Daybreak Weekend: Retail Preview, UK Budget, China PMI

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0:10this is bloomberg daybreak weekend our global look at the top stories in the coming week from our daybreak anchors all around the world straight ahead on the program we look ahead to earnings from it hardware giant dell and retail ahead of the thanksgiving holiday i'm nathan hager in washington i'm caroline hepker here in london where we're looking ahead to the uk's highly anticipated autumn budget i'm doug krisner looking at why china's economy continues to struggle. That's all straight ahead on Bloomberg Daybreak Weekend on Bloomberg 1130 New York, Bloomberg 99.1 Washington, D.C., Bloomberg 92.9 Boston, DAB Digital Radio London, Sirius XM 121, and around the world on BloombergRadio.com and the Bloomberg Business App.

1:02Good day to you. I'm Nathan Hager. We begin today's program with more tech earnings. Yep, we're not quite done with them just yet. We'll hear from IT hardware giant Dell. It opens its third quarter books after the market close on Tuesday. Ahead of it, we're joined by Woo Jin-ho, Senior Technology Analyst for Bloomberg Intelligence. Great to speak with you. And I guess we're sort of coming off the glow of NVIDIA's earnings this past week, right? Does the AI chip giant inform how you're thinking about what we could get from Dell this week? Yeah. Hey, Nathan, thanks for having me on. You know, the NVIDIA results are actually quite positive for Dell's AI story.

1:41You know, there's a$20 billion sales outlook for fiscal 2026. There is maybe a little bit room for upside in the third quarter results and as well as the fourth quarter outlook. And the fiscal 27 outlook looks very promising as well, given the momentum. Now, the issue is its profitability, right? The AI service have not been the most profitable for the industry. Dell has actually done a fairly good job, and we'll see where they are on the profit margin side. Well, does that tell you then that we could see the AI data center business for Dell overshadow its more traditional PC business? Well, look, that's going to be one of the data points that investors are going to be pointing to.

2:28There's actually a lot of controversy on Dell heading into the print for the traditional businesses. Memory pricing has come in focus. service, you know, the DRAM chips that goes into your PCs as well as the servers, that's been up 300 % over the last month or so. And that could potentially not only affect margins in the near term, but also the pricing dynamics. And given how inelastic that the PCs can be, that could affect demand. Well, how could Dell potentially get past some of the drag on its margins that you see from the AI servers? Yeah, it's really tough to say. It's probably going to be very, very tough.

3:12And they actually did a good job at their recent analyst day on keeping their guidance on AI server margins low. They've guided to mid to high single digit AI server margin, which is a very sobering outlook and a realistic outlook. So if they do a better job on the AI server side, on the margin of profitability side, there is room for upside. But it's already baked into expectations. So I'm comforted by that. Now, in your note leading up to these earnings, you say you're looking for signs of improvement from Dell when it comes to operational changes. Can you walk us through what you're thinking there?

3:52Yeah, absolutely. So a couple of things that Dell has been doing over the past couple of quarters of streamlining the operations, cutting costs. And they actually were on the forefront on some of the cost actions in terms of relative to the growing AI mix. And I do think there's scope for Dell to maintain a high single digit operating margin profile, despite a growing AI mix. Now, of course, a lot of people who follow this company closely know that the federal government is a pretty important customer for Dell. Of course, we've had a government shutdown. Now that the government's back open, how could that feed into the outlook for Dell?

4:42Yeah. So, well, from a results perspective, there might be a chance that it might be a drag on Now, the outlook is going to be a little iffy in the sense that it may take a little bit or some time for the federal government to really start ramping up their spending engine. So there might be some headwind on the growth outlook, but it's going to be just a temporary blip in my mind. And the focus will turn to fiscal 2027 guidance thereafter. And in terms of the AI business overall, does that point to opportunities for Dell or is the competition just too fierce out there? No, you know, I will tell you, all the AI server vendors have been very aggressive in terms of winning the footprint.

5:40Among the AI server vendors, two have stood out, Supermicro and Dell being the other one. I do think that of the hardware vendors that are out there, Dell is probably one of the better positioned to win more global footprint sales. And that, you know, going back to your margin question, that could help margins as other players decide to back out. Appreciate this. Thank you so much. That is Wu Jin-ho, Senior Technology Analyst for Bloomberg Intelligence. We move next to the retail space. A couple names in that sector opened their books on Tuesday as well. That would be Kohl's and Abercrombie & Fitch.

6:20We're also expecting overall retail sales numbers that would have come out sooner if not for the government shutdown. September figures are due out Tuesday as well. Busy times for Mary Ross Gilbert of Bloomberg Intelligence. She's a senior equity analyst who covers retail. It is so great to have you with us as well. Of course, we've been hearing from so many of the retail giants lately. We got Target results that were kind of different from Walmart's results. What does that tell us about what we could be getting this week, Mary? So, Nathan, it's a great question. And I think what we're going to see come Tuesday, I think Abercrombie actually could have a miss.

6:58And it's really going to be on their namesake. And we might have, you know, and this is based on Bloomberg's second measure transaction data, we might have less of an increase on the Hollister side of the brand. So that could also impact their results. But with regard to Kohl's, Kohl's, we think they probably meet expectations. They're looking for like around a 4 % or 5 % decline in sales because they're still trying to get their assortments right. And then, of course, operating margin is expected to drop, and it's pretty low as it is. It's already in the low single digits. So, you know, Kohl's really has a lot to get right.

7:37And that's going to be a big focus, how they're positioned for holiday. and where their comp sales are on a monthly basis, because we did see in July that they were flat. So there was encouragement that maybe those sales could improve with the third quarter. So we'll see that when they go to report on Tuesday. Let's hone in a little bit more on Kohl's, because this is one of those kind of department stores that sort of feeds to all ends of the retail spectrum, doesn't it? Whether you're a value conscious consumer or someone who's more willing to spend on the high end. Yeah, they do. They really skew to the lower end consumer, really on the value segment, as you pointed out.

8:19And one of the merchandising mistakes that they made last year is that they really cut back on private label. And that was really a good category for them. The brands that they have, the private brands like So Sonoma, really resonate with their customers. And so bringing those back, they've already started to see a boost in their sales because of that. The other thing they did was they got rid of or honed back on petite sizing. And that was another very, very important category for them, having that extra sizing. So bringing all that back, they're already seeing a lift. And it's also higher margins.

8:58So that's also helping them on the margin side. So we haven't seen the erosion that we thought we would with tariffs. So they've really made no comments on tariffs having an impact. So that's going to be, you know, a big focus. But really, you know, Macy's is going to come in the following week. And we think we're going to see better trends there because we think their strategy of going in and bringing back service, of bringing in more relevant brands is really starting to show some traction there. We should see potentially positive comp sales come out of Macy's for the go-forward business because that's really the focus there.

9:36Dillard's already reported, and they came in with a very nice 3 % increase in comp sales, so a good sign for department stores. And there are probably some investors who have memories of the scandal surrounding the previous CEO of Kohl's. Has the department store gotten past that? I think they have really the current interim CEO that they have seems to be doing a really good job very quickly getting things back into the store that matter. For example, they're going to have fine jewelry and over 25 percent of the stores. I mean, yeah, they need to have it in the vast majority of the stores for the holiday season.

10:19But it's a big improvement from when they brought in Sephora and they did it as a replacement of jewelry, not something you can really do because that's a key gifting category for consumers during the holidays and other key gifting seasons. So he's making some decisions very quickly that are showing green shoots of improvement there. And I think that is encouraging for Kohl's. And let's turn in the time we have left to Abercrombie and Fitch. You mentioned some of the challenges that some of its specific brands could be facing. Talk us a little bit more through that and how name brand apparel is faring overall in this current economic environment.

11:02Yeah, so Nathan, actually, overall, I would say apparel overall looks to be very strong, especially for those that are executing. And if you look on, let's say, the off price, because we had TJX report and they had great numbers. So that just goes to show you they're carrying all the name brands and the consumers love it. So they're flocking to off price. But going back to Abercrombie, Abercrombie, the namesake brand, has posted four years of double digit comp sales increases. So we're now cycling those four years and that's why their sales are coming in lower year over year on a comp sales basis.

11:41So it's really hard to keep bringing in more newness, more excitement to keep that going. And their core customer there are really the millennials. Their Hollister brand really shows that that's still performing well. Now, is it performing as good as analysts expect? Based on the data, we're not so sure, but that's something we're going to look for next Tuesday when they go to report their results. And Hollister really caters to the Gen Z customer. And that customer, by the way, loves to shop in-store. 70 % of their sales are generated in-store. And Abercrombie, 60 % are generated online. Lots to think about in the retail space.

12:23Thank you for this, Mary. Really appreciate it. That's Mary Ross Gilbert, Senior Equity Analyst covering retail for Bloomberg Intelligence. And coming up on Bloomberg Daybreak Weekend, we'll look ahead to the UK's highly anticipated autumn budget. I'm Nathan Hager, and this is Bloomberg.

12:48As markets move and headlines break, what matters most is context. A Bloomberg subscription gives you unmatched reporting, sharp analysis, and powerful tools that help you connect the dots. Visit Bloomberg.com slash podcast offer to learn more. This is Bloomberg Daybreak Weekend, our global look ahead at the top stories for investors in the coming week. I'm Nathan Hager in Washington. Up later in our program, we'll look ahead to some key economic data from the world's second largest economy. But first, in a few days' time, U.K. Chancellor Rachel Reeves will deliver an autumn budget, which she hopes to lessen the debt burden plaguing the country's finances.

13:29The announcements become one of the most hotly debated fiscal events of the year among investors, economists and business leaders. But will Reeves be able to balance party, politics and prudence? For more, let's go to London and bring in Bloomberg Daybreak Eurobanker Caroline Hepker. Nathan, the Labour government has endured a volatile period of pre-budget U-turns and a political crisis in recent weeks. Yet one constant has been the Chancellor's indication that she plans to give herself more breathing space against her own fiscal rules. However, with an income tax hike appearing to be dropped and Reeves favouring multiple smaller tax increases instead, investors and economists are sceptical about how she can make the numbers add up.

14:15Now traders are bracing for volatility as the deadline to share her economic plans for the country looms large. The cost of one-week options, which now spans the upcoming fiscal event, have climbed to multi-month highs for major sterling pairs, this in recent days, as traders pay to protect themselves against potential swings in the pound. According to Bloomberg strategists, the waters have also been muddied ahead of the announcement. There are worries that the government could wrong foot the markets. Reeves' bid to increase the fiscal headroom comes against the backdrop of a significant deterioration in the public finances since her last economic statement back in the spring.

14:55She left herself a slim£9.9 billion margin against her spending rules, a buffer near historic lows. Now, the latest forecasts from the Office for Budget Responsibility show that her position has worsened by about£20 billion since then, driven lower by a productivity downgrade and those policy U-turns I mentioned. That's as the FTSE 100 had its worst run since August in the lead up to the budget, amidst worries about AI being a bubble and signs of corporate pain, with the somewhat erratic data in the UK showing unemployment rising. It all does raise the bar for the Chancellor as she tries to navigate Britain's finances without spooking investors or exacerbating the flight of global capital.

15:47Kamakshaya Trevedi, Chief FX and Emerging Market Strachist at Goldman Sachs, tells me there are a number of factors at play. Look, I think it's a really interesting juncture for the UK. I think the inflation release, the fact that it has come down alongside some of the weaker labour market data that you had in the last couple of weeks, I think those are important. I mean, there has obviously been a lot of back and forth, a lot of uncertainty around exactly what is and isn't going to be in the budget. I mean, if you take a step back and think about it from a macro standpoint, irrespective of the exact tax and spending decisions that they make, it looks like this is going to be a budget that is going to be fiscally conservative.

16:32Kamakshaya Trevedi, Chief FX and Emerging Market Strategist at Goldman Sachs, speaking there to me and Stephen Cowell on Bloomberg Radio. While also part of the equation are the political pressures facing the Chancellor, who is attempting to unite what seems like a fragmented parliamentary Labour Party, the delicate balance between investors, voters and MPs is something I've been discussing with Bloomberg's chief UK economist, Dan Hansen, and our UK politics reporter, Joe Mays. Dan, can I start with you just on the economics firstly? There's been some back and forth about just how big of a fiscal hole Rachel Reeves is facing.

17:12Can you just give us an update on the latest expectations from the Office for Budget Responsibility and what that means? Sort of reading between the lines of everything we've heard, and particularly from our Bloomberg News colleagues, the number seems to be around£20 billion, the fiscal slippage. Now, that's made up of quite a few things and actually quite a few offsetting things. The biggest reason for the whole is that the OBR, which is the UK's fiscal watchdog, is going to reappraise how quickly it thinks the economy can grow in the medium term, in particular how quickly productivity in the UK economy is likely to rise over the next five years.

17:52That is the single biggest factor determining the fiscal forecast, the path of productivity growth. So if you change that, you play around with the numbers quite significantly. And we think that could blow a£20 billion hole in of itself in the public finances. Interest rates are a little bit higher. There have been some policy U-turns. That probably adds another£10 billion. So that gets you to£30 billion. The reason why you then come back to 20 is that the OBR looks like it will also take a look at its wage growth forecast, which is quite low compared to other forecasters. And obviously that gets some money back for the Chancellor.

18:30So I think a reasonable expectation is something in the region of£20 billion. So that's the economics. What about the politics? We've heard a lot about the political pressure facing the Chancellor as she's preparing for the budget statement. Where is it coming from, Jo? Well, I think the political pressure is really around this question of can Reeves afford to do a budget that really annoys Labour MPs and the public? And that really is what she is in line to do because she has to increase taxes, have spending restraints to fill the fiscal hole that Dan just described. And really the question for this budget has been for me, how aggressively can she fill that hole with things like tax increases?

19:12how large can she build her fiscal buffer to give her breathing space for the rest of the parliament now my sense from the treasury you know about a month ago was that she was willing to go quite aggressive she was really willing to build that fiscal headroom up perhaps up to 20 billion pounds 25 and really impress markets show markets that she was a really strong stable chancellor and she hoped she'd be rewarded with lower borrowing costs and that would help her for the rest of the parliament then we saw this change in the last few weeks where it seemed like especially with the briefing against West Streeting from Number 10 and how that immediately shone a light on the leadership of Keir Starmer and raised questions about how stable he is, which in turn raises questions about how stable Rachel Reeves is, because there's such a partnership there, that it seems like what happened was they realized they couldn't go so aggressive with the tax increases, especially touching the manifesto promises around income tax, national insurance, VAT.

20:04So they've rolled it back to a certain extent to ward off some of that threat from Labour MPs. And that's why we've got this new position where it looks like the manifesto won't necessarily be broken. She will still try and restore her fiscal buffer, perhaps increase it a little bit. But I don't think as much as she might have done before that whole episode. Dan, do her plans add up, though, without major tax hikes, increases to the headline rate of income tax? What was quite strange about what was being briefed is that they were going to do this two up, two down policy where they'd raise income tax by 2p, but cut national insurance by 2p.

20:42And it seemed to me that if you're going to break the manifesto, you might as well break it big time and really raise some money because£6 billion is not a lot of money to raise. So it seemed like, I understand there was an attempt to go through that muddy path of not upsetting Labour MPs too much, but it seems like the big revenue raisers are off the table. and that does make it a lot harder to raise the money. You know, you can look at it now and say, well, if I put, you know, capital gains tax, I put that up by one percentage point, you know, that currently raises X, well, I could get a little bit more money.

21:18But what actually happens is that people look at that and move their money elsewhere and the tax base is very mobile. So if you have a lot of small measures with that risk attached, you end up in a world where you struggle to raise, you potentially, I should say, struggle to raise the money. There's just a lot more uncertainty. You know, there's a sort of backloaded in sort of the parlance, the backloaded element to it, which isn't what markets like to see. They like an upfront down payment when it comes to fiscal, when it comes to a fiscal adjustment. Yeah, absolutely. In terms of the pre-announcement that you mentioned, the big speech, which laid out her economic thesis a couple of weeks ago, did that do more harm than good?

22:00I think the immediate harm we've seen is that it has created a sense of chaos and loss of control around narrative for this budget, because you've had Reeves clearly preparing the country for one thing and then moving away from that in the last couple of weeks. And that does give an air of lack of control and wayward government. And that is clearly harmful. But I think that the kind of counterbalancing point is that she did nevertheless prepare in the minds of voters the idea that the manifesto could be broken. And now it's likely heading for a budget where it isn't broken. And so you can see why the ultimate outcome is a kind of net positive for Reeves in that she can say, I haven't broken the manifesto and we still have stable public finances because everything I've announced and we've kept our promises.

22:52So I think ultimately it's landed in a place that isn't awful for Reeves. And you can see why she did it in that they know the OBR productivity downgrade that Dan just described is very hard to explain. and if Reeves hadn't done that, it would have been lost pretty much entirely on Budget Day and in the post-budget coverage where all of the newspaper headlines would have been about the tax increases. So I think Reeves wanted to get out there first and make her case in a moment where the public were focusing on that rather than the tax rises. Dan, just if we look forward to the next few days, is there a particular announcement which could spook markets or which would spook markets the most?

23:37I mean, that's hard to, any particular one is hard to put nailed down. I mean, the thing that markets don't want to hear anything about is something that increases inflation. So any sense that a policy, the policies or the set of policies, I should say, aren't particularly disinflationary, that's going to be a big warning sign for markets. and you're likely going to get a negative reaction. I think the other thing, going to Joe's point, it's very hard to know exactly what the market expects in terms of building the headroom against the fiscal rules. But, you know, if she only adds£5 billion to the headroom, it's not really, I mean, it's nothing really.

24:25So I still think there's possibly a rabbit out of the hat whereby originally the plan was to build£25 billion of headroom using that income tax rise. Now maybe it'll be closer to 20 because I think that, you know, going to Jo's point about politics of this and what's the best path for Reeves, if there is a strong negative market reaction, that's going to be a problem for her as well. So, you know, there's that side of it as well that she's trying to balance as well as the politics. My thanks to both of you for joining me. That is our chief UK economist, Dan Hanson, and our UK politics reporter, Jo Mays.

25:03I'm Caroline Hepker here in London. You can catch us every weekday morning for Bloomberg Daybreak Europe, beginning at 6 a.m. in London. That's 1 a.m. on Wall Street. Nathan. Thanks, Caroline. And coming up on Bloomberg Daybreak weekend, we'll look ahead to official PMI figures in China. I'm Nathan Hager, and this is Bloomberg. Bloomberg.

25:32This is Bloomberg Daybreak Week and our global look ahead at the top stories for investors in the coming week. I'm Nathan Hager in Washington. We turn now to China, where there's a question as to whether the economy will hit this year's growth target of 5%. In the week ahead, Beijing releases its official PMI figures. For more, here's Doug Krizner, host of the Daybreak Asia podcast. Nathan, weak economic momentum in China has persisted from the third quarter into the early part of the fourth quarter, and the slowdown appears to be broad-based. For a closer look, I'm joined by John Liu, Bloomberg Executive Editor for Greater China.

26:07John joins us from our studios in Beijing. John, thank you for being here. I'd like to start with this PMI data, and I'm curious as to whether we're going to learn anything new regarding the Chinese economy. I think the PMI data that we get is going to show a continued weakness in the economy. Manufacturing PMI has been in contraction for seven consecutive months. I think we will get an eighth consecutive month. Services PMI has been very, very close to that 50-point edge between contraction and growth, and I think we will stay there. There's even a danger that we will slip into contraction for services as well.

26:47You know, it's interesting that you made that point about services, because when I look at some of the more high-frequency type data coming out of China, or even the monthly activity data for the most recent month, demand domestically is still struggling. And I know the government has been trying to figure out a way to address this issue. Are there any novel ideas that have kind of emerged or is it basically turning into a bit of a treadmill and going back to the old playbook to try to figure out what approach may work? So I think the situation has actually gotten a little bit worse in the last month or so.