Daybreak Weekend: U.S CPI, UK Security, China CPI

22:52I mean, we know that they've talked about it a great deal. Defence Minister John Healy, the Prime Minister, the new NATO defence spending commitments, but it's a difficult time fiscally for Britain too. Well, it is. Minkir Starmer, the Prime Minister, back at the time of the NATO summit, he said the first duty for Prime Minister is to keep the country safe and that sits above all other duties. And so, you know, it is a priority for the government. We've got the recent news that the UK is going to buy at least a dozen new US-made F-35 fighter jets, For example, it is part of the NATO pledge to increase spending on defence as a proportion of GDP.

23:30It's going to have to commit to getting there. The question is, like, at what point does it get there? Is it closer to 2035? But the but, the big but, as you were saying, is Chancellor Rachel Reeves has some very delicate fiscal waters to navigate. And she's got her budget in late November. There's a lot of chatter that she will need to raise taxes or cut spending. I mean, some estimates are up to, what,£51 billion to fill a hole in public finances. And so where do you find that money? How can you show that you're still spending money towards defence in those environments? And do you face potentially a backlash at home if you're cutting welfare in order to divert money into defence spending?

24:11And yet the UK has been at the forefront of trying to support Ukraine, being at the heart of the so-called coalition of the willing. tony um president putin doesn't obviously want nato troops in ukraine i mean how likely do you think that might be well this is one of the big unanswered questions i think the russia says consistently putin says that he will not tolerate the presence of nato countries troops uh in in ukraine they've said all along that they can't allow ukraine into nato but they don't even want nato troops present in ukraine given that the coalition of the willing is basically comprised to countries that are in NATO.

24:49It's very difficult to see how you square that circle. Ukraine, of course, is very concerned to ensure that it has security guarantees that mean something and aren't just on paper. So they will want to know very concrete answers to very concrete questions. Who comes if the war starts again? What do they send? When do they send it? How can we expect to defend ourselves in these different scenarios? And at the moment, the coalition of the willing isn't really sketching out the answers to that question that would allow them then to say, OK, well, we feel fairly secure in the event that the war stops and Putin continues to present a threat to us.

25:27Meanwhile, the uses of technology within Ukraine are being rapidly integrated within the defence space across Europe and here in the UK. In the next few days, we're highly likely to see a lot of that. But in terms of the frigate deal for the UK and that£10 billion that I mentioned, the idea of reviving shipbuilding in Britain, it does look like the Nordics are looking to the UK. And there was also a big question mark about that, wasn't there, Rose, about actually whether Britain and this defence spending sort of gusher that we're expecting was going to come to Britain. well yeah and the uk did beat out other countries you know it was looking like france germany and the us were also competing for that for the norway frigate deal and a big selling point for the uk was that um interoperability of their vessels right which is they they work well together that's much more efficient it reduces costs and that's increasingly something that's going to be on the table with defense deals and that's possibly a selling point for the uk kit that talks to kit um and systems and equipment that work together and a lot of that is what can bae for example get out of the pie right the frigate steel will create some jobs in Glasgow interestingly BAE Systems recently raised its earnings outlook for the for the full year and it talked about being positioned particularly to contribute to the US Golden Dome homeland defense project so certainly you know BAE is optimistic about what it can get but it's also a lot of competitors for this increasing pie and the US is you know pushing very hard for its companies to be involved and to get deals.

27:04It's a bit of a crowded field. And so the UK is going to have to show that it's bringing something special to these deals in order to keep winning them. Tony, what do you think about the European defence spending, budgets, commitments, what it means for the industry, the speed of developments? Yes, I mean, it's boom times for defence industries across Europe, of course, because nervous Europeans worry that Trump might want to walk away from NATO, committed to enormous increases in defence spending, in line with his demand to spend something like 5 % of GDP on defence. But one of the lessons from the Ukrainian war is indeed that there's this great imbalance between spending on systems that countries might be interested in, tanks, missiles, warships, you know, which cost millions, sometimes hundreds of millions of dollars to build and the effectiveness of those systems on the battlefield.

27:57Ukraine has been very successful in repelling Russian attacks using drones. You can take out a two million dollar tank with a two hundred dollar drone. So there's a great imbalance in effectiveness here and some of the spending I think in these countries isn't yet reflecting the changes on the battlefield that we're seeing. Okay let's see whether that is addressed at this industry gathering in London in the coming days. My thanks to Bloomberg's Chief Asia Correspondent Rosalind Matheson and to our Russia Government and Economy Team Leader Tony Halpin for speaking to me, looking ahead to the Defence Industries DSEI exhibition in London in the next few days.

28:35And you can find details about new defence industry deals on the Bloomberg Terminal and our website. I'm Caroline Hepker in London. You can catch us every weekday morning for Bloomberg Daybreak Europe beginning at 6am in London. That's 1am on Wall Street. Tom.

28:49Tom Busby:Thanks, Caroline. And coming up on Bloomberg Daybreak Weekend to look ahead to some key economic data in China and what it means for the world's second largest economy. I'm Tom Busby and this is Bloomberg.

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31:59Tom Busby:Tom, China's economic momentum is weakening after solid growth in the first half of the year. Bloomberg Economics says a government crackdown on price wars is holding back production, with a worsening downturn in the housing market putting an additional drag on activity. So what should we expect when we get fresh readings on Chinese consumer and producer prices? we bring in Bloomberg Markets Live strategist, Mary Nicola. She is in our Singapore radio studio. Mary, thank you so much for joining us. The place I'd like to begin with is, first of all, your expectations for both headline and core CPI next week.

32:41So China, I think one of the big things is that it's been struggling with is deflation. So I think we're going to probably see more of those disinflationary pressures coming through because of the fact that we're not seeing a particular uptick in consumption. We've seen retail sales data from the previous month that was quite weak. So overall, it doesn't look like there are any significant price pressures really coming through just yet. Obviously, there's some upside in terms of the initiatives that the government is pulling through on the consumption initiatives to stimulate it. But it's still in early stages and it's in early days.

33:20So I think what we're going to see is just more disinflation, and that trend is likely to continue. So we'll see just more of the same.

33:29Tom Busby:Yeah, specifically then on PPI, are we looking at less deflation or an outright turn into positive territory? Oh, it's definitely early days on that one, too, because we've had consistent and several months of deflation on the producer price index. The government has launched this anti-involution campaign, which is to try and limit this excessive competition. But we still haven't seen a true turnaround there in terms of what's coming through. We've seen in earnings that the competition is really fierce among many of the commerce platforms. So in terms of PPI, you're likely still to see a deflationary pattern.

34:13Tom Busby:Now, PMI surveys have shown input costs are up, but selling prices are capped. How much pass-through should we expect from factories to consumer prices? Well, I think what we're seeing is the fact that consumption is still very tepid. And because of that, it looks like there is not as much pass-through coming through. Retail sales is still weak. We have to remember that the Chinese household is still recovering and trying to recover from what is happening in the property sector. There's still that property sector malaise. We've seen lots of households come back and try to pay back their mortgages where they're not taking out as many new loans.

34:56We've seen that in last month's data. And again, we could see that in this month's data where that still that trend continues where they're trying to pay back their debts. So if we're seeing consumption not pick up and still that the policy stimulus hasn't come through, it looks like the pass through in terms of getting to the consumer is going to remain limited.

35:20Tom Busby:How likely are we to see any indication that energy is playing a role in PPI, be it oil, refined products, or electricity tariffs? Oh, I think more broadly, that's one of the catalysts driving inflation lower, not only in China, but more broadly throughout Asia. So if we look at CPI in countries like Indonesia, India, for example, we're seeing significant declines in inflation. A lot of it it has to do if we look at just how oil prices have declined since the start of the year, that has become a clear catalyst for lower prices everywhere in the region. And of course, if we continue to see that trend in oil prices, that's obviously going to filter through to headline inflation in Asia and of course, more broadly, globally.

36:11Tom Busby:From energy to property weakness, how are rents and housing related services feeding into CPI? Yeah, that's still going to have downward pressure on CPI because we haven't seen a strong rebound in house prices and house prices still remain very weak. The problem with housing in China is there hasn't been a broad based recovery and there hasn't been a broad based package in terms of stimulus to really offset and to lift the property market. So what we've seen is consistent decline in housing prices. We've seen that property sector malaise really stay within the economy. And that's been quite a drag.

36:51But what the government has tried to do with some of its stimulus initiatives is to try and offset this property drag by supporting consumption or supporting this AI tech drive, which has been one of the key things that has been supporting the equity markets. And that's one of the drivers that's going to continue where the focus has been on bringing China up that value chain and bringing AI as a key support for the economy.

37:20Tom Busby:Mary, with consumer confidence soft and household savings high, is demand strong enough to lift services inflation? You know, it's interesting because one of the key things that the government has been focused on is providing subsidies and support for specific services, whether it's child care or other services. But at the same time, we've seen households build their reserves and build their ammunition and savings for a rainy day. And that has a lot to do with what we've seen in the property sector. Keep in mind, a lot of households in China do put much of their savings into houses and much of their investment into houses.

37:57But we're seeing a shift and that shift is coming through in terms of shifting into the equity market. So we've seen how bond yields have risen as a result of that transition for households from the bond market into the equity market. And given that household deposits are near record highs, we could see that shift continue and that actually be supportive for the equity market. So one of the things about the equity markets is if you continue to see gains, that could improve overall optimism and that could actually help consumption. So it's almost a feed-through channel from what we see from the equity markets down to consumption.

38:36And so we could see a pickup in services, but still, it's still in its early stages.

38:41Tom Busby:I have to ask for Chinese consumers and by implication for the Chinese economy, certainly tariffs, weak confidence, housing are all headwinds. Of those three, is there one that's being more talked about than any of the others? I think for a great deal, it's interesting to see tariffs have been largely shrugged off. And that's because of the fact that we've seen strong exports. The property sector has been something that's been trudging along in the background. I think what the key focus is for the markets is just on consumers and ensuring that there's a pickup in consumption. because at the end of the day, if you have exports feeding through and supporting the overall economy and investment, especially on the property sector side, declining, you still need that consumption channel to come through to help support growth.

39:32And that's going to be actually the key trigger that helps growth into this year and into next year. So it really will come down to consumption. And I think that's going to be the key focus, whether it's retail sales or some of the policy initiatives that the government focuses on.

39:50Tom Busby:That's Mary Nicola, Bloomberg MLive strategist in Singapore. Let's get some more perspective now. Earlier in the week, we heard from Kevin Sneeder, APAC ex-Japan president at Goldman Sachs. He struck an optimistic tone on Chinese equities amid resurgent flows. Sneeder spoke exclusively to Bloomberg's Averill Hong at Goldman's Asia leaders conference in Hong Kong. So, Kevin, let's start with China, because we're seeing in terms of the market performance, it's really being underpinned by liquidity, even against the backdrop of these macro risks. What are you seeing from global investor flows? Well, certainly, as you say, this is a very interesting time in terms of the rally that's taking place in Chinese equities.

40:36Tom Busby:This is not an overnight rally. It's worth noting that it was a year ago that we saw the media conferences and the announcement of various measures and really since then there have been a few milestones along the way. The first milestone of course was in Hong Kong where we saw the Hong Kong market really move and now we're seeing the onshore market A-share rally taking place and what we're hearing from our clients and investors is sentiment has improved, foreign investors are showing more interest but the positioning changes are yet to come. Most Most of what we're seeing is still domestically oriented.

41:10Tom Busby:And I think it's worth remembering that a big driver of this rally remains the retail investor in China. And it's that retail investor who's got this excess saving that a lot of people are talking about, the household savings that have built up, and they're looking for other options, and the equity markets are providing some of that focus. But sentiment has improved. The first half in China saw relatively strong GDP growth. The second half is likely to be more challenging, so we should keep a careful attention to the underpinnings here, the fundamentals. China still faces many challenges, but this rally in the equity markets has got some legs.

41:48What are your clients saying about what they want to see more of before that positioning comes back?

41:54Tom Busby:Well, it really depends which clients. If, from your question, you're asking about the foreign investor, clarity and consistency are the key words that come to mind. because ultimately there's still a focus on some of the headwinds, the demographic headwind, deflation and the challenges that we're seeing from a combination of overcapacity and demand limitations. And finally, of course, the backdrop for all of this, the geopolitics, remains and lingers. So progress in each of these is what underpins confidence to ensure the foreign investor can return and the flows can move. We are seeing some return, though.

42:31Tom Busby:I think it's important to acknowledge that hedge fund positioning has improved. But the long onlys, the longer term investor, that's going to take a lot more clarity and a lot more consistency before we see the flows move. Has that been enough for Goldman to lower its bar on investing in China as well as, you know, build on the business that's already here? Well, we've been in China for 40 years. We have a long history here. We are very committed to our business here. We've been maintaining the footprint through tough times and good times. This is a moment when we see certainly opportunity and we continue to look at China with a lens that says there are plenty of places where our clients need services, need the support that we can provide, and we're going to be there for them.

43:13Tom Busby:And it's with that lens, our client lens, that we're very focused on the opportunities that we have in China. We talked about Hong Kong earlier. We're seeing this IPO boom. Is Goldman looking at expansion potentially here? Well, this has been a busy time. 57 so far this year, 200 in the pipeline. There's a lot of activity building in Hong Kong. And in that context, we're hiring. We certainly are hiring. We continue to look at the opportunity to meet the needs of our clients. But we'll do it in a thoughtful way because one of the things which I'm very focused on and my colleagues are very focused on is making sure that we're there for our clients, but we don't get ahead of ourselves.

43:50Tom Busby:And so it's a thoughtful approach, but we certainly are hiring. Kevin Sneader, APAC ex-Japan president at Goldman Sachs, speaking with Bloomberg's Averill Hong. And I'm Charlie Pellett, catch us weekdays for the Daybreak Asia podcast. It's available wherever you get your podcasts. Tom? Thanks, Charlie. And that does it for this edition of Bloomberg Daybreak Weekend. Join us again Monday morning at 5 a.m. Wall Street time for the latest on markets overseas and the news you need to start your day. I'm Tom Busby. Stay with us. Top stories and global business headlines are coming up right now.

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