Bloomberg Daybreak: Europe 04/10/2024

Summary

In today's financial news, Hong Kong shares rallied as Treasury yields dipped from 2024 highs ahead of the latest US inflation data. Federal Reserve's Raphael Bostic indicated a potential shift from his previous stance on a single rate cut this year, should economic data warrant it. Meanwhile, Apple's production in India doubled, signaling a strategic shift from China. Fitch Ratings downgraded China's outlook to negative amidst concerns over foreign debt and fiscal buffers, while Chinese equities showed resilience. TSMC reported a 34% year-on-year increase in sales, underlining the tech giant's growth. Geopolitical tensions and economic indicators are closely watched as they continue to influence market trends and strategic decisions globally.

Takeaways

• 📈 Hong Kong shares rallied as Treasury yields declined from 2024 highs ahead of the latest US inflation data release.
• 💡 Fed's Raphael Bostic anticipates only one US rate cut this year, but is open to changing his view if the economic situation evolves.
• 📱 Apple doubled its iPhone production in India in the last fiscal year, signaling a strategic shift away from China and towards India as a manufacturing hub.
• 🌐 Fitch Ratings downgraded China's outlook to negative from stable, citing concerns over foreign debt and fiscal buffers, while affirming its A-plus default rating.
• 📉 The S&P 500 dipped below the 5200 level, with tech shares leading the losses, as markets await the US inflation report.
• 🛫 Boeing faces allegations of taking shortcuts in the production of its 787 Dreamliner, leading to a slide in shares and an investigation by the Federal Aviation Authority.
• 💔 At least three people were killed in an explosion at a hydro power plant in northern Italy, disrupting the power supply and raising concerns about safety measures.
• 🚀 TSMC reported a 34% year-on-year increase in sales for March, reaching over 6.1 billion USD, and is set to receive substantial grants and loans from the US government for its Arizona expansion.
• 🌍 South Africa and the European Union are working on plans for a bilateral summit, following reports of a strained relationship due to South Africa's naval exercises with Russia and China.
• 🏦 The Financial Conduct Authority estimates that about 7.5 million people in the UK are struggling to pay their bills, a significant drop from 11 million at the start of the previous year.

Q & A

What is the current situation in Hong Kong's stock market according to the transcript?

Hong Kong's stock market is rallying while Treasury yields come off their 2024 highs as traders anticipate the latest US inflation report.

What does Fed's Raphael Bostic predict about US rate cuts this year?

Fed's Raphael Bostic sees only one US rate cut this year, but he is open to changing his view if the economic data justifies it.

How did Apple's production in India change in the last fiscal year?

Apple doubled its iPhone production in India in the last fiscal year, making it worth 4 billion USD as the company accelerates its pivot away from China.

What was the response of the Chinese ministry to Fitch Ratings' outlook downgrade for China?

The Chinese ministry expressed disappointment about Fitch's outlook revision and stated that it will continue to resolve local government debt problems, asserting that the scale of local hidden debt has been gradually reduced.

What is the current status of the US dollar and Brent crude prices?

The US dollar is pretty steady, while Brent crude prices are back below $90 a barrel, holding a two-day decline due to a mix of factors including a gain in US crude stockpiles and geopolitical tensions in the Middle East.

What does the transcript suggest about the overall Asian market?

The overall Asian market is experiencing a quiet light trading day ahead of the CPI report and a couple of holidays in Asia. Most of the attention is currently on the forex market, with the yen just below a 34-year low against the dollar.

What is the significance of the TSMC sales numbers mentioned in the transcript?

TSMC's sales for March increased by 34% year on year, reaching more than 6.1 billion USD, which is slightly ahead of their own guidance and indicates a strong start to the year for the company.

What are the potential implications of the US inflation report for the markets?

The US inflation report could significantly impact the markets as it has been a key factor influencing the Federal Reserve's decisions on interest rates and as traders are closely watching for signs of disinflation.

What is the current status of the US-China relationship according to the transcript?

The transcript suggests ongoing tensions between the US and China, with Apple's increased production in India being seen as a move to diversify away from China, and the US ambassador to Japan stating that the US strategy is to isolate China with the help of its allies.

What is the situation with the European Union and South Africa's bilateral summit?

Plans for a bilateral summit between the European Union and South Africa have been thwarted, with South Africa failing to commit to a date. This has raised concerns about the trade relationship between the two, especially considering the EU is South Africa's biggest trade partner and foreign investor.

What are some of the key economic data points to watch for in the transcript?

Key economic data points to watch for include the US inflation report, the US ten-year note auction, the Fed meeting minutes, and the US monthly budget statement.

Outlines

00:00

🌐 Global Economic Updates and Market Tensions

The paragraph discusses the rally of shares in Hong Kong and the decrease in Treasury yields following the 2024 highs. It highlights the anticipation of traders for the latest US inflation report. The Fed's Raphael Bostic shares his viewpoint on a potential single rate cut for the US this year, with openness to altering this view if the economic landscape changes. Additionally, the tech giant Apple's increased production in India is noted, signifying a strategic shift away from China. The market's cautious approach in the face of pending inflation data and the impact of two CPI reports are also discussed. Lastly, the segment covers the steady dollar, oil prices, and the state of broader Asian markets, including the Fitch Ratings' downgrade of China's outlook and the response from the Chinese ministry.

05:02

📉 Market Reactions and Fiscal Policies

This paragraph focuses on the market's reaction to the anticipated CPI report and the potential for rate cuts. It features a discussion with Bloomberg's Jill on the expected moderation in core services prices and the implications for the overall CPI gauge. The conversation also touches on the Fed minutes and the significance of these in light of recent data surprises. Additionally, the segment covers Apple's diversification strategy, with a focus on its increased iPhone production in India. The implications of this shift for Apple's relationship with China are explored, along with the steady increase in the number of workers at manufacturing facilities in India.

10:03

🤝 International Relations and Trade Partnerships

The paragraph delves into the dynamics of international relations, particularly between South Africa and the European Union. It discusses the plans for a bilateral summit and the challenges in committing to a date, as previously seen in 2023. The impact of South Africa's naval exercises with Russia and China, and the concerns these actions raise about the country's relationship with Western powers, are highlighted. The EU's significant trade and investment relationship with South Africa is noted, along with the importance of regular political dialogues as part of their Trade Development and Cooperation Agreement. The response from both the EU and South Africa to recent reporting is also discussed.

15:05

🛫 Aviation and Aerospace Industry Developments

This segment provides an update on the aviation and aerospace industry, focusing on the investigation by the Federal Aviation Authority into claims made by a Boeing employee about production shortcuts. The allegations concern the 787 Dreamliner and the assembly process, with Boeing disputing the claims. The impact on Boeing's stock and the comparison of Boeing's performance with Airbus is discussed, along with the potential for recovery and the structural changes in the European defense sector. The segment also covers the significant investment in TSMC's expansion in Arizona, with the US government's grants and loans, and the broader implications for the chipmaking industry.

20:08

🚗 Global Supply Chain Challenges and Automotive Industry Insights

The final paragraph discusses the global supply chain issues faced by the automotive industry, as experienced by Mazda. The challenges are multifaceted, including battery shortages, the impact of the Baltimore bridge collapse, and increased exports from China. Mazda's efforts to mitigate delivery delays are highlighted, along with the broader supply chain constraints affecting the production of vehicles. The CEO's views on the future of vehicle types, including EVs, hybrids, and internal combustion engine vehicles, are also shared, emphasizing the potential for hybrid technology and the enduring demand for traditional engines.

Keywords

💡Bloomberg Daybreak Europe

Bloomberg Daybreak Europe is a financial news program that airs on Bloomberg Television, providing comprehensive coverage of the latest business and financial news from Europe and around the world. In the context of the video, it serves as the platform through which the host, Lizzy Burden, introduces and discusses various economic and market-related stories that are relevant to the viewers' daily agenda.

💡Hong Kong Shares

Hong Kong Shares refer to the equities or stocks of companies listed on the Hong Kong Stock Exchange. These shares are a significant component of global financial markets and can be an indicator of economic health and investor sentiment. In the video, the rallying of Hong Kong shares suggests a positive market movement, which is influenced by various factors including US inflation readings and Federal Reserve interest rate decisions.

💡US Treasury Yields

US Treasury Yields represent the return on investment for holders of U.S. Treasury securities, such as bonds. These yields are closely watched by financial markets as they can indicate the market's expectations for future interest rates and economic growth. In the context of the video, the mention of Treasury yields coming off their 2024 highs suggests a shift in market sentiment, possibly in response to anticipated changes in monetary policy.

💡Federal Reserve

The Federal Reserve, often referred to as the Fed, is the central banking system of the United States. It plays a critical role in determining the country's monetary policy, including setting interest rates and controlling the money supply. The Fed's decisions have significant implications for financial markets and the broader economy. In the video, discussions about the Fed's stance on interest rates and inflation are central to understanding market movements and economic forecasts.

💡Apple's Production in India

Apple's Production in India refers to the manufacturing of Apple products, specifically iPhones, within India. This is significant as it indicates a geographical diversification strategy by Apple, potentially to mitigate risks associated with over-reliance on a single manufacturing base, such as China. The increase in production volume in India also reflects the country's growing importance as a manufacturing hub and its potential as a market for Apple's products.

💡Geopolitical Tensions

Geopolitical Tensions refer to the political conflicts or strained relationships between different countries or regions. These tensions can affect global markets, trade, and investment flows. In the context of the video, geopolitical tensions are noted as a factor influencing oil prices and market sentiment, with specific reference to the Middle East.

💡Gold Prices

Gold Prices refer to the cost at which gold, a precious metal and widely traded commodity, is sold. Gold is often seen as a safe-haven asset during times of economic uncertainty or inflation, and its price movements are closely watched by investors and traders. In the video, gold prices are discussed in the context of market performance and as an indicator of broader economic trends.

💡Fitch Ratings

Fitch Ratings is a major credit rating agency that assesses the creditworthiness of entities, including governments and corporations, by assigning them credit ratings. A downgrade in a country's outlook by Fitch can signal potential economic challenges and affect investor confidence. In the video, Fitch's action of cutting China's outlook to negative from stable is highlighted, indicating a less favorable economic outlook for the country.

💡Boeing 787 Dreamliner

The Boeing 787 Dreamliner is a wide-body, long-haul, commercial airliner manufactured by Boeing Commercial Airplanes. It is notable for its advanced design, which includes extensive use of composite materials. The aircraft has been subject to various production issues and scrutiny over quality and safety. In the video, allegations of shortcuts in the production process are mentioned, which could impact Boeing's reputation and the trust of its customers.

💡US Inflation Report

The US Inflation Report is a key economic indicator that measures the rate at which the prices of goods and services are rising in the United States. It is closely monitored by the Federal Reserve and influences decisions on monetary policy, such as interest rate adjustments. The report's findings can greatly affect financial markets, as it provides insight into the health of the economy and the purchasing power of consumers.

Highlights

Hong Kong shares rally as Treasury yields come off 2024 highs ahead of the latest US inflation report.

Fed's Raphael Bostic sees only one US rate cut this year, but is open to changing his view if the economic data justifies it.

Apple doubled its iPhone production in India in the last fiscal year, accelerating its pivot away from China.

Fitch Ratings cuts outlook for China to negative from stable, citing long-term foreign debt problems and fiscal buffer risks.

Chinese ministry responds to Fitch's outlook revision, expressing disappointment and commitment to resolving local government debt issues.

US CPI report is expected to show a tick down to 0.3% at the headline and core levels, with market attention on any signs of disinflation.

Boeing is under investigation by the Federal Aviation Authority following whistleblower allegations of shortcuts in the production of the 787 Dreamliner.

TSMC, the world's top chipmaker, reports a 34% year-on-year increase in sales for March, reaching over 6.1 billion USD.

European defense stocks experience their worst day in almost 18 months after Goldman Sachs warns of peak multiples in defense firm shares.

Mazda CEO discusses global supply chain issues, including battery shortages and increasing exports from China, impacting the automotive industry.

US inflation report is set to release, with market reactions potentially being influenced by recent economic data nerves.

Bloomberg reports on South Africa's relationship with the European Union, following a failed bilateral summit last year and concerns over alliances.

US Ambassador to Japan, Rahm Emanuel, speaks on Washington's efforts to isolate China with the help of Tokyo and other regional allies.

Bloomberg source reports at least three people killed after an explosion at a hydro power plant in northern Italy.

Bloomberg's Jennifer Sullivan discusses the strategic trade relationship between South Africa and the European Union, and recent concerns over summit cancellations.

British Foreign Secretary David Cameron meets with Donald Trump to discuss continued aid for Ukraine amidst political tensions.

Bloomberg's Mohamed El-Erian suggests that businesses may need to be more strategic in their approach to economic policy, rather than solely reactive.

Transcripts

Good morning. This is Bloomberg Daybreak Europe

I'm Lizzy Burden in London. And these are the stories that set your

agenda. Shares in Hong Kong rally While Treasury

yields come off their 2024 highs as traders count down to the latest reading

on US inflation. The Fed's Raphael Bostic says he sees

just one US rate cut this year, but adds he's open to altering his view if the

economic picture changes. Plus, Apple says it made 4 billion

worth of iPhones in India last fiscal year, doubling production as the tech

giant accelerates its pivot away from China.

Well, good morning. And it's caution in the markets this

morning as we await that inflation print.

Later, traders impatient for rate cuts have already had to contend with two hot

CPI reports this year. Will the third be another thorn in their

side? Now, as stocks were waiting for this

report yesterday, you did have the S&P 500 dipping below that 5200 level in

video leading the losses, closing just above it.

And this morning, futures stateside pointing to a higher opening as they are

here in Europe. But if we flip the board over to the

cross asset picture, we're not expecting too much movement on treasuries in as we

wait for the CPI report, she says, triggering fireworks in the markets.

But you did have Treasuries climbing in yesterday's session.

The ten year yield falling well below that 4.5% level, 4.35% is where we are

currently. The dollar pretty steady, Brent, back

below $90 a barrel holding the two day decline because on the one hand you had

this industry report pointing to a gain in US crude stockpiles.

But on the other, you've got geopolitical tensions in the Middle East

capping the losses. And then just finally, gold.

The level that we're looking for for the intraday record high is two, three,

eight four, and we're hovering just below that currently.

But let's get a look at broader Asian markets now.

Tanya Chen's waiting for us in Hong Kong.

Tanya, what's happening where you are? Hey, good morning, Lizzie.

So just breaking in the last hour. We did see that Fitch Ratings has just

cut the outlook for China down to negative from stable.

Just want to give you a couple of details here.

They're citing long term foreign problems, increasing risks to its fiscal

buffers. The agency did affirm its A-plus default

rating, given obviously still solid economic growth prospects.

And obviously there's strength in trade. And just wanted to tell you also about

the response that we've gotten from the Chinese ministry.

They responded saying they were disappointed about Fitch's outlook

revision and that it will continue to resolve its local government debt

problems and that the scale of the local hidden debt has been reduced gradually.

And if you take a look at Chinese equities, they've just reopened after

this lunch break. Prior to the lunch break, they were

outperforming, especially the tech shares are really leading that.

It seems like they're actually holding on to those gains.

Also elsewhere in China, assets, the bond yield really didn't react much

earlier when the news had come out saying with the yuan, that's might be

because the sentiment has been already maybe priced into the market.

In December, we saw Moody's had actually done the same revision, cutting its

outlook to negative. That was then on similar concerns around

the fiscal picture, but also the spiraling property downturn as well and

also just elsewhere and benchmark equity benchmarks across Asia.

It's a quiet light trading day, as you were saying, ahead of CPI.

Also, a couple of holidays in Asia as well.

Most of the kind of attention right now is kind of on the forex market.

If you flip to the yen board there, the yen is still just right below that 34

year low against the dollar. Earlier today, Bloomberg had reported

that there's a consideration that the central bank may raise its inflation

forecast later this month. Obviously, traders are really waiting to

see if the Japanese government will come in and intervene, especially right below

that 152 level. And also elsewhere in New Zealand.

They had a hawkish hold today. Concerns around, obviously the inflation

picture, but they're also looking potentially for a more sustained period

of restrictive policies. Or you're seeing the Kiwi also slightly

higher. I put on the board Tai bot and also how

on there central Bank of Thailand coming out with a monetary policy decision

today. All right, Tony Chan and Hong Kong, we

thank you. As we note that markets are closed in

Singapore and South Korea. Plenty more happening nonetheless.

But let's get back to the US macro story, because Atlanta Fed President

Raphael Bostic says he's open to changing his view from seeing one rate

cut this year to more or later if the economic picture changes.

This is the head, of course, of the US inflation reading that we're expecting

later today and for analysis Bloomberg's Jill joins us now.

Jill, what sort of CPI print you reckon could really boost market bets on Fed

cuts? Which numbers are you focused on?

Well, Lizzie, I think what you really want to see in the CPI prints is more of

a moderation in some of those core services prices.

So particularly when you're looking at like owner equivalent rents, primary

rents, you want to see something that actually does indicate that there's more

of a disinflationary trend there. I think that that would probably help

move the needle at least a little bit, because I think the overall numbers, I

mean, the headline CPI gauge you're looking at, core CPI gauge might be a

bit cooler. I don't know that we're going to expect

something as hot as January and February, particularly because a lot of

the hotness around those numbers was attributed to more seasonal factors.

But yeah, I think that when you're combining, you know, in any case, when

you're combining some of this inflation data with what we've already seen, you

know, out of this really resilient labor market, you know, those nonfarm payrolls

that we just got, it's really just about how much progress can we actually make

toward disinflation to get the Fed back in line with that 2% annual target?

We'll see what we end up getting out of this March one.

I think it'll be a little bit more difficult to explain away things that

seasonal. But ultimately, see, once we gear up for

the CPI data later this this this today. Okay.

And the other highlight on the agenda today is, of course, the Fed minutes 7

p.m. London time.

Given all the data surprises we've had since the last FOMC meeting.

How useful, Jill, with these minutes actually be?

Well, Lizzie, I mean, look, I think that anything is useful when it comes to the

Fed to some extent. I think that you'll see something in

there that at least, you know, kind of tells us about why some of those FOMC

members started to pare back their bets on rate cuts.

We obviously didn't see a massive shift in the dot plot, but we did see a little

bit of a pare back, at least, you know, during the last meeting.

So maybe we'll get a little bit more clarity there.

You know, maybe we'll get some more details on some of those, you know,

supply side economic concerns. And ultimately, I think, you know, you

might get some more flavor in there about why it is that the Fed really sees

this as kind of this Goldilocks economy right now is Bloomberg Economics has

been saying it's not too hot, too cold. But what do you do with that when, you

know, we're trying to gear up for when exactly you're expecting those first

interest rate decisions to come. But, yes, I think that it's been a

little bit noisy, particularly when we've gotten that that labor market

data. You know, we're also just, you know,

confronting the the CPI data that's coming up.

So, as you know, I mean, as long as they keep saying that we're really, really

data dependent. Yeah, I think those those minutes seem

to feel like they're getting a bit more out of date just because every single

time you get that, it's like, well, we've had like, you know, several,

several data prints in the lineup. So we'll see though, hopefully we get a

little bit more strategy thinking on, you know, again, why why they were at

least starting to think about paring back those rates at that time.

We'll take any clues at this point on the path ahead for Fed Springborg's

still thesis. Thank you for that analysis.

Now Bloomberg has learned that Apple has assembled 4 billion of iPhones in

India over the past fiscal year. So, in effect, they've doubled

production as it accelerates to push the accelerates the push to diversify beyond

China. For more on this Bloomberg scoop, let's

bring in India technology correspondent Sun Culp.

Pretoria I'll throw out some sort of call.

How much is this demand driven? How much is this supply increase driven

by Indian demand for iPhones? The Indian demand is still small in

shipment terms. Apple's about 6% of India's market.

So the iPhones are still pricey. In India.

There are no carrier plans in India. So much of this demand is actually

export demand. Apple exports a bulk of its devices that

it makes in India. And what does it show about the

significance more broadly of India to Apple?

So what we reported was that Apple made 4 billion worth of iPhones in India.

These are factory gate prices. What this shows is the shows the rise of

India as a manufacturing hub. It also shows that Apple is tying its

feet to India in some ways, where it's trying to diversify out of China, where,

you know, Washington and Beijing are constantly in a tussle, a trade war.

So Apple's like putting its eggs in different baskets and it's using India

as a major destination to make iPhones with this.

Apple is making about 15% of its global iPhone output in India in volume terms.

So this is incredibly important for Apple as well.

And where does it leave Apple's relationship with China?

What was China going to be thinking as they look on this increase in production

in India? I'm pretty sure they're not going to be

happy. But what I can say is our reporting

shows that Apple's done this shift very steadily, but very quietly.

They don't make noises about it. They'd like to do things very quietly in

general. But all of their three major contract

manufacturers, the Taiwanese, have steadily increased the number of workers

at their factories manufacturing lines. In fact, now there's an Indian iPhone

maker, the Tata Group, and they're building their own factory, which we've

reported previously. So I think there is some manufacturing

coming India's way from China. But the overall, you know, environment

in India is good for Apple. And therefore, I think that they're

betting on this market both in terms of manufacturing and in terms of sales as

well. All right.

India technology correspondent Susan Fertel, we thank you.

Excellent reporting. A Bloomberg scoop right there.

Now, we have got a busy day ahead at 6:30 a.m.

London time, we get TSMC monthly sales. Of course, this is the world's top chip

maker. It shares already saw their biggest gain

in more than a month yesterday on the news that it's set to win grants and

loans from the US government. And we're going to bring you full

analysis of those numbers from Tim Copen out of Taipei later this hour.

But before and then we'll get to the big highlight of the day at 1:30 p.m.

London time. And this is, of course, the US inflation

report, as we've been discussing with Jill.

The numbers for March, the expectation being for a tick down to 0.3% at the

headline and core levels. But of course Chair Powell is really

hammered home recently that there'll be no cuts until officials are sure

inflation is on track to that 2% target. So we'll watch out for more bumps in the

road of disinflation. And then at 7 p.m.

London time, we'll get the Fed minutes for the March meeting.

The explanation behind the shift in the DOT plot toward fewer cuts for 2024, but

still says we've had lots of economic data surprises since then.

Still, we'll take whatever clues we can get, but you can get a roundup of the

stories you need to know to get your day going.

By going to the edition of DAYBREAK today, just go to a wide B, go on your

terminal. You've got a bit of China news there to

kick off your day. But coming up on Bloomberg Daybreak

Europe, how are relations between the European Union and South Africa?

We're going to discuss that after the failure to host a bilateral summit last

year. Is South Africa turning elsewhere in the

world for allies? That's next.

This is Bloomberg.

Welcome back to Bloomberg Daybreak Europe.

Now to a curious dynamic in international relations.

South Africa and the European Union say they are working on plans for a

bilateral summit. But it comes after Bloomberg reported

plans to hold a gathering last year had been thwarted, with South Africa failing

to commit to a date. For more on what's happening behind the

scenes, joining me now is Bloomberg's Jennifer as opposed to John.

What's behind the current concerns here? Yeah.

Lizzie, I mean, the concerns, as you mentioned, really center around this

trade relationship between South Africa and the European Union, something that

both sides really call it strategic. But the reason why there is concern is

the European Union is South Africa's biggest trade partner, biggest foreign

investor. In 2022, it actually accounted for $56.4

billion in commerce. But then the big question is, why

haven't we seen these summits happen? And these summits really started based

on this agreement between the two blocks in 2024.

It's called the Trade Development and Cooperation Agreement.

And as part of that agreement, it was meant to have annual regular political

dialogues. And that's what we saw from the summits

that were held between 2009 and 2013. But the big question, as you mentioned

in your intro, is why then haven't we seen summits happen since then?

We heard people familiar with the matter speak to our Bloomberg's Antony cuisine,

saying that the reason why we didn't see it last year is that potentially South

Africa was just not committing it to a date.

And that really is a concern, especially if we think about what we saw in 2023

here in South Africa. We saw the country holding Navy

exercises with Russia and with China, of course, also being accused by US

ambassador of potentially deploying arms to Russia.

And so this all really created a bit of concern about really where this

relationship stands between the two blocks.

Yes. Russia and China.

Really the elephant in the room here. Excellent reporting from Bloomberg.

How are we hearing that? Both sides are responding to that

reporting. Well, I think it's been interesting to

see the response really and just how swift we saw from both sides responding

to this Bloomberg reporting. So we heard.

Let's just start with the EU. We heard the EU ambassador to South

Africa coming out. Her name is Sandra Cramer.

She tweeted on X and she posted saying that this is false and misleading.

South Africa and the US are working closely towards holding a summit.

And we're also hearing from South Africa saying that it still insists that this

relationship between the West, between the EU and the US is still very

important. And they point to the fact that

President Cyril Ramaphosa and also Foreign Minister Pandor have held

regular meetings with the West. And so it seems like there is in some

part there's some effort to have this summit be held.

But we have to remember that we're just a few weeks out from an election being

held here in South Africa. And so the question is, what happens

after that election? How does that affect potentially the

relationship? And really, what does this mean for the

future relationship between South Africa and the Western powers and Russia and

China? So a really complicated story here, but

a lot of a lot of sides weighing in, Lizzie.

Yeah. Can it be the reset button on that

relationship? Maybe not in a good way.

Bloomberg's Jennifer Sullivan. Sacha, thank you for bringing us the

latest. Now for some other stories making news

this morning. British Foreign Secretary David Cameron

has held a meeting with Donald Trump in an effort to persuade the presidential

candidates, Republican allies to stop blocking more aid for Ukraine.

The talks in Florida came ahead of Cameron's trip to Washington to meet

will makers, as well as Biden administration officials there.

A $60 billion U.S. aid package for Ukraine has, of course,

become snarled on politicking ahead of the November presidential election.

Elsewhere in UK News, a new survey of British adults says about seven and a

half million people are struggling to pay their bills, with many falling

behind on their domestic or credit commitments.

The estimate from the Financial Conduct Authority shows a big drop in the

numbers in difficulty, down from 11 million at the start of last year.

But the total is still higher than before The cost of living spiralled

after the pandemic. I will bring you more on both of those

conversations on the Bloomberg UK Politics podcast out today.

And we also have a conversation with the US ambassador to China.

Coming up next on the program, he tells us Washington is seeking to isolate

China with the help of its allies in Asia.

We'll have more on that next. This is we back.

I think Chair Powell has made it very clear that he's willing to look through

these bumps. To use his phrase, the inflation story

hasn't changed. So they will need overwhelming evidence

that it is more than a bump in order for them to change their views.

You think they're too sensitive to recent data and maybe not being

strategic enough? What do you mean by that?

So I think if you look forward and you talked about in the last hour about

business confidence, if you look forward, there's reasons to believe this

economy may slow. So if you are setting policy, not

according to what has happened, but according to the lags with which the

policy operate, you would be more dovish than you would be otherwise.

If, however you focus exclusively on the data, you will end up being too hawkish.

You talk about small business optimism. Let's go there.

It came in at the lowest level since December of 2012.

Sometimes it's hard to know how to read some of these gauges, especially because

we get people on all the time saying they're all broken.

How important is this in contrast with all of the bullishness in the Momo and

the FOMO and the woe that we keep hearing?

This is really important. The big mistake that was made in 2021

when people embrace the transitory narrative was they didn't listen to the

companies, and the companies were clearly saying, we have inflationary

pressures in the pipeline, we have pricing power, we're going to pass on

that imported inflation, if you like, that was coming in this time around.

Listen to the earnings call. And they are worried about the outlook

for the rest of the year. So so I do think you need to listen to

them because often the aggregate data doesn't capture what businesses are

feeling on the ground. Listen to companies, he says.

If you don't want to make the mistakes again of the past, that's our Bloomberg

Opinion columnist Mohamed El-Erian there.

Now to another interview. The US ambassador to Japan has told

Bloomberg that Washington is seeking to isolate China with the help of Tokyo and

other regional allies. Rahm Emanuel spoke to Bloomberg from the

White House lawn ahead of a visit by Japanese Prime Minister Fumio Kishida.

This comes at a historic moment for both countries as they change dramatically

their kind of deterrence, posture and position.

Japan's change in the last two years, five separate policies that have been

basically on the books for 70 years from the size of the defense budget, the

current strike capability in the defense area, normalizing and level rigging, the

level of relationship with the Iraq, the Republic of Korea to a new, more solid

strategic level. The United States also has made some

fundamental changes going from a hub and spoke system to a lattice multinational

type of strategic architecture. And I kind of see this state visit the

fourth from a head of state in the region out of five that the president's

done. It's kind of putting a period at the end

of one era that's defined as alliance protection and beginning to write the

first chapter of the new era of alliance projection with Japan.

And that's not just for the Indo-Pacific, but also as a key

strategic partner in a global set of issues.

The second thing it's kind of bookend the week started with Australia,

the United States, Japan and the Philippines doing naval and air

exercises together in a new multinational effort and have the end of

the week with a historic first ever trilateral between the United States,

Japan and the Philippines head of state that reflects and symbolizes the change

in the United States approach. It also symbolizes the kind of role that

Japan's going to play as a constant in our era, in our relationships in the

area. But it also symbolizes China's whole

strategy is to isolate the Philippines, isolate Australia with their economic

coercion, isolate Japan by not accepting their fish to be exported.

Our strategy is to flip that script and make the isolated party China.

They're the ones that are isolated in the South China Sea as it relates to the

Philippines. They're the ones that are isolated when

it comes to trying to use economic coercion to coerce Australia to change

their posture, and they become the isolated party, which is why they throw

in the towel of that effort. So that's how this state visit.

It's been a long it's been nine years since the last Japanese Prime Minister

has had a visit. But it comes at a critical juncture

where the relationship will pivot into a new kind of posture and a new position.

I wanted to hone in, Ambassador, you've mentioned, of course, the first try that

summit with the Philippines. How far do you expect Japan to involve

itself when it comes to these confrontations in the South China Sea,

where, of course, these encounters tend to be more aggressive than what we see

in the East China Sea? Well, the whole goal is not to have a

conflict. That's what credible deterrence is.

And understanding that this is not China versus the Philippines.

This is China trying to coerce the Philippines into changing their policy,

which the international court in 2016 ruled was in favor of the Philippines,

not China. And understanding that China needs to

understand that the Philippines has some very, very important friends in the

neighbourhood the United States, Japan and Australia in this situation.

U.S. ambassador to Japan, Rahm Emanuel,

speaking to Bloomberg earlier ahead of the Japanese prime minister's visit to

Washington. Coming up on the program, a Boeing

employee says the plane maker took shortcuts to ease production bottlenecks

for its 787 Dreamliner. We'll bring you that story next.

This is Bloomberg.

Good morning. This is Bloomberg Daybreak Europe.

I'm Lizzie Borden in London. And these are the stories that set your

agenda. Shares in Hong Kong rally While Treasury

yields come off their 2024 highs as traders count down to the latest reading

on US inflation. The Fed's Raphael Bostic says he's open

to changing his view for only one rate cut this year if the economic data

justify it. Plus, Boeing shares extend their slide

as a whistleblower makes new allegations of shortcuts in the production of the

787 Dreamliner. While good morning, is caution the

watchword on the markets this morning as we wait for that US inflation report

later. It's kind of been a thorn in the side of

traders who are impatient for rate cuts. So far this year you've had two hot CPI

prints so far. Could this be another one?

Yesterday on the markets, you saw the S&P dipping below that 5200 level.

NVIDIA leading the losses and closing just slightly higher than that level.

But this morning, futures pointing to a slightly higher opening.

Both stateside and much more strongly here in Europe.

But if we flip the board over to the cross, our asset picture, not a whole

lot of movement expected on treasuries in the run up to that inflation report.

You've got the ten year yield currently at 4.35%.

Having climbed in yesterday's session treasuries, the ten year yield is, as

you can see below that 4.5% level that we were talking about earlier in the

week. But the dollar pretty steady now, crude

below $90 a barrel as traders weigh on the one hand, the geopolitical tensions

and on the other, this new report pointed to a gain in US crude

stockpiles. And then finally, you've got gold there

at two, three, five, eight an ounce. So hovering below that record high of

2384. All eyes, as I say, on that inflation

report. But we've just had some breaking news

across the terminal. It is the latest sales numbers from

TSMC, the world's top chip maker, and they have come in at 95.2 billion.

So this is up three 34% year on year. So impressive numbers here and we will

dig into them later in the program with Tim Corp.

And of course, we also had the news yesterday that TSMC is getting 1.6

billion of grants and loans from the US government in order to build factories

in Arizona. So we had the shares benefiting from

that yesterday. We will break down those numbers from

Tim Corp in Taipei. But 195 billion Taiwanese dollars is the

number for March sales from TSMC. But now let's check in on how Asia

markets are faring. We have Tanya Chen in Hong Kong on

standby for us Tanya. Hey, Good morning, Lizzie.

Yeah, Lots of breaking news out of our region today.

Just recapping something that happened just an hour, about an hour ago.

China's outlook being downgraded by Fitch Ratings.

They're citing long term foreign debt problems there, citing concerns about

its first fiscal buster buffers. If you look there, though, the rating

actually is still being affirmed at A-plus.

There's still obviously a lot of economic growth that they are looking at

and monitoring. And there's also strength in trade as

well. China's ministry also responded saying

that they were disappointed about the Fitch's outlook revision, that it will

continue to resolve its local government debt problems and the scale of that

hidden debt has been gradually reduced. If you look over at how China's assets

have reacted to this breaking news, equities prior to the lunch break had

already been outperforming and seems that they're extending those gains,

particularly around technology shares. Both the Chinese government bond yields

and the yuan remain steady around the breaking news.

We did see in December that Moody's had also done a similar downgrade to their

outlook. And so perhaps this sentiment is largely

been priced into the market already. Elsewhere in the rest of the region, as

you have been saying, kind of the rest of the market is waiting for this US CPI

numbers, especially for currency traders, especially everyone's looking

at where the yen is right now. It's just still right below that 34 year

low against that dollar. Traders are watching out for potential

signs of intervention. Bloomberg had a report out saying that

the central bankers may consider raising its inflation forecast later this month.

Governor Awada has reaffirmed, though, that the tightening policy may not have

been one and done in March. Also elsewhere, the Kiwi is

strengthening a little bit. The central bank earlier today had a

hawkish hold saying that they were looking for a more sustained period of

restrictive rates. We'll also get a decision out of the

Bank of Thailand later today as well. All right.

No surprises from the BNZ. Tanya Chen in Hong Kong.

Thanks for taking us through those Asia markets.

Now back to Boeing. The Federal Aviation Authority is

investing claims made by a Boeing employee who says the plane maker took

shortcuts to ease production bottlenecks for its 787 Dreamliner.

In a statement, Boeing said the claims were, quote, inaccurate and don't

represent the comprehensive work being done to ensure the quality and long term

safety of the aircraft. Well, to take us through what's been

going on. Here we have Bloomberg's Benedikt

Kamall. Great to have you on the program.

Just tell us more about what this whistleblower is actually alleging.

So this allegation came out last night. The whistleblower appeared on a

conference call together with his lawyers.

And the allegation, as you said, is around the seven, eight, seven

Dreamliner. That's the larger model, the wide body

aircraft. And the allegation is essentially that

the way the plane was put together. So you have these barrels that a piece

together that then show cracks and then you have to fix them in the production

process, that that wasn't done properly, that they applied shortcuts, that they

put speed over sort of caution, that they were too fast putting these

together. Obviously, as you say, Boeing disputes

this, says that's not true. We have robust processes in place, but

the allegation is out there. And as you said, the stock did take a

bit of a dip as a result. And Boeing deliveries also came in

alongside the Airbus delivery numbers. They were the lowest in Q1 for almost

three years. But you did have a bit of a glimmer of

hope visible in March on perhaps the order side.

You're right. And to be honest, you know, the first

quarter was one to forget. And everyone really knows that.

People knew that this was a very difficult phase for Boeing.

And the numbers came in a little bit light, but they weren't terrible.

And so there is some hope looking forward.

They've managed to stabilize the output. They have won orders.

So it shows that there is still a product that people want to buy if they

can maintain this and sort of start crawling out towards the end of the

year. And maybe there's a hope for recovery

about. Right.

Not so bad, but how does it compare to Airbus?

So obviously side by side it looks much worse.

I was had a fairly strong quarter. The first quarter is always a little bit

weaker. They are coming out of the rush of the

end of the year and in the first couple of months are always a little bit on the

light side. But as you said, side by side obviously

looks much stronger. And that sort of the bigger story here

that we have these two companies taking these diverging paths.

I was doing very well. Boeing really working through a whole

series of problems. I'm getting on a plane to Frankfurt

later. You'll have to tell me afterwards which

kind of plane. I'll figure it out.

Benedict Carr Well, we thank you for that update on the Boeing allegations,

the latest numbers. Now, a Bloomberg source says at least

three people have been killed after an explosion at a hydro power plant in

northern Italy. And also renewables and green power says

fire impacted a transformer at the plant.

And we can get more details now with Bloomberg's Alberto Brambilla, who joins

us now. Alberto, what happened here and what's

the current situation on the ground? Yesterday afternoon, an incident

occurred in a green power plant in the northern Italy and it's near a dam, a

water bathing. The workers were doing mundane

maintenance around it were a m leveling the facility when a turbine exploded and

actually damaged a water pipe. And that flowed into the building.

And they were working for for 40, 40 meters deep underground.

And the search for the survivors actually went along, all denied by the

firefighters. It it's a five.

It's a four. Four people are missing while three are

dead and five are seriously, seriously injured.

And today, the D today did the authority.

We will start the investigating on the case.

So about her. Of course, the focus is on the human

toll. But can you just walk us through how

much disruption it's caused in terms of the power supply, the or the potential

impact? Yeah, the potential impact for now is

the company said that the the impact for now there is not no impact on their

production of electricity production neither initially neither locally even

though the the facility is actually one of the most powerful of the region in

there and not in Italy Emilia-Romagna. And actually the investigations are

ongoing by the authorities and by the judiciary.

And so that will take time before the the planned will will restart properly.

And so they this is remain to be seen what will be actually the impact on the

on the network, on the power production. Okay.

Bloomberg's Alberto Brambilla, we thank you for that update on that deadly

explosion yesterday. Well, coming up, Europe's defense stocks

slide after Goldman Sachs warns of peak multiples in defense firm shares.

We'll bring you that next. This has been back.

Welcome back to Bloomberg Daybreak. If you're just joining us at 6:42 a.m.

here in London, and we saw European defence stocks falling heavily yesterday

for their worst day in almost 18 months. This is after Goldman Sachs analysts

warned that the sector's recent rally had left it trading at elevated price

valuations. Well, I'm joined now by Bloomberg's

Oliver Crook in Berlin. Ollie, a big sell off in defense.

Just take us through these moves. Yeah.

So we saw it, as you say, you know, the biggest sell off in defense stocks in

almost a year and a half and names that are really only moved in one direction

for the last two years since the invasion of Ukraine so that Saab,

Leonardo, Ryan, Mattel all basically in the red and actually they were the

biggest losers on the Stoxx 600 yesterday.

A lot of this was traced back to that Goldman note that you're mentioning that

we're really they're flagging these issues on multiples that are a little

bit higher. What they were pointing to is price or

earnings that are about a 45% premium to his to the Stoxx 600 versus historically

when it's usually at a 7% discount. Right.

And so also when thinking about these stocks.

So it's important to put it all into sort of context.

Yes it's a big sell off, almost 10% off a sub yesterday.

We've got to put this into context. Right.

And so we have to pick our superlatives pretty carefully here because there are

so many of them. But since the invasion of Ukraine, you

know, Rheinmetall is up almost 450%. It is a third best performer on the MSCI

World Index and it carries the same p e ratio actually just above Apple.

And these are all things I would have thought completely unthinkable a couple

of years ago. But that's really what happens when you

have these black swan events and really it's such a paradigm shift as you do in

European defence and how Europe is thinking about its own defense and

spending money on it. Yeah, we were just talking about the

U.K. Foreign Secretary David Cameron, going

over to the US trying to lobby Donald Trump to keep that aid going to Ukraine

if he becomes the president. So you would think that there's going to

be funding to keep the war going and fund spending on defense.

But what only does the path look like ahead for these companies?

Yeah. So, Lizzie, for investors, I think it's

really trying to weigh up those two sides.

The structural tailwinds and the possible headwinds and the structural

tailwinds are some of the things that you're talking about there.

Right. Europe needs to get to its 2% spend on

NAITO. There is the question of if Trump was

elected president of the United States, what does it mean?

Would the US pullback and would that mean even more spending on defense,

maybe closer to 4%? That's what it was during the Cold War.

And we had a story out yesterday from Bloomberg Economics that crunched the

numbers. If the G7 were to try to go to 4% of GDP

spend on defense, that would mean 0 trillion over the next ten years.

So that would be absolutely mammoth. And we're also still at the very

beginning of the European rearming strategy, a rearming strategy that

involves spending that money not just on defense, but on European defense, which

is why these stocks have done so well. So what the market is trying to do and

investors are trying to say is, yes, we have all these tailwinds, but how

durable are there and what are the threats the threats are?

You know what? Where is this money going to come from?

Right. You can only have money come in so many

ways. You have to raise taxes.

You have to either raise debt, you need to cut spending elsewhere or you need to

grow. You know, growth is not necessarily the

strong suit for Europe historically, and you're not really going to get there

where you need to get on defense. Taxes is raising taxes.

That's not terribly popular and getting cuts to the other parts of the

government. Very complicated, as we learned with the

German budget crisis and debt, there isn't that much fiscal headroom for a

number of the countries within Europe. So all of these things are the questions

that investors are weighing right now. But I think it's fair to say when you

have something so big a paradigm shift, some investors taking a little bit of

money off of the table, but I don't think we're probably quite at the final

pricing on this. Lizzie?

Okay. Very interesting to look at the market,

the company impact of that geopolitical news out of Naito and out of the various

diplomatic wranglings going on around the world.

But events. Oliver Crook, we thank you for that

update on European defense stocks. Now, we've got a lot to watch out for

here today at 12 p.m. London time.

It's US MBA Mortgage Applications at 1:30 p.m.

London time. Of course it's US CPI, the highlight of

the economic data for the week and then at 6 p.m.

we get the US ten year note auction. It's worth about $39 billion before 7

p.m. London time.

It's those Fed meeting minutes with the US monthly budget statement, so we keep

an eye on that for clues as to the rate path ahead.

We've got plenty more coming up. Stay with us.

This is Bloomberg.

Let's get back now to those latest numbers from the chipmaker TSMC that we

broke earlier in the program. Sales for the month of March increased

34% compared to a year ago, coming in at more than 6.1 billion USD.

Tim Copen from Bloomberg Opinion joins me now for analysis.

Tim, just break down these numbers for us, would you?

Well, it's a big number, $6 billion just for the month, but for the whole

quarter, more than 8.8 billion. Now, that's actually slightly ahead of

their own guidance. They guided 8 to 8.8.

So a little bit ahead, which is very, very nice and augurs well for a good

year for TSMC. You know, the chip industry has been

very, very strong over the last year, but in fact TSMC sales fell last year

mainly because things like iPhones and other mobile phones were not doing well.

Has been the area that's really picked up for them in video of course is a huge

client for them. AMD is another big client.

Ironically, Intel is a competitor, but also a client intellectually outsources

some of their best chips to TSMC for manufacturing.

So there's a lot of chip demand in what we call high performance computing.

That's the, you know, the massive server farms that are built and operating to

build models for all of these companies around the world who are very excited

about that. And that's really going to be the driver

for this year. And the first quarter looks like a

really, really good start for TSMC because of course, we also saw Intel

unveiling its new AI accelerator to try and challenge NVIDIA.

What's the sort of ripple effect for TSMC?

That's really good news for TSMC, whichever way you look at it, because

some of those chips will probably end up going to TSMC to be manufactured.

And if they're not, then AMD and NVIDIA will just have to double down and go

back to TSMC with the latest designs and really prompt TSMC to churn them out for

them as well. So this kind of arms race, while TSMC is

building the weapons for the AI arms race, everybody is going to need to turn

to them at some point. So yes, Intel comes out with a new chip.

Fantastic. I think TSMC would welcome that.

And then the good news doesn't start for TSMC.

Of course, yesterday we also saw them winning a lot of grants and loans from

the US government. How significant is that for TSMC but

also for the broader chipmaking industry?

Well, TSMC is not going to say no to $6.6 billion in grants.

There's another 5 billion, which is really just a sweetener.

It's a loan that the US government is going to offer, but it's a loan, so

they're going to have to pay it back. So it really doesn't count as the grant,

the 6.6 billion compared to the 65 billion TSMC is expecting to spend in

Arizona over the next few years. Sounds like a lot of money.

It's really a drop in the bucket. And the thing is, they don't

automatically get that number. They've got to keep hitting various

phases of contracts with the US Department of Commerce and Treasury to

say, hey, you know, you've got to churn out this many chips at this time

schedule. If they missed any of that, they won't

get all of the money. So it's dependent on them hitting a lot

of targets over the next few years. If they do execute, they could get up to

$6.6 billion. But again, that is not a lot compared to

the massive, massive expenditure they're putting in to Arizona.

And it is going to be good for the rest of the industry.

Intel is also, you know, expanding in the US.

Samsung, the other big chip chipmaker, is also expanding in the US.

So overall it's very, very good for the US chip ecosystem, but we need to see

how it's going to play out over the next few years because engineers are much

more expensive than you get in Korea or in Taiwan.

So the cost of making the chips will be a lot higher and clients like Apple,

Nvidia, AMD are going to have to wear that cost.

$6 billion. Chicken feed?

Or is it your TSMC typical in from Bloomberg opinion.

We thank you for breaking down those latest numbers.

Now, Mazda CEO says the carmaker is watching global supply chain issues

caused in part by battery shortages and increasing exports from China.

The CEO told us those challenges have only grown after last month's Baltimore

bridge collapse. At the moment,

our production team has been closely working with the Port of Baltimore and

of course our new entity to find out port points nearby for inbound vessels.

And also we are working for alternative ports we have in the East Coast

Jacksonville Temporality to minimize the delay of delivery to the customer.

So that is a current outlook and we're looking forward to come back to the Port

of Baltimore was the operation is back on track.

So that's dealing with the finished product, the delivery of those products.

As far as making your cars here, are you dealing with any supply chain

constraints, the getting supplies and things are we do have a supply chain

issue globally.

That is a few reasons behind it. One is the best.

There are shortages during pandemic.

A compressor company is a scrap to all the best sellers and they are needed

reinvent to more LNG based, you know, better fuel

efficiency and low CO2 business. That is one reason.

And the second reason is just mentioned Suez Canal and the Panama Canal is able

to pass through. And the third reason is a significant

increase in exports from China mainland. Now, those are contributing to a

significant challenge for, you know, logistics right now.

I am curious, I'm glad you brought up China.

Most of what they're exporting, though, are they Those are primarily EVs or are

they direct competitors to the models that Mazda is producing?

It is a combination between the pure battery EDI and the range extender and

internal combustion engine. It depends on the brand or Chinese

brand. What car do you think will sell the most

EVs hybrids or ices in the next, say, five years?

I believe a still internal combustion engine has strong support from the

consumers. And the secondly, I see great potential

in hybrid. That is a perfect solution

for customers. There is no

anxiety for range, right? Either getting traction, right that.

An exclusive conversation with the master CEO right there.

But of course, the focus today is the US inflation report.

1:30 p.m. London time is when it drops and it has

been a bumpy path of disinflation so far for the US economy.

Just take a look at this chart. You can just see how sticky super core

inflation has been in the US. If you strip out food and energy, you

can see it right here. But if you flip the board, we can take a

look at the potential market reaction because nervous traders really have been

pretty nervous in the run up to economic data of late.

You can see it in the difference between the one day VIX and the VIX.

You've got the jobs numbers in the blue bars, white bars showing the CPI.

So brace yourselves. The drama hasn't ended yet and they'll

take you through it all on the next program.

Markets today is coming up next. So stay with us.

This is Bloomberg.