Speaker 1: This is Bloomberg day Break Weekend, our global look at
Speaker 1: the top stories in the coming week from our Daybreak
Speaker 1: anchors all around the world. Straight ahead on the program.
Speaker 1: It's been quite a run for the bulls on Wall
Speaker 1: Street as we enter the final stretch of the year.
Speaker 1: I'm Tom Busby in New York. I'll have that store.
Speaker 2: I'm pline Hege here in London, where we're watching upcoming
Speaker 2: data for signs of the slow puncture in the UK's
Speaker 2: housing markets.
Speaker 3: I'm dek Krisner with a look at how the Bank
Speaker 3: of Korea might respond to vibrancy in the South Korean economy.
Speaker 4: I'm Kayleie Lyons in Washington, where Congress is set to
Speaker 4: return from his holiday break with a long to do list.
Speaker 5: That's all straight ahead on Bloomberg day Break Weekend, the
Speaker 5: business news you need to wrap up your week in
Speaker 5: just one fifteen minute podcast available on Apple, Spotify, The
Speaker 5: Bloomberg Business Appen everywhere you get your podcasts.
Speaker 1: Well, good day to you. I'm Tom Busby. We begin
Speaker 1: today's program with a focus on the stock market as
Speaker 1: we enter the last trading month of the year. After
Speaker 1: a slump in twenty twenty two. This year has been
Speaker 1: a good one for equity investors, particularly those in tech.
Speaker 1: Now the Nasdaq has far outpaced both the S and
Speaker 1: P five hundred and the Dow Jones Industrial Average. And
Speaker 1: right now with inflation easing, a surprisingly strong corporate earning
Speaker 1: season now wrapping up, and bets that the Fed is
Speaker 1: done hiking rates, we've seen with just a few minor
Speaker 1: hits a November rally, the big question can it continue well?
Speaker 1: For that, we bring in Bloomberg Intelligence Chief Equity Strategist
Speaker 1: Gina Martin Adams and her colleague Bloomberg Intelligence equity strategist
Speaker 1: Michael Casper. Thank you both for being here. Gina, I'm
Speaker 1: going to start with you, where do you see the
Speaker 1: economy now and what do you anticipate we're going to
Speaker 1: see in the markets in the weeks ahead.
Speaker 6: Yeah. So, we actually have a really interesting model we
Speaker 6: call our economic regime model, which gives us a sense
Speaker 6: of where the economy is in real time. And unfortunately,
Speaker 6: after the regime model was generally supportive of very strong
Speaker 6: risk taking conditions in the broader equity markets throughout much
Speaker 6: of twenty twenty three, it actually took another dip in October,
Speaker 6: and if we take a step back, and we think
Speaker 6: about what this regime model tells us. Back in twenty
Speaker 6: twenty two, the regime model said that the economy was
Speaker 6: very low probability still in recovery. In other words, the
Speaker 6: economy may have already been in some form of a
Speaker 6: recession in twenty twenty two, at least according to this model,
Speaker 6: which of course coincided with terrible equity market returns. As
Speaker 6: the economy was decelerating, we lost a lot of momentum
Speaker 6: in the equity market as well. And then come into
Speaker 6: twenty twenty three, and the model actually signaled that we
Speaker 6: should get more optimistic. As of January of twenty twenty three,
Speaker 6: it was saying, you know, it's not going to get
Speaker 6: much worse here. Things are starting to get a little
Speaker 6: bit better. Even though that getting better was somewhat short term.
Speaker 6: In twenty twenty three, it did support the rally in stocks,
Speaker 6: and now it's saying, hey, hold on a minute. Things
Speaker 6: do appear to have slowed precipitously in the fourth quarter.
Speaker 6: Even though the earnings recovery does appear to be underway,
Speaker 6: there are certain segments of the earnings recovery that look
Speaker 6: pretty vulnerable to a deceleration in the broader economy right now,
Speaker 6: and that could be the risk going into twenty twenty
Speaker 6: four is the groups that really did not correct in
Speaker 6: that first dip in twenty twenty two may be set
Speaker 6: to correct as we move into twenty twenty four. That
Speaker 6: doesn't mean the whole market is necessarily vulnerable because we
Speaker 6: went through twenty twenty two, but it does mean that
Speaker 6: there are some vulnerabilities in the equity market and we
Speaker 6: need to navigate those as we approach next year.
Speaker 1: And are there specific segments you're referring to right now
Speaker 1: about the Yeah.
Speaker 6: I'll let Mike talk to that a lot because he
Speaker 6: does run our sectors scorecard. But specifically the consumer sectors
Speaker 6: look quite weak. If we think about what happened in
Speaker 6: the fourth quarter earning season, sorry, the third quarter earning
Speaker 6: season that just passed for the S and P five hundred,
Speaker 6: really generally pretty strong earnings emerged X Energy the index
Speaker 6: posted nearly ten percent earnings growth. When we look at
Speaker 6: the whole S and P five hundred at large, it
Speaker 6: looks like about four percent earnings growth. But we did
Speaker 6: start to see some downward revision momentum. We started to
Speaker 6: see some guidance in particular from those consumer companies and
Speaker 6: consumer staples and discretionary do appear to be the worst sectors.
Speaker 6: That said, there are some strong sectors, and I'll let
Speaker 6: Mike speak to those, because there are opportunities in this environment.
Speaker 1: What's a strength from you, Mike, let's hear it. Let's
Speaker 1: hear it.
Speaker 7: Certainly, Communications is the one at the top of the list,
Speaker 7: right so, earnings have been strong in twenty twenty three,
Speaker 7: They're expected to be strong in twenty twenty.
Speaker 1: Four as well.
Speaker 7: Tech is up there as well. We run a five
Speaker 7: factor sector scorecard and those two are at the top
Speaker 7: of the scorecard right now. It's joined by financials, which
Speaker 7: is quite an interesting case if you believe consensus rate
Speaker 7: expectations for twenty twenty four. There for a little bit
Speaker 7: of yield curve steepening, which should be a good fundamental
Speaker 7: driver for especially the banks within financials, and our model's
Speaker 7: flaging financials as one of the top plays in the
Speaker 7: S and P five hundred at least. Right now. On
Speaker 7: the flip side, I'll talk about some of the weakness. Definitely,
Speaker 7: the defensives. Utilities, real estate staples have been consistently towards
Speaker 7: the bottom of our model in the s and P
Speaker 7: five hundred, and they're staying there at least right now.
Speaker 1: So let's go back to the weaknesses. Now, we discussed
Speaker 1: the consumer, discretionary, consumer staples. So we're getting some mixed
Speaker 1: signals on the consumer. They're pulling back, they're not pulling back.
Speaker 1: They're spending well, gas is cheaper, so people are spending
Speaker 1: money elsewhere. Where do you see the consumer right now?
Speaker 1: And we are going, I mean Thanksgivings over, we are
Speaker 1: in the heart of the shopping season. Now where do
Speaker 1: you see the consumer?
Speaker 8: Yeah?
Speaker 6: So, unfortunately, I think sentiment tells you a lot about
Speaker 6: what you need to know about the US consumer. And
Speaker 6: sentiment has been deteriorating very rapidly over the last couple
Speaker 6: of months after it recovered a little bit in early
Speaker 6: twenty twenty three. And the biggest conundrum with respect to
Speaker 6: sentiment is this occurred without an increasing gas prices. Normally,
Speaker 6: the consumer is pretty predictable. When they see gas prices accelerating,
Speaker 6: they get a little bit, you know, they get a
Speaker 6: little bit bummed out. They don't feel great, They have
Speaker 6: to spend more at the pump, and so they spend
Speaker 6: less elsewhere, and that definitely happened in parts of twenty
Speaker 6: twenty two. But we've seen gas prices actually correcting for
Speaker 6: the last several weeks. Gas prices moving lower has not
Speaker 6: enabled to bump in consumer sentiments. So the consumer's a
Speaker 6: little bit bummed out.
Speaker 4: I think.
Speaker 6: At the same time, we are seeing some minor job
Speaker 6: losses emerge or some weaknesses emerge in the broader job market,
Speaker 6: and that is filtering through to consumer confidence. Consumers are
Speaker 6: feeling just a little bit less confident than they have
Speaker 6: been in the last couple of years. It doesn't necessarily
Speaker 6: mean the consumer has to crash And I think that
Speaker 6: this is one thing that's really important to consider is
Speaker 6: we all think of two thousand and nine as the
Speaker 6: representative example, or two thousand and eight as the representative
Speaker 6: example of what to expect from the consumer, and that
Speaker 6: was one of the single worst recessions for the US
Speaker 6: consumer in US history. So that's not necessarily the outlook.
Speaker 6: Just because the consumer is feeling bummed out doesn't mean
Speaker 6: that their spending has to go through the floor and
Speaker 6: they crash out and they don't spend a dime.
Speaker 1: Yeah, that's a tough comparison, it's.
Speaker 6: A really tough comparison. Instead, they may just incrementally pull
Speaker 6: back a little bit as they get a little bit
Speaker 6: more cautious with respect to their outlays. Nonetheless, that can
Speaker 6: have material impacts on sectors where earnings are somewhat sensitive
Speaker 6: to what's happening with that overall growth out look.
Speaker 1: Yeah, the job market has consistently good, but we have
Speaker 1: seen some cracks. We've seen continuing claims rise. That means
Speaker 1: long term unemployed are having a little trouble right now.
Speaker 1: And I think that is where we're seeing the consumer
Speaker 1: pull back, the people who say, hey, I don't know
Speaker 1: what's going to happen in a month or a year.
Speaker 2: Yeah.
Speaker 6: And if you think about how that though impacts profits,
Speaker 6: and this is something that MI can I do a
Speaker 6: lot is really just analyze what's happening and inside the
Speaker 6: profit stream for the S and P five hundred as
Speaker 6: well as the Rustle two thousand, because profits are what
Speaker 6: drives stock prices. The economy doesn't necessarily drive stock prices,
Speaker 6: it's profits that do. Right, And if the consumer is
Speaker 6: reacting because many businesses are pulling back on their investment
Speaker 6: in employment, that actually impacts the earning stream in different
Speaker 6: ways than I think many people think, because if we're
Speaker 6: seeing job losses emerge, which we did and in little
Speaker 6: bits and pieces over the course of the last day
Speaker 6: teen months, but nonetheless we did see job losses emerge.
Speaker 6: If we see those job losses emerge, that means companies
Speaker 6: are spending less, which means their margins can improve, which
Speaker 6: means they actually can have earnings growth. This is what
Speaker 6: took a lot of folks by surprise throughout twenty twenty three,
Speaker 6: is the earnings environment actually improved quite materially. Even though
Speaker 6: the economy was generally decelerating for much of this year,
Speaker 6: we did see profit growth emerge in the second half
Speaker 6: of this year. That's not because revenue growth got stronger.
Speaker 6: It's because companies were cutting costs.
Speaker 1: And we've seen that in information technology, Mike, You've seen
Speaker 1: some saying, well, maybe not going to you know, buy
Speaker 1: a whole new system of computers and mainframes. Have you
Speaker 1: seen Yeah, certainly.
Speaker 7: I think tech companies margin has been a driver for
Speaker 7: long term tech gains, especially last cycle, and I think
Speaker 7: that's really where they're focused. They can't really control what's
Speaker 7: going on in revenues. That's more economically sensitive, so everybody's
Speaker 7: going to focus on the margin line and how they
Speaker 7: can improve their business. And I'll just add that the
Speaker 7: trends that Genus pointing out are also evident in small caps, right,
Speaker 7: So small cap net income margins are actually starting to improve.
Speaker 7: They hit a bottom a few quarters ago and they're
Speaker 7: starting to move upward, and that's causing some earnings growth
Speaker 7: in the Russell two thousand when it's been pretty much
Speaker 7: a dearth for over a year. So an interesting trend
Speaker 7: of merging there.
Speaker 1: Well, as we start to wrap up, we talked about
Speaker 1: some sectors that have been in real trouble. Let's go
Speaker 1: back to the ones that are doing really well. AI
Speaker 1: fueled information technology sector is doing really well. You spoke
Speaker 1: of a few others. What can investors look forward to
Speaker 1: in the final month of the year.
Speaker 7: Yeah, so the final month of the year. I want
Speaker 7: to point out though, the valuations on tech. We keep
Speaker 7: talking about tech. Tech valuations are the only it's the
Speaker 7: only sector trading above its pre pandemic norm pretty much
Speaker 7: by a wide margin. If you look at everything else
Speaker 7: in the S and P five hundred, it's cheap to
Speaker 7: that pre pandemic five year average. So there's a bit
Speaker 7: of a dichotomy there in the S and P five hundred,
Speaker 7: and I'm really watching that going into the end of
Speaker 7: the year. I mentioned the communitycation stocks before having strong
Speaker 7: earnings growth. Communications actually is the cheapest sector in the
Speaker 7: S and P five hundred right now if you look
Speaker 7: at their megacaps, Alphabet, Matta, Disney, Netflix, all cheap to
Speaker 7: their pre pandemic five year averages, which is in stark
Speaker 7: contrast to everything else that's going on in tech, with Apple,
Speaker 7: Microsoft and Nvidia trading well above those averages. So that's
Speaker 7: what I'm watching the end of the year.
Speaker 1: Well, it's a lot to look forward to. And our
Speaker 1: thanks to Bloomberg Intelligence Chief Equity Strategist Gina Martin Adams
Speaker 1: and our colleague Bloomberg Intelligence Equity strategist Michael Casper. Thank
Speaker 1: you both for being here.
Speaker 6: Thank you very much for having us.
Speaker 9: Thank you.
Speaker 1: Coming up on Bloomberg day Break Weekend will take you
Speaker 1: to Europe to see how the mortgage and real estate
Speaker 1: markets in Britain are holding up. I'm Tom Busby and
Speaker 1: this is Bloomberg. This is Bloomberg day Break Weekend, our
Speaker 1: global look ahead at the top stories for investors in
Speaker 1: the coming week. I'm Tom Busby in New York. Up
Speaker 1: later in our program, as Congress returns from their holiday break,
Speaker 1: we preview the upcoming budget battles for the house in
Speaker 1: the new year. But first, in the UK, inflation is slowing,
Speaker 1: but the Bank of England is warning against any expectations
Speaker 1: of an interest rate cut. Cold comfort for suffering homeowners
Speaker 1: following fourteen rate hikes by the Central Bank. There. Fresh
Speaker 1: data in the coming days will tell us how the
Speaker 1: mortgage and real estate markets in Britain are holding up.
Speaker 1: And for more, let's go to London and bring in
Speaker 1: Bloomberg Daybreak europe Banker Caroline Hepgar Tom.
Speaker 2: Economists say that the UK housing market is in the
Speaker 2: middle of a slow puncture, so we're watching the upcoming
Speaker 2: data on mortgage lending and house prices carefully. Figures last
Speaker 2: month from Halifax and nationwide showed a slight uptick in prices,
Speaker 2: but also a major slow down in the number of sales. Economists,
Speaker 2: including our own nirvaj Sha, warned that prices still have
Speaker 2: further to fall. Joining me now to discuss is our
Speaker 2: economics report Lucy White and our European real Estate reported
Speaker 2: Damien Shepherd, you can tell us all about how the
Speaker 2: housing market is actually holding up. Damien, can you just
Speaker 2: talk us through where the UK housing market is at
Speaker 2: the moment. It's sort of quite difficult to discern that sometimes.
Speaker 1: Yeah, exactly.
Speaker 9: I think the main two things that people have their
Speaker 9: iron at the moment is where a house price is
Speaker 9: at and where a mortgage rate's at. In terms of
Speaker 9: the latter, mortgage rates are extremely high but steadily declining,
Speaker 9: And in terms of house prices, again we're seeing some
Speaker 9: steady declines, but not necessarily the doomsday predictions that we
Speaker 9: had at the back end of twenty twenty two. So
Speaker 9: there's some housing data coming out next week which should
Speaker 9: point us perhaps more in the direction as to where
Speaker 9: we're going. But we're in a period where buyers are
Speaker 9: looking at the market and thinking I'm priced out a
Speaker 9: lot of them are anyway, And at the same time,
Speaker 9: sellers will have a lot of nerves about where the
Speaker 9: value of their properties going. So in a bit of
Speaker 9: a strange period as we enter the winter, do.
Speaker 2: You expect the house prices to continue falling then? And
Speaker 2: sort of how severe? Because who's as I mentioned Niral
Speaker 2: Shah saying is actually a slow puncture. A lot of
Speaker 2: people had really thought, had not you know, completely discounted
Speaker 2: the idea for crash, But we don't seem to be
Speaker 2: in that position now. How far how fast do you
Speaker 2: think prices are falling?
Speaker 9: I think slow puncture is a really great definition for
Speaker 9: what's happening. I think we're in a period where the
Speaker 9: buyers are looking at the headlines and thinking I should
Speaker 9: be getting a discount if I'm buying a property now,
Speaker 9: And at the same time, you've got sellers who you know,
Speaker 9: aren't willing to come to terms with the fact that
Speaker 9: their house price is probably not worth what it was,
Speaker 9: you know, eighteen months ago. So I think once those
Speaker 9: you know, two things come together and buyers and sellers
Speaker 9: start to see more eye to eye, then we'll start
Speaker 9: to see those house prices accelerate more.
Speaker 2: Lucy White want to bring you in on this point.
Speaker 2: Then the relationship between the housing data that we get
Speaker 2: and the UK's overall economic position, I mean, the housing
Speaker 2: market is is a fundamental bedrock of the economy.
Speaker 10: Absolutely. I think this is one of the tensions that's
Speaker 10: really holding back any further force in prices at the
Speaker 10: moment is that actually, you know, we've had a lot
Speaker 10: of talk about a recession, but we haven't necessarily seen
Speaker 10: that yet, and in some ways the economy has held
Speaker 10: up a lot better than we might have expected in
Speaker 10: the aftermath of the pandemic. So what's actually holding back
Speaker 10: any further declines at the moment is the fact that
Speaker 10: we're not really seeing huge losses in the labor market.
Speaker 10: You know, we're not seeing huge rises in unemployment. And
Speaker 10: while there's no force selling, there's a real constraint on
Speaker 10: supply at the moment, so you know, people aren't being
Speaker 10: forced to sell their homes, so you know, there's nothing
Speaker 10: really pushing the house prices down. At the same time,
Speaker 10: you know, we've got buyers, as you say, constrained by
Speaker 10: you know, very high mortgage prices. So I think, you know,
Speaker 10: as long as the Bank of England base rate remains
Speaker 10: where it is at the moment, you know, we're not
Speaker 10: going to see mortgage rates hugely come down. A lot
Speaker 10: of economists I'm just talking to you are saying that
Speaker 10: we're not going to really see any any huge change
Speaker 10: in the mortgage rates until the Bank of England starts
Speaker 10: cutting its rate. Whether that is you know, as the
Speaker 10: market's expecting sometime next year or you know, the Bank
Speaker 10: of England is pushing back on that a little bit
Speaker 10: and saying, you know, it's going to be later and
Speaker 10: remains to be seen.
Speaker 2: And also of course the impact that people remortgaging has
Speaker 2: on consumer spending. I mean, you've got something like one
Speaker 2: point six million people who are still about to face
Speaker 2: a kind of a repricing in their mortgage, will have
Speaker 2: to re mortgage their homes. That could be a very
Speaker 2: significant effect that has yet to hit the economy.
Speaker 10: Absolutely, yeah. And whether we see you know, kind of
Speaker 10: people deciding to downgrade into smaller properties as that happens,
Speaker 10: it's still kind of up in the air at the moment.
Speaker 10: But you know, as we say, as you say, the
Speaker 10: Bank of England is thinking that around half of its
Speaker 10: monetary tightening, you know, those rate hikes that have happened
Speaker 10: since December twenty twenty one, about half the effect of
Speaker 10: that has been felt in the economy me so far.
Speaker 10: And partly that is because you know, we've got a
Speaker 10: lot more people now on fixed rate mortgages than we
Speaker 10: did have in the past, and they're not really feeling
Speaker 10: the effect of those base rate hikes until their fixed
Speaker 10: term comes to an end, and as you say, several
Speaker 10: of those are going to be next year, and that's
Speaker 10: when a lot of people really might start feeling the pain.
Speaker 2: Lucy, I wonder whether you were struck by you know,
Speaker 2: you're talking about young people, Damien, that the recent surveys
Speaker 2: around the number of young people you know who, especially
Speaker 2: those who are renting, who are leaving London and the
Speaker 2: Southeast because of affordability issues. I mean, the effect again
Speaker 2: on the UK economy is very significant in terms of
Speaker 2: you know, the property bonanza sort of helps fuel the
Speaker 2: wealth of many millions of people, but it has been
Speaker 2: really quite destructive to opportunities for others, especially perhaps younger people.
Speaker 10: Absolutely, yeah, and you know, we're seeing a lot of
Speaker 10: data at the moment saying that you know, if you
Speaker 10: can afford to buy a house, it's better than renting.
Speaker 10: You know, it's more cost effective than renting, and that's
Speaker 10: just not really an option for so many young people,
Speaker 10: as Damien was saying, because supply is so constrained in
Speaker 10: those hot spots like London. And as you say, we
Speaker 10: are seeing more and more evidence that younger people are
Speaker 10: starting to move out of the capital to find opportunities elsewhere. Anecdotally,
Speaker 10: I've been hearing from several businesses who are kind of saying,
Speaker 10: we're really struggling to recruit some of those younger graduate
Speaker 10: jobs because people just can't afford to live here anymore.
Speaker 10: You know, they're going to Manchester or Birmingham or Liverpool,
Speaker 10: and that's going to be a real problem, I think,
Speaker 10: especially as businesses try and you know, find people at
Speaker 10: that at that lower end of the scale. And it's
Speaker 10: worth saying as well that this is going to be
Speaker 10: a double edged sword for rishie Zunak ahead of an
Speaker 10: election next year because on the one hand, you know,
Speaker 10: his traditional voter base tend to be older people who
Speaker 10: don't want to see a fall in house prices. You know,
Speaker 10: they're sitting on properties that they've and they're very happy
Speaker 10: with the way things are going. But at the same time,
Speaker 10: the millennial generation is the first generation that isn't growing
Speaker 10: more conservative as it gets older, possibly because of you know,
Speaker 10: issues like house prices, and that's going to be a
Speaker 10: real challenge for the Conservative Party as it needs to
Speaker 10: you know, retain popularity among some of those age groups in.
Speaker 2: Terms of higher for longer then There's another argument though,
Speaker 2: in terms of the Bank of England keeping interest rates
Speaker 2: you know, perhaps higher for longer, which is still the
Speaker 2: theme that officials are talking about, that actually that can
Speaker 2: be absorbed, that the period of time over which will happen,
Speaker 2: that it's a normalization of interest rates, and that that
Speaker 2: can be absorbed that sort of strategy. How do we
Speaker 2: think about higher for longer From the Bank of England.
Speaker 10: I think it's something that they're really pushing on at
Speaker 10: the moment because they need to make sure that those
Speaker 10: inflation expectations among you know, people in the economy are anchored.
Speaker 10: You know, they don't want to end up in a
Speaker 10: situation like we were getting towards, you know, earlier this year,
Speaker 10: perhaps where people are thinking, oh, you know, inflation has
Speaker 10: been so high for so long that I don't believe
Speaker 10: it's going to come back down to two percent, which
Speaker 10: is where it's supposed to be, and for that reason
Speaker 10: they start bargaining up their wages again, inflation ends up
Speaker 10: in a sort of self sustaining doom loop essentially, So
Speaker 10: the Bank of England really is kind of trying to
Speaker 10: hammer home that message that we will stay high for
Speaker 10: as long as we need to.
Speaker 2: Thank you to Bloomberg Economics reporter Lucy White and our
Speaker 2: European real estate report at Damien Shepherd. Really great to
Speaker 2: have you on Bloomberg Radio. I'm Caroline Hepgar here in London.
Speaker 2: You can catch us every weekday morning for Bloomberg Daybreak.
Speaker 2: You're at beginning at six am in London. That's one
Speaker 2: am on Wall Street.
Speaker 1: Tom our thanks to Bloomberg day Break Europe Banker Caroline
Speaker 1: Hepgar and coming up on Bloomberg day Break weekend. It's
Speaker 1: a big week ahead in South Korea. We'll get a
Speaker 1: preview of what we can expect. I'm Tom Busby and
Speaker 1: this is Bloomberg. This is Bloomberg day Break Weekend, our
Speaker 1: global look ahead at the top stories for investors in
Speaker 1: the coming week. I'm Tom Busby in New York. Will
Speaker 1: the Bank of Korea keep the door open for another
Speaker 1: possible rate hike from the current three point five percent?
Speaker 1: Or will it keep its restrictive policy in place for
Speaker 1: longer after prices rose more than expected last month? For more,
Speaker 1: let's get to Bloomberg Daybreak Asia co host Doug Krisner.
Speaker 3: Tom, there are several positives for South Korea exports are recovering,
Speaker 3: the labor market has been resilient, and the economy is
Speaker 3: still expanding. Now the glaring negative. South Korea's household debt
Speaker 3: increased last quarter to a record. We want to take
Speaker 3: a closer look now with Bloomberg's Paul Jackson, who covers
Speaker 3: the economies of South Korea and Japan. He joins us
Speaker 3: from our studios in Tokyo. Paul, it's always a pleasure.
Speaker 3: So South Korea has avoided recession. We know that the
Speaker 3: Bank of Korea was one of the first global central
Speaker 3: banks to hike rates. I think there was a total
Speaker 3: of about three hundred basis points and tightening between August
Speaker 3: twenty one and January twenty three. Now, since January, the
Speaker 3: BOK has kept that key rate restrictive and it's done
Speaker 3: so for five consecutive meetings. So we have a policy
Speaker 3: meeting in the coming week. I mentioned the fact that
Speaker 3: household dead is elevated. It seems like tighter credit conditions
Speaker 3: are warranted. So what's next for the BOKA.
Speaker 11: Well, I think they're going to keep with this hawkish
Speaker 11: hold stance. It makes a lot of sense for them.
Speaker 11: They kind of threaten to go higher. They talk about
Speaker 11: taking rates higher if needed, but really I think we've
Speaker 11: got into a situation where it's about keeping the rate
Speaker 11: where it is at three point five percent, which is
Speaker 11: the highest it's been since two thousand and eight. So
Speaker 11: it is pretty restrictive, and it's a case of keeping
Speaker 11: this in place for longer rather than going higher. And
Speaker 11: we spoke to an ex board member just earlier this month,
Speaker 11: and that was kind of a view that he adhered to,
Speaker 11: that it's a case of sticking at this three point
Speaker 11: five percent for longer rather than pushing it higher. Now,
Speaker 11: we have seen some challenges to the central banks inflation
Speaker 11: few and for economists too, because we're up to three
Speaker 11: point eight percent again, and you know, we were down
Speaker 11: in the two percent range earlier in the year, so
Speaker 11: things have been heating up. This is not exactly what
Speaker 11: you're wanting to see if you're an inflation fighting a bank.
Speaker 11: But given these household debt concerns and so on, I
Speaker 11: think they just want to keep it at the sweet
Speaker 11: spot of three point five percent.
Speaker 3: So is anyone concerned about stress in the overall financial
Speaker 3: system as a result of household at being so high?
Speaker 3: Has that been a concern at this point.
Speaker 11: I think it has been a concern, and in terms
Speaker 11: of dealing with that issue, I think the property market
Speaker 11: is a key supplier of this household debt, the key
Speaker 11: factor in this household debt. So it's been a case
Speaker 11: of ensuring that the property market doesn't crash. Now in
Speaker 11: actual fact, well there was a fall in prices. Everything's
Speaker 11: on the rise again and that's been one of the
Speaker 11: reasons why the household debt started to rise again. So
Speaker 11: I think some of these measures that the government took
Speaker 11: to ensure that the property market didn't crash maybe been
Speaker 11: a bit too successful and now feeding into the debt.
Speaker 11: So maybe it's a case of the government needing to
Speaker 11: pair back some of its extra measures to support the
Speaker 11: property market. That's the better way forward than getting the
Speaker 11: Bank of Korea to change policy, which is more like
Speaker 11: moving your super tanker in the ocean. It's not something
Speaker 11: you want to do lightly.
Speaker 3: So very quickly. What did the government do to support
Speaker 3: the property market to keep things from crashing.
Speaker 11: Well, I think it's just a case of enabling people
Speaker 11: to take out loans to buy, and also to support
Speaker 11: those owners looking to turn over their properties and put
Speaker 11: more out into the market. Keeping the liquidity going in place.
Speaker 3: It's South Korea is such an important bell weather for
Speaker 3: global trade. I think exports account for roughly forty percent
Speaker 3: of GDP. We're talking about semiconductors, we're talking about automobiles,
Speaker 3: even cargo ships. How is the export side of the
Speaker 3: economy functioning? And given the fact that you know, China
Speaker 3: is still weak, we've got weakness in Europe. I mean,
Speaker 3: is that showing up in the data.
Speaker 11: Yeah, I think we're you know, we are seeing that
Speaker 11: the figures not just in South Korea but also in
Speaker 11: Japan and around the region. Still fairly feeble for China,
Speaker 11: but showing signs of improvement. I think the overall export
Speaker 11: picture is starting to look rosier for South Korea. We
Speaker 11: have had the first rise year on year last month,
Speaker 11: and we've got preliminary data for November also pointing to
Speaker 11: a further gain this month. And remember the exports did
Speaker 11: help lift GDP in the last quarter. We're expecting a
Speaker 11: year on year growth to be about two percent in
Speaker 11: the last quarter. That's the economist's view. So that should
Speaker 11: take us to about one point four percent for the year,
Speaker 11: which is in line with the IMF forecast. A note
Speaker 11: also The IMF released its report last week on South
Speaker 11: Korea and says, hey, Bank of Career should really just
Speaker 11: stay where it is, keep policy going, and exports should
Speaker 11: help to lift the economy next year for growth over
Speaker 11: two percent two point four percent.
Speaker 3: Obviously, the currency is a big part of the trade story,
Speaker 3: and the Korean one has been holding up reasonably well,
Speaker 3: particularly against the dollar. If the FED now begins to
Speaker 3: make a minor change in policy, Let's assume for the
Speaker 3: moment that the FED is on hold and maybe in
Speaker 3: fact we get raid cuts mid twenty twenty four. What
Speaker 3: would be the outlook then for the Korean currency? Wouldn't
Speaker 3: it strengthen? And might that not be a negative when
Speaker 3: you consider the trade story.
Speaker 11: Well, I think that the one has been at very
Speaker 11: low levels. We're in a better position than we were
Speaker 11: a year ago. I mean, in the fall of last
Speaker 11: year it was pushing four hundred and fifty, which was
Speaker 11: seen as very very weak for the one. We're in
Speaker 11: a better place now would below oney three hundred, so hey,
Speaker 11: a bit more strengthening. I don't think that's going to
Speaker 11: be too bad, and I don't think policymakers are going
Speaker 11: to be too concerned about that it's really been the
Speaker 11: weakness that has been the concern up till now.
Speaker 3: So we were talking about the importance of trade, and
Speaker 3: I know that the South Korean president was recently in
Speaker 3: the UK looking to establish a free trade agreement. What
Speaker 3: do we know about that?
Speaker 11: Yeah, so President Yun has been in the UK this week.
Speaker 11: He met King Charles the Third and also Prime Minister
Speaker 11: Rishi Sinak and they're essentially launched kind of officially the
Speaker 11: trade negotiations between the two sides. Now, if you think
Speaker 11: back to Brexit, when the UK left the EU, you
Speaker 11: know they had to quickly renegotiate trade agreements with some
Speaker 11: key countries and Career was one of them. But essentially
Speaker 11: all the conditions in the agreement they've got in place
Speaker 11: at the moment are just like copycat, you know, what
Speaker 11: they had during the time of membership of the EU.
Speaker 11: So now these latest round of negotiations should give you know,
Speaker 11: more concrete signs of whether you know, there's an actual
Speaker 11: change in the trade relations that's more favorable to both countries.
Speaker 11: And let's face it, for the UK that's probably more
Speaker 11: important to them because they've got to justify this move
Speaker 11: out of the EU, which hasn't been a great success
Speaker 11: so far.
Speaker 3: Yeah, yeah, and I would imagine a lot of the
Speaker 3: focus is going to be on critical technologies. I'm thinking
Speaker 3: artificial intelligence, quantum computing, semiconductors obviously, do I have that right.
Speaker 11: Yeah, that's right. The corporation is going to be a
Speaker 11: lot of that. They have announced more research funding for
Speaker 11: UK and South Korea to be looking into those areas
Speaker 11: of artificial intelligence semiconductors, as you mentioned, So that's a
Speaker 11: key point of the cooperation between the two sides.
Speaker 3: Paul, it's always a pleasure. Thank you so much for
Speaker 3: spending some time to chat with us. Bloomberg's Paul Jackson.
Speaker 3: He covers the economies of South Korea and Japan for
Speaker 3: us from our bureau in Tokyo. I'm Doug Krisner. You
Speaker 3: can catch Brian Curtison myself weekdays here for Bloomberg day
Speaker 3: Break Asia, beginning at seven am in Hong Kong six
Speaker 3: pm on Wall Street.
Speaker 1: Tom, Thank you, Doug, and coming up on Bloomberg Daybreak weekend,
Speaker 1: the House getting ready to return from its Thanksgiving break
Speaker 1: with a very long to do list for lawmakers as
Speaker 1: they head back to the capital. I'm Tom Busby, and
Speaker 1: this is Bloomberg. I'm Tom Busby in New York with
Speaker 1: your global look ahead at the top stories for investors
Speaker 1: in the coming week. And it's a busy week on
Speaker 1: Capitol Hill as lawmakers return from their Thanksgiving break. For more,
Speaker 1: Let's head to our Bloomberg ninety nine one newsroom in
Speaker 1: Washington and Bloomberg's sound on co host Kaylee Lines.
Speaker 4: Yeah, Tom. After enjoying the Thanksgiving holiday at home with
Speaker 4: their families, lawmakers may find their thankfulness slowly morphing into
Speaker 4: dread as they return to Washington to face a lot
Speaker 4: of business that they have to deal with, and it
Speaker 4: might not be easy. Joining us now for more on
Speaker 4: the long to deal list Bloomberg's Billy House who covers
Speaker 4: Congress for us. So, Billy first and foremost, let's talk
Speaker 4: about funding, because, of course, before they left for Thanksgiving,
Speaker 4: Congress passed a continuing resolution kicked the can down the
Speaker 4: road to two different funding deadlines January nineteenth and February second.
Speaker 4: It still might be far away enough that they aren't
Speaker 4: going to face the real pressure to get it figured
Speaker 4: out for a while. What's your sense?
Speaker 8: That's absolutely correct. What they did was avoid what we've
Speaker 8: seen in recent years jamming by one party or the
Speaker 8: other of a bill right before Christmas. But what new
Speaker 8: Speaker Mike Johnson did do in the Senate followed up
Speaker 8: by approving it was past a CR or current funding levels,
Speaker 8: a different approach, a two step approach. It would see
Speaker 8: some agencies come up for expiration of that funding in
Speaker 8: on January nineteenth and others on February twentieth. That's a
Speaker 8: two step sort of now deadline that he faces. That
Speaker 8: might have seemed like a good idea, but as the
Speaker 8: days go by, we see more of his people upset
Speaker 8: about that approach, saying it's very very much like his
Speaker 8: predecessor Kevin McCarthy as Speaker and relied on Democratic votes
Speaker 8: to get passed in the House. So there's been a
Speaker 8: lot of upset over that, and that will play out
Speaker 8: over the next week.
Speaker 4: Yeah, exactly. It's very similar in that it was a
Speaker 4: clean continuing resolution, no spending cuts included, and passed with
Speaker 4: overwhelming Democratic support. And yet it seems like, at least
Speaker 4: for the time being, Mike Johnson, the new Speaker, got
Speaker 4: away with it. I just wonder how long realistically that
Speaker 4: grace is going to last, how stable at footing his
Speaker 4: speakership is on.
Speaker 8: Well, it is the same mass that plagued or be
Speaker 8: deviled McCarthy with the filling of a new swearing in
Speaker 8: of a Republican this week after last week's election in Utah,
Speaker 8: Johnson can only afford to lose now four Republican votes
Speaker 8: on party line votes. That's the same math that led
Speaker 8: McCarthy to have to make deals with Democrats on almost
Speaker 8: every spending bill. That's not going to change for Johnson
Speaker 8: early next year. And so the question is he has
Speaker 8: said he's not going to do any more stopgapp spending
Speaker 8: bills known as continuing resolutions, as he just did. But
Speaker 8: how is he going to pass anything without Democrats? And
Speaker 8: that's going to be the big deal when his conservative
Speaker 8: far rank, far right rank flank wants deep spending cuts
Speaker 8: and changes to policies.
Speaker 4: And of course that's just on the appropriations side of
Speaker 4: the equation. There's also the question of emergency funding for
Speaker 4: Israel and Ukraine. Is that realistically something that could happen
Speaker 4: before the end of this year.
Speaker 8: That's the goal is to do it by mid December
Speaker 8: or by the end of the year. But and Senate
Speaker 8: supporters of the Ukraine aid anyway in both and backers
Speaker 8: in both parties are negotiating on some way out of that.
Speaker 8: The outlook in the House again is murkier because the
Speaker 8: conservatives there that are demanding stark immigration changes as part
Speaker 8: of that package, and the Senate Democrats who control that
Speaker 8: chamber just aren't going to go along with some of
Speaker 8: the things that are being floaded by the House Republicans.
Speaker 8: So that's still murky. And then there's a course aid
Speaker 8: to Israel. As time goes on and more and more
Speaker 8: public opposition shin or the polls starts showing less support
Speaker 8: for continuing levels of Israel funding, that's murk here too.
Speaker 4: All Right, well, I guess we'll see. I would imagine
Speaker 4: that George Santos wasn't feeling super thankfulness thanksgiving. Billy House,
Speaker 4: Bloomberg Congressional reporter, thank you so much, and Tom again,
Speaker 4: that to do list is long.
Speaker 1: Thank you, Kaylee. That was Bloomberg sound On co host
Speaker 1: Kaylee Lines reporting from our Bloomberg ninety nine to one
Speaker 1: newsroom in Washington, and you can hear sound on weekdays
Speaker 1: one to three pm Wall Street time on Bloomberg Radio.
Speaker 1: And that does it for this edition. Of Bloomberg day
Speaker 1: Break weekend. Join us again Monday morning at five am
Speaker 1: Wall Street Time for the latest on the market's overseas
Speaker 1: and the news you need to start your day. I'm
Speaker 1: Tom Buzzbeak. Stay with us. Top stories and global business
Speaker 1: headlines are coming up right now.