Surveillance: BOE Decision & Apple Earnings Preview
Sree Kochugovindan, abrdn Senior Research Economist, breaks down the Bank of England's decision to keep rates unchanged. Greg Valliere, AGF Investments Chief US Policy Strategist, discusses the Israel-Hamas war and its political impact in Washington. Jonathan Pingle, UBS Chief US Economist, says a slowdown in the US labor market would lead to a slowing in inflation. Geetha Rananathan, Bloomberg Intelligence US Media Analyst, discusses Disney's plan to buy Comcast's stake in Hulu. Pierre Ferragu, New Street Research Head of Global Technology Infrastructure, previews Apple's earnings release.Get the Bloomberg Surveillance newsletter, delivered every weekday. Sign up now: https://www.bloomberg.com/account/newsletters/surveillance Full transcript:This is the Bloomberg Surveillance Podcast. I'm Tom Keene, along with Jonathan Farrow and Lisa Abramowitz. Join us each day for insight from the best and economics, geopolitics, finance and investment. Subscribe to Bloomberg Surveillance on demand on Apple, Spotify and anywhere you get your podcasts, and always on Bloomberg dot Com, the Bloomberg Terminal and the Bloomberg Business App. What a joy to see her in London. Sree Kachigovin and joins us right now, senior research economists at Aberdeen three. I'm absolutely fascinated by how the US stands alone, how Jerome Powell yesterday stood alone with massive stimulus leading into massive real GDP. Does the United Kingdom, where Governor Bailey stands now, do they need stimulus to keep it going? I think stimulus would probably not be a good idea at this point. Really, what we want to tackle is inflation. Now. The Bank of England have a very challenging backdrop. Growth outlook is weakening, but we still have very elevated inflation pressures. Now inflation is past the peak, it has started to decelerate. However, energy costs are still quite elevated. The headline inflation is still very high. And also we have even though those multi price based effects will start to unwind over time, we still have very sticky core services and wage pressures in place. So stimulus right now would not be a good idea for the UK. Now it's not restrictive fiscal background at the moment, but further stimulus would actually not be helpful with the Here's a fun fact from the Bloomberg News story that Lucy White wrote for US. Ben Bernanke actually attended the Bank of England's meeting as an observer. It's part of his review into the UK central banks forecasting communications. And of course this comes as Bailey has faced some criticism that they didn't move quickly enough to respond to inflation. Sree, can you compare and contrast the efficacy of communication at the BAIE versus the FED. I think, as we mentioned earlier, there was a conversation about group think. There is a split within the within the Bank of England, and I think the communication has been quite clear from the various members. We've had the arguments for staying on hold, the arguments for perhaps another an additional hike, and all of those are quite consistent actually with the data that we're seeing. But it seems that on the whole we are witnessing switch towards a focus on growth and the weaker activity data and some greater faith in terms of inflation actually passed the peak and decelerating from here. So we're also seeing there. So we have a signal from the split in the vote, and we also have that signal well, very very clear in terms of rates are going to be on hold for a meaningful period of time, even if, as we expect, the economy enters a recession, rates are going to remain quite elevated. And that's quite a burden for small companies in particular who are much more sensitive to the rate cycle. They are facing a profit squeeze. There is a bit of an issue there in terms of future business investment and so there are a number of challenges there, particularly for the smaller, smaller firms. So that's something that the Bank of England are going to have to really be wary of. Yeah, credit availability for small firm is always an issue, whether it's stateside or across the pond street. When it comes to the stimulus versus austerity debate, that time was referencing how does the Bank of England's decision to keep rates on hold for a second straight meeting and warn about a possible recession, warn about the need to perhaps raise rates in the future of inflation reaccelerates. How does that restrain or limit the government's options when it comes to supporting the economy. I think the government is also very aware, and we have heard from Sunak p at the Prime Minister. We have heard that there is a focus on inflation even within the government. Yes, they do have an election coming up, but they're worried about stimulus too soon and too much stimulus too soon. So I think they're going to pair back on any measures that are going to fuel inflation. Further, I think that's also concerned from them, get every challenging decision for them, given that there is an election on the horizon. Are all the gains in the United Kingdom focused on London? I mean, I mean, is it like, you know, the dominance of Paris and France. Are all the economic gains which you have been tangible here have they been focused on the south of England? Well, there has been a big debate for a number of years with regards to the regional disparities, and that was something that for a few years there have been some focus on what are the policies that can help level up the economic outlook. However, it has been quite challenging in order to do that with the pandemic recovery from the pandemic. And I think the leveling up policies may be, you know, they're on the horizon in the future, but right now, really the focus is quite narrow. That regional disparity, unfortunately, is still very much there. Christrie, thank you so much. Cut your govid in with us with Aberdeen joining us now. On the other points in the Wars of Washington, Gregory Vellier, he's chief US Policy Strategistic AGF Investments. Greg I believe it is November, that's twelve months away from an election. Take the drama of October in our many wars and fold it into how things change twelve months before an election. How does your world change given the pending one year out election. Well, good morning time. So many unknowns. I'd say one big one is Benjamin Netanaihu. If you saw the extraordinary story in the New York Times on Monday talking about how Israel and Netanaihu were blindsided by Hamas they got totally caught off guard. There's going to be recriminations. I think that has to be looked at very carefully. There's the FED and there's this continuing fight in the House between fairly moderate Republicans and the right wing. That fight is about to resume within days, right, But you've got a right wing Speaker of the House. Now, shouldn't that restore some order in the House. One would think Scarlet wouldn't one, But I'm not quite sure about that. I think that even a handful four or five House Republicans could block this next spending bill. And there are Republicans in the House who don't want to spend money on Ukraine, as you guys know, and some lukewarm attitudes toward Israel. But the big fights still is a budget. We have a budget deadline in about two weeks and they're not close to being done. Yeah, and so we're watching that November seventeenth deadline very carefully. I want to get your take also on what the economy means for the presidential election tries. It might The White House has been selling Bidenomics, but it's not doing very well. When consumers are feeling pretty sour. What does the current FED policy mean for the economy in twenty twenty four. Well, I think there's maybe some relief among consumers that the FED didn't raise race. But I thought you and Tom a few minutes ago hit it perfectly talking about food prices. I mean, food prices are up. What did you guys say, nineteen percent cumulative? Yeah, over three years, over three years, But that leaves an awful lot of people, maybe not us, but leaves an awful lot of people discouraged that this is not improving. Yeah. What's important there, Scarlett, is the USDA with this is really good data from the US Department of Agriculture. They say that for the have nots of America, it's not third world, but thirty percent of their compensation is going to food, which means thirty percent of their conversation is not going to discretionary spending or anything else that usually supports the economy. Greg, I want to bring it back once again to FED policy in the economy in twenty twenty four because J. Powell's term expires as FED chaer in early twenty twenty six. So whoever wins the twenty four to four election, would get to pick the next FED chair. What does that mean to you? And I bring this up because if Donald Trump wins the nomination, yes he nominated Powell as fedchair, but he also nominated Judy Shelton as a FED governor. Yeah. I think if Biden wins, obviously he'll try to keep at Jerome Powell. If Trump wins, he will fire and get rid of Powell as quickly as possible, and that will I think cost some anxiety for the markets. You know, one other quick point I would make about what we could see in the next year or so that maybe is outside of the box. I go to piece this morning on Robert F. Kennedy Junior. There's a new poll out overnight from Quinnipiac showing him a twenty two percent that I was surprised. I think a lot of people were surprised to see that. And I do think that he will take away from Joe Biden, young people, independence, African Americans, environmentalists. Robert F. Kennedy Jr. Is not going to be the next president, but he may determine who will be. Craig Villie, thank you so much. With AGF investments, we can rip up the script with a gentleman that worked in the macroeconomic section at the FED. Jonathan Pingle joins the course with UBS, their chief US economists, John I'm sorry, I got to go here, and Julia Cornado XBMB Perry by Macro turns his way out in front of this. Are we completely misguessing the efficiency, the productivity, the technological advancement of America? Are we just flat out to pessimistic? Well, I mean it's hard to know what the expectations are, right there aren't that many people as in the weeds on productivity, you know, on the immigration rebound as Julia, and you know, give Julia a lot of props since we were at the board together a year long time ago. But I would say two things, and Sheer Powell touched on this yesterday. One is, you know, we have been seeing a pretty impressive rebound and labor supply and that's been both the combination of you know, a significant improvement and net international migration coming out of the pandemic. In addition to you know, some groups like prime age women punching out new all time highs and their labor force participation rates. And you know, we've certainly been writing about that, and Julia's done a good job as well on the productivity stuff. Though we do have to remember that productivity was incredibly weak as we went through the pandemic and immediately coming out, so we did have a fair amount of catch up to do. And when we look at sort of the longer run trends after today's data, just mathematically you are going to be a little bit above the longer run trends. So it is good news, but you're actually really still not that far from what we were seeing pre COVID. But I will say together, I think it's right. We're seeing nominal wage gains slow, and some of that is these supply side improvements and unit labor costs dropping. You know, we were forecasting a seven to ten drop. You know that is the result of the slowness we saw in average hourly earnings combined with basically five percent GDP growth in the third quarter. So that's a good supply side story. Tell me about course services. The chairman didn't talk about it much yesterday, but are we seeing a service sector disinflation to give confidence to an outright goods deflation? We are? I mean, we've had We've had some positive news on the core services over the last several months, but I would say we're sort of not out of the woods yet, right Like, you know, I think that's one of the reasons Chair Powell yesterday, you know, and Mike McKee did a great job with his you know, trying to pin the chair down on the objective versus subjective decision. But what we want to see is a little bit more slowing in the labor market in order to see more slowing in those components of inflation, because if we look at the ECI, it does look like wage gains are still a little too risk to be consistent with sustainable two percent inflation. So I do think the Chair and Mike was just saying this, they do need to get the labor market to slow here if they are going to achieve their mandate and restore price stability. All right, this is clearly a big, big week for labor market data. You had ADP employment change jolts and of course jobless claims this morning. Unit labor costs as well in productivity. We know that the UAW has come to agreements with the automakers, but if you are an union organizer and I'm thinking of the Actors Guild, for instance, that is still on strike. What is your takeaway from the flood of data that we've gotten on the labor market right now? Well, land market's still tight, right so you know, so you know, even I mean, and I don't really think you need to look much beyond the unemployment rate at three point eight percent to say, you know, the nation's at full employment and markets are tight, and you know you've got a point here where there might be some bargaining power for workers. The other interesting thing about a number of these strikes is there are a lot of non wage issues at stake. You know, you're talking about, you know, the use of AI for the actors, you're talking about, you know, the shift to electric vehicles amongst the UAW. And that's actually been sort of an interesting aspect where, you know, a lot of these labor negotiations it's not just about the wages, you know, it's really also about sort of these changing industry dynamics that they want to protect their workers from. So how does that show up in the data, How does that show up in the economy in what's measurable, Well, we should definitely see the impact of the UAW strike tomorrow. In tomorrow's data, you know, the BLS released their strike report. You know, between the strikes the Big Three and Mac Trucks, that should be about a thirty thousand job reduction in motor vehicle and parts assemblies employment. You'll see it in Table B and B one of the employment situation release. So we should definitely see that way on the employer report tomorrow, but that'll rebound in the subsequent in the subsequent report. And I think the bigger picture is that you have put in place for some of these contracts, you know, a return to things like you know, cost of living adjustments, et cetera. So this should generally mean for these workers somewhat firmer wage gains over the next few years than would have otherwise been the case. Jonathan Tingle, thank you for the brief, particularly there quickly on advancing productivity is with UBS. I love saying this the Union Bank of Switzerland. We're going to get complicated here and straighten this out. Hulu being taken out by Disney. Brian robertson Comcast unloading the Dogkeetha Ranganathen of Bloomberg Intelligence is truly encyclopedic on this near nine billion dollar that transaction. Getha, I'm lost here. Is Comcast happy today that they unloaded the stock or is this the deal of a lifetime for mister Eiger? So this is this is, as you just pointed out on this is a pretty complicated transaction. All that we got yesterday was that Disney is definitely buying out comcast thirty three percent stake. So Disney already owns two thirds of Hulu, so we know for certain that Comcast is offloading it who Disney is buying it? Now the biggest question here is going to be price. So we know the floor value was set at twenty seven billion. Disney actually came out yes, they're saying that they do expect to make that initial payment of you know, eight it's actually nine billion minus some capital calls, which which is why you get the eight point six billion. But really the point is going to be how much greater than twenty seven billion is the valuation going to be? And that is where all of the complexity is going to arise over the next few months. I mean, John Pharaoh is addicted to Hulu. He's just you know, he like binge watches Love Island USA and the rest of it. GITHA doesn't matter who watches this stuff in this transaction or is this just people distant from what we watch every day? I mean, Hulu has forty eight million subscribers some so it is a very very successful streaming service. You're absolutely right. It has a very deep catalog of classics. It has all of us Keith, You're not going to sell surveillances audience. The Love Island USA is a classic. Continue well, it has you know, it has a lot of the must watch shows, right you brought up the Bear Only Murders in the Building is show. It has a lot of shows that come up from broadcast TV, so it's a great catch up service. And it also has kind of this live Hulu Plus live option as well. So there are a lot of different flavors that it offers. But I think the biggest thing for Disney is really the ad component of it. If there is any streaming service out there that has got advertising right, it is Hulu. We know that Netflix is struggling with that right now, so is Disney Plus. So are a lot of the established services. Amazon is looking to bring an advertising service. Hulu is the one established brand already bringing in about three three and a half billion dollars in AD revenue. So that infrastructure is a gold mine and is super valuable to Disney and for that reason, Hulu is one of the few profitable streamers. Netflix of course another profitable streamer here. But what is it about the ad packaging that Hulu has figured out. As a consumer of Hulu, it's really frustrating to see the same Tom Brady hurts commercial over and over again. No, you're absolutely right, But at the same time, I mean, this is a company, you know, obviously they have They are the ones that have ads, that have had ads on now for the longest period of time. They've built all these different they've built very a very very robust AD stack, and they've also kind of made all these different you know, relationships with advertisers. Of course, you have the larger Disney brand as well at work there, but that is something where they've really been able to crack the code. I mean, Hulu is one service where you have majority of you know, the consumers on the on the ads supported option, which is what has made it such, you know, so successful in what it's set out to do. Disney says it has enough cash and credit to buy Hulu, whereas Comcasts will be using the proceeds to boost its accelerate its stock repurchase program. When this financial transaction is completed, does it move the needle at all for either Disney or Comcast stock. I think it definitely moves the needle for Disney because this removes a key overhang. Remember, there are so many strategic questions that are still kind of pending for Barb Biger, whether it's the future of ESPN, whether it's the sale of the ABC network, and so, you know, kind of just closing this deal with Hulu and then integrating it with Disney Plus, I think just removes a key overhang for the stock. Five years out, do they mate. Do you see Hulu combined with Disney Plus to really take on Netflix as a combined adult in kids' entity. Absolutely, I think that is what the plan is. I mean, at the end of the day, they are looking to get synergies across the board in their streaming product because Disney Plus is still losing money. It is still going to lose about two and a half three billion dollars this year. But I think when you combine this we're looking at savings of at least one one and a half billion dollars. I think it's definitely going to accelerate streaming crafitability for Disney. Synergy to me means rebundling, So you're going to have to pay some big, heftier price to get all these different channels or streamers into twenty. That's what Paul Sweeney would say as well. What I'm fascinated by is when we're all said and done with this. I mean, there's Hulu and there's Disney Plus, and they're going to merge and they're gonna take on Netflix. Keitha, do you see a true duopoly out there? Is that where streaming is heading? It definitely is heading there, Tom, There's no doubt about it. I mean Netflix is far ahead of the competition. They have almost two hundred and fifty million subscribers. We do see them getting to three hundred million over you know, maybe the next few years. But yes, this is kind of very much turning into you know, Netflix versus Disney versus most probably Amazon. So yeah, maybe a tryal Max HBO. Yeah, that's a tough one, you know, Hbo Max. You know, she's got to be a second tier service, second tier look at it. She's just like, Wow, you know what's so bad about that? And this goes, this goes with Discovery Plus and Max and all that is. You know where am I going to see ninety day fiance? I know you're addicted to it. If it doesn't work, O Githa ruganof and thank you so much. I think I learned something there. Pierre Farragu wrote the Black Books for Bernstein and Technology for years. Yes, he's got a fancy title Global Technology Infrastructure at New Street, but the answer is once and forever he will always own the Black Books over at Alliance Bernstein Peer. Thank you, Pierre, Thank you so much for joining us. And you have been cautious on Apple. Is now a time to buy the shares? After the lassitude that we've seen over the last twelve months. I would have liked to say yes, but unfortunately, and the reason why I would have liked to say yes is because sentiment is very very low on the name. You know, sixty percent by ratings and forty percent sale and a neutral rating for that name. It's very very It's as low as can be, I would say. So we've had like a very slow yeer. You know, three after in a row in negative growth, we're getting back to politive growth probably on the guide, but it's just because we're hitting like the the easier compare now and so that slowdown, like the stock reacted relatively well to that slowdown. If you look at the Apple stock, it roughly tracked the NASDAK. So not much happened on the stock. And the reason why you know I wouldn't jump on board now is first not a significant pullback so valuation. You're still paying like a hefty premium for our early It's partly justified, of course, for the quality of the franchise. But you know what happens next that really creates a surprise and gets the stock to work. From here, the high kinmentalist the harder matter pere single digit revenue growth. So I went back to the pandemic and basically sales are up forty seven percent from twenty nineteen, but the free cares flow generation after that is up seventy one percent. In your caution, are you suggesting that that formula they have of operating leverage, of generating ebit, of generating free cash flow is now broken? Given single digit revenue growth. No, I think it still works. But you know, of five percent revenue growth, you don't you don't generate as much free castural growth. So the way I like to think about it is out of like you know, between three and five percent revenue growth apper it can generate you know, you know, above five percent, like six seven percent earnings DIVIDI and free casual growth on a sustainable basis through like systematic buyback, through operating leverages that there are. So there is definitely a huge amount of quality there and a very strong benitry as you just mentioned. So all that is worth su premium. When you look at Apple today, it's straight on twenty seven times, you know, for for our earnings status and plus names who grow between five and ten percent anum, the overall economics are treading on like twenty two times, So you have a significant premium. So you won't have like a evaluation surprise out of this very healthy, very high quality model. And so when you own the Stoke today, you have to to believe this premium is going to remain, which I think is fine, but you can't expect like a sudden jump and a sudden increase in valuation multiple unless you have a new growth story, and that's where it's kind of difficult to expect that to cor right. The China part of the equation is not a growth story for Apple right now. How is May sixty pro getting a lot of attention kind of stealing the thunder in many ways? And Apple bears will always point to the China demand for iPhone fifteen as a reason to not be optimistic. How does Tim Cook frame the negative headlines that are hitting Apple out of China, whether it's the sixty pro or whether it's Beijing's ban of using foreign phones for government workers or stayed owned enterprises. Yeah, so I think it's a very good question. It's a source of concern. Interestingly, I don't think it's going to materialize that quickly because like the new Qua Way phone is really like in early innings, you know, they probably don't have a strong case to be that competitive against the iPhone. But it's true that you know, in this junk you mentioned since twoenty and twenty term, a lot of that was like what we're getting out of the picture in China and Apple really like gaining about twenty million XI units iPhone units combined with an increase in a spit and so that part of the business I think is true is kind of a trick over the next couple of years. Because China, China might be able to put together alternative to the AFO, the aphone remained like an exceptional product. You know, this is the only phone at a string animeter manufacturing a note for the main shift exceptional quality, exceptional like integrated software and hardware that there are. So I wouldn't say the Chinese are going to create the fund that can compete with the iPhone, but we know that in the past about twenty million funds we are selling at Huawei, and when Huawei dies appeared that market seem to have moved straight into Apple's hands. I see, and that's that's a concern of course. So how about Apple and AI? I mean, Apple was kind of left behind when Chat, GPT and all the other AI tools you know, took over the zeitgeist. I know Apple's working on things with relaated relative to Siri, and how can incorporate more generative AI into its products? Is this something that has reached a point where investors can can model it? No, So I think on the business model of Apple, you know, with making all its profits from selling hardware and then selling like mostly subscription services over this hardware, Like you know, the kind of like magical one trick where you can chart like thirty dollars a months for a generative AI based services that does doesn't really exist. The way I see it is that for Apple, generative are is going to be more of a defensive move. Siria has never been exceptionally impressive in terms of what it can achieve in terms of voice recognition and user user service. Apoba is going to continue to do their best to enhance the overall user experience with generative AI, But I don't see that as like as a revenue enhancement for them as it could be for like a Microsoft or Google and metal and advertising and things like that. Heard you just to finish here, is the Apple such a animal like you were mugged by your kids to go out and buy more toys like bram or like food like King. I mean you're on the same game. Are you suggesting that this is a stock that treads water for five years or are you actually looking for a diminished share price? So that's I think from from here over the next five years, I think that's a stock that can compound with its earnings power or its dividend power, so you know, it can compound like in single digits, maybe high single digits, so it's not it's not too bad for a very high quality name. And then I would look at buying it only if there is a bit of a dislocation at some point, like a loss in confidence if this quality I see that Apple wasn't there all the time. And so if you see like a weakness coming out of China or things like that, and if the stock is hurt by that, I think I would be I would be baking to revisit and look at, you know, getting into the name at a more attractive evaluation because when you're talking, companding and valuation is almost everything, because that's that's what drives, you know, your ability to buy back your stock more efficiently and things like that. So I really think you need a lower melteaper to make Apple compelling, like you know, single legy companding opportunity, and then a kind of like a breakthrough opportunity, you know, an opportunity to increase prices, to increase in clevolume, to launch a new products. Difficult to see that on the horizon. To be honest, Pierre, thank you for the brief peer fargu for some real Apple caution. They're different than the fanboys that so many people speak of. Subscribe to the Bloomberg Surveillance podcast on Apple, Spotify, and anywhere else you get your podcasts. Listen live every weekday starting at seven am Eastern Bloomberg dot com, the iHeartRadio app tune In, and the Bloomberg Business app. You can watch us live on Bloomberg Television and always on the Bloomberg terminal. Thanks for listening. I'm Tim Keane and this is Blumber HmSee omnystudio.com/listener for privacy information.