Daybreak Weekend: Retail Earnings, European Banking, Japan Eco

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1:22they may already be seeing from the Trump tariffs. I'm Tom Busby in New York. I'm Stephen Carroll in London, where we're looking at the challenges facing European banking consolidation ahead of an upcoming shareholder vote in Italy. I'm Doug Krizner with a look at what we can expect from a slew of Japanese economic data in the week ahead. That's all straight ahead on Bloomberg Daybreak Weekend. On Bloomberg 1130 New York, Bloomberg 99.1 Washington DC, Bloomberg 92.9 Boston, DAB Digital Radio London, Sirius XM 121, and around the world on BloombergRadio.com and the Bloomberg Business App.

2:04Well, good day to you. I'm Tom Busby, and we begin today's program with a slumping U.S. housing market. This week, though, some key data, including housing starts and existing home sales for July. Also, earnings from the nation's biggest home improvement chains and what those numbers could tell us about the housing market. And for more, we're joined by Drew Redding, Bloomberg Intelligence U.S. home building analyst. Drew, thank you so much for being with us. We know all the usual suspects, sky-high home prices, mortgage rates now just under 7 % amid those challenges. Let's start with what do you expect to see in the July housing starts number?

2:39Yeah, you hit the nail on the head. You know, we think that housing starts will come under further pressure through one half. We're down about 1 % over last year. And the weakness has really come from the single family side. Single family starts are down about 7 % year to date, while multifamily units are up 17%. You know, given what we've heard from the builders, we expect that we'll continue to see a pullback in single family production through the remainder of the year. Now, remember, the public builders account for roughly 50 % of industry volumes. And what they've been telling us almost universally is that they're limiting their pace of starts as they look to match production with demand.

3:18So that's a big piece of the pie that we know is going to slow down in the coming months. If you look at the inventory levels in the new home market, we're at the highest since 2007. And a lot of that is under construction or completed inventory. So there's really no incentive for builders to keep adding new supply until they start to clear out some of that excess spec inventory. And how are they going to clear that out? What incentives do they have for would-be buyers? I think everybody understands at this point just how aggressive the builders have been in their use of sales incentives. You know, what they use is going to depend on the buyer type.

3:53Typically, you'll see first-time or entry-level homebuyers take the mortgage rate buy down. That's the predominant incentive out there in the market. But you do see some buyers on the higher end will choose to take some type of options in the design studio, maybe some structural options or help with a down payment or something like that. But primarily what we're seeing is the use of mortgage rate buy downs. And that's really what's eating into builders margins right now. We've heard from a number of the builders during earnings saying that they expect that incentives aren't only going to remain the same.

4:26They think they're actually going to tick up a little bit higher in the second half of the year. So we'll see how that plays out with rates coming in a little bit over the last several weeks. But certainly incentives are the thing to watch out for in the second half for the builders. Well, and are those the high prices and the elevated rates that are making home sales so difficult? Is it pushing more people at all income levels to rent instead of buy right now? Are they waiting it out? Yeah, certainly, you know, we've seen more demand on the rental side of the business. You have rents starting to moderate a little bit with some of the supply that's come into the market.

5:03We had some data come out recently on household formation, and it was driven exclusively by renter households. And as you mentioned, it's the rates and it's the prices that are pushing people out of home ownership. So, you know, rates could come down a little bit. We think it'll help the marginal buyer, but home prices are still 50 percent higher than they were at the end of 2019. So we think you really need a combination of lower rates and maybe prices to come down a little bit, along with some income growth in order to get the housing market moving a little bit better. And that goes for the existing home sales as well.

5:35Same thing, the elevated prices. But they are seeing a little more inventory come on the market, though, for existing homes, right? Yeah, so we think with the inventory that's come on the market, we're up about 25 percent year over year. And now we're within somewhere around 10 percent of 2019 levels. We think that could help with volumes, but we think that it's going to come at the expense of prices. So home prices have already started to moderate on a year-over-year pace. And if you look at some of the biggest markets in the country, we're already down year-over-year in terms of prices. So we think that will continue to play out where the existing home market will see some volume gains, but you're going to see prices come down a little bit.

6:15The Fed's next policy meeting just a few weeks away. Wall Street pretty much expecting policymakers to lower their benchmark lending rate for the first time this year. But what would that mean for housing? And what would that mean for Home Depot and Lowe's, which report their latest earnings this coming week? Yeah, good question. I mean, all you have to do is look at the builder stocks to see kind of some of the enthusiasm that's out there in terms of the potential for Fed rate cut. What you have to remember is, though, that mortgage rates have probably largely already priced in any reduction by the Fed.

6:46So I wouldn't expect to see a significant leg lower in mortgage rates just from the Fed cut. So, you know, mortgage rates have come in over 50 basis points. We're at about six and a half percent now compared to over seven just just back in the beginning of July. So we've certainly made some significant progress in terms of what that means for the home improvement space and Home Depot and Lowe's. You know, one of the big areas of concern has been the weakness in big ticket discretionary spending. So think of things like kitchens and bath remodels, flooring projects. These are things that typically tend to be financed.

7:26So with rates having been as high as they are, we've seen people put off those purchasing decisions. You know, so we again, we think just like it'll help home sales on the margin. I think you'll see a little bit more refinancing activity with rates in the mid to low 6 % range, which could on the margin spur some of that big ticket spending. And, you know, when that does start to come back, we think that some of the investments Home Depot and Lowe's have made over the last couple of years, despite this market weakness, will really put them in a good position for growth. Well, let's hope for good news.

7:58New home construction numbers for July out on Tuesday. Existing home sales for that same month on Thursday. Home Depot earnings on Tuesday. Lows on Wednesday. Our thanks to Drew Redding, Bloomberg Intelligence U.S. home building analyst. We move next to more corporate earnings coming this week from two of the nation's biggest retailers, Walmart and Target. With inflation still a worry. Are Americans spending and are they spending at those stores? And have those stores seen any impact so far from the Trump tariffs? For all that and more, we're joined by Jennifer Bartaschus, Bloomberg Intelligence Senior Analyst, Retail Staples and Packaged Foods.

8:35Well, Jen, thank you. And I want to start with actually some pretty good news that came out this past Friday from the Commerce Department. Retail sales advancing in July, helped by auto sales, and all those Black Friday-like sales at Amazon, Walmart, Target, Best Buy, and others. Now, that is good news, isn't it? But what does it tell us about the consumer right now? It's overall good news with regards to the consumers are willing to spend, but they're spending on those sales events. And so what that really underscores is that that consumer value proposition is so important for these retailers.

9:11People are willing to spend, but they want deals. They want to see prices that they think are good prices. And so that's really the takeaway. And when you offer that compelling proposition, they are responding. And so there's a little bit of money out there. It's not necessarily going to help this current quarter of earnings, but it should help next quarter earnings for sure. Well, let's talk about this quarter earnings, the second earnings. Walmart was a big winner of all that to online spending. Also, still blowout grocery sales, double digit growth in online sales. What are you expecting to see in its second quarter results?

9:47What's interesting about Walmart is they have arguably the best visibility into your mainstream American consumer than any other retailer. They touch almost the entire population in the United States to some degree. And so what we're expecting to see is just another strong quarter for Walmart. That value proposition that I mentioned is something that drives people there. But Walmart has been really good about execution. And so they've been good about executing in terms of growing their marketplace, in terms of their offerings, improving the quality of their grocery and continuing to grow market share there.

10:23So it's a combination of execution as well as the value proposition that they offer that really should drive some strong results with regards to top line growth and same store sales. Now, aside from its food aisles, a lot of what is sold at Walmart is imported. A lot of that coming from China. what impact have the Trump tariffs had on Walmart so far? And can it manage to limit passing along those higher costs to shoppers or, you know, or is it coming? And we know it's coming. I think that there are going to be some costs that go up for consumers. But the advantage that Walmart has is that it is so big and its scale is so large that it can help minimize the amount that it does have to pass through to consumers.

11:05And they can be very selective on which products it hits. And so, you know, when you're talking about, especially general merchandise or things like apparel, that's where the tariffs come into much more play. But Walmart has that ability to negotiate with their suppliers. They've had a very active program for a long time in terms of, you know, purchasing manufactured in the USA goods in their home departments, for example, and things like that. So they've had long-term efforts in place to sort of mitigate where they're sourcing from. And in the recent year or two, they've really diversified the sourcing of where they're getting goods from.

11:46So that makes them a little, it makes it a little bit easier for them to offset that impact. But inevitably, there will be some prices that have to go up and that will ultimately impact consumers. Well, let's talk about the other side of the coin and that is Target, which has been struggling now for a couple of years. Sales growth stagnating. It's facing a boycott after scrapping DEI initiatives just last week. Bank of America downgraded the retailer. So what do you expect to see in its earnings report this week? Very much like the first quarter, we're going to see a little bit more divergence between Target and Walmart.

12:21And Target simply has not yet gotten back to that cache that it once had with with its consumers and its core its core followers and their their digital sales are slowing they have a a different approach to a marketplace which is much more limited in scale and importantly we're seeing that some of the partnerships that were supposed to help drive growth coming to an end so the partnership that walmart has with alta for example, where they had Alta stores within a Target store is coming to an end. And both retailers are sort of going their separate ways. So, you know, those are the kinds of things where, you know, I think people are looking at Target and wondering, you know, where is the future growth going to come from?

13:06And, you know, they can compete to a certain degree on price, but they are much more exposed in terms of tariffs and other pressures because of the merchandise mix that they sell. Our thanks to Jennifer Bartaschus, Bloomberg Intelligence Senior Analyst, Retail Staples and Packaged Food. Coming up on Bloomberg Daybreak Weekend, we'll look at the challenges facing European banking consolidation plans. That's ahead of an upcoming shareholder vote in Italy. I'm Tom Busby and this is Bloomberg.

13:45This is Bloomberg Daybreak Weekend, our global look ahead at the top stories for investors in the coming week. I'm Tom Busby in New York. Up later in our program, we'll look ahead to several key data points in Japan. But first, the countdown is on in Italy to a deadline in a potential takeover in the banking sector. Mediobanca shareholders will vote on its bid to take over wealth manager Banca Generale. It's the latest in a string of potential deals which could consolidate Europe's banking sector. But some remain opposed to creating bigger financial institutions on the continent. For more, let's go to London and bring in Bloomberg Daybreak Europe anchor Stephen Carroll.

14:23Tom, Italy has been at the heart of a wave of attempted banking consolidation across Europe, and things are set to heat up in the coming weeks. Despite encouragement from the European Union, only a few of the potential deals are sealing real progress towards completion. Italy's Unicredit and Spain's BBVA have launched attempts to buy rivals, only to meet with sometimes bitter opposition from Berlin, Rome and Madrid. Mediobanker's CEO Alberto Nagel says national governments are standing in the way of creating bigger banks in the EU. His lender is facing an unsolicited takeover offer from rival Monte de Paschi, which is supported by its largest shareholder, the Italian government.

15:03Nagel has repeatedly rejected the bid, which he calls totally inadequate, and has in turn mounted an acquisition effort for Banca Generale, the wealth management unit of the country's biggest insurer. It gives the Mediobanca CEO a unique perspective on this European-wide issue. Here's what he had to say about the situation when he spoke to Bloomberg earlier this month. Well, we are, as I said, delivering or over-delivering on our strategy. Our strategy is a strategy where we are focusing more and more on wealth management and IB, capital light. On top, we have also worked at BankerGenerife transactions.

15:40So for our shareholder, according to our view, there is no match between Mediobanca standalone plus Banker Generali and the possibility to be part of a group. How big is the probability that Montepasci actually gets Mediobanca at the end of the day? Well, this is up to our shareholder. No, we are, as I said, recommended to look carefully at the content of Montepaschi because financially it is a discount to our market value. You know, as Montepasque is half of our market cap, this transaction is construed where basically our shareholder should get 60 % of the combined entity, but not pay the premium.

16:25So this is something that, honestly, a long term shareholder of Mediobanca should not accept. Mediobanca CEO Alberto Nagel there speaking to Bloomberg's Francine Lacqua earlier this month. So what does the future of the Italian lender look like? And more broadly, what does it tell us about the European banking landscape? To discuss, I'm joined by our senior finance reporter in Milan, Sonia Serletti, and by Bloomberg TV anchor, Kriti Gupta, who's been following this story across the continent for us. Sonia, to you first, ahead of this shareholder meeting in the coming days for Mediobanco, what can you tell us about the offer that they're making for Banca Generale?

17:00Yes, as you said before, Italy's banking sector is now at the centre of this fresh wave of a merger and acquisition activity that kicked off in early November. And at the center of the action now, there's Mediobanca, who's seeking investor approval to go ahead with the bid for Banca Generale to basically fend off hostile takeover from rival Banca Monte de Paschi di Siena. Nagel, he's the CEO of Mediobanca, is proposing Banca Generale bid as alternative to Monte Parchi takeover offer. And on August 21, there is a key moment because investors of Mediobank are called to decide whether to go ahead with this bid or they can reject the proposal in what would be a big blow for Nagel's strategy to preserve the bank's independence and secure his own future at the helm of the bank.

18:03What are the expectations ahead of that vote? The expectations are uncertain. The vote will be likely very tight. We have seen that Nagel has before postponed the meeting amid the sign that he wasn't able to get the majority. I want to remember that Mediobanka needs the 50 % plus one of voting in favor of the bid to go ahead. And then he has rescheduled the meeting after some shareholder change happened. So maybe he thinks that he can get back. For sure, the situation is delicate. And if he will be able to win or lose the meeting, it's still uncertain. But what I want to say is that while the vote will be a big win or a big blow for Nagel's strategy and Nagel attempts to fend off the attempt to fend off Montepaschi's bid, the final endgame, the final battle will happen in September when Montepaschi will close his offer on Mediubanka.

19:20And from this result, a lot of things can change, not only for Mediobanca, but probably for the whole landscape of Italian banking. And just to understand this, why is Nagel so keen to refuse the Montepaschi offer? Alberto Nagel, first of all, is the longstanding CEO of Mediobanca. And he has emerged like this central figure in resisting Montepaschi's approach. I would say that his reluctance is rooted in a sort of combination of strategic and reputational factors. For Nagel, Mediobanker's legacy and independence is a core priority. He affirmed that the core activities of the two banks are different, being Montepaschi mainly a retail bank, while Mediobanker is focused on wealth and investment banking.

20:10Furthermore, there are questions around valuation and governance. Nagel and this board see the terms of the Montepaschi offer as underwhelming and potentially disruptive. So valuation is not reflecting the real value of the offer. And on the other side, there are issues about governance, according to Nagel. In Italy, nothing is simple, and all of this M &A saga is like an intricate chess game where there are cross-shareholdings, competing alliances, overlapping interests that mean that every move reverberates through the financial system. In particular, on this bid, what we see, Mediobank's largest shareholders are billionaire, taikun Francesco Galtagirone and Del Vecchio families.

21:02They also have major stakes in Montepaschi, who's doing a bid on Mediobank and Assicurazioni Generali, which sees Mediobank as main shareholder too. So there are a lot of different interests and Nagel is evoking a conflict of interest too. And so this is another matter of opposition. Let's say that the history shows that any hostile bid see the reluctance of the CEO of the target company in agreeing on bid. Yeah, I mean, it's an absolutely fascinating web of cross-shareholdings, as you described, Sonia. Let's zoom out a bit. I want to bring in Kriti Gupta, who's been listening into the conversation as well.

21:47I mean, Kriti, you've been across the banking story across Europe. Just talk to us about the motivation behind what's driving this wave of consolidation. Well, it's a fascinating story because in some ways it's been in the works since the inception of the EU, frankly, and this idea that you want to have a coordinated bid, you want to build out a capital markets union, you want to bring out a banking union as well. And this kind of consolidation is seen as an intermediary step or even just a first step towards that ultimate goal. There's a couple of other factors here, though, in that Europe, especially in recent years, has really been trying to get more competitive and take over market share internationally from some of the more U.S.

22:26kind of focused banks, but also some of the growing competition in Asia as well. So that's another piece of it. And the thinking there is you have to be stronger at home to be able to do that kind of business abroad. The third piece of this is kind of a little bit of a hangover when it comes to the experience a lot of European banks have had from COVID and also from the GFC and arguably the sovereign debt crisis as well. This idea that if you are already operating in different markets, so a hypothetical for Unicredit or for BBVA, where you're operating your home country of Italy or Spain, but also of operations in, say, the UK or, say, in Germany or name your country in times of recession, when the government needs to take active steps to protect the banking sector of that individual country.

23:10how easy is it for some of those banks that belong to a different home country to pull out those funds or to inject that kind of liquidity? And there have been concerns in those previous crises of who that loyalty kind of belongs to and whether being a European bank ultimately means that you are a Spanish or an Italian or a German bank first. Talk to us about some of the other, we've reflected on some of the Italian moves there with Sonia, but talk to us about some of the other big deals that we're watching elsewhere in Europe. I know that BBVA and Sabadell is one that you've been particularly monitoring closely.

23:42I'm fascinated by the story because I think it's such a crucial one. Consolidation on the surface seems like such a normal, natural thing to pursue, especially as you get larger and especially as some of these banking behemoths really pursue that kind of scale. I think what gets missed quite often in the argument that the likes of Banco Sabadell or arguably other takeover acquisition targets are making is simply this idea that the bigger you get, the harder it is to service, you know, the local bakery that has a loan and that's been working with the local branch of, say, Sabadell for centuries or decades or whatever.

24:16And that's the concern that is ultimately showing up. And a lot of these big banks that are under major pressure to build out the profitability, lean into digital banking, it also not only influences or kind of drives the question of how can they serve smaller clients, your local clients, but also how they can employ the people in certain regions. And that's really what has been a consistent sticking point in some of these consolidation conversations. Talk to us about how this is playing out between national capitals in Europe and the European Union, because the EU, I mean, if you read the Dragio or the letter reports, you know, banking consolidation, capital markets, union, deeper capital markets, all things everyone seems really happy about until you get some of the national governments involved who say we like the idea.

25:00But in this particular case, we don't think that it's appropriate for the market. How much of a tension is there between those two sides? Oh, my gosh, the tension couldn't be more tense, frankly. It's fascinating because it also goes back to this question of who is actually in charge of a European country? Is it the local government or is it the folks over in Brussels, for example? And this is something you see, a tenuous conversation you see in any industry, really. It's not just coming up in banking consolidation. You've seen it in things like foreign policy narratives. You've seen it in defense rearmament.

25:31You've seen it in kind of local investment in things like infrastructure. Whose burden is that to decide those policies? Not to mention regulation as well. Things like tech regulation have largely been driven out of Brussels, but there have been local conversations about that as well. From a banking standpoint, again, this is something where Brussels is thinking about Europe as a whole and how it can compete on the international stage as a whole. What it can, and the argument that a lot of local governments are making, especially as politics starts to drive the conversation, is are you thinking about the people employed in a certain region of a certain country that could be driving a national narrative or a national shift or a change in local regulation?

26:10And that's where the tension comes between what you're thinking of in Brussels versus Madrid or Rome or Paris. Okay, Krita Gupta, thank you very much for talking us through that. And to our senior finance reporter in Milan, Sonia Cerletti, helping us to look ahead to that key shareholder meeting happening in the coming days. I'm Stephen Carroll in London. You can catch us every weekday morning here for Bloomberg Daybreak Europe, beginning at 6am in London and 1am on Wall Street. Tom? Thank you, Stephen. And coming up on Bloomberg Daybreak Weekend, we'll check in on the health of the Japanese economy with the release of several key data points.