

32:33

this is going to be high on the agenda of Yellen's

32:35

trip to China.

32:36

We know that the government will released the Work

32:38

Report back in March and with it this plan

32:40

to unleash new productive forces.

32:43

High tech is a big part of that story. Innovation

32:46

another way of driving growth. Jill, do you have a

32:48

sense of what this may look like if we take EV's,

32:51

if we take solar panels out of the equation,

32:54

what does high tech and innovation look like?

32:57

I don't really know that you can totally take EV's

32:59

and solar panels of the equation

33:01

there, Doug, because I think that is pretty central

33:04

to this idea of what China is trying to accomplish

33:06

here, right. I mean, we know that no matter what happens

33:08

with the property sector, even if Beijing is able

33:10

to put a floor under this crisis, we are not going

33:13

to see real estate contribute

33:15

to GDP in the way that we have in the years past.

33:17

That's just absolutely done. So what

33:20

China really needs to do in terms of this long term

33:22

strategy for new productive forces is find

33:24

ways to replace bits of

33:27

how the property sector contributed to

33:29

GDP with some of these other sectors.

33:31

And so that does mean investing a lot

33:33

more into evs and solar panels,

33:35

which is of course obviously leading to some of

33:37

these overcapacity challenges that you're

33:40

seeing out of the US when it comes to China, the fact

33:42

that they're subsidizing so much.

33:45

But I think that at this point, I mean, it's

33:47

still a fairly vague slogan, right, I mean,

33:49

how else do you really prescribe, you know, describe

33:51

new productive forces?

33:53

Yeah, And I think one thing i' added is that the

33:56

idea for this new new productive

33:58

forces is China

34:00

wants to climb up the value chain in

34:02

areas like Ai. China also

34:05

want to make I mean, wanted to play a much bigger role

34:07

in the Chinese economy because it

34:09

will make people more productive and then the workforce

34:11

will be a lot more skilled and this will

34:13

make China a lot more competitive in

34:15

the longer term.

34:16

Well, you mentioned workforce there, Alan Jill.

34:18

I mean, where are we right now when you look at the labor

34:21

market, particularly youth unemployment.

34:23

Do we have a sense of where the unemployment rate

34:25

is these days?

34:26

Oh? Gosh, Doug, Well, I think that with

34:28

the youth unemployment rate, there's just been so much

34:31

chatter about that one over the last year, right, I

34:33

mean, we saw that one just removed from

34:35

the official database for several months in

34:37

twenty twenty three, as policymakers

34:39

said that they were retooling it. Ultimately,

34:42

now they're still putting it out, although they've stopped

34:44

highlighting it in their big regular

34:46

press conferences. It does seem like it's ticked

34:48

down a bit to around fifteen percent or

34:51

so rather than the north of twenty

34:53

percent that we were seeing in twenty twenty

34:55

three, though obviously still a major

34:57

issue. I mean, look, young people in

35:00

China, these recent graduates have really been hit

35:02

tremendously over the past several

35:05

years, not just because of the economic slowdown

35:07

and all the pandemic controls and all of that, but also

35:10

this whole realignment within China around

35:12

how the tech sector has handled this crackdown,

35:14

this austerity campaign. All of that has led

35:17

to jobs drying up, and I think, you know, some

35:19

levels of dissatisfaction still, particularly

35:21

among China's use well.

35:22

And if we can agree that consumers

35:24

really have been keeping a pretty tight

35:27

leash on spending, is there a way that

35:29

the government might address this through

35:32

means other than just lowering interest

35:34

rates. Are their ideas floating around, maybe

35:37

to issue some type of coupons directly

35:39

that could be used to purchase goods.

35:42

Are people beginning to get a little creative.

35:44

I think they are on the China's

35:46

top economic planet and the RC actually

35:48

recently met to just talk about how

35:51

they could implement this program. And some of those

35:53

people and the companies they

35:55

met are a consumer goods company and

35:58

importantly recycling companies, because they're

36:00

going to encourage consumers to replace old

36:02

goods, durable goods and cars and

36:06

factories to replace the equipment. So

36:08

that's going to create a lot more demand if implemented

36:11

the way it wants to for

36:13

new equipment and appliances

36:16

and what's that way it's going to go. China's

36:18

going to have to deal with that in some

36:20

way. Yeah.

36:21

I think Alan did a really good job of summing

36:24

up the plans that are actually in

36:26

consideration here. But I think the really

36:29

important thing to underscore is that in terms

36:31

of direct cash handouts, China's

36:33

just absolutely not going there.

36:35

I think that it would take a tremendous amount for

36:37

China to actually consider something like that. They've been

36:39

incredibly critical of what Western

36:42

governments in particular were doing in terms of cash

36:44

hand ats to households during the pandemic and

36:46

it seems like that's still a bridge too far

36:48

for China's government, right, But it was very interesting.

36:50

There was a report just in the last week I

36:53

published where President she was

36:55

considering a US style

36:58

quantitative easing as a way

37:00

of providing a little bit more liquidity into

37:03

the market and may be a little bit more risk taking.

37:06

Can you imagine a world alan where

37:09

quantitative easing shows up in part

37:11

of the pboc's playbook.

37:13

I think so far talks of Chinese

37:15

style q E is still premature. The

37:18

line that Cgpen said was

37:20

taken out of a new

37:22

book published featuring his quotes

37:25

from months ago, and there's

37:27

still no sign, no follow up on whether the

37:30

Chinese Central Bank will do something similar. And

37:33

you know, just generally speaking, China is

37:36

trying to prove that there is a

37:38

way to grow its economy without

37:40

resorting to Western style stimulus

37:42

measures that created problems that

37:45

we saw in the global

37:47

financial crisis. So I think it's

37:50

still too early to say whether that's going to happen.

37:53

Joe Lisis Alan Wong, thank you so

37:55

much for joining us here to help us understand

37:57

what's going on in the Chinese economy and what

38:00

we may see in the week ahead with that inflation data.

38:02

I'm Doug Krisner. You can join Brian Curtis and

38:05

myself weekdays here from Bloomberg Daybreak

38:07

Asia beginning at eight am in Hong Kong

38:09

eight pm on Wall Street.

38:11

Tom, Thank you, Doug, and that does it for

38:13

this edition of Bloomberg day Break Weekend. Join

38:16

us again Monday morning at five am Wall

38:18

Street time for the latest on markets overseas

38:20

and the news you need to start your day. I'm

38:23

Tom Busby. Stay with us. Top

38:25

stories and global business headlines are coming up

38:27

right now.