'Bloomberg Surveillance: Early Edition' Full (10/19/22)

'Bloomberg Surveillance: Early Edition' Full (10/19/22)

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This is Bloomberg Surveillance early edition with Francine Lacqua. Well, good morning, everyone, and welcome to Bloomberg Surveillance Early Edition. I'm Francine Lacqua here in London. Here's what's coming up on today's program.

UK inflation comes in hot to CPI returns to double digits as food prices soar. The prime minister this trust faces and Qs today with her premiership in the balance. Streaming success shares in Netflix jump in extended trading thanks to better subscriber data. After nearly a year of disappointing results plus risk reversal, European stocks dropped after jumping at the open inflation fears, batter sentiment. So first things first, let's check on the markets.

And we did see a bit of a rally ahead, actually, a couple of traders and message me. Thank you, Andy. I know you're a loyal watcher. And every morning you say this rally, will it hold? Will it not hold where this time you were? Right. If you look at European stocks, they're down two tenths of a percent with, I guess, that sign of confidence that the Bank of England gave yesterday.

They're ready for QE. It will start a couple of days before that November 3rd meeting. The market was thinking, right? Well, it means that they think they can pull it off.

Now we go back to inflation fighting broke. So they're maybe not expecting the market chaos that we lost that we saw in the last couple of days. But it does not mean that the road and path ahead is easy. Sterling, 112, 72 yen, a lot going on, or at least a lot of speculation certainly from fund managers betting actually that dollar yen will move, putting pressure on the BMJ and then the US 10 year yield for 0 6 0 7 or Kathleen Hays. Talking to James Bullard a little bit later on, that is a must watch interview of the day. So let's also see whether we have a map

of Europe to see if there are any differences. For example, between the DAX unchanged, the UK down two tenths of a percent. So it's a bit of a wait and see situation.

I think we are seeing a reversal certainly compared to how we opened up an hour ago because of inflation fears, but nothing too ugly on the markets just yet. Now let's keep it on the UK. Inflation jumped more than expected to a 40 year high of ten point one percent. It comes as embattled Prime Minister Liz Truss is due in parliament, where she's hoping to regain authority amid the fallout over her government's mini budget U-turn. Let's bring in Bloomberg's Lizzie

Burton. So, Lizzie, the inflation print and the BSE, it means that the B A, we, because of the Kutty, you know, announced yesterday, is now ready to go back to flat inflation, I guess, with everything it has. Exactly. Andrew Bailey put in a confident foot forward with this statement that Kuti is going to star after the Halloween budget, though not at the long end of the curve, because, of course, that's where the market turmoil happened in response to quasi quasi hangs mini budget. But we are back in double digit inflation in September after seeing the foreign secretary, James cleverly in Westminster. He has said that this figure is concerning, but for the Bank of England at its November meeting, the debate was between 75 basis points and 100 basis points. This might tempt some members of the

monetary policy committee to go for a hundred. But really, markets have pared back their bets to have a really big hike since quasi crossing was replaced with Jeremy Hunt as chancellor. The FTSE is reporting, Lucy, that the UK charts are also examining extending the windfall tax, raiding the profits of bank and energy companies.

So this is significant because it could also turn businesses against them, I guess. Indeed, and it's not it's actually on top of the rise in corporation tax. Remember, that was the second big U-turn that Liz Truss had to make. But these are the, as he puts it, eye

watering lead, difficult decisions that the Chancellor, Jeremy Hunt, is going to have to make to fill that 40 billion pound hole in the public finances. And at the other end of the spectrum, we've heard that he's asked all government departments for health and Defence to shave 15 percent off their budgets. He hasn't promised to protect pensions, even though we've seen this inflation figure really squeezing vulnerable households. The chancellor said they would protect

and pension as a crucial constituency for the Conservative Party. So when we get to prime minister's questions today, you can expect the opposition leader, Keir Starmer, to really focus on what he's dubbed Austerity 2.0. And if the prime minister can't field those questions, well, she might not make it. To the end of the day. The chancellor is going to address Tory backbenchers at the 1922 committee at 5:00 p.m. later. Lizzie, thanks so much.

Lizzie Britton there, joining us, of course, from Westminster. I have to say, the number of vets everywhere I look to on to how long the prime minister survives is not a great benchmark of how long she stays in power. We're now joined by Jeremy Stretch, head of G10 Effect Strategy at CIBC. Jeremy, I'm going to ask you whether you took bets. I mean, I mean, we're kind of joking about it, but this is serious in terms of economic news because the U-turn is incredible. I mean, we went from, you know, tax

cuts, we're funding. We're fine to austerity. So this is not even a U-turn. This is like a U-turn plus some. Oh, absolutely. I mean, I put out several notes over the

course the last couple of weeks headlined Anarchy in the UK. And it feels rather like that because we have seen this sort of completely anarchic relationship between politics and economics and the fiscal backdrop and the divergence between monetary and fiscal policy over the course of the last few weeks. And if you're an international investor sitting outside the UK looking in, then the UK doesn't look a particularly attractive place to invest. And so unsurprisingly, investors have been sitting on the sidelines or at least questioning as to whether they the valuations in terms of standing assets were appropriate. So this is not only about politics. This is just the fundamentals of this country and what the Bank of England will have to do to get inflation under control. Absolutely.

I mean, we had after that mini budget on the 25 September fiscal and monetary policy actually in conflict. And that was really one of the concerns that the market had. Now, at least we're seeing fiscal monetary policy getting back into the same page or the same construct in terms of the policy backdrop. So we're not seeing the sort of fiscal

expansion that was really creating some of these problems in the Bank of England. But clearly, the bank has difficulties ahead. And I think they will be forced to adjust policy by the most in the lifecycle of the NPC. But we're looking for a 75 basis point hike from the NPC at the next meeting.

Jeremy, and I know this is something that maybe is counter-intuitive for a lot of people are not thinking about it that way. But if if inflation needs to be under control or does the Bank of England really have to put this country into a deep recession, even if it could be short lived to make sure that inflation goes back? I mean, how much demand do they need to destroy? Well, of course, this is exactly the same debate we're seeing in the US. And I think we are going to see demand destruction in the UK because clearly we're seeing, you know, the the average consumer being materially impacted by higher prices. Already we've got the impact of mortgage rates and a substantial number of people are going to be mortgage refinancing, a much higher levels over the course of the next 15 to 18 months.

So I think we are going to see a fairly substantial downturn. We're looking for probably a one to one of the quarter percent contraction in GDP next year. I think that's baked in. But I think the Bank of England isn't going to need to go quite as far as the market is pricing, because I think the degree of demand destruction already that is going to be in place will reduce a substantial degree of these inflationary pressures. So what's your Colin Sterling for it from now until the end of the year in 2023? So for the end of the year, from now on to the end of the year, I think Sterling comes under a renewed bout of pressure and uncertainty as we see this political maelstrom play out. So I think we may well see another dip back towards a sort of 1 10 threshold. I don't think that's the. We could see what happens after that. Well, I think I think we then find a

little bit of a floor. I think we I think the parity calls, I think, have moved away because I think the you know, the normalization of fiscal policy I think reduces the parity threat, which was clearly writ large after the mini mini fiscal event on the 21st of September. I think towards the end of this year, though, we start to find a little bit of stability. And I think we can see Sterling coming back a little bit against the dollar through the course of next year. But I think we also see sterling potentially coming under a little of pressure against the euro. And I think that might be the better way

to play it over the course of the next few months. All right. Jeremy, don't go anywhere, because we all have a great chart for you. Looking at the US markets on edge over the US housing market after a measure of US homebuilder sentiment yesterday slumped for a 10th straight month. Markets reporter Valerie Title is here to take us through it. Valerie, I came in and you said, look at this chart tram. So what is it telling you?

Thanks, Francine. Okay. So I have a chart. I'm the exact data. Yesterday, the Home Builders Sentiment Index vs..

US unemployment. Now the homebuilder sentiment index, as you mentioned, came in lower and a tenth straight month. But it's also posting the steepest decline on record, the fastest decline on record. So this is concerning because we know that housing tends to lead the U.S. economy.

And I've mapped this versus the US unemployment data. So if we were to look, let's say 2008, 2006, when we saw a huge deterioration, U.S. housing and unemployment rose. People are jumping to conclusions. Again, we're seeing a very large drop in this sentiment. Does that mean with the lag, of course, that we'll see unemployment rising now? Yes, this chart might be concerning, but but the one bright spot I can point to you, Francine, which is in my next chart, is that some people will say that the US is less exposed to housing and they point to things like the fact that residential construction spending now versus in 2006 is a bit lower. And we know that housing, the housing market generally is a bit less leveraged.

So that's the argument that poses maybe the U.S. economy. You can weather a housing downturn. You know, we've heard from Bank of America and those results, for instance, that the US consumer is still strong. So maybe things like that compounded with the fact that we're a little less exposed to housing going forward means that the U.S. economy can weather the storm. Valerie, thanks so much. Valerie, title there. Now you can see Valerie's charts, of course, on oil terminal analysis via G TV go in the Bloomberg terminal. He has some great little numbers that

you can type on your own, I think make them steal Valerie's charts. I highly recommend that. We're back with Jeremy Stretch, head of G10 Affect Strategy at CIBC. Jeremy, you also don't need like a pitch and economics to understand that maybe everything is a bit skewed because of Covid. So we're seeing consumer spending

holding strong until what needs to happen for that to completely fall off a cliff? Well, you're actually right. We're seeing consumer spending holding up. But I think some of those narratives in relation to the housing market and the impact that we're going to see in higher prices in terms of discretionary spending, I think are going to come through and come through quite quickly.

I was particular interested by that chart just being shown there about the homebuilders index and the flow through into unemployment. I think one of the big things in terms of the US dynamic is looking at that substantial fall that we saw in job vacancies over the course of the last month or so. That's again, a little bit of a siren call to suggest that the labor market is showing some signs of fragility if we see that reflected in terms of the Beige Book when that's released tonight as well. Then I think that's consistent with a moderation in activity. And I think that will start to stem some of the more extreme assumptions in terms of Fed rate worth that rates are going.

And I think that will play into the narrative of the dollar story starting to lose a little bit of momentum as we go into 2023. I don't believe that with the dollar. It just feels like there's everything supporting it unless the rest of the world picks up. Well, in the sense I think I think that's true. And in a sense, what we've seen, of course, is the dollar has been the only story in town through the course of the last twelve months or so.

It has been the growth story. It has been the interest rate story. It has been the safe haven flow. So I think if you start to take away some of that momentum in terms of the macro story, we take away some of that dynamic in terms of Fed tightening expectations. Then I think you end up with a situation where the market is already relatively long with dollars and you start to question whether you should add or extend some of those flows. And I think also if you start to see some of this moderation, we can see this moderation in terms of gas prices continue. Now, of course, that's a big if.

But if we aren't going to see this moderation in terms of European gas prices persist, then that takes away some of that negative narrative for the eurozone equation as well. Talking about big ifs, what happens in Japan? I mean, the story there was absolute incredible. Does it you know, does it force does yen force actually go to do something? Well, it's interesting.

I mean, just as I was leaving the office, I was just looking at the 10 year J.G. BS and that appeared to be the case. The yield curve control wasn't quite operating in the way that it was intended or as we would have expected. Now, clearly, we're getting more. We've been heading inexorably towards this big line in the sand at 150. And the question is, is that going to be the year that the threshold is going to probably be MF back into the market? But the ultimate bottom line is that if you're looking at solo or unilateral intervention without dealing with the fundamental regional rationale as to why the end is cheapening up, i.e. B.J., or in the completely opposite spectrum to every other global central bank, it is very much the case that throwing money against the against the dollar and cross is going to be a relatively sort of of almost throwing money into the air because you're not going to get anything other than a short term reaction. So the question is, are the Japanese

going to allow that yield curve control threshold to moderate and perhaps even without necessarily adjusting it formally, but just allowing those those rates just edge up a little bit. And that might be one of the precursors to seeing something of a top in terms of dollar yen. I would suggest it's maybe the more exciting country right now and a little controversial. Well, it's yes. Well, it will. Well, I mean, we've been waiting. We've been waiting for. We've been waiting for a consistent

period of Japanese inflation for the last 30 years. Now, there'd be OJ have achieved it, corrode achieving his aim towards the end of his tenure. But you have to question as to how. How that's come around and whether it is actually a beneficial story for a Japan PFC. Jeremy, thank you so much.

As always, Jeremy Stretch, the head of G10 Affect Strategy at CIBC. Now, coming up, Netflix returns to growth as Hollywood breathed a sigh of relief that the worst may be over for the streaming giant. More on that in a moment. This is Bloomberg. Economics, finance, politics, this is Bloomberg Surveillance early edition of Francine Lacqua in London. Now, Netflix shares jumped as much as 16 percent and extended trading after the streaming giant returned to growth.

It follows two quarters of falling subscribers hit shows like Season 4. Stranger Things helped it add two point four million members. Beating expectations. So for more on all this, let's get straight to our Berlin based tech reporter, Aggie Control.

I guess I'll ask you what you're watching at home in just a second. But it does seem like the worst is actually over for Netflix. Yeah, it does seem that way, especially when it comes to the subscriber growth. Essentially, what we're looking at is the the subscribers are growing again after two quarters where it was seen as this was a driving figure for the successes of the company in the last couple of years. And now we saw a drop in the first half of this year that seems to have been done away with. But what's interesting to hear from

Netflix is that they're also saying that they're not going to be focusing so much on subscriber growth, but rather the top line is going to be about the revenue going forward. This is also incorporated into the fact that they're kids. They're bringing in a ad, but advertising based model as well. That will be priced cheaper than the non advertised version of Netflix. And essentially that's going to

incorporate be incorporated into their revenue as well as the cost of subscriptions and also partnerships going forward. So it's a potentially growing into a more mature form of media product than purely based on subscription growth. So again, what about this dollar dilemma? How is that impacting revenue? Yes. So essentially Netflix as a global company and a company that is keen to get subscribers all around the world is obviously concerned about the pressure on incomes across the world, especially with the strong dollar. And what that means for other economies. And so now we're also seeing that especially seeing as this platform has engaged with a huge amount of investment in local language content in places like a career or where I'm sitting in Germany and they're keen to get subscribers from other parts of the world. Essentially, what we're seeing now is

that they would need to make sure that those subscribers are able to continue paying for these subscription models even when the cost of living is potentially squeezed. Thank you so much. I can tell there are Bloomberg's tech reporter and I'm coming up cranking up the pressure you get. Consumer inflation comes in harder than expected and of the UK prime minister trying to reassert her authority in parliament. We'll discuss that next.

This is good for. Economics, finance, politics, this is Bloomberg Surveillance early edition of Francine Lacqua here in London. Now let's return to our top story this morning. U.K. consumer inflation coming in hotter than expected. September CPI hitting ten point one percent.

It comes ahead of the embattled prime minister, Liz Truss, appearing in parliament later. Let's bring in Bloomberg's Jon Step. John, you're here because you're also launching a new global newsletter focusing on wealth. So how do you save me money if I subscribe? Which, by the way, I have in the U.K., inflation back in double digit. What does that mean for consumers like you and me? It's really unpleasant facts. I mean, I'm glad to hear you subscribe. Thank you very much.

Yes. So this is you know, inflation's a 40 year high. Banker, 40 year high. You know, always puts more pressure on the Bank of England to raise interest rates. And at this stage, whether that is the cause of a percentage point of a full percentage point, it doesn't matter. Interest rates are going off anyway. In the meantime, the government's not

going to help as much as it was hoping to help us out because we're good. Jeremy Hunt and I knew the kind of austerity lite type approach to budgeting. So really, I think the important thing for consumers and investors to understand is that the world has changed and this is the new normal. We can't expect to sit and wait and hope that the ultra low interest rates and low inflation comes back because it's not going to come back, certainly not anytime soon. It doesn't mean inflation. Inflation is going to be in double digits for the next 10 years, but it is going to be much more volatile.

And that means that you need to take a much more active approach to managing your personal finances. So, John, is there anything that people can actually do to shield themselves apart from spending less? I mean, obviously, spending less is one option. But if you're looking for something that's a bit less kind of depressing. I mean, if you can I mean, no silver linings here at the moment.

We think treasuries going off, the savings rates have going off as well. So you can get better rates and the cash is not going to keep up with inflation by any means. But for example, we can get savings rates of upwards of 4 percent. Something is 5 percent, though. So we haven't moved the cash in your bank account recently to show for doing that. Take a look. Another kind of silver lining, which is something that rates people coming up to retirement, may want to take a look at it as annuity rates, annuities have been basically favor with pensioners. You know, a sense that the pension

reforms are letting WMATA joy, though, in retirement points. I mean, that's because low interest rates mean the annuity rates are extremely low. Now they have started to pack up again. It doesn't necessarily mean that they were the right thing for you, but certainly something you start consented in again if you are coming out of retirement or even in retirement and want to look at your options for getting an income. And over the longer term,

I mean, the other night, there's also your mortgage is probably the other kind thing. I don't think that's the thing that's going to be scared in a lot of people at the moment. And that's understandable. There's still no empty seats short of when mortgages in a very short speech. We were looking just like more than 6

percent. It is pretty scary. We'll get more on DAX for the moment. I think a lot of the mortgages are fixed rates, but then I think it's middle next year with some of those start trailing off. John it up plenty more of course, on the UK. We'll also talk crypto. Next to this is. UK inflation comes in hot CPI returns to double digits as food prices soar.

The Prime Minister Liz Truss faces p.m. Tuesday. Was her premiership in the balance screaming success? Shares in Netflix jumped at premarket thanks to better subscriber data after nearly a year of disappointing results. Plus, risk reversal. European stocks are mixed after jumping at the open inflation fears. Better, better sentiment. Well, good morning, everyone, and welcome to Bloomberg Surveillance Early Edition.

I'm Francine Lacqua here in London. Now we need to look, of course, at pound. We had a good conversation with Jeremy Stretch on the fact that to after the mayhem, after the chaos that we saw not only in sterling, but in gilts over last couple of days, we're going back to fundamentals and fundamentals. Don't look that good.

If you are the we right now. So we had that ten point one percent inflation, double digit still at a 40 year high, but it was even higher than expected. That means that the market may be currently pricing in sterling while a bit lower as Bank of England increases rates by maybe a bit more than they were pricing in yesterday. We also had news yesterday that Q2. The main question there is how much Kutty translates into interest rate rises. Now, it's been a tough year for crypto, with prices crashing and questions over its environmental credentials persisting.

The industry is also facing increased scrutiny from regulators for its high energy consumption at a time when many countries are struggling to keep the lights on. We're joined by Adam back. He's chief executive officer and co-founder of BLOCK Street. Adam, thank you so much for joining us. Because Backstrom actually also added so much in the equation. I know you can't walk in the street

without people coming up to you and ask you questions about how it all started and where crypto currencies are going from here. Let's maybe start in El Salvador. What did El Salvador teach you about the usage of crypto going forward? Well, I think an interesting story with El Salvador is kind of encouraging foreign direct investment so that they see a new rising sector and offer kind of offshoring corporations for crypto exchanges and things like that. And so I think it has been a success story for them as increased tourism and they've adapted it as a second legal tender as well. I mean, there's also been questions, question marks and concerns about what it means. Longer term, do you think the I don't know if El Salvador is kind of a template of what others. Also just a small countries can do and

whether that would be a positive or negative. I mean, I think it's a positive if you can see sort of similar things historically with Dubai offering free trade zones for international companies to operate in the Middle East and Singapore areas, kind of phasing out natural resources or coming up in the world. Does it only work in countries where they don't have a strong belief in some of the fiat currencies? Well, it certainly brings it to the fore of their mind more readily because they're relying on international remittances with high fees. They have unstable inflationary local currencies. But of course, in the West, we're experiencing inflation for the first time as well.

So I think that's open more people's eyes. I mean, when you look at inflation and some of the market chaos that we saw in the U.K., it also, you know, other parts of markets worldwide. Is there really a case that some of the crypto currencies are more stable going forward? Does it change the equation? Does it make it more mainstream? Well, I think it means that people are looking to preserve spending power because they're thinking that their savings will be going back double digits per year, just standing still. And it's very difficult to figure out where to put it.

Stocks, bonds, everything looks uncertain. So while Bitcoin is still in the early phases of adoption, so has some volatility, at least has a growth story? I don't know. One of the things that you're talking about is lightning and liquid, which is basically, you know, something that is meant to make Bitcoin payments faster and cheaper. How far along are we? That infrastructure, lightning, which is forms of retail and micro payments, is really undergoing very rapid adoption, sort of double digit percentage growth month or month and a lot of development activity. And that drives to kind of use cases you see in El Salvador could have more payment focused. But do you think that will accelerate

significantly if you're looking at cheaper payments, faster payments than you know, does it start rolling some of the big credit cards out there? Yeah, I mean, I think the payments use cases more seen in emerging markets. And in the West, you more see that queen as a savings technology or inflation hedge. You're here for digital assets conference. What's the mood like? Well, I mean, the market's, you know, bitcoin and the wider market is in some disarray, but the financial institutions actually seem to be steadily planning for the future and adding support for Bitcoin related products. So offering the ability to buy Bitcoin with your brokerage account or your savings account, that kind of thing. There are a lot of.

Conversations on sustainability and electricity usage going forward. I think there's some misunderstandings about that. For example, you know, the power that's generated is usually built to peak capacity. So typically at least 50 percent of power is unused. And we do some mining in Canada, in Montreal, and that province has all hydro power, about 50 percent unused.

And actually, it's difficult to buy power because the government corporation. But there's enough unused power in that province to power the entire Bitcoin network. So there's actually a lot of surplus green power in the world. That's all hydro. But is that even true?

And we're looking at record prices for energy. We're talking everyday about the cost of living crisis. So does that change? Because of some of these inflationary pressures that we're seeing and the scarcity of energy? Well, I think the problem is that it's difficult to transport energy over long distances. Right. So Canada has a very low population density. There's 65 hydro terms in that region. There are other countries with such kind

of imbalances of populations of power generation. So Bitcoin sort of seeks out the low cost, environmentally friendly power, basically. You've also joined forces, I think, with Jack Dorsey in Texas. Yeah. So we started a solar and battery powered bitcoin farm. And so it's under construction at the moment.

And the point there is that Bitcoin is a sort of fire of last resort, which makes power generation projects more profitable earlier in a cycle. And so it makes it easier for projects to get project financing to build green power and ultimately sell that on to residential industrial use. So it's the solar installers done by Tesla and it's using the Tesla and mega packs. And so this so this is entirely solar. And do you see this being replicated in other states? Yeah. So, I mean, our thought is to rather than having people debate about policy to just build a project, opened the finances that people can see the economics of it and then replicate it much larger. Okay. Adam, great to meet you. So you'll have to come back and we'll

talk a bit more about this. Adam back there, chief executive officer and co-founder of BLOCK Stream joining us. A reminder, of course, you can access also all of the latest data and news on crypto on the Bloomberg terminal. Going to see our WIP go on the Bloomberg

terminal, crypto. Coming up next, we'll be joined by the Nestlé chief executive, Mar Nader to talk about earnings, the Swiss food giant. Stay with us for that exclusive conversation. This is Bloomberg. Economics, finance, politics. This is Bloomberg Surveillance early edition of Francine Lacqua. You're in London.

Now, let's say shares are surging as the world's biggest food and coffee maker pushes through the largest price increase in decades to try and shield the hit from inflation. Now group prices are up some nine point five percent while volumes fell over the quarter. Let's talk and look at some of the brands underpinning its success. We love it, of course. In the world of artisan caffeine ness, Cafe Instant remains a huge money spinner for Nestlé.

There's also the boutique offering of Nespresso coffee pods. It's one of Leslie's high margin products, but volumes declined and European sales have dropped after a strong 20 21 now. Better news for Nestlé is dog food brand Purina, which is helping to drive growth. Pet food has done phenomenally well these past few years, partly due to a rocketing pet ownership during the pandemic. I am, of course, very tired to put pet

food and also coffee. We're delighted to be joined now by the Nestlé chief executive officer, Mark Schneider, for an exclusive conversation. So, Mark, thank you so much for joining us. I mean, it is pretty incredible that

you've passed on the biggest price rise in decades. Are you worried that people will buy less, that people will not be able to afford your products, especially in Europe when seen? Good morning and thanks for having me. Good to be back on the show. And I know this is a situation that no one wished for. And what we're trying to do here is protect our margins from some of the same pressures that every family feels. So we're seeing that huge upward

pressure coming from energy. Some of the agricultural commodities and also transportation costs. And we're not even passing everything on because as we saw with our half year numbers, our gross margin has also been reducing over the last year and a half. So in a sense, we are struggling to catch up. And understandably, these numbers get all the headlines, but they only partially recovering some of the additional cost pressures that we're seeing. But Mark, we're seeing it a different government support in terms of different countries in Europe. So are there countries where you worry

more about consumer backlash because of increasing prices just because inflation is too high for them and their wages aren't following? So far, we've seen only very limited trading down. And I think the big unknown, especially for Western Europe for the fall and winter, is energy insecurity and how hard that is going to be hitting households to disposable income after energy costs. And that's the one where we are watching very closely and seeing how the fall and winter will play out. I mean, when do you find out whether

consumers are switching to white labels? If if you look at the trajectory, again, of consumer spending, of the cost of living crisis, of energy prices, of the winter months. Where do you think or when do you think peak consumer angst is? Well, when it comes to white labels to keep in mind, we're not only offering premium brands, we have brands across a number of price points. And so when there's trading down, it doesn't mean we lose that consumer. We may be able to have a compelling offering at a different price point. We are also promoting more in terms of value pack and larger pack sizes. With a white label, you've seen a bit of

a recovery because most of these private label brands have been suffering a lot during Covid times. Some of their supply chains weren't holding up as well as with the plant goods manufacturers. So some of the recovery there was already ongoing. We now need to watch over the winter exactly how the situation unfolds.

So when you look at all the products that you are for all the categories. Which category do you think is more resilient to price hikes? I think in general, those large key categories we have like coffee and pet care tend to be very resilient. We know that from past crises and also from other markets around the world. So clearly there's a lot of

legends here to these brands and to these products. And I think that bodes well under the circumstances to protect your margins. There are other things that you could do increase, you know, for example, making some of the packaging smaller, the size of smaller, but same price point has that's been done. Will it be done? Well, a key part for us was to actually look internally and see where we can find efficiencies so that all the pressures here that we saw on the gross margin arrive at the bottom line. And so a lot of internal cost savings have happened over the last year and a half. And then we also have undergone a very aggressive program, which we call cut the tail to push the head.

So this is lower rotation. SEIU is being phased out in favor of high rotation, more successful core SDK use that helps to improve supply chain efficiency. And the other thing is, it really improves visibility of those core offering. So it helps sales down the line. So you're a volume measure, which is

basically real internal growth actually contracted in the fourth quarter. But although nine months it was rising. What does that tell you about price pressures? Well, I think it's important that we're living at a very volatile time and that we don't interpret the volume development only in response to pricing because we're also lapping very, very strong quarters from last year due to a very strong corporate demand.

People were still spending a lot of time at home in third quarter last year. And so that's where it makes it so hard to read. Some of it is simply the high level of comparables. Some of it may be the early response to some of the pricing. Some of it is supply chain constraints and some of it is what I mentioned earlier. And that is our voluntary phasing out of

certain excuse as we're trying to seek efficiencies to offset inflation. Talk to me a little bit also about the outlook for wage inflation next year. So how much will that erode profitability? How much do you have to increase wages of your workers? That's a very important question. We're watching this very closely. In most countries, those negotiations, 423 will unfold over the winter and during the first quarter. So it's very hard. As of this point, to give a precise estimate, every country, of course, has its own calendar. But this to me is a key item to watch out for during the winter and beginning of twenty three.

I think you also said that you were suffering supply chain constraints, for example, in the water business and in North America. Can you give us more details on that? Yes. So North America is mainly around our pet care business. As you know, that business has stepped up tremendously doing Covid times with so many people adopting pets. And, you know, a one time significant step up in demand and then good continued growth on top of that. So here we're adding capacity, which would come on stream later this year and next year and help to alleviate the situation water.

Interestingly, when it comes to carbonated offerings, CO2 has become scars as some of the industrial gas producers have less CO2 available. We were supply chain constrained in that area. Is there anything that you can do to protect yourself against some of these supply chain constraints? Know you were quite good at dealing with them during Covid and lockdown. Yeah. And look, it's the same recipe now. Keep your head down.

Focus on your operations, focus on the daily blocking and tackling. So when I look at the way we run the company now, it's a lot more operational down into the weeds and the details compared to the time before when there was more time available for longer ranging strategic thoughts. Now it's really day to day trying to make sure that these supply chain constraints remain limited and do not morph into bigger problems. Do you expect them to potentially morph into bigger problems or does it actually ease in 2023? I think what we're seeing now with some of the economic activity slowing down, I think I'm seeing slight improvement on supply chain issues around the world, especially when it comes to global shipping. So some of the traffic and the demand is down and I think that's helping to ease things. But I think it's too early to call this like an end to the crisis.

So it's something we still watch very closely. And then hopefully, you know, as we go through the rest of this year and only 23, that easement trend will continue. And actually same question mark. I don't think I mean, I know you talked a little bit about wage, wage pressure and wage inflation, but overall, what are you expecting inflation to peak? Does it get worse in 2023? Overall inflation before settling down? Yeah. So what we're clearly seeing is some of the inflationary pressures continuing. So this is not over yet. And some of this will kind of go into 23.

When exactly it's going to peak, I think a lot of it has to do, especially in Western Europe with the energy situation, because that's a big driver of inflation and also, of course, has a big impact on our cost position and our manufacturing and distribution costs. So that's the big unknown. But some inflation would certainly continue into 23, even just because of the full year effects of the rises that we have seen in 22 so far. So what do you plan to position Seattle's best coffee? Is it going to be a high premium with other brands? So to us, this is a very exciting brand that we got to know through our Starbucks Global Coffee Alliance that we struck in 2018. It is positioned less premium compared to the original Starbucks brand. It's more of a mainstream mid-range brand, very trusted in particular in the United States building, of course, on Seattle's reputation as being one of the core places to get a good coffee in the United States. And so we came to like this brand a lot, and it helped to also cover the gap price point wise that we had before. And so we're very excited now to get

complete ownership of this brand and to continue to develop it going forward. We're talking about coffee and getting a good cup of coffee. What happens with an espresso? Can you increase prices of an espresso capsule? Is there a limit to how much people will will pay for those capsules? So, of course, being faced with the levels of inflation we're seeing, we also had to adjust prices there. The good news is that the basic interest in the brand and portion coffee or capsule coffee continues to be unabated and very strong. What you're seeing when it comes to crow flight compression is mainly due to the very, very high quarters that we're lapping from last year.

That was unavoidable because as you can imagine, people working from home, consuming coffee from home portion coffee was the go to solution. And now as they move back to the office, we're seeing some of that is the fundamental underlying demand is still very strong. We're very bullish on this brand. Yeah, I was actually looking at my shopping basket right in the grocery store. And I was trying to think what I was going to cut.

So do you have a crystal ball? And, you know, if things get worse, if people need to save, let's say, 10 percent of their. And you look at a shopping basket, which one of your products would they buy less of or change to a cheaper brand? Everyone, of course, would love to have a crystal ball. And again, the situation right now is pretty volatile and very, very hard to read because you're having the economic uncertainty, you're having some of the inflation that had happened already plus and you have these very, very uneven and volatile year over year comparisons due to the pandemic. My personal guess is it's not so much about cutting one thing or another. It is mainly about, you know, some will

be trading down some more of the trading down that we started to see. And that's why it's so important that we offer our brands at different price points. The other obvious one in food is if you need to make ends meet. Eating out less is a quick way to do that because the value proposition between a meal in home and meal out of home is is vastly different. And of course, out of home is also hit by the labor constraints and some of the rising labor costs.

Mark, thank you so much. Subscriptions to two cooking recipe Web sites increase. A chief executive of Nestlé, of course, on these results. Now, coming up, the U.K. prime minister prepares to face parliament with consumer inflation hitting a 40 year high. We'll have plenty more of that shortly. This is. We're starting to break markets where previously we've been very poor.

So is the United States is curry flying a former one with its new found popularity. And so, of course, out of that comes commercial revenues by attracting new partners and commercial partners to go into the sport. So it's a it's a it's a win win scenario. Is there more that can be can be done on that front to grow the fan base? Absolutely. I think we're just scratching at the surface of what we're seeing is more and more youngsters coming to sport, more more young girls coming into following Formula 1. And I think that's a really encouraging

thing. And I think that, you know, once they come to look at it, the most important thing is to keep them engaged. So the racing is going to be good. The product has to be good.

It has to stand up for itself. It has to be inclusive. It has to take all of those all of those boxes. Well, that was the Red Bull racing team principal Christian Horner speaking with our very own Tom Mackenzie F1 team's headquarters.

You can watch more of that interview on power players and you show where we speak to some of the most influential figures in the world's sport, Laura Bloomberg Surveillance. I think there's a genuinely large cloud of uncertainty out there, a lot of factors are putting us back into a more traditional 1970s, 80s and early 90s mindset. We believe that these markets are fire patients, diversification and discipline. There's so much fear out there and it's been priced in.

We're priced for a lot of bad news. This is Bloomberg Surveillance early edition with Anna Edwards, Matt Miller and Kailey Leinz. It's 10:00 a.m. in London, 5:00 a.m.

in New York and 5:00 p.m. in Hong Kong. Our top stories today, 40 year high UK inflation returns to double digits, intensifying pressure on the government and the central bank to act. Meanwhile, Prime Minister Truss faces prime minister's questions with her premiership in question. Amazon of Netflix shares in the streaming giant such as subscriber growth signals the worst may be over after a string of disappointing results. Plus, Wall Street continues to add headcounts. The biggest U.S.

banks are expanding their workforces. Even as executives talk of cutbacks. Welcome to Bloomberg Surveillance Edition. I'm Anna Edwards in London with Matt Miller and Kailey Leinz in New York. And Kelly, European equity markets kind of losing momentum as we go through today's session. A strong dollar and higher rates in

focus. Yeah, and they were the focus, too, in Asia overnight where we definitely didn't see that much momentum coming through after two days of rallying here in the United States. It was a mostly down day for Asian equities. You did have some outperformance coming from Japan, but with losses in China and Hong Kong, the MSCI Asia Pacific index as a whole down about eight tenths of one percent. And a lot of that was dragged the drag led by technology, the Hang Seng Tech Index down about 4 percentage points for likes of Ali Baba, 10 cent JT dot.com. All of those big weights on the Asian session again comes back to that higher rate story that Anna was just talking about. And on the subject of higher rates, we

are seeing upward pressure on bond yields globally and Japan is not immune to that. Take a look at the 10 year JCB yield. If you have your Bloomberg terminal up, it'll show you that at zero point to 5 7 percent. What is that above the 25 basis point cap that the Bank of Japan would like to see on that 10 year JCP yield puts Corona and Co. in a very difficult spot as we continue to see the Japanese yen weakening against the US dollar and is weaker once again this morning. One forty nine forty four is where we trade. We are pushing near 150 on dollar yen.

Quite a puzzle for Japanese policy makers, but of course that's not a yen exclusive story that pretty much everything is weaker against the US dollar. Yeah, we do have the dollar up today for sure, but still fascinating to see the yen getting back close to that record weakness. We have S&P futures down, although only marginally, and it does look like it's the UK inflation numbers that pushed us down. We had been up on futures throughout the night. We finished up in the cash trade yesterday, more than 1 percent to about thirty seven twenty on the S&P 500.

So much better than the thirty six hundred thirty five hundred levels that we've been seeing over the past few weeks. The US 10 year yield is coming back up as investors let go of that debt. It's both a tailwind and a headwind for stocks. Obviously, investors feel comfortable enough to let go of the perceived safety of government debt. On the other hand, as these yields rise, they become a bigger competitor to stocks for returns.

The Bloomberg Dollar Index, as Kelly mentioned, gaining thirteen forty three is the level here and we have the dollar up against most major currencies today. So dollar strength often a problem for stocks that could hold back a little bit of a rally and 9x crude ISE wanted to point out. Right now, we're trading at just eighty three dollars and four cents for West Texas Intermediate and we've seen lows around sixty dollars highs at one hundred and twenty five. So as we talk about the SPDR story today. Keep in mind that we're still at a relatively low end of the range that we've seen for oil over the past year or so. And what you see in terms of European

stocks. Yeah, well, this is the picture for European stocks and that is pretty red, pretty red across the board. The CAC fairly flat. But elsewhere, we're seeing selling of European stocks in the main, I should mention the Dutch market actually up by four tenths of one percent. Tech stocks to the full there. Broadly speaking, an interesting data point just dropping on the Bloomberg the euro area, September inflation number coming in at nine point nine percent.

This is a revision down from 10 percent. That's the number we previously had in mind. This is the final reading. So at the margin, perhaps a little bit of good news if you're looking for those numbers to come down. The fact that we're the right side then of that 10 percent, double digit mark, not so in the U.K.. More on that in a moment. This is what we're seeing on a couple of

U.K. assets. And this is that the yield curve we've got here for you want gilts. So the two year yields here, the 30 year yield, and you could see them moving in opposite directions. And that yes, there's inflation number here. But there's also the fact that we've heard from the Bank of England and what they plan to do with quantitative tightening. It is going to be starting almost

exactly at the time it had been planned. Give it take a day or so. But what's interesting is they're not going to be selling at the long end, only at the short end. And so in anticipation of that short end supply, you see some selling going on there. And those yields pushing higher so that. What we're seeing that flattening of the yield curve reflecting expectations around Kuti in the U.K., the other UK

story is that was Matt mentioned. What's going on in inflation? We'll get more on this from Lizzie Burton shortly. But really interesting to see the way the dollar gains. The pound sells off as if the market is not really thinking about links between that inflation, print and hiking. Central banks and therefore strengthen

the pound. They're instead thinking about what that means in terms of weakness in the U.K. economy. Here's the German two year gilt, because we saw an incredibly weak. We saw a weak auction when it came to the seven year part of the German debt curve. But I put this in here because we're

seeing actually more movement at the two year. We are seeing some selling and some yields going higher. That seems to be the broad story across what we're seeing in the European debt markets today. And Louise in focus, this is the banking group down by four point three percent today as we see the chancellor in the U.K. getting ready to try and find all of

that missing money, essentially fill the holes in his fiscal and his fiscal plans. Is he going to turn to energy companies? Is he going to turn to banks to try and increase taxation? There is already a surcharge on the banking sector above and beyond what is normal on corporation tax. That is something that those in the city are going to be pushing back against. But it is for the moment that fear weighing on banking stocks. Now, let's stick with themes around the UK and go to Westminster as UK inflation returns to double digits, jump back over that 10 percent mark. And for more, we're joined by

Bloomberg's Lizzie Burton, who has the focus on that inflation print for us. Your thoughts, Lizzie? This is driven by food price growth on. We're back to where we were in July, a 40 year high and significant that we're in double digits. I'm sure that there are members of the Monetary Policy Committee at the Bank of England who would be tempted by this to vote for 100 basis points, perhaps. But I have to say, since quasi crossing was replaced as chancellor with Jeremy Hunt.

Markets have pared back their expectations from that hundred basis points and now it's back to a debate between 75 and 100. We've also learned, as you say, from the Bank of England that they are going to get on with quantitative tightening after the Halloween budget, but they're not going to do it at the long end yet. Which for me is a statement from the BBC to say, we're re prioritizing this fight against inflation.

We're not forever going to be a backstop for the government, but we have got a firm eye on financial stability, hence the compromise, because, of course, it's at the long end where you saw that market turmoil after the mini budget. But this really is a confident statement from the Bank of England Governor Andrew Bailey. You have to wonder how many people are going to actually dress up as Kweisi Qua Tang's mini budget this Halloween. Losing the Financial Times is reporting that the new chancellor could raid bank and energy company profits. What does that mean for the competitiveness of the UK? But when you factor in that one of the other u turns that Liz Truss has had to do was that she's actually going to raise corporation tax and you throw in employment taxes as well. U.K. finance is warning that London could be

less competitive than other financial centres like Frankfurt and New York. And this at a time when Liz Truss has raised the stakes and said that her premiership is going to be all about growth, growth, growth. So it's a very difficult challenge to meet. But, of course, Jeremy Hunt really needs to plug this 40 billion pound hole in the public finances at the other end of the spectrum. We're hearing that he's asked all government departments for health and Defence to shave 15 percent off their budget. He's not even guaranteeing that he'll protect pensions when pensions are searching and pension, as is such an important constituency for the Tory party. So Liz Truss facing prime minister's

questions later today. She'll have to hope that she can give the performance of her life because Hutton is meeting backbench Tory MP was at 5:00 p.m. today. If she can't pull it off, could be curtains for trust today. All right. Well, we'll look forward to your reporting throughout the day. Bloomberg's Lizzie Berman from Westminster. Thank you so much.

Meanwhile, here in the U.S., Minneapolis Fed President Neel Kashkari says the Fed can't pause hikes if inflation is still rising. If we don't see progress in underlying inflation or core inflation, I don't see why I would advocate stopping at four and a half 4, 4, 7, 5 or something like that. So essentially four and a half percent

doesn't necessarily mean they're done. And later today, we'll get another take. We'll hear from St. Louis Fed President Jim Bullard, who will be speaking with Bloomberg at 330 p.m.

New York time. Eight thirty p.m. in London. Anna. Now, Netflix shares are up after the streaming giant stemmed its subscriber losses in the third quarter, hit shows like Season 4 of Stranger Things helped it to add two point four million members beating expectations. Reed Hastings, chairman and co CEO of Netflix, spoke yesterday. Well, thank God we're done with shrinking quarters, so that's a vague feeling of we're back to the positivity. We still got F acts.

That's a huge hit. You know, as we've explained. So that's not going to go away. But other than that, the all the stars are lining up very well for us. Reed Hastings there. Let's get the latest then on this business.

Aggie Cantrell joins us, our Berlin based tech reporter. Aggie is the worst over than for Netflix. Can we say that after they've turned this corner? Essentially, when you're looking at the subscriber numbers for this quarter, that has massively beat estimates. That's incredibly important for Netflix, especially seeing as that subscriber growth has been such a metric that they have stuck to for so long. It's been crucial for them to indicate that growth and for the last two quarters, that has been very bad for the company. So going forward, they're also

projecting further subscriber growth over the holiday period over the fourth quarter of this year. And that's going to be that is an important figure for them. But it's also interesting to point out that the company themselves have been saying now that they're moving away from talking about subscriber growth as a key focus, they're going to be looking more at revenue as a whole. This is also incorporated into the fact that the company is now looking at bringing in an ad based option for people who want to pay a lower amount, but will also have ads per hour on the platform. And so they're now looking at focusing on top line revenue more than they are on subscriber growth. OK. You said they'd like us to look at the

top line, but what about the bottom line? And when it comes to profitability, especially considering the stronger dollar, what kind of dilemma does that pose for Netflix? So they have flagged the fact that sales and profits will be impacted by the stronger dollar. And it's important to note that essentially Netflix sees itself as a very global business. It's got local language content in a huge amount of the countries in which it operates. And that in order to get subscribers not only in the US but overseas as well, they also are concerned about the price pressures on consumers, especially in a time when incomes are being squeezed and when inflation is essentially requiring people to look at their pocketbooks and see where they can save money. And so in order to go forward and gain more subscribers and gain better, more revenue going forward, they need to make sure that they're able to offer something at a price point that people can af

2022-10-21 22:40

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