• 00:00> > THIS IS BLOOMBERG MARKETS, HERE'S WHAT YOU NEED TO KNOW. ANTONY BLINKEN IS MEETING WITH CHINESE PRESIDENT XI JINPING IN BEIJING TO CONTINUE THE SILENT TENSIONS BETWEEN THE TWO COUNTRIES MAYBE USING. PLUS, A TOUGH WEEK AHEAD FOR THE U.K. IT VOTE ON BORIS JOHNSON AND A RATE HIKE ONCE AGAIN ON THURSDAY. PLUS, CREDIT SUISSE MAY BE DUE FOR A MASSIVE DOWNSIZING OF INVESTMENT BANKING BUSINESS AFTER IT IS TAKEN OVER BY UPS. BECAUSE WE ARE WITHOUT THE U.S. EQUITY MARKETS AND BOND MARKETS, U.S. SECRETARY OF STATE ANTONY BLINKEN IS SPEAKING AFTER HIS MEETING WITH THE CHINESE PRESIDENT OVER IN BEIJING. LET'S JUST DIP INTO THIS PRESS CONFERENCE. > > -- THE CHALLENGES POSED BY THE P.R.C.. THE UNITED STATES WILL ADVANCE A VISION FOR THE FUTURE THAT WE SHARE WITH SO MANY OTHERS -- A FREE, OPEN, STABLE AND PROSPEROUS WORLD. UPHOLDING THE ORDER THAT IT HAS FOR YEARS SAFEGUARDED PEACE AND SECURITY GLOBALLY. TO SHAPE THAT FUTURE, WE START WITH DIPLOMACY INCLUDING WITH CHINA. I CAME TO BEIJING TO STRENGTHEN HIGH-LEVEL COMMUNICATION, TO MAKE CLEAR OUR POSITIONS AND INTENTIONS IN AREAS OF DISAGREEMENT AND AREAS WHERE WE MIGHT WORK TOGETHER. WHERE INTERESTS ALIGN, AND WE DID ALL OF THAT. HERE IN BEIJING, I HAD AN IMPORTANT CONVERSATION WITH PRESIDENT XI JINPING AND I HAD CONSTRUCTIVE DISCUSSIONS WITH MIKE COUNTERPARTS. I APPRECIATE THE HOSPITALITY EXTENDED BY OUR HOSTS. IN EVERY MEETING, I STRESSED THAT DIRECT ENGAGEMENT AND SUSTAIN COMMUNICATION AT SENIOR LEVELS IS THE BEST WAY TO RESPONSIBLY MANAGE OUR DIFFERENCES AND ENSURE THE COMPETITION DOES NOT VEER INTO CONFLICT. DURING THOSE MEETINGS, WE HAD A ROBUST CONVERSATION ABOUT REGIONAL AND GLOBAL CHALLENGES. THAT INCLUDES RUSSIA'S WAR OF AGAINST -- AGGRESSION AGAINST UKRAINE. I REITERATED THAT WE WOULD WELCOME CHINA PLANNING A CONSTRUCTIVE ROLE ALONG WITH OTHER NATIONS TO WORK TOWARD A JUST PEACE BASED ON THE PRINCIPLES OF THE UNITED THIS -- NATIONS CHARTER. ALL MEMBERS OF THE INTERNATIONAL COMMUNITY HAVE AN INTEREST IN ENCOURAGING THE DPRK TO ACT RESPONSIBLY, TO STOP LAUNCHING MISSILES, TO START ENGAGING ON ITS NUCLEAR PROGRAM. CHINA IS IN A UNIQUE POSITION TO PRESS PYONGYANG TO ENGAGE IN DIALOGUE AND TO END ITS DANGEROUS BEHAVIOR. I RAISE CONCERNS SHARED BY A GROWING NUMBER OF COUNTRIES ABOUT THE P.R.C.'S PROVOCATIVE ACTIONS IN THE TAIWAN STRAIT AS WELL AS IN THE SOUTH AND EAST CHINA SEA. ON TAIWAN, I REITERATED THE LONG-STANDING POLICY THAT HAS NOT CHANGED. WE DO NOT SUPPORT TAIWAN INDEPENDENCE, WE REMAIN OPPOSED TO ANY UNILATERAL CHANGES TO THE STATUS QUO BY EITHER SIDE. WE CONTINUE TO EXPECT THE PEACEFUL RESOLUTION OF DIFFERENCES. WE REMAIN COMMITTED TO MEETING THEIR RESPONSIBILITIES UNDER THE TAIWAN RELATIONS ACT, INCLUDING MAKING SURE THAT TAIWAN HAD THE ABILITY TO DEFEND THEMSELVES WE ALSO SPOKE ABOUT A RANGE OF BILATERAL ISSUES INCLUDED -- INCLUDING CONTINUING -- TO GUIDE A RELATIONSHIP. THESE ON OUR RESPECTIVE ECONOMIC POLICIES INCLUDING OUR CONCERNS ABOUT CHINA'S UNFAIR TREATMENT. I HEARD ABOUT THE PROBLEMS INCLUDING RECENT PUNITIVE ACTIONS AGAINST AMERICAN FIRMS. I ALSO HEARD THAT U.S. COMPANIES WANT TO CONTINUE, AND INDEED, GROW THEIR BUSINESSES HERE. IN MY MEETINGS I SOUGHT TO CLARIFY ANY MISUNDERSTANDINGS OR MISPERCEPTIONS ABOUT OUR APPROACH. THERE IS A PROFOUND DIFFERENCE FOR THE UNITED STATES AND FOR MANY OTHER COUNTRIES BETWEEN DE-RISKING AND DECOUPLING. OUR COUNTRIES TRADED MORE OVER THE LAST YEAR, MORE THAN EVER OVER THE LAST YEAR. THE SECRETARY ELLEN TESTIFIED BEFORE CONGRESS LAST WEEK IT WOULD BE, AS SHE PUT IT, DISASTROUS FOR US TO DECOUPLE. THAT MEANS INVESTING IN OUR OWN CAPACITIES AND IN SECURE, RESILIENT SUPPLY CHAINS, PUSHING FOR LEVEL PLAYING FIELD, AND PROTECTING YOUR CRITICAL TECHNOLOGIES SO THAT THEY ARE USED AGAINST US. I MADE CLEAR THAT WE WILL CONTINUE TO TAKE TARGETED ACTIONS NECESSARY TO PROTECT U.S. NATIONAL SECURITY. I ALSO DISCUSSED HUMAN RIGHTS. THE UNITED STATES AND THE INTERNATIONAL COMMUNITY REMAIN DEEPLY CONCERNED ABOUT P.R.C. HUMAN RIGHTS VIOLATIONS INCLUDING IN TIBET AND HONG KONG. I ALSO SPECIFICALLY RAISED WRONGFULLY DETAINED U.S. CITIZENS AND THOSE FACING EXIT BANS. THERE IS NO HIGHER PRIORITY FOR ME THAN THE SAFETY AND WELL-BEING OF U.S. CITIZENS OVERSEAS AND I WILL CONTINUE TO WORK INTENSIVELY TO SECURE THEIR RELEASE AND SAFE RETURN HOME. AS WE WERE TO ADDRESS OUR DIFFERENCES, THE UNITED STATES IS PREPARED TO COOPERATE WITH CHINA AND AREAS WHERE WE HAVE MUTUAL INTEREST INCLUDING CLIMATE, MACRO ECONOMIC STABILITY, PUBLIC HEALTH, FOOD SECURITY. ON FOOD SECURITY, WE BELIEVE CHINA CAN PLAY A KEY ROLE IN ALLEVIATING GLOBAL FOOD INSECURITY. I UNDERSCORE THE IMPORTANCE OF SUPPORTING A LONG-TERM EXPANSION OF THE BLACK SEA GRAIN INITIATIVE WITH APPROXIMATELY 18 MILLION TONS GOING TO DEVELOPING COUNTRIES. LONG-TERM EXPANSION IS CRITICAL FOR AVOIDING FOOD SHORTAGES IN SOME OF THE POOREST, MOST FOOD-INSECURE COUNTRIES IN THE WORLD AS WELL AS PRICE SURGES. I RAISED AS A PRIORITY THE ISSUE OF SYNTHETIC OPIOIDS AND FENTANYL. A CRISIS IN THE UNITED STATES. FENTANYL IS THE NUMBER ONE KILLER OF AMERICANS AGED 18 TO 49. I MADE CLEAR THAT WE NEED MUCH GREATER COOPERATION TO ADDRESS THIS CRITICAL ISSUE. WE AGREED TO EXPLORE SETTING UP A WORKING GROUP OR JOINT EFFORT SO THAT WE CAN SHUT OFF THE FLOW OF RECURSIVE CHEMICALS WHICH HELPED FUEL THIS CRISIS AND A GROWING NUMBER OF DEATHS. FINALLY, PEOPLE TO PEOPLE EXCHANGES BETWEEN STUDENTS, SCHOLARS AND BUSINESS SCHOLARS THE BENEFITS ARE CITIZENS, ECONOMIES AND RELATIONSHIP. AND WE COMMITTED TO WORK TO INCREASE DIRECT FLIGHTS BETWEEN OUR COUNTRIES. TO CONTINUE DIALOGUE ON THESE AND OTHER IMPORTANT ISSUES, I WOULD ADVISE -- VISITS OVER THE COMING WEEKS. AND WE WELCOME FURTHER BUSINESS BY CHINESE OFFICIALS -- VISITS BY CHINESE OFFICIALS TO THE UNITED STATES. TO THAT END, I INVITED HIM TO VISIT WASHINGTON AND HE AGREED TO COME AT A MUTUALLY SUITABLE TIME. A LITTLE LATER THIS EVENING, I LEAVE FOR LONDON TO ATTEND THE UKRAINE RECOVERY CONFERENCE AND I WILL ALSO HAVE AN OPPORTUNITY TO BRIEF ALLIES AND PARTNERS ON THIS VISIT AND TO CONTINUE TO STRENGTHEN OUR ALIGNMENT. WE HAVE NO ILLUSIONS ABOUT THE CHALLENGES OF MANAGING THIS RELATIONSHIP. THERE ARE MANY ISSUES ON WHICH WE PROFOUNDLY, EVEN VEHEMENTLY DISAGREE. WE WILL ALWAYS TAKE THE BEST COURSE OF ACTION TO ADVANCE THE INTERESTS THE AMERICAN PEOPLE. BUT THE UNITED STATES HAS A LONG HISTORY OF SUCCESSFULLY MANAGING COMPLICATED, CONSEQUENTIAL RELATIONSHIPS THROUGH DIPLOMACY. IT'S THE RESPONSIBILITY OF BOTH COUNTRIES TO FIND THE BEST WAY FORWARD AND IN BOTH OUR INTEREST AND THE INTEREST OF THE WORLD. > > THE FIRST QUESTION GOES TO IAN MARLOWE WITH BLOOMBERG. ANNA: THAT WAS ANTONY BLINKEN AT THE PRESS CONFERENCE TAKING PLACE IN BEIJING AFTER HIS MEETINGS WITH SENIOR CHINESE DIPLOMATS AND INDEED, THE CHINESE PRESIDENT. WE WILL LEAVE THAT PRESS CONFERENCE THERE. INTERESTINGLY, STARTED OUT ASSESSING HOW THEY ARE CLEAR EYED ABOUT THE CHALLENGES AND THE RELATIONSHIP AND THEY HAD STOOD -- SUBSTANTIVE CONVERSATIONS BUT THEY HAVE BOTH COME TO THE AGREEMENT THAT THEY NEED TO STABILIZE THEIR RELATIONSHIP. I SUPPOSE AT ITS CORE, THAT IS A POSITIVE MESSAGE. > > > > IT IS INTERESTING IN TALKING ABOUT THE NEED FOR NEUTRALIZATION, BUT ALSO LAYING OUT SOME CLEAR MARKETS WHERE THE U.S. SIDE DEAUVILLE -- DOES FEEL THAT CHINA HAS STEPPED OUT OF BOUNDS ON A NUMBER OF THINGS INCLUDING SUPPLY OF OPIOIDS INTO THE U.S. FOR EXAMPLE, THE QUESTION OF TAIWAN SAYING THESE ARE ISSUES, BUT AT THE SAME TIME, SAME WE NEED TO HAVE MUTUAL ENGAGEMENT ON A BROADER ARRAY OF STUFF. IT IS REALLY A BALANCING ACT THAT THE U.S. IS GOING THROUGH CHINA, AND CHINA IN TURN, MAKING THE OVERARCHING RELATIONSHIP. YOU GOT A BUNCH OF SERIOUS PROBLEMS YOU'RE DEALING WITH. ANNA: HE REFERENCED THE U.S. HAVING A HISTORY OF DEALING WITH THESE COMPLICATED RELATIONSHIPS. PROVOCATIVE ACTIONS BY CHINA INTO THE TAIWAN STRAIT. THEY DON'T SUPPORT THE INDEPENDENCE MOVEMENT, THEY WANT THE STATUS QUO. > > THAT'S PROBABLY AGREEMENT. THE UNDERSTANDING WAS THAT HE WAS GOING TO PUBLICLY RESTATE THE U.S. STANCE ON. THERE'S BEEN A BIT OF QUESTIONING ABOUT IT. CLEARLY, WE RESPECT THE CURRENT POSITION. WE DON'T WANT TO UPSET THE APPLE CART ON ANY OF THAT. WE CERTAINLY DON'T WANT ANY KIND OF MOVE TOWARD A CONFLICT OVER TAIWAN. SORT OF REASSURING CHINA ON THAT FRONT. BUT EQUALLY IN THE LONGER TERM THERE ARE STILL TENSIONS. ANNA: INTERESTING THAT HE TALKED ABOUT TRADE, AND MAKING THE POINT ON THE BLOOMBERG, THE VALUE OF TRADE BETWEEN NATIONS. HE TALKED ABOUT HOW THE TWO COUNTRIES ACTUALLY TRADED MORE THAN EVER WITH EACH OTHER LAST YEAR. THESE NUMBERS TEND TO GROW, BUT IT IS WORTH MAKING THAT POINT THAT DESPITE ALL OF THE TALKING, DECOUPLING OR DE-RISKING, DEGLOBALIZATION, ALL OF THESE PHRASES THAT WE HAD TO EXPLORE AND EXAMINE, BUT AT THE END OF THE DAY, THESE TWO MASSIVE ECONOMIES ARE STILL TRADING MORE WITH EACH OTHER THAN THEY HAD IN THE PAST. > > > > AND THAT'S WHY THE HEALTH OF THE CHINESE ECONOMY IS SO IMPORTANT IN THE U.S. WE ARE SEEING CHINA START TO STEP OF STIMULUS TO PROTECT ITS ECONOMY AND OF COURSE, THE EFFECT IS ENORMOUS BECAUSE IF CHINA GOES DOWN, SO DOES THE REST OF THE WORLD. IT IS IN OUR INTEREST TO HAVE THAT ECONOMIC RELATIONSHIP ON THE EVEN KEEL. ALL THIS TALK ABOUT REASSURING INDUSTRIALIZATION WITH THE U.S., BRINGING BUSINESSES BACK TO THE U.S., EUROPE BRINGING THEM BACK TO INVEST IN EUROPE. IN THE END, THE RELATIONSHIP IS STILL SO INTERCONNECTED AND INTERDEPENDENT. THE IDEA OF DERAILING THE SUPPLY CHAINS IS VERY COMPLEX AND NOT SOMETHING YOU CAN DO OVERNIGHT. ANNA: HE MAKES THE POINT YOU ARE MAKING IN THE Q & A SESSION THAT JUST FOLLOW THAT PRESS CONFERENCE. CHINA'S BROAD ECONOMIC SUCCESS IS ALSO IN AMERICA'S INTEREST TO UNDERSCORE THEIR RELATIONSHIP BETWEEN THE TWO. HE DID SAY TOWARD THE END OF THE PRESS CONFERENCE HE EXPECTS ADDITIONAL SENIOR VISITS WITH U.S. OFFICIALS. SO PERHAPS SUGGESTING THAT WE MIGHT SEE A MEETING OF XI AND BIDEN THAT HAS BEEN TALKED ABOUT FOR A LONG TIME. > > THAT CERTAINLY SEEMS TO BE THE HOPE ON BOTH SIDES. THE CHINESE FOREIGN MINISTER MAY NOT GO TO THE U.S. FOR A VISIT, SO WE GET THAT LEVEL OF MEETING GOING ON, BUT THE IDEA IS TO PAVE THE WAY FOR THE U.S. PRESIDENT AND CHINESE PRESIDENT TO SIT DOWN IN PERSON AND NOT JUST HAVE A MEET AND GREET, BUT A PROPER SIT DOWN MEETING THAT GOES FOR SEVERAL HOURS AND REALLY TALK THROUGH SOME OF THESE ISSUES THAT HAPPENED. PERHAPS IN INDIA, THE G20 MIGHT HAPPEN. IN THE U.S., IT WOULD BE INTERESTING IF XI JINPING WAS GOING TO THE WHITE HOUSE TO HAVE A PUBLIC VISIT. THAT WOULD BE QUITE TELLING. WE ARE LOOKING FOR SIGNS THAT WE CAN MOVE TOWARD THAT KIND OF MEETING. > > WORTH MENTIONING THERE IS AN IMPORTANT VISIT OF SENIOR CHINESE OFFICIALS TO EUROPE. THANK YOU VERY MUCH FOR JOINING US WITH ANALYSIS OF ANTONY BLINKEN'S VISIT TO CHINA. ♪ ANNA: WELCOME TO BLOOMBERG MARKETS, A SPECIAL EDITION OF THE PROGRAM. U.S. PUBLIC HOLIDAY TODAY, SO NO BOND OR EQUITY TRADING. LET'S GET THE INVESTOR PERSPECTIVE THIS MONDAY. A JAMES ATHEY JOINS US. THERE ARE NICE TO HAVE YOU WITH US. I WANT TO TALK TO YOU ABOUT BOND MARKETS AND THE THINGS THAT ARE YOUR BREAD-AND-BUTTER, BUT I SUPPOSE IT IS INTERESTING TO THINK ABOUT WHAT WE'VE SEEN IN THE RATES MARKET, HOW THAT SITS WITH ENTHUSIASM FOR STOCKS WHICH HAS SEEN A FIVE-WEEK RUN HIGHER ON > ' > > I'M VERY MUCH SCRATCHING MY HEAD. WE CAN ALWAYS MAKE SOMEWHAT CONVINCING ARGUMENTS TO RATIONALIZE THESE MOVES, BUT ON THE FACE OF IT, YOU LOOK AT 2022 AND REALLY KRYPTONITE FOR THE MARKET WAS EXPECTATIONS AROUND TIGHTER POLICIES AND HIGHER YIELDS, PARTICULARLY FLASHY YIELD CURVES. THE LAST EIGHT WEEKS OR SO, WE'VE SEEN A REALLY, REALLY UNUSUAL-LOOKING MACRO DYNAMICS BATTENING NOT JUST IN THE TREASURY CURVE, BUT ACROSS THE WORLD. WE'D SEEN THE DOLLAR SUBTRACT BETWIXT AND BETWEEN, BUT WE'VE SEEN RISK MARKETS REALLY SHRUGGING OFF JUST ABOUT ANYTHING BEING THROWN AT THEM. IT'S ALL GOING TO MAKE PARABOLIC AS IT DOES INCREASINGLY LOOK IF IT TECHNICAL AND PROBABLY A BIT UNSUSTAINABLE. ANNA: A BIT UNSUSTAINABLE. AND WHAT BREAKS THEN, JAMES? DO WE SEE STOCKS DROPPED OR DO WE SEE THE RATES SORT OF FRENZY THAT WE ARE SEEING WITH HIGHER YIELDS? WHAT ARE YOU EXPECTING TO SEE CHANGE? > > THAT'S A GOOD QUESTION, AND IT BECOMES QUITE DIFFICULT TO ANSWER IN A CREDIBLE FASHION. I DEFINITELY THINK THAT WHAT WE KNOW IS THAT RATES HAVE A DIRECT IMPACT ON THE ECONOMY. THAT IS WHY CENTRAL BANKS ARE IMPACTING THE WAY THAT THEY ARE. THEY ARE TRYING TO SLOW THE ECONOMY. AND SO HIGHER RATES WILL DO THAT, WHEREAS HIGHER EQUITY PRICES ARE A TAILWIND TO THE ECONOMY. MARKETS AT THE MOMENT ARE TO SOME DEGREE FIGHTING EACH OTHER IN A WAY THAT THE U.K. GOVERNMENT AND THE BANK OF ENGLAND HAVE SEEMINGLY BEEN FIGHTING EACH OTHER. I EXPECT THAT THE RECESSION IS THE ANSWER TO ALL OF THESE QUESTIONS AND THEREFORE CURRENTLY I LOOK VERY WRONG BECAUSE WE ARE ABSOLUTELY NOT IN RECESSION AND ANYTHING, CERTAINLY LABOR MARKET DATA HAS BEEN SURPRISINGLY ON THE UPSIDE. BUT I DO THINK THAT WE ARE SEEING JUST THE SORT OF LAST LEGS OF POLICY THAT WE KNOW EXISTS AND IS PROBABLY LONG GONE FROM WHAT WE LIKE TO ADMIT. THEY WILL WIN OUT IN THE END AND WE WILL SEE ECONOMIC DATA COMING OFF MORE SIGNIFICANTLY. ANNA: SO ECONOMIC DATA COMES OFF MORE SIGNIFICANTLY, WE DO END UP IN A RECESSION. WHERE SEEMS MOST LIKELY TO FEEL THAT MOST? RECESSION EXPECTATIONS HAVE SORT OF EBBED AND FLOWED ALL OVER WESTERN MARKETS. > > YOU'RE ABSOLUTELY RIGHT, THAT HAS BEEN ONE OF THE MOST PRONOUNCED FEATURES OF THE MARKET, IT HAS BEEN QUIETLY REVERTING THE STORIES THAT HAVE EBBED AND FLOWED ALONG WHAT HAS BEEN VERY VOLATILE DATA. YOU GO BACK TO THE BACK END OF LAST YEAR, EUROPE AND THE U.K. STOOD OUT AS THE MOST PESSIMISTIC REGIONS BECAUSE OF THE COST OF LIVING, THE ENERGY SHOCK AND WHAT THAT WAS GOING TO DO BOTH THE CONSUMERS AND TO BUSINESSES. WE SAW NATURAL GAS PRICES MODERATING, THE NARRATIVE FLIPPED AND SUDDENLY EUROPE AND THE K COULD CROSS BECAUSE THEY WEREN'T HAVING ANY HEADWINDS. ULTIMATELY I THINK WE ARE ALL HEADED TO A RECESSION BUT I THINK THE ANGLO-SAXON ECONOMIES, THOSE WITH HOUSING MARKETS WHICH HAVE DONE PARTICULARLY WELL, FLOATING RATE MORTGAGE MARKETS AND THE FEEDTHROUGH FROM MONETARY TIGHTENING INTO THE CONSUMER'S POCKET IS A BIT MORE DIRECT, A BIT MORE SEVERE. AND OF COURSE, WESTERNS TEND TO BE MORE HEAVILY RELIANT. ANNA: WHERE DOES THAT LEAVE THE U.K., THE SITUATION YOU DESCRIBED? IT IS OPEN, OF COURSE, TO SOME VARIABLE RATES IN THE MORTGAGE MARKET THAT THE PEOPLE HAVE FIXED, AND IT IS THOSE FIXES THAT DELAYED THE IMPACT OF THE HIGHER RATES WE’'VE SEEN ALREADY. TO COME THROUGH AND BE FELT IN THE MONTHS AND YEAR AHEAD? > > IT IS LIKE A DELAYED FUSE ON THE BOMB GOING OFF. WE KNOW THAT THE HOUSING MARKET HAS FLIPPED 33%, SO YOU GOT 33% WHO ARE OWNERS, 33% WITH A MORTGAGE AND 33% ARE RENTERS. IT'S SHORT MORTGAGES WHICH OF THEM TAKEN IT IN THE LAST FEW YEARS. THE BANK OF ENGLAND TALKED ABOUT THIS, LAST WE HEARD. HE THOUGHT THAT ONLY AROUND ONE THIRD OF MONETARY TIGHTENING TO THAT POINT WAS ACTUALLY ACTIVE IN THE ECONOMY AND IT SEEMS LIKELY THAT THE BANK HAS BEEN DRAGGED BACK TO THE TABLE TO POSSIBLY EVEN ACCELERATE THEIR TIGHTENING AGAIN. HOW QUICKLY AND EXACTLY IT PLAYS OUT IN TERMS OF THE ECONOMIC DATA IS ALWAYS DIFFICULT TO SAY, BUT I DO EXPECT US TO BE ON A DOWNWARD PATH THROUGH THE SUMMER AND INTO THE OTTOMAN TERMS OF THE ECONOMIC DATA. ANNA: WHAT WILL THE POLITICAL PRESSURE ON THE BANK OF ENGLAND AT UP TO, DO YOU THINK? > > YOU SEE THE TESTIMONY IN FRONT OF THE TSC AND WHETHER IT IS QUESTIONS COMING FROM THE RIGHT OF THE LEFT, LOU OR READ, EVERYBODY IS CAN READ ABOUT WHAT THESE HIKES AND INTEREST RATES ARE DOING. WE KNOW THAT THEY ARE GOING TO BE HAVING A PARTICULARLY NASTY EFFECT ON THOSE ON THE LOWER END OF THE INCOME SPECTRUM. WE ALSO KNOW THAT UNFORTUNATELY, NOT JUST IN THE U.K., BUT EVERYWHERE. THAT'S WHAT WE HAVE INFLATION TARGETING CENTRAL BANKS, SPENDING HOURS ABOUT HOW WE ARE GOING TO FIND OURSELVES HERE. WHAT THE GOVERNMENT NEEDS TO DO IS HOLD THE LINE. WE'VE SEEN HEADLINES TALKING ABOUT PRICE CONTROLS AND ABOUT MORTGAGE RELIEF. IF YOU LEARN ANY LESSONS IN THE 70'S, WHAT WE NEED TO DO UNFORTUNATELY IS TAKE THE MEDICINE. I DON'T EXPECT THEM TO BECOME AS AGGRESSIVE AS THE MARKETS ARE CURRENTLY PRICING, BUT THEY DO NEED TO CONTINUE TO TIGHTEN MONETARY POLICY. ANNA: THANKS SO MUCH FOR YOUR TIME, WE APPRECIATE IT. THE WORLD'S LARGEST AVIATION SHOWCASE HAS RETURNED. PLAYMAKERS ARE GATHERING AT THE PARIS AIR SHOW TO ANNOUNCE NEW DEALS AND INNOVATIONS IN THE POST AND I MAKE WORLD. BUT DESPITE THE RETURN OF GLOBAL TRAVEL, ONE AIRPORT IS ON A QUEST TO BAN PRIVATE JETS. GUY JOHNSON REPORTS. > > LUXURY DESTINATIONS FOR AMSTERDAM. PERHAPS THOUGH, NOT FOR LONG. PLANS TO BAN PRIVATE JETS FROM ITS RUNAWAYS BY 2026, SETTING A HUGE PRECEDENT FOR OTHER TRAVEL HUBS AND GENERATING PLENTY OF CONTROVERSY. AS MANY AS 17,000 PRIVATE JETS CROSSED THE RUNWAYS LAST YEAR, AND THE AIRPORT ARGUED THEY ARE NOISIER AND GENERATE 20 TIMES MORE CARBON EMISSIONS PER PASSENGER AND COMMERCIAL FLIGHTS. THE PLAN WAS ANNOUNCED A FEW MONTHS AFTER CLIMATE ACTIVISTS STORMED THE TARMAC TO BLOCK PRIVATE JETS AND COMES ON TOP OF THE DUTCH GOVERNMENT'S PROPOSAL TO CAP THE TOTAL NUMBER OF FLIGHTS TO AND FROM THE AIRPORT. > > PERSPECTIVE FOR THE AIRLINES, AND FOR SKIP ALL ITSELF. > > THE UNEXPECTED BAN WILL HIT BUSINESS TRAVEL HARDEST. > > PRIVATE AVIATION IS A BUSINESS TOOL, ESPECIALLY FOR AMSTERDAM WITH THE TOP THREE DESTINATIONS ARE LONDON, SWITZERLAND AND FRANCE. SO THEY ARE NOT REALLY BEACH DESTINATIONS AND HOLIDAY DESTINATIONS. > > FOR NOW, THE FATE OF AMSTERDAM PRIVATE JETS REMAINS UNCLEAR. THE QUESTION NOW IS THE MOVE ACCELERATE THE DEVELOPMENT OF MORE SUSTAINABLE ALTERNATIVES? ANNA: THAT WAS GUY JOHNSON REPORTING. FOR MORE ON THE PARIS AIR SHOW, SUBSCRIBED TO THE OFFICIAL BLOOMBERG PARIS NEWSLETTER. A QUICK WORD ON WHAT WE HEARD FROM ANTONY BLINKEN, HE WAS TALKING OVER IN BEIJING. HE SAYS THE U.S. IS CLEAR EYED ABOUT THE CHALLENGES POSED BY CHINA AND IT UNDERLINE AND REITERATE THE U.S. CAN INTO THE ONE CHINA POLICY. HE ALSO SAID THAT HE IS CONCERNED ABOUT CHINA MAY BE PROVIDING RUSSIA WITH NEW TECHNOLOGY. PLENTY MORE COMING THROUGH FROM THAT PRESS CONFERENCE. ♪ ANNA: WELCOME BACK TO BLOOMBERG MARKETS, A SPECIAL EDITION BECAUSE OF COURSE IT IS A U.S. PUBLIC HOLIDAY. SO NO EQUITY OR BOND MARKET TRADING STATESIDE. LET'S PAUSE THE MARKET CONVERSATION TO GIVE YOU AN IMPORTANT CONVERSATION. A G7 MEETING IN JAPAN. -- SPOKE EXCLUSIVE THE -- EXCLUSIVELY TO PETE BUTTIGIEG, THE U.S. SECRETARY OF TRANSPORTATION. > > AS WE SEEK TO DE-RISK AND DIVERSIFIED OUR ECONOMIC RELATIONSHIPS, WE DO WANT TO MAKE SURE THAT THESE CAPABILITIES ARE NOT CONCENTRATED WITH ANY ONE COUNTRY. CERTAINLY, WITH A COUNTRY THAT MAY DEMONSTRATE A WILLINGNESS TO USE THESE IN WAYS THAT ARE NOT CONNECTED TO WHAT IS THE BEST GOING FORWARD, EITHER COMMERCIALLY OR IN TERMS OF THAT RULES-BASED INTERNATIONAL ORDER. WE WANT TO MAKE SURE THAT AT LEAST ONE WE CAN AGREE ON MATTERS FROM CLIMATE CHANGE TO PUBLIC HEALTH, THAT WE ARE OPERATING ON A BASIS THAT CAN BE UNDERSTOOD TO BE FOR THE BENEFIT OF ALL. THOSE ARE THE KINDS OF THINGS WE ARE FOCUSED ON HERE. > > YOU TALK ABOUT DE-RISKING. ARE THERE ANY OTHER SECTORS THAT NEED DE-RISKING, EVEN THE DRUG SECTOR IN CHINA? THE WORLD'S RELIANT ON BASIC DRUGS WHEN IT COMES TO CHINA. > > I WANT TO MAKE SURE NOT TO WANDER TOO FAR OUTSIDE OF MY OWN PORTFOLIO. I KNOW THAT THESE ARE ACTIVE CONVERSATIONS BOTH BY AND MULTILATERALLY. WHAT I CAN SAY WITH REGARD TO SUPPLY CHAINS IS THAT WE HAVE SEEN HOW IF THERE IS NOT ENOUGH DIVERSIFICATION, YOU SEE EXTRAORDINARY LEVELS OF GEOPOLITICAL RISK OR EVEN JUST LOGISTICAL RISK IN THE U.S. BECAUSE OF THE EXTREME VARIATION AND THE CLOSURES AND THE OPENINGS IN ASIA AND CHINA SPECIFICALLY. THERE IS A GREAT DEAL IN TERMS OF GOODS. I THINK THAT IS ONE EXAMPLE OF THE KIND OF WAKE OF CALLS THAT THE U.S. AND THE GLOBAL COMMUNITY IN GENERAL AND THE EXPERIENCING, ESPECIALLY IN THE LAST TWO OR THREE YEARS. DARK OUT SINCE WE ARE TALKING ABOUT SUPPLY CHAINS, WE HAD U.S., JAPAN, KOREA, TAIWAN INVESTING HEAVILY IN THEIR OWN RESPECTIVE SEMICONDUCTOR SECTORS. COULD THAT LEAD TO OVERCAPACITY? > > RIGHT NOW, OVERCAPACITY SEEMS TO BE THE LEAST OF OUR PROBLEMS WHEN HE COMES TO THE RACE FOR SEMICONDUCTORS. WHAT WE KNOW THAT SEMICONDUCTORS ARE GOING TO BE EVEN MORE IMPORTANT IN THE FUTURE. SO RATHER THAN ALLOW OURSELVES TO AGAIN BE IN A SITUATION WHERE WE ARE COMING UP SHORT, WE ARE MAKING SURE THAT BOTH IN TERMS OF OUR RELATIONSHIPS WITH FRIENDS AND TRADING PARTNERS AND IN TERMS OF OUR GYMNASTIC CAPACITY -- WHICH BY THE WAY, IS ALSO BENEFITED FROM A FOREIGN DIRECT INVESTMENT WHILE STRENGTHENING AT AND RELATIONSHIPS, IT IS SOMETHING THAT MAKES SENSE AND CAN HELP US TO CUSHION SOME OF THE GEOPOLITICAL RISK. ANNA: THAT WAS PETE BUTTIGIEG SPEAKING ABOUT -- AT THAT G7 EVENT. IN BEIJING WE JUST HEARD FROM ANTONY BLINKEN, GIVING A PRESS CONFERENCE FOLLOWING HIS REALLY HIGH-LEVEL MEETING OVER IN CHINA. HE MET WITH CHINESE OFFICIALS AND PRESIDENT XI HIMSELF WHICH IS BEING SEEN AS A SORT OF COMFORTING SIGNED IN TERMS OF THE DYNAMIC BETWEEN THE TWO COUNTRIES. SOME OF THOSE LINES COMING THROUGH TOWARD THE END OF THE PRESS CONFERENCE, HE REITERATED ONCE AGAIN THAT THE U.S. IS COMMITTED TO ONE CHINA POLICY. HE ALSO WENT ON TO SAY PROGRESS WITH CHINA IS HARD, IT TAKES TIME. CHINA AND THE U.S. TO POSITIVE STEPS DURING THIS BEIJING TRIP. LET'S GET A MARKETS PERSPECTIVE ON ALWAYS HEARD HERE. VERY NICE TO SPEAK TO YOU THIS MONDAY MORNING. WE HAVE THESE COMFORTING NEWS LINES, I SUPPOSE, FROM THE U.S. ADMINISTRATION AND FROM CHINA AS WELL. PROGRESS BEING MADE ON THE RELATION THE SO THAT IS ALL FINE. WHAT ABOUT THE CHINESE ECONOMIC STORY, FUNDAMENTALLY? SOME DISAPPOINTMENT THAT WE DIDN'T SEE FURTHER SUPPORT ANNOUNCED OVER THE WEEKEND. > > OBVIOUSLY, WE HAVE SEEN DISAPPOINTING DATA AND WHAT IS INTERESTING, AS ONE OF THE REASONS WHY WE DON'T THINK WE ARE GOING TO SEE A VERY FORCEFUL, BIG STIMULUS, IS THAT THE RECOVERY IS UNEVEN. YOU ACTUALLY HAVE SOME STRENGTH IN THE SERVICES SECTOR AS WE CONTINUE SEEING THAT POST-COVID REBOUND IN CONSUMER CONFIDENCE IN SOME SECTORS AND IN SOME PLACES. SO WHEN THE AUTHORITIES LOOK AT THE DATA AND THEY LOOK AT THE OFFICIAL DATA THAT THEY SEE EVERY MONTH, THEY ARE PROBABLY NOT SO WORRIED BECAUSE THERE ARE PATCHES OF STRENGTH AND PATCHES OF WEAKNESS. THAT'S WHY WE THINK THE STIMULUS IS LIKELY TO CONTINUE BEING MORE TARGETED RATHER THAN VERY BROAD. ANNA: SO WE ALREADY SAW THE MONETARY POLICY RESPONSE, THE NEAR TERM LENDING RATE AND MEDIUM-TERM LENDING FACILITY. WE SAW GREAT CUTS ON BOTH OF THOSE HORIZONS. SO WHAT IS NEXT, WHAT KIND OF STIMULUS ARE WE WATCHING HER? MORE ON THE MONETARY SIDE, OR WILL THERE BE TARGETING FISCAL MEASURES? > > FOR FISCAL SIDE, I THINK WE NEED TO WAIT FOR THAT MEETING LATER IN JULY BECAUSE THESE OTHER MEETINGS AFTER WHICH WE TEND TO HAVE THE POLICY SHIFTS. IT IS UNLIKELY BE WILL SEE SOMETHING BEFORE THAT. AFTER THAT, THE FOCUS IS ON CONSUMER AND ON THE PROPERTY MARKET. THE PROPERTY MARKET STIMULUS, IF IT IS MORE BROAD, THAT IS GOING TO BE A GAME CHANGER. ANNA: WHAT HAPPENS HAS A BIG IMPACT ON EUROPEAN MARKETS. YOU JUST HAVE TO SEE THE RESPONSE OF LUXURY GOODS STOCKS TO UNDERSTAND THAT DYNAMIC. SO LET ME TAKE THAT CONVERSATION AND MOVE TOWARD EUROPE. WE ARE HEARING FROM THE CHIEF ECONOMIST OF THE ECB, GIVING A SPEECH OVER IN MADRID. HE IS SAYING SEPTEMBER IS SO FAR AWAY, LET'S SEE IN SEPTEMBER. THIS OF COURSE IN REFERENCE TO WHETHER WE GET A SECOND RATE HIKE. IT SEEMS JULY IS VERY MUCH THE EXPECTATION. LET'S NOT PREJUDGE. WHAT DO YOU EXPECT TO SEE, HOW MUCH MORE HIKING CAN THE ECB DO NOW THAT THE FED IS SEEMINGLY ON COURSE? > > IT IS CLEAR THAT THE ECB IS DATA-DEPENDENT, AND ARE WATCHING WHERE THEY ARE GOING, AND IT IS LIKELY THAT WE WILL SEE THE HIKE IN JULY, AS YOU SAID. AND SEPTEMBER WILL DEPEND. BUT I THINK IT IS CLEAR THAT THEY ARE CLOSE TO THE END OF THE CYCLE. IT IS CLEAR IN THE CASE OF THE FED OR IN THE CASE OF THE DOE, BECAUSE IT SEEMS LIKE THE INFLATION IS LESS CHANGED, EVEN THOUGH THEY ARE BECOMING A BIT WORRIED ABOUT WAGES, ABOUT NEGOTIATED WAGES. BUT IT SEEMED THAT WE ARE CLOSE TO THE PEAK. PERHAPS RISK UPSIDE TO THE TERMINAL RATE FROM HERE, BUT WE THINK IT IS PROBABLY THE BASE CASE. ANNA: CLEARLY THE DEBATE IS WHETHER WE GET MORE HIKES IN THE VERY SHORT TERM. I WONDER WHAT IT IS THAT THE FED WOULD NEED TO SEE TO ENABLE THEM TO TAKE A REAL DOVISH PIVOT TO CUT RATES. WHAT KIND OF WEAKNESS WOULD JUSTIFY THAT? EVEN THOUGH YOU MAKE PROGRESS ON INFLATION AND PROGRESS ON LOOSING THE LABOR MARKET, INFLATION IS STILL WAY ABOVE TARGET AND LABOR MARKETS ARE STILL TIGHT. > > IS IMPORTANT TO UNDERSTAND THE PROGRESS OF INFLATION TOWARDS TARGET IS GOING TO BE NONLINEAR. IT'S ONE THING TO GET FROM SIX TO 54, BUT THAT IS COMPLETELY A DIFFERENT LET DOWN WHEN YOU TRY TO GET INFLATION FROM FOUR TO TWO. IT IS GOING TO BE HARDER, GOING TO BE STICKIER. AS YOU LOOK AHEAD, THE FED NEEDS TO SEE THE LABOR MARKET TURNING. NOT JUST INCREASING BY 20%, 30, BUT 1500 BASIS AND UP, AND INFLATION STARTING TO FALL TOWARD TARGET MORE FORCEFULLY, MORE RELIABLY. ANNA: SO THE RATES STAY AT THIS LEVEL FOR A LONG TIME. TWO YEARS, OR NOT QUITE THAT LONG? > > FIRST OF ALL, WE THINK THAT WE LOOK INTO THE TERMINAL RATE. IT DEPENDS ON WHERE THE DATA GOES. AND THEN OBVIOUSLY, HOW THE ECONOMY REACTS. A RESILIENT PARTY DUE TO THOSE HUGE IMPLICATIONS, THOSE TAILWINDS ARE STILL THERE, BUT THEY ARE FADING. WE WILL START SEEING ECONOMIC WEAKNESS. IT DEPENDS WHEN AND HOW QUICK IT MANIFESTS ITSELF. BUT FOR THE TIME BEING, IT IS NOT ON THE HORIZON. ANNA: THE RATES CONVERSATION CLEARLY OF INTEREST OVER IN THE U.S. TWO YEAR YIELDS HAVE RISEN FOR THE FIRST TIME IN 2008 AHEAD OF A WEEK OF ASIAN DATA AND THE BANK OF ENGLAND RATE DECISION. I'M JOINED ON-SITE YEAR IN LONDON TO GO THROUGH THE ANALYSIS. WHAT ARE WE EXPECTING WITH THE INFLATION PRINT? WHAT IS THE EXPECTATION? > > ON THURSDAY WE ARE EXPECTING THE 13TH STREET RATE RISE FROM THE BANK OF ENGLAND AFTER THAT INFLATION ON WEDNESDAY. TRADERS ARE ACTUALLY SEEING A 6% PEAK RATE FOR THE BANK OF ENGLAND. WE HAD THE GOVERNOR SPEAKING OVER THE WEEKEND WHO SAYS HE WOULD NOT RULE THAT OUT EVEN IF IT ISN'T HIS BASE CASE. AS YOU SAY, -- HAS RISEN TO THE HIGHEST LEVEL SINCE 2008. LAVROV, INVESCO, ASSET MANAGEMENT SAYING THAT THIS IS THE MOMENT BY BECAUSE YOU MIGHT NOT SEE YIELDS AT THIS MOMENT FOR MUCH LONGER. YOU'VE GOT THE RISK OF HIGH RATE CREATING A RECESSION IN THE U.K. THEY ARE SAYING THE MOMENT IS NOW BUT IF WE GET ANOTHER UPSIDE INFLATION TO RISE ON WEDNESDAY, -- SAYS HE DOESN'T HAVE THE CONVICTION TO MAKE A CALL ABOUT THAT NOW. ANNA: WE WILL BE MAYBE RAGGING ON THAT INFLATION PRINT. WE'VE HEARD A LOT OF CREATIVE TALK FROM THE U.K. GOVERNMENT ABOUT THINGS THEY MIGHT WANT TO DO AT THE MARGIN TO TRY TO EITHER REDUCE PRESSURE ON SHOPPING BILLS OR ON MORTGAGE PAYMENTS. ECONOMISTS MIGHT QUESTION WHETHER THOSE THINGS WOULD BE WISE TO DO, FLYING IN THE OPPOSITE DIRECTION OF MONETARY POLICY RIGHT NOW. WHAT KIND OF PRESSURE IS RISHI SUNAK UNDER? > > -- PLUS THE LEVELS THAT WE SAW IN THE AFTERMATH OF THE BUDGET. RESOLUTION FOUNDATION THINK TANK, BILLS ARE GOING TO GO UP 3000 POUNDS PER YEAR BECAUSE OF THE MORTGAGE COST IF YOU HAVE A MORTGAGE. BUT OF COURSE, IT IS HIS NUMBER ONE PRIORITY TO HAL VE INFLATION BY YEAR-END. HE'S ALSO GOT A TARGET OF GROWING THE ECONOMY THIS YEAR, ONE OF HIS TOP FIVE PRIORITIES. WE MAY NOT MAKE ANOTHER ONE OF HIS PRIORITIES, EITHER. THERE ARE CREATIVE SOLUTIONS BEING FLOATED AROUND, BECAUSE HER SUPPORT WITH MORTGAGES TO AVOID REPOSSESSIONS. THE TREASURY HAS SAID THAT THAT WOULD BE AT ODDS COMPLETELY WITH THE BANK OF ENGLAND IS DOING, NOT A POSITION THE TREASURY WANTS TO BE IN. ANNA: AND AS TEMPTING AS IT MIGHT BE IF YOU PUT ANY POLICIES IN PLACE THAT GO AGAINST MONETARY POLICY THAT REDUCES THE PRICE SIGNALS IN THE MARKET, AND THERE WE GO. THERE IS ANOTHER POLITICS STORY BREWING HERE IN THE U.K. ALL AROUND BORIS JOHNSON. THE LONGTAIL OF BORIS JOHNSON'S LEADERSHIP LIVES ON BECAUSE U.K. LAWMAKERS ARE DEBATING HIS LEGACY TODAY. > > THERE HAS BEEN THIS REPORT BY LAWMAKERS, BORIS JOHNSON'S INVOLVEMENT, BUT ALSO WHETHER OR NOT HE MISLED PARLIAMENT OVER THEN. THAT VOTE IS NOW EXPECTED IN 4:30 P.M. THIS AFTERNOON. IT IS GOING TO BE A FREE VOTE BUT IT COULD BE HUGELY EMBARRASSING FOR RICHIE SUNAK. WHAT WE ARE EXPECTING IS THAT MANY CONSERVATIVE MPS ACTUALLY ABSTAINED BECAUSE WHAT RICHIE SUNAK DOESN'T THE DIVISIONS WITHIN HIS BE EXPOSED WE KNOW THAT BORIS JOHNSON HAS ALREADY STEPPED DOWN. THE QUESTION NOW IS WHETHER HE CAN MAINTAIN ACCESS TO THE WESTMINSTER PARLIAMENTARY ESTATE. IT'S CALLED OFFICE ATTACK DOGS SO IT LOOKS LIKE IT IS NOT GOING TO BE AS ERRORS HE AN MIGHT HAVE BEEN FOR RICHIE SUNAK. ANNA: THANKS VERY MUCH. INDEED, THE POLITICAL NARRATIVE AS IT CONTINUES TO RUMBLE ON. BORIS JOHNSON STILL A FEATURE OF THAT, IT WOULD SEEM. COMING UP, CREDIT SUISSE MAY BE DUE FOR A MASSIVE DOWNSIZING AFTER ITS TAKEOVER BY UBS. WRITING ABOUT THIS IN A NEWSPAPER OF THE WEEKEND, WHAT DOES THAT ADD UP TO? WHAT KIND OF MASSIVE DOWNSIZING OF THE SE -- EXPECTING TO SEE? ♪ > ANNA: WELCOME TO A SPECIAL EDITION OF BLOOMBERG MARKETS. LET'S GET OVER TO ONE OF OUR CORPORATE STORY THAT WE ARE EXPLORING TODAY. A HINT AT BIG CUTS AT THE FORMER CREDIT SUISSE WORKFORCE IN INVESTMENT BANKING. LET'S GET TO BLOOMBERG MIRIAM FOR MORE DETAILS. MIRIAM, TAKE US THROUGH WHAT WE KNOW ABOUT PLANS AROUND THAT. MIRIAM: IN TERMS OF NUMBERS, WE CAN EXPECT BIG CUTS AT THE INVESTMENT BANK. THEY'VE BEEN VERY CLEAR ABOUT DOWNSIZING CREDIT SUISSE'S INVESTMENT BANK. HE WAS EVEN TALKING ABOUT PUTTING EMPLOYEES THROUGH A CULTURE FILTER, BECAUSE THERE'S BEEN LEGACY -- AT THE CREDIT SUISSE'S BUSINESSES AND UBS IS KEEN ON NOT TAKING ON BOARD SOME OF THESE HETERO ISSUES. NESBITT -- NOW THERE IS A QUESTION AROUND THE JOB CUTS. WE'VE ALREADY SEEN ABOUT 10% OF CREDIT SUISSE'S EMPLOYEES THAT HAVE LEFT, SO THAT IS A NUMBER THAT WE EXPECT TO SEE INCREASING. BUT THEY HAVE BEEN VERY CLEAR THAT UBS'S DECISION TO JUST SHRINK THE INVESTMENT BANK QUITE QUICKLY. ANNA: WHAT OTHER CONCERNS AROUND CULTURE -- WHAT ARE THE CONCERNS AROUND THE RISK-TAKING APPETITE WE SAW AT CREDIT SUISSE AND NOT LETTING THAT PERHAPS EMBED IN A NEW WORKFORCE AT THE COMBINED GROUP? HOW IS THAT BEING TALKED ABOUT WHERE YOU ARE? MYRIAM: THIS IS ACTUALLY THE MAIN KIND OF TASK AT HAND, AND THAT IS THE REASON WHY IT HAS BEEN TAKING A WHILE AND IT IS GOING TO TAKE IT IS GOING TO TAKE A WHILE GOING FORWARD. CREDIT SUISSE HAS HAD 45,000 EMPLOYEES, SO WE ARE GOING TO SEE THAT NUMBER SHRINK. THERE HAS BEEN A LOT OF ISSUES AT CREDIT SUISSE'S INVESTMENT BANK, ALTHOUGH IT HAS PERFORMED RELATIVELY WELL IN TERMS OF DEALS AND SO ON. WE SEE ISSUES RELATED TO INVESTMENT BANKS, SO UBS IS TAKING A VERY CAUTIOUS APPROACH TO ENSURE THAT SOME OF THESE MORE RECKLESS HABITS DON'T TRANSPIRE WITH THE NEW GROUP. ANNA: IT'S GOING TO BE A VERY LONG-TERM PROCESS, THIS INTEGRATION. ARE WE TALKING YEARS TO PUT TOGETHER THESE TWO BUSINESSES? WHAT IS THE SCALE OF THIS? MYRIAM: IT WILL, ABSOLUTELY. IT IS A MASSIVE TASK AT HAND. WE'VE SEEN A BIT OF THE RESHUFFLE AT THE EXECUTIVE LEVEL EARLIER THIS MONTH, SO THAT IS KIND OF THE FIRST BIG STEP TO ESTABLISH WHO IS GOING TO BE AT THE HELM, WHO IS GOING TO BE RESPONSIBLE FOR WHAT PART. WE'VE GOT BUSINESS EXECUTIVES FULLY DEDICATED TO THIS BIG INTEGRATION. WE ARE TALKING THREE OR FOUR YEARS AT BEST. SO WE WILL SEE. TIME WILL TELL WHETHER THAT IS A PROCESS THAT CAN BE SPED UP OR NOT. ANNA: THANKS FOR BRINGING US THE STORY. MYRIAM FROM SWITZERLAND WITH THE LATEST ON PULLING TOGETHER UBS AND CREDIT SUISSE. THE WORLD'S LARGEST AVIATION SHOWCASE HAS RETURNED. -- HAS BEEN SPEAKING TO GUY JOHNSON FROM ON BOARD QATAR AIRWAYS PLANE AT THE PARIS AIR SHOW. > > WE ALREADY HAVE A LARGE AMOUNT OF ORDERS ALREADY PLACED WITH BOEING AND AIRBUS IN THE PAST AND WE ARE JUST WAITING FOR THEIR SUPPLY CHAIN TO RAMP UP. I KNOW THAT THAT IS VERY EXCITING. BOTH MANUFACTURERS WANT HUGE ORDERS, BUT YOU CAN ALWAYS GET THE ORDERS. WHEN WE CAN SUPPLY THEM IS THE BIG QUESTION. GUY: HOW MANY PLANES THAT YOU ARE CURRENTLY EXPECTING WILL GET HERE ON TIME? > > NONE. ALL OF THE ORDERS ARE DELAYED. I DON'T BLAME THE TWO MANUFACTURERS, IT IS THE SUPPLY CHAIN REALLY DECIMATED DURING COVID. PEOPLE DIDN'T REALIZE. AND THE GOVERNMENTS DIDN'T REALIZE THAT THEY SHOULD COMPENSATE THE INDUSTRY TO KEEP EVERYBODY ON JOBS FOR WHEN THERE IS A TURNAROUND. AND NOBODY PAID ATTENTION EXCEPT QATAR AIRWAYS THE THIS IS WHY WE WERE THE HIGHEST GROWTH AIRLINE DURING THE 2020, 2020 1-22. GUY: AS YOU SAY, YOU BOUNCED BACK. THE INDUSTRY IS BOUNCING BACK AS WELL. IS THIS SUSTAINABLE? > > YES. FOR THE FORESEEABLE FUTURE, YES. GUY: WHAT DOES THE FOR FUTURE MEAN? > > A FEW YEARS. THERE IS A SHORTAGE OF CAPACITY. THERE'S NO AIRPLANES AVAILABLE. BOTH MANUFACTURERS ARE STRUGGLING TO DELIVER AIRCRAFTS BECAUSE THEY HAVE ENGINE PROBLEMS AND THE ENGINE MANUFACTURERS CANNOT LIVE UP TO THE SUPPLY REQUIREMENT. GUY: BUT AS YOU SAY, THE INDUSTRY CAPACITY IS CONSTRAINED AT THE MOMENT. ARE YOU WORRIED YOU WON'T BE ABLE TO GET THE AIRCRAFT THAT YOU WANT IN THE FUTURE? > > THIS MIGHT BE A PROBLEM AND THIS IS GOING TO BLOCK THE EXPANSION PLANS BEFORE 29 TEEN -- 2019. EACH YEAR WE ARE PROMPTING THE END OF THE SECOND. GUY: YOU DON'T THINK NOW WOULD BE A GOOD TIME TO PLACE THOSE ORDERS? > > FIRST OF ALL, I DON'T NEED TO PLACE ORDERS BECAUSE I ALREADY HAVE SUBSTANTIAL ORDERS. THE PROBLEM IS THAT EVEN IF YOU ORDER TODAY, YOU'RE NOT GOING TO SEE THOSE AIRPLANES FOR THE NEXT FIVE YEARS. GUY: HOW LONG DO YOU THINK THIS IS GOING TO TAKE TO SORT OUT? > > I AGREE DURING YOUR ECONOMIC CONFERENCE IN DOHA, WE MENTIONED THE SUPPLY CHAIN WILL NOT COME TO THE 2019 LEVEL FOR AT LEAST THE NEXT COUPLE OF YEARS, OR EVEN MORE. GUY: SO IS THE INDUSTRY GOING TO BE SUPPLY-CONSTRAINED? DOES THAT MEAN THAT FARES ARE GOING TO REMAIN-THE FORESEEABLE FUTURE? > > IT'S ALSO PLIANT DEMAND. THERE IS LESS SUPPLY AND DOUBLE DEMAND. PEOPLE WANT TO TRAVEL. GUY: SO HIGH FARES ARE GOING TO STAY HIGH? > > I THINK THEY ARE GOING TO STAY HIGH. ALSO KEEP IN MIND THAT OIL PRICES ARE HIGH. WE ARE NOW BEING PUSHED TO GET -- IN PLACE WHICH IS EXORBITANTLY EXPENSIVE AND UNAVAILABLE. ALL OF THIS IS A FACTOR THAT IS INCREASING THE COST OF THE VALUE THAT YOU HAVE TO PAY TO TRAVEL. GUY: THE MOVE IS GOING TO BE INFLATIONARY, YOU THINK? > > ABSOLUTELY. YOU ARE PAYING FOUR TIMES THE PRICE TO HAVE, WHAT DO YOU EXPECT? GUY: DO YOU THINK OF THE 2050 TARGET ARE LOOKING ACHIEVABLE AT THIS POINT? > > KNOWS, I DON'T THINK SO. PLEASE EXPLAIN TO ME ONE STAFF MANUFACTURER UNDERTAKING THAT THEY WILL BE ABLE TO FILL IN THE DEMAND OF 2050. I DON'T THINK SO. LET US NOT FULL OURSELVES. -- FOOL OURSELVES. FIRST, LET US SEE FROM EXXON MOBIL, TOTAL ENERGIES, ALL THESE PEOPLE. ASK THEM, WHAT DO THEY PRODUCE, AND THEY WILL NEVER GIVE YOU AN ANSWER. GUY: YOU'RE GOING TO SEE SIGNIFICANT COMPETITION IN THE GULF. -- EXPECTED TO PLACE A NEW, BIG ORDER. WE NOW HAVE RIYADH AIR. HOW MUCH COMPETITION ARE THEY GOING TO BE PROVIDING FOR YOU? ARE YOU WORRIED ABOUT THAT TYPE OF COMPETITION? > > I LOVE COMPETITION. GUY: HOW STRENUOUS DO YOU THINK THE COMPETITION IS GOING TO BE? > > IT WILL BE TOUGH, BUT AT THE END OF THE DAY, IT WILL BE SURVIVAL OF THE FITTEST. GUY: AND WHY DO YOU THINK THAT QATAR IS GOING TO BE THE FITTEST? > > I DIDN'T SAY I WOULD BE THE FITTEST, BUT I LOVE COMPETITION, SO LET'S SAY. -- LET'S SEE. ANNA: SPEAKING TO GUY JOHNSON FROM ABOARD A PLANE AT THE AIR SHOW, TALKING ABOUT A HOST OF SUBJECTS. SUSTAINABLE AVIATION, THAT IS CERTAINLY ONE OF THE THINGS THEY WERE DISCUSSING. LET'S TAKE A LOOK AT SOME OF THE EVENTS HAPPENING IN THE WEEK AHEAD. TODAY, U.S. MARKETS ARE CLOSED, SO NO TRADING STATESIDE. ON WEDNESDAY, WE WILL GET THE LATEST INFLATION PRINT OUT OF THE U.K., REALLY INTERESTING TO WATCH BECAUSE IT COMES JUST BEFORE A CENTRAL BANK MEETING. PLUS, A BUSY DAY ON CAPITOL HILL ON WEDNESDAY WITH FED NOMINATION HEARINGS TAKING PLACE. FINALLY ON THURSDAY, WE GET THAT BANK OF ENGLAND RATE DECISION. WILL IT COME DOWN SUBSTANTIALLY ENOUGH FROM 8.7% TO ALLOW THE MARKET TO WORK OUT OR GET RID OF SOME OF THOSE EXPECTATIONS? THE MARKET CURRENTLY PRICING IN FIVE HIKES FROM THE BANK OF ENGLAND. INTERESTING IN THAT CONTEXT TO TELL YOU THAT WE JUST GOT UPDATE FROM ONE OF THE BELLWETHER COMPANIES IN THE U.K., AND THEY SAY THE TRADING OVER THE LAST SEVEN WEEKS HAS BEEN MATERIALLY BETTER THAN HAS BEEN EXPECTED. THAT'S AN INTERESTING READ ON THE U.K. CONSUMER AS WE HEAD INTO A BUSY WEEK OF DATA ON THE U.K. AS THEY SAY, INFLATION DATA AT THE NEXT SHARE PRICE. 3% OVER THE LAST TWO DAYS. UP TODAY ON THE BACK OF THAT NEWS FLOW. WE WILL GET BACK TO THE MACRO SHORTLY. CENTRAL BANKS FIGHTING INFLATION. ANNA: THIS IS BLOOMBERG MARKETS. A TOUGH WEEK AHEAD FOR U.K. PRIME MINISTER RISHI SUNAK AS A PARLIAMENTARY VOTE ON HIS PREDECESSOR OREST JOHNSON TODAY AND LIKELY A BANK OF ENGLAND RATE HIKE THURSDAY. INTEL WILL RECEIVE 1 BILLION IN SUBSIDIES TO BUILD A CHIP FACTORY IN EAST GERMANY THIS IS AFTER THEY ANNOUNCED A $25 BILLION PLANT IN ISRAEL. THE WORLD'S LARGEST AIR SHOW RETURNS TO PARIS AFTER A FOUR YEAR HIATUS. WE WILL HEAR FROM SOME OF THE CEOS OF THE WORLD LARGEST AIRLINES. WELCOME BACK TO THE PROGRAM. THIS IS A SPECIAL EDITION OF BLOOMBERG MARKETS. THERE IS NO TRADING IN STOCKS OR BONDS IN THE UNITED STATES BECAUSE OF THE HOLIDAY. WE ARE DOWN BY 0.7% ON EUROPEAN STOCKS. BANKS STAND OUT TO THE UPSIDE, BENEFITING WITH RATES GOING HIGHER AND THE U.K. NARRATIVE THIS MORNING'S BEEN ABOUT SHORT IN INTEREST RATES WITH TWO-YEAR YIELDS AT LEVELS WE HAVE NOT SEEN SINCE 2008. U.K. TWO YEAR YIELD IS UP. SOME CLEAR DISAPPOINTMENTS ON THE CLOSE OF THE SESSION IN ASIA. WHAT WILL WE HEAR FROM THE CHINESE GOVERNMENT? WILL WE HEAR MORE STIMULATION? LET'S GET ANALYSIS NOW. LET ME ASK YOU ABOUT THE CHINA STORY. IT HAS CREATED SOME DISAPPOINTMENT IN MARKETS AROUND FISCAL STIMULUS. WHAT ARE WE EXPECTING TO HEAR? > > IT REALLY IS ALL ABOUT SPECIFICS AND ALL OF THE DETAILS IN WHICH THE CHINESE GOVERNMENT COULD POTENTIALLY REJUVENATE THE CHINESE ECONOMY. IT HAS BEEN FLAGGING EVER SINCE IT EMERGED FROM THAT COVID ZERO ERA. IT HAS BEEN A DISAPPOINTMENT AND CHINA WAS THE BIG POSITIVE STORY THIS YEAR BUT WE HAVE NOT SEEN IT HAPPEN YET. THEY ARE USING RATES AS A TOOL TO STIMULATE THE ECONOMY BUT IT HASN'T WORKED. INVESTORS IN PARTICULAR ARE LOOKING FOR THE CHINESE GOVERNMENT TO BE MORE SPECIFIC AND MORE DETAILED IN TERMS OF THE STIMULUS THEY CAN PROVIDE. PERHAPS THEY WILL USE A BROADER SET OF MEASURES. ANNA: WE ARE WAITING ON THAT SO THAT WILL BE CONTINUED. WE HEARD ABOUT THE MONETARY POLICY RESPONSE. THAT IS CHINA SO LET'S TALK ABOUT THE U.S. STOCKS WITH THE S & P IN THE NASDAQ WITH FIVE WEEKS OF GAINS FOR THE MARKET. IS THIS SOMETHING WE THINK CONTINUES. ARE WE HEARING INVESTORS SAY THEY WILL JUMP ON THIS? DO WE STILL HERE VOICES SAYING THIS IS NOT FOR REAL? > > I THINK WE HAVE HAD A LOT OF NAYSAYERS SAYING IT'S TOO GOOD TO BE TRUE. THE RALLY STEALS -- STILL KEEPS GOING ANYWAY. ONE OF THE CRITICISMS OF THE CURRENT EQUITY RALLY IN THE U.S. IS THAT IT'S TOO NARROW, IT'S NOT BROAD-BASED ENOUGH AND IT'S NOT SUSTAINABLE. THAT COULD WELL BE TRUE BUT IT'S NOT STOPPING THE RALLY NECESSARILY FROM CONTINUING. WHAT WE HAVE SEEN IS A MORE ENCOURAGING MIX IN TERMS OF THE ECONOMIC DATA IN THE U.S. AND HOW THAT PLAYS INTO THE FED'S CALCULUS. THE PAUSE IN JUNE HELPS TO SHORE UP SOME OF THAT SENTIMENT IN THE EQUITY MARKETS. AT THE SAME TIME, WE HAVE SEEN A SLOW DOWN AND SOME OF THE U.S. DATA, PARTICULARLY WHEN IT COMES TO THE BALANCE BETWEEN THE STRENGTH OF THE LABOR MARKET AND THE COST OF LABOR, THAT'S BEEN MORE OF A GOLDILOCKS SITUATION. WE'VE SEEN THE COST OF LABOR BEING IN CHECK WHILE THE LABOR MARKET ITSELF STILL REMAINS VERY RESILIENT. THAT IS COMBINED WITH A PAUSE FROM THE FED AT LEAST FOR JUNE. IT'S QUITE A BENIGN ENVIRONMENT FOR STOCKS HERE. ANNA: SO FAR, SO GOOD CAN A TIGHT LABOR MARKET IN THE U.K. COULD BE A HEADACHE FOR THE BANK OF ENGLAND. WE HAVE RESILIENT INFLATION HERE. INFLATION IS NOT COMING DOWN AS FAST AS SOME OTHER MARKETS, EIGHT 17% IS WHERE WE -- 8.7% IS WHERE WE ARE. > > AS YOU MENTIONED, 5% TO YEAR YIELD, WE HAVE NOT SEEN THAT IN 15 YEARS, 6% ON MORTGAGE RATES IN THE MARKET. IT FEELS LIKE BOTH INVESTORS AND CONSUMERS ARE BRACING FOR MORE PAIN FROM THE BANK OF ENGLAND WHEN IT COMES TO RATE HIKES. THAT'S THE EXPECTATION EVER SINCE LAST WEEK WHEN WE GOT THE EMPLOYMENT DATA THAT SHOWED WAGE GROWTH BIGGER THAN EXPECTED. THE INFLATION REPORT THIS WEEK CONTINUES TO SURPRISE TO THE UPSIDE EVEN IF THERE IS A BIG CHANCE IT WILL MECHANICALLY COME DOWN BUT OF IT DOESN'T, IT WON'T COME DOWN ENOUGH AND THAT'S WHAT WE WILL BE WATCHING. IT COULD STAKE MORE ELEVATED THAN ANYONE IS EXPECTING THAT WILL BE THE HEADACHE FOR THE BANKERS. ANNA: WE WILL KEEP AN EYE ON THE U.K. ASSETS AS A RESULT. THANKS FOR JOINING US. JOINING US NOW ON THIS SPECIAL EDITION OF BLOOMBERG MEETING -- BLOOMBERG MARKETS IS OUR NEXT GUEST. WE WERE TALKING ABOUT THE U.K.. WE HAD INFLATION IN THE U.K. RUNNING AT EIGHT POINT 7% LAST TIME AND IT'S EXPECTED TO DROP DOWN TO 8.4% WHICH IS NOT A HUGE DROP. WHAT IS THE LINK BETWEEN THAT INFLATION PRINT AND WHAT WE GET FROM THE BANK OF ENGLAND IN THE MONTHS AHEAD? > > I THINK THIS INFLATION PRINT WILL NOT BE ALL THAT IMPORTANT BECAUSE IT'S ALMOST A DONE DEAL. ALMOST CERTAINLY, THEY WILL GO NEXT TIME. WE NEED TO LOOK NOT JUST AT THIS INFLATION PRINT TO GET AN IDEA OF WHETHER THE BANK OF ENGLAND WILL DELIVER NEW RATE HIKES OR WILL DELIVER A RATE HIKE THE MARKET IS NOW PRICING IN. THIS REPORT ON INFLATION, THE CORE IS THE CORE MEASURE. CORE INFLATION IS STILL VERY HIGH. IT WOULD BE EASIER TO ARGUE THAT THE BANK OF ENGLAND IS GOING FOR RIGHT WAY. MUCH OF THE RATE HIKE IMPACT IS ON A FINE LINE SO THEY SAY LET'S NOT OVERDO IT. ANNA: WE ARE FOCUSED ON THE LONG AND VARIABLE LAGS. HOW MUCH IS THAT CREATING DELAYS AS FAR AS THE HIKING THUS FAR? FROM AN ECONOMIST PERSPECTIVE, WHAT DO WE NEED TO SEE IN THE LABOR MARKET TO PROVIDE LOOSENESS? IS THIS SOMETHING THAT'S IN THE GOVERNMENT PURVIEW? THE TIGHT LABOR MARKET AND THE INFLATION STORY ARE CLEARLY FRONT AND CENTER. > > THERE IS NOT THAT MUCH THE GOVERNMENT CAN DO. THE U.K. WOULD HAVE NEEDED MORE SCALED IMMIGRATION THAT'S EASIER TO PUT IN THE U.K. IT TYPICALLY COMES FROM EUROPE BUT WITH BREXIT, IT'S NOT AN OPPORTUNITY. THERE IS NOT ALL THAT MUCH U.K. GOVERNMENT CAN DO. LABOR MARKET CAN TRY TO KEEP PUBLIC-SECTOR PAY WHICH IS DIFFICULT. THEY WANT TO SEND A SIGNAL TO THE OVERALL LABOR MARKET THAT WAGE INFLATION IS TOO HIGH BUT ITS LIMITED FOR THE GOVERNMENT. FISCAL POLICY WILL NOT TURN EXPANSIONARY BUT IN THE U.K., IT MIGHT CONTRACT. IT WOULD HELP THE BANK OF ENGLAND CONTROLLING DEMAND. ANNA: LET ME ASK YOU ABOUT THE ECB AND WHERE YOU STAND ON THAT CONVERSATION. WE SAW A RATE HIKE EXPECTED IN JULY. YOU MAKE THE POINT IN YOUR NOTES THE WAY THE ECB IS FOCUSED ON THE WAY STORY AND THE IMPORTANCE OF THAT. WHAT DO YOU SEE IN WAGES IN THE EURO ZONE? WHAT IS THE KEY TAKEAWAY THERE? > > UNFORTUNATELY FOR THE ECB, WAGE OF NEAR-TERM LET'S SET LET -- LOOKS SET TO ACCELERATE. IT MIGHT GO IN GERMANY TO 7%. THE ECB HAS TO FORM AN OPINION WHETHER THIS IS A ONE TIME THING AND THEY ARE TRYING TO MAKE UP FOR THE LOSSES THANKS TO LOWER ENERGY PRICES LAST YEAR AND THIS YEAR OR WHETHER THIS IS THE START OF A DANGEROUS WAGE PRICE SPIRAL. CHRISTINE LAGARDE AT THE ECB SAID CORRECTLY LAST THURSDAY IT IS NOT A SPIRAL. I EXPECT THIS WAGE DEVELOPMENT TO BE A FACTOR AND WE HAVE GERMANY WERE WE ALREADY KNOW INFLATION WILL BE BACK TO 4%. IT'S LESS THE CURRENT WAGE DATA PUT MORE WILLINGNESS OF THE ECB TO LOOK THROUGH WHAT LIKELY WOULD JUST BE A TEMPORARY HIKE IN WAGE INFLATION TO THE UPSIDE FOR IT NORMALIZES. ANNA: THERE IS A BUZZWORD GOING AROUND MARKETS, GREEDFLATION. IT ADDS UP TO WHERE BUSINESSES ARE ALLOWED TO MAINTAIN MARGINS THEY JUST SEEM TO HAVE THAT KIND OF POWER. CHRISTINE LAGARDE WEIGHED INTO THAT POLITICALLY, TALKING ABOUT THIS. DOES THIS HAVE TO DO WITH THE INFLATION WE SEE IN EUROPE? > > NO, I THINK IT'S THE WRONG WORD. WITH A LOT OF COMPANIES RAISING PRICES, OTHER COMPANIES TOOK THAT IS SIGNAL TO RAISE PRICES WELL BUT THEY CAN ONLY RAISE PRICES IF THERE IS DEMAND. THE CENTRAL BANK WILL START TALKING ABOUT RESPONSIBILITY FOR INFLATION FOR THE CENTRAL BANK. THIS IS THE DEBATE THE EUROPEAN CENTRAL BANK CAN HAVE INSTEAD OF GETTING INTO THAT. ANNA: I WONDER IF THEY ARE LISTENING. LET ME GO STATESIDE WITH OUR CONVERSATION. WHAT IS YOUR EXPECTATION THERE? THE PAUSE NARRATIVE HAS BEEN SOLIDIFIED BUT NOW WE HAVE THESE DOTS THAT SUGGEST FURTHER HIKES. DO WE GET A COUPLE OF MORE HIKES FROM THE FED? > > IF WE GET ONE MORE RATHER THAN TWO, THE DOT PLOTS MAKE FORECASTING AS A SIGNAL OF INTENT. THEY WANT TO DO MORE TO GET INFLATION UNDER CONTROL BUT IF WE CONTINUE TO SEE MAYBE THAT U.S. WAGE INFLATION CONTINUES TO RECEDE TO WHERE IT'S TOLERABLE, THAT MEANS THE FED DOES NOT NEED TO DO MORE THAN ONE MORE HIKE. ANNA: MAYBE ONLY ONE MORE SO HOW LONG DO WE STAY AT THESE ELEVATED LEVELS? > > I WOULD SAY ROUGHLY TO THE END OF THE YEAR. WITH AN ELECTION APPROACHING, THE FED DOES NOT WANT TO RISK TOO MUCH OF A RISE IN UNEMPLOYMENT. AS THE ECONOMY IS DECELERATING, HOPEFULLY IT WILL NOT LEAD TO READ -- HOPEFULLY IT WILL NOT LEAD TO RECESSION. LABOR MARKET WILL PROBABLY SOFT AND IT MAKES GOOD SENSE FOR THE FED TO NOT RISK A SERIOUS RISE IN UNEMPLOYMENT. WITH INFLATION COMING DOWN, I THINK BY THE END OF THE YEAR, THEY WILL STRICTLY NEW BALANCE BETWEEN UNEMPLOYMENT AND THEIR INFLATION OBJECTIVE AND START RETURNING TO A MORE NEUTRAL, NORMAL FED FUNDS RATE WHICH ROUGHLY SPEAKING COULD BE AROUND 3.5%. ANNA: IT'S A COMPLICATED DYNAMIC BETWEEN ELECTION CYCLES AND FED POLICY. THANK YOU FOR JOINING US. COMING UP, THE PARIS AIR SHOW HAS RETURNED. GUY JOHNSON HAS SAT DOWN WITH THE AVALON CEO AND WE WILL BRING IN MORE OF THAT CONVERSATION COMING TO YOU SHORTLY FROM PARIS. THIS IS BLOOMBERG. ♪ ANNA: WELCOME TO BLOOMBERG MARKETS. THIS IS A U.S. PUBLIC HOLIDAYS AND NO TRADING IN EQUITIES IN THE U.S. BUT EUROPEAN MARKETS ARE TRADING AT A LOWER LEVEL. THE WORLD'S LARGEST AVIATION SHOW GETS UNDERWAY AS PEOPLE GATHER IN PARIS. GUY JOHNSON IS LIVE FROM THE EVENT WITH THE AVALON CEO. THANK YOU VERY MUCH INDEED. IT IS A BUSY SHOW IF THE FIRST TIME WE ARE BACK IN PARIS IN FOUR YEARS. THE LAST SHOW WASN'T 2019. SINCE THEN, THE INDUSTRY HAS BEEN THROUGH DIFFICULT TIMES AND IT'S NOW BOUNCING BACK WITH SIGNIFICANT VIGOR. DEMAND IS OFF THE CHARTS RIGHT NOW AND IS THAT DEMAND SUSTAINABLE AND IS THIS A NEW MODEL? IT'S A GREAT ENVIRONMENT TO BE A LEASING COMPANY OF WHICH AVALON IS ONE OF THE LARGEST. THIS IS THE COMPANY CEO AND JOINTS ME NOW. > > GREAT TO SEE YOU, THANKS FOR HAVING ME. DEMAND IS SUPERSTRONG SO IS IT SUSTAINABLE? > > ABSOLUTELY, WE PUBLISHED OUR OWN FORECAST ABOUT A WEEK AGO WITHIN THAT, WE HIGHLIGHTED ABOUT 3300 AIRCRAFT THAT WERE NOT PRODUCED DURING COVID. THAT ACCOUNTS FOR ABOUT 15% OF THE GLOBAL FLEET. THERE IS NO RECOVERY PLAN FOR THAT CAPACITY OVER THE MEDIUM TERM. BUT WE HAVE SEEN IS DEMAND SPRING BACK TO PRE-COVID TRENDS, DEMAND HAS CAUGHT UP WITH GROWTH TRENDS BUT SUPPLY WILL TAKE A NUMBER OF YEARS TO CATCH UP WITH THAT DEMAND. ZZ WE ARE HAVING THIS CONVERSATION WITH THE ACTUAL AIR SHOW WAS TAKING PLACE. IF YOU HEAR AIRCRAFT FLYING AROUND THE BACKGROUND, THAT'S THE REASON WHY. IN TERMS OF WHAT IS DRIVING THAT , DEMAND IS CLEARLY THERE BUT THERE IS ALSO THE ISSUE OF SUSTAINABILITY. HOW MUCH OF THE DEMAND IS BEING DRIVEN BY A NEED TO INCLUDE MORE SUSTAINABLE AIRCRAFT? > > THE BULK OF THE DEMAND GROWTH IS FOR THE GROWTH OF THE EMERGING MIDDLE CLASS AROUND ASIA. IN TERMS OF REPLACEMENTS, WE SEE THAT BROADLY SPEAKING, ONE IN EVERY TWO AIRCRAFT WILL BE PRODUCED OVER THE NEXT 20 YEARS AND IT WILL BE FOR REPLACEMENT OF TECHNOLOGY AIRCRAFT. AT ITS CORE, THE BIGGER AREAS OF GROWTH WE HAVE IDENTIFIED ARE INDIA, ASIA, CHINA AND LATIN AMERICA. THAT'S IN LINE WITH ECONOMIC ACTIVITY. THE BULK OF DELIVERIES WILL BE GOING THERE. WELL PASSENGER DEMAND HAS BOUNCED BACK STRONGLY, THE ABILITY OF THE INDUSTRY TO SATISFY THAT DEMAND IS NOT. GUY: BOEING IS HAVING PROBLEMS, AIRBUS IS HAVING PROBLEMS, THE ENGINE MANUFACTURERS ARE HAVING PROBLEMS. YOU CANNOT GET THE OVERHEAD BINS OR SEEDS OR LANDING GEAR. IT GOES ON AND ON. WHY HAS THIS INDUSTRY STRUGGLED SO MUCH? > > I THINK THERE WERE GENERAL SUPPLY CHAIN ISSUES AROUND THE WORLD FROM LOTS OF THINGS. IF YOU WANTED TO ORDER A NEW CAR, YOU HAD TO WAIT LONGER OVER THE LAST COUPLE OF YEARS. IT HAS GONE A LONG WAY BACK TO NORMALITY. THE ISSUE SPECIFIC TO AVIATION IS THAT DURING COVID, SUPPLY CHAINS WENT TO NEARLY ZERO. ALL OF THE SUBSUPPLIER'S ARE ACTUALLY HAVING TROUBLE AND THEY ARE WAITING TO HAVE THE DEMAND RESILIENT AND ALLOCATING RESOURCES WITH THE HELP OF MANUFACTURERS TO ACCELERATE THE DEEP DOWN SUPPLY CHAIN. GUY: YOU SAY WITHIN THE SUPPLY CHAIN, THERE IS THE CAUTION THE DEMAND IS SUSTAINABLE. THEY'RE NOT WILLING YET TO COMMIT TO SOLVING THE PROBLEM? > > THE SMALLEST SCALE SUPPLIERS OF STRUGGLED TO HAVE THE BEST CAPACITY IN MAINTAINING THE PRODUCTION CAPACITY. IT WILL HAVE A RAPID SNAPBACK FOR RECOVERY. GUY: YOU TALK ABOUT THE ABILITY OF FINANCING. CAPITAL MATTERS SO WHAT IMPACT IS IT HAVING? > > FROM HER PERSPECTIVE, IT'S GOT MINIMAL IMPACT ON THE DAY TO DAY BUSINESS. ALL OF OUR DEBT IS LONG-TERM AND THE VAST MAJORITY IS HEDGED OVER THE LONG-TERM. WE SEE INTEREST RATES GO UP BECAUSE THERE IS A STRONG INFLATIONARY ENVIRONMENT. THAT IS GOOD FOR DEMAND FOR AIRCRAFT AND INFLATION IS GOOD FOR ASSET OWNERS. IN TERMS OF COST OF CAPITAL, THE COST OF CAPITAL IS GOING UP OR LEASING COMPANIES LIKE ANY OTHER BUSINESS. AVALON'S OWN RATINGS FOR FITCH WERE PUT ON POSITIVE LAST WEEK. WE BELIEVE THEY'RE EASY ACCESS TO CAPITAL BUT IT'S A DIFFERENT PRICE POINT. WITH THEIR BUSINESS MODEL WHERE WE PROVIDE CAPITAL TO AIRLINES AND AIRCRAFT TO AIRLINES, THAT ALLOWS US TO REPRICE THAT CAPITAL. GUY: ARE AIRLINES HANGING ONTO THEIR AIRCRAFT LONGER? ARE WE GOING TO BE SEEN FLEETS BEING TWO OR THREE YEARS LONGER THAN THEY NORMALLY WOULD BE? > > UNQUESTIONABLY, WE SEE A HUGE TREND FROM AROUND THE WORLD AIRLINES TRYING TO EXTEND. THEY WOULD TYPICALLY EXTEND MONTHS IN ADVANCE BUT NOW THEY ARE MOVING OUT TO TWO OR THREE YEARS IN ADVANCE. THEY WANT TO ENSURE THEY HAVE WHAT THEY NEED. AS YOU MENTIONED, THERE IS THE UNCERTAINTY IN AIRCRAFT. GUY: ONE OF THE BIGGEST PROBLEMS THE INDUSTRY FACES IS WITH ENGINES. THERE IS A NEW GENERATION WHICH I ASSUME ARE MORE FUEL-EFFICIENT. THEY'RE ALSO MORE FRAGILE AND LESS DURABLE. ARE WE SEEING A SITUATION WHERE THEY ARE MORE FUEL-EFFICIENT BUT ONCE YOU BALANCE THAT AGAINST THE COST OF HAVING TO SHOP MORE OFTEN, THOSE TWO THINGS CANCEL OUT? > > WE ARE SEEING THE TREND. IT'S NOT JUST THEORY THEY ARE DELIVERING. THEY ARE DELIVERING FUEL EFFICIENCY AND ONGOING RELIABILITY. THERE ARE NO IN-FLIGHT SHUTDOWNS OR SAFETY ISSUES. BECAUSE OF DIAGNOSTICS, THEY HAVE TO GET REMOVED EARLIER THAN ANTICIPATED AND THAT INCREASES MAINTENANCE COSTS. FOR THE OVERALL ECOSYSTEM, THAT IS SWALLOWING UP THE FINANCIAL BENEFIT OF THE MORE FUEL-EFFICIENT AIRCRAFT BUT WE ARE SEEING POSITIVE TRENDS. WE ARE SEEING THE MANUFACTURERS MAPPING OUT A PATH TOWARD A LONGER, MORE DURABLE ENGINE BUT IT'S TAKING LONGER THAN ANYONE ANTICIPATED. GUY: YOU SAID YOUR TARGETING PLACES LIKE INDIA WHERE THESE ENGINES ARE STRUGGLING AT THE MOMENT. IS THAT HAVING A MEANINGFUL IMPACT ON ENGINE CHOICES? YOU GO WITH THE PRATT & WHITNEY? DTF HAS STRUGGLED BUT OUR PEOPLE MAKING ACTIVE DECISIONS BASED ON WHERE THEY ARE BASE BECAUSE OF THE DURABILITY ISSUES? > > AIRLINES IN THE REGION HAVE BEEN OPERATING WITH BOTH ENGINE TYPES AND THEIR CLEARLY MAKING THEIR FLEET DECISIONS BASED ON THE DURABILITY ISSUE AND CONSISTENCY OF OPERATIONS. THAT'S BEEN A HUGE DRIVER FOR AIRLINES. GUY: DO YOU THINK THE BIG MANUFACTURERS SHOULD EMBARK ON NEW PROJECTS OR FIX THE CURRENT ISSUES? > > I THINK THEY NEED TO GET THESE ENGINES TO GET WHAT THEY WERE ADVERTISED TO DO WITH DURABILITY AND CONSISTENCE. GUY: WHAT ABOUT THE AIRBUS IS AN BOEINGS? SHOULD THEY MAKE SURE THEIR SUPPLY CHAINS ARE SOLID AND EVERYTHING IS WORKING FINE BE WHERE THEY PURCHASE? > > DELIVER WHAT IT SAYS ON THE TIN IN THE MANUFACTURERS HAVE LEARNED IS OF OTHER STAKEHOLDERS THAT THE RISKS ASSOCIATED WITH LARGE-SCALE INNOVATION AND AIRCRAFT FROM INTRODUCTION OF NEW TECHNOLOGY, IT TAKES TIME. IF YOU LOOK AT ANY OF THE AIRCRAFT BROKERS, ALL HAVE SUFFERED PROBLEMS IN DIFFERENT SIZES, SHAPES AND FORMS BUT THE CONSISTENT POINT IS HIS INTRODUCTION OF NEW TECHNOLOGY IN A AN INDUSTRY THAT'S REGULATED AND REQUIRES WRITTEN LEVELS OF RELIABILITY TAKES A LONG TIME AND HUGE CAPITAL INVESTMENT. GUY: HOW MANY AIRCRAFT ARE FILLING UP AT THE TIME? > > VERY FEW. GUY: SO THIS IS AN INDUSTRY THAT HAS WORK TO DO? > > ABSOLUTELY AND ALL THE RIGHT PEOPLE ARE HERE TO DO IT THE GREAT THING ABOUT THE INDUSTRIES WE HAVE REINFORCED THE RELIABILITY OF DEMAND. GUY: GOOD TO SEE YOU AND THANKS FOR STOPPING BY. BACK TO YOU. ANNA: THANKS VERY MUCH. THE PARIS AIR SHOW, IT'S BEEN A FEW YEARS SINCE WE BEEN HERE. THEY ARE CARRYING ON IN THE BACKGROUND OF THAT CONVERSATION. YOU CAN SUBSCRIBE TO THEIR OFFICIAL NEWSLETTER AND YOU CAN DO THAT ON THE BLOOMBERG WEBSITE. STILL AHEAD, GLOBAL CENTRAL BANKS ARE TIGHTENING TO CONTROL INFLATION BUT ARE THEY REALLY? WE WILL TALK TO OUR NEXT GUEST ABOUT A PROSPECTIVE THEM THE GLOBAL RATES ENVIRONMENT COMING UP SHORTLY. THIS IS BLOOMBERG. ♪ ANNA: WELCOME TO BLOOMBERG MARKETS, A SPECIAL EDITION BECAUSE OF THE U.S. PUBLIC HOLIDAY. BIG WEEK FOR U.K. WATCHERS WITH INFLATION DATA DUE OUT MIDWEEK IN A BANK OF ENGLAND DECISION TO THURSDAY. VERY GOOD TO HAVE YOU WITH ME. I HAVE BEEN READING YOUR ESSAY AND IT HAS A DEPRESSING TITLE. IT'S FULL OF MORTGAGE MISERY. TAKE US THROUGH WHAT KIND OF MISERY WE ARE SEEING IN THE MORTGAGE MARKET. > > MORTGAGE RATES, THE AVERAGE IS GOING UP TO 6%. THAT'S A BIG STORY BECAUSE MANY PEOPLE ARE COMING OFF THE FIXED RATE. THEY SAID IT WOULD ADD THE EQUIVALENT OF 300 POUNDS PER MONTH PER HOUSEHOLD. IT WILL CAUSE A LOT OF PEOPLE PAIN'S THE BANK OF ENGLAND IS UNDER A LOT OF PRESSURE. MARKET EXPECTATIONS OF INTEREST RATES HAVE SHOT UP BECAUSE INFLATION HAS BEEN STRONGER THAN PEOPLE EXPECTED. ON THE OTHER HAND, THE MORTGAGE RATE POINTS TO A RECESSION BECAUSE PEOPLE COULD GET CRUSHED BY THE PRICE OF THE MORTGAGES GOING UP AREA THEY ARE BETWEEN A ROCK AND A HARD PLACE. ANNA: TALK US THROUGH THE LAGS IN THE MORTGAGE MARKET IN THE U.K. HOW MUCH HIKING WE HAVE SEEN FROM THE BANK OF ENGLAND AND HOW MUCH IS STILL YET TO BE FELT IN THE MORTGAGE MARKET? WE ARE FIXED OVER TWO YEARS YOU MIGHT NOT HAVE SEEMING INTEREST RATE HIKES TO DATE AND YET WE WILL HAVE MORE TO COME. > > UNLIKE THE U.S., WITH LONG-TERM LOANS AND THEY GO FASTER IN THE U.K.. THIS IS MORE EXTREME THAT IT WAS DURING THE LAST HOUSING BUBBLE. MORTGAGE LENDING HAD COLLAPSED AND THERE WERE LOTS OF MORTGAGES THAT PEOPLE COULDN'T EFFECTIVELY AFFORD. THAT POINT THE HOUSING MARKET WAS MORE VULNERABLE. THE MORTGAGE MARKET IS MUCH LESS VAR IN A BOWL THAN IT WAS. -- VULNERABLE THAN IT WAS. IT MEANS THE BANK OF ENGLAND HAS TO TAKE THAT INTO ACCOUNT. THEY CANNOT SEE THE EFFECT OF THAT. ONE BANK ESTIMATE SAID IT'S BEING FELT BY THE ECONOMY. INFLATION AT THE MOMENT HAS BEEN SERIOUSLY AFFECTED BY THE WAY THE ENERGY PRICES ARE KILL -- ARE CALCULATED IN THE U.K. AND ELSEWHERE. WE DON'T GET THE INFLATION READING UNTIL AUGUST OF THIS YEAR AND BY THAT POINT, IT MIGHT TAKE A LONGER TIME TO RAISE RATES. THE BANK HAS TO MAYBE PROP RATES BACK UP. TILL -- IT'S UNTIL WE GET THE JULY DATA IN AUGUST. ANNA: IT MAY BE MORE OF A DOVISH HIKE FROM THE BANK OF ENGLAND. WE WILL SEE WHETHER WE GET THAT SO THANK YOU FOR JOINING US. THANK YOU VERY MUCH FOR JOINING US. LET'S GET A GLOBAL PERSPECTIVE ON MARKETS. NICE TO HAVE YOU WITH US. THANK YOU FOR JOINING US. WE WERE TALKING ABOUT THE VIEW THAT THE U.K. IS BETWEEN A ROCK AND A HARD PLACE. SIMILAR WORDS MIGHT APPLY TO THE U.S. ECONOMY. WE ARE AWAITING DATA ON THE U.S. IN TERMS OF WHETHER WE NEED FURTHER TIGHTENING FROM THE FED. WE ARE TALKING ABOUT LAGS AND WHAT HAS BEEN DONE IN TERMS OF RATE HIKES. > > I THINK WE WILL BE WAITING 18 MONTHS. HOW DO YOU CLOCK THAT. WE TALKED TO INVESTORS ABOUT THE FACT THAT WHEN YOU ADJUST THE THERMOSTAT IN YOUR LIVING ROOM, THE TEMPERATURE DOESN'T CHANGE IMMEDIATELY, IT TAKES TIME FOR THAT TO FLOAT TO THE MARKET WE ARE ACTUALLY AWAITING JOBS DATA AND NONFARM PAYROLLS AND TRYING TO GUESS IF THEY'VE DONE ENOUGH. WHY WE ARE WAITING AND GUESSING, THEY HAVE HALTED HIKES AND ADDED FURTHER DISCOMFORT INTO THE MARKETS. ANNA: DO YOU THINK IT'S A MISTAKE FOR THE FED TO BE ON PAUSE? > > I DON'T THINK THEY HAVE ANY CHOICE. THEY BEEN ON PAUSE TO THAT INTO THE MARKET AND INTRODUCE THAT DISCOMFORT. THEY CANNOT THEN GO RAISE RATES AGAIN BECAUSE THEY WILL PUT SHOCK INTO THE MARKET. THE MARKET WILL GET SCARED THAT THEY DIDN'T DO ENOUGH AND THERE WILL BE THE WHIPSAW. THEY ARE BETWEEN A ROCK AND A HARD PLACE WITH JUST BECAUSE OF BEING PAUSED AND IF THEY WAIT FOR MORE DATA, AND IF THEY REIGNITE INTEREST RATES, THE MARKET WILL PANIC. IT WILL BE INTERESTING TO SEE HOW CONSUMERS REACT THIS SUMMER. THE NUMBERS ARE PRETTY BAD. THE MARKET IS A LITTLE OVERBOUGHT AND WE COULD HAVE A SCARY FALL. ANNA: DO WE HAVE TO INTERPRET THIS SO NEGATIVELY? IS THERE WERE AN ARGUMENT THAT MAYBE THE ECONOMY NEEDS SHORT RATE RISES BUT AT WHITER INTERVALS THAN WE HAD SEEN PREVIOUSLY? IS THAT A JUSTIFIABLE ARGUMENT ON THE PART OF THE FED OR OTHER CENTRAL BANKS? > > THE FED HAS TO OPERATE WITHIN THE CALENDAR THEY BEEN OPERATING IN. THE MARKET IS TRYING TO PREDICT IF THE FED WILL CONTINUE ITS PATH. THEY CANNOT OPERATE OUT OF THOSE BANDS IN QUARTERS AND MONTHS. AS PART OF THEIR ISSUE IS THAT THEY HAVE LATER DATED THAN THEY ARE ABLE TO ADJUST TO. THEY ARE FORCED TO OPERATE WITHIN AN OLD LEGACY SYSTEM THAT IS NOT AS AGILE AS IT NEEDS TO BE. ANNA: WHAT DO YOU MAKE OF STOCKS RIGHT NOW. WE HAVE SEEN STOCKS RISE DESPITE THE BED COMING THROUGH YESTERDAY. IT WAS A SLIGHTLY HAWKISH DOVE. WE SAW STOCKS CONTINUING TO RISE THROUGH ALL OF THAT. DOES THAT LOOK SUSTAINABLE TO YOU? > > IT DOES NOT. I'M CONCERNED WITH HOW THESE MARKETS WILL MATURE THROUGH THE SUMMER INTO THE FALL. THE REAL DATA UNDER THE HOOD IS UGLY. I THINK THE MARKETS HAVE BEEN GAME OF FIVE WITH ALL THE FREE MONEY BEING PUMPED INTO THE SYSTEM. IN THE TIDE GOES OUT, WE WILL SEE U.S. SHORTS ANNA WILL NOT BE A PRETTY WALL. ANNA: WHAT DO YOU DO WITH STOCKS AT THE MOMENT? ARE YOU INTERESTED IN ANY? > > WE HAVE POSITIONED OUR PORTFOLIO INTO COMMODITIES. WE OWN 75% COPPER IN ALMOST 15% LITHIUM. A LOT OF GOVERNMENT MONTE -- MONEY IS BEING PUMPED INTO THE ELECTRIFICATION OF HER ENERGY GRID IT DEMANDS FOR THOSE METALS CONTINUES TO RISE. OUR NYSE TRADED CHARGE MANAGES THOSE COMMODITIES AND THERE'S A FLIGHT TO WALLY WHEN IT COMES TO MARKETS WE FROM EQUITIES WITH A LOT OF EXECUTION RISK AND A LOT OF RATE EXPOSURE. IT'S HARDER AND HARDER FOR COMPANIES TO GET DEBT AND HARDER FOR COMPANIES TO RAISE CAPITAL IN THE MARKETS. THE UNDERLYING COMMODITIES THAT RISE WITHOUT EXECUTION RISK IS HOW WE CHOOSE TO PLAY IT. ANNA: I WAS INTERESTED IN YOUR THOUGHTS ON CHINA AND COMMODITIES IN THE CAR SECTOR. CHINA IS TARGETING COMPLETE CHARGING UNITS BY 2030. IS THERE OPPORTUNITY IN THAT KIND OF STATEMENT? > > NO DOUBT, CHINA HAS BEEN EARLY AND COMMITTED TO THIS FOR A LONG TIME. JANET ZOOMS OUT AND THINGS IN 100 YEAR PLANS WERE THE U.S. THANKS INTO AN FOUR YEAR INCREMENTS WHICH IS HORRIFYING. CHINA IS AHEAD OF THE CURVE NOT ONLY AN ELECTRIFYING THERE GRID IN THEIR VEHICLE FLEETS BUT THEY HAVE SECURED OVER 50% OF THE GLOBAL SUPPLY OF COPPER, LITHIUM, NICKEL EMMA COBLE ALL PROCESSING OF ELECTRIC ASIAN IS COMING THROUGH CHINA WHICH IS WHY I THINK YOU SEE SECRETARY BLINKEN SITTING OVER THERE AND PLAYING NICE WITH CHINA BECAUSE WE ARE FORCING -- WE ARE FORCED INTO BUSINESS WITH THEM AND WE HAVE TO PLAY NICE AND WITHOUT THEM, CHOOSING TO SEND US THE METALS WE NEED FOR OUR GREEN ENERGY FUTURE, WE HAVE A VERY SCARY ENVIRONMENT FOR WHAT THE PRICE OF THOSE UNDERLYING METALS SHOULD RISE TO. ANNA: WE HEARD SOME NICE WORDS, TO USE YOUR PHRASE, FROM BOTH SIDES AFTER THOSE MEETINGS IN BEIJING. THANK YOU VERY MUCH FOR BEING WITH US. INTEL ANNOUNCING PLANS TO EXPAND IN GERMANY AND IN ISRAEL. WE HEARD FROM THEN ABOUT EXPANSION IN POLAND AS WELL. LET'S START WITH GERMANY, STORY YOU HAVE FOLLOWED CLOSELY. WHAT IS THE DEAL WITH GERMANY? > > ESSENTIALLY FOR INTEL, THEIR REMOVAL OF SOME OF THE PRODUCTION FROM EAST ASIA AS THEY ARE LOOKING TO OTHER PLACES TO PUT SOME OF THEIR PRODUCTION TO DO YOU RISK FROM THE GEOPOLITICAL SITUATION IN EAST ASIA. THAT IS COINCIDING WITH AN EFFORT ON THE PART OF THE EUROPEANS AND THE AMERICANS TO UNSURE A LOT OF THEIR CHIP PRODUCTION. THE INTEL ROLE HAS BEEN ESTABLISHED A COUPLE OF YEARS AGO THAT THEY WERE GOING TO PUT THIS PLAN IN EFFECT AND IT HAS COME TO FRUITION BUT WITH A MUCH YOUR COMMITMENT ON THE SIDE OF THE GERMAN GOVERNMENT WHEN IT COMES TO THOSE SUBSIDIES. GERMANY ITSELF IS ALSO LOOKING TO BUILD OUT ITS OWN CHIP PRODUCTION. THIS INTEL PLANT, WE'RE LOOKING AT 6.8 BILLION DOLLARS IN SUBSIDIES AND NOW WE ARE LOOKING AT 10 BILLION EUROS IN SUBSIDIES OF THAT'S A MASSIVE STEP UP IN A MASSIVE COMMITMENT TO INTEL ON THE PART OF THE GERMAN GOVERNMENT THAT'S WHAT WE WERE HEARING TODAY IN BERLIN. ANNA: INTEL IS ALSO EXPANDING IN OTHER PLACES. CHIPMAKERS ARE MOVING BEYOND EAST ASIA AND THIS SEEMS TO BE A TREND WE ARE SEEING FROM MICRON TO INTEL TO OTHER CHIPMAKERS, TRYING TO FRIEND SURE A LOT OF THEIR PRODUCTION FACILITIES. > > ABSOLUTELY, THERE IS A HUGE CHIPMAKING PRODUCTION THAT'S HAPPENING IN KOREA AND TAIWAN -- AND TAIWAN AND JAPAN. THERE IS A CONCERN THAT A LOT OF THE CHIP BUSINESS IS DEPENDENT ON THE WORLD WHERE THE GEOPOLITICAL RISK STILL AN OPEN QUESTION. THERE HAS BEEN A LOT OF EFFORT FROM THE U.S. WITH THE CHIPS AND SCIENCE ACT AND FROM THE EU. THERE IS A BIG COMMITMENT THEY WANT TO BRING THIS INTO A REALM THEY FEEL THEY CAN CONTROL BECAUSE IT'S A CRUCIAL PART OF THEIR SUPPLY CHAIN AND MANUFACTURING. WITHIN EUROPE, WE ARE SEEING A BIGGER COMMITMENT TO SUBSIDIZING THE CHIP INDUSTRY AND THIS TARGET OF OF 20% OF THE CHIP PRODUCTION BEING DONE IN EUROPE BY THE YEAR 2030 WHICH IS A HUGE COMMITMENT FOR A BLOCK WHICH IS CURRENTLY ONLY DOING 10% OF THE WORLDS CHIP MANUFACTURING. ANNA: SO THIS IS A REAL STEP UP. EUROPE HAS AMBITIONS IN THIS PARTICULAR SECTOR. > > YES, THAT IS THE COMMITMENT IS THIS TARGET OF 20%. THAT'S BEEN A COMMITMENT FOR A WHILE AND SINCE THE WAR IN UKRAINE AND SINCE GERMANY AND THE REST OF EUROPE HAS BEEN TALKING ABOUT THE SUPPLY CHAINS, THAT ORIGINAL COMMITMENT IS ONLY BECOME MORE PERTINENT TO THIS STORY. DURING THE PANDEMIC, THERE WAS A BIG FOCUS ON CHIP MANUFACTURING AND EVEN NOW, THERE IS A MASSIVE COMMITMENT ON THE SIDE OF THE GERMANS AND THE REST OF EUROPE TO BUILD UP THAT CHIP MANUFACTURING. THE BIG CONCERN IS BERLIN IS WHAT THAT MEANS FOR LOCAL PRODUCTION. A LOT OF THE CHIP MANUFACTURING THAT WAS ALREADY IN EUROPE WAS ABOUT POWER SUPPLIES THE AUTOMOTIVE INDUSTRY. WHAT THEY ARE CONCERNED ABOUT IS MAKING SURE THEY ARE ATTRACTING COMPANIES LIKE INTEL AND TSMC, THE BIG TAIWANESE SEMICONDUCTOR INDUSTRY COMPANY TO BUILD THESE VERY HIGH TECH CHIPS IN EUROPE. IT'S NOT JUST ABOUT BEING ABLE TO SECURE PART OF THE SUPPLY CHAIN. IT'S ALSO ABOUT BUILDING OUT THE SUPPLY CHAIN FOR THE MUCH MORE HIGH TECH CHIPS WE ARE SEEING THAT ARE BEING BUILT IN EAST ASIA. ANNA: THANK YOU VERY MUCH. IT'S INTERESTING HOW THIS IS ABOUT RIVALRY WITH TSMC. COMING UP, WE WILL BE BACK TO PARIS FOR THE AIRSHOW. . GUY JOHNSON WILL SIT DOWN TO TALK ABOUT THE LEASING MARKET. ANNA: WELCOME BACK TO BLOOMBERG MARKETS, A SPECIAL EDITION FOR THE U.S. PUBLIC HOLIDAY. NO TRADING STATESIDE BUT EUROPEAN MARKETS ARE LOSING A LITTLE BIT OF GROUND THIS MONDAY MORNING. WORLD'S LARGEST AVIATION SHOWCASE HAS RETURNED TO PARIS WITH PLAYMAKERS RETURNING TO ANNOUNCE NEW DEALS AND INNOVATIONS. GUY JOHNSON IS THERE LIVE WITH A SPECIAL GUEST. GUY: THANK YOU VERY MUCH INDEED. WE WERE JUST JOKING -- IS AT THE GODFATHER OF THE LEASING INDUSTRY OR THE GRANDFATHER OF THE LEASING INDUSTRY? > > 50 YEARS SINCE I'VE FORMED THE COMPANY. GUY: HOW MUCH IS THE INDUSTRY CHANGE SINCE THEN? > > A LITTLE BIT, BACK THEN, THE LEASING COMMUNITY WAS NONEXISTENT BUT BY 1975, 1% OF THE AIRCRAFT IN THE AIRLINE WORLD RELEASED. TODAY, WE ARE AT 55%. GUY: THIS IS A PERFECT ENVIRONMENT TO BE ALEASER. > > IT'S CLOSE TO OPTIMAL. YOU GUYS HAVE GOOD CREDIT RATINGS. THEREFORE, YOU WILL GET BETTEL -- BETTER DEALS ON CAPITAL AND RATES IN THAT ADVANTAGES THE AIRLINES WHEN THEY COME TO YOU. > > WE HAVE TWO SIGNIFICANT ADVANTAGES. WE BIDEN FOLKS A WE ORDER HUNDREDS OF AIRCRAFT, ALMOST 400 AIRCRAFT IN THE PUMP LINE -- IN THE PIPELINE YET TO DELIVER. WE NEGOTIATE REASONABLY GOOD PRICING ON THE WHOLE LINE OF AIRBUS PRODUCTS. SECONDLY, WE ENJOYED LOWER COST OF CAPITAL THAN MOST OF THE AIRLINES. THAT GIVES US A SIGNIFICANT ADVANTAGE. WE HAVE AIRCRAFT DELIVERIES IN 2024 AND SO ON THAT ARE NOT AVAILABLE NOW TO A NEW BUYER WHETHER IT'S AN AIR WINE OR NOT JUST AIRLINE OR NOT. WE HAVE THE PRODUCT, TRACT OF FINANCING AND AIRLINE TRAFFIC DEMAND GROWING MUCH FASTER THAN ANY WAS PROJECTED. GUY: LET'S TALK ABOUT THE SUSTAINABILITY IN A MOMENT BUT GOING BACK TO THE AIRCRAFT YOU GOT ANY WERE EXPECTING, ARE YOU GOING TO GET THOSE AIRPLANES? > > WE WILL GET THEM BUT WE WILL GET THEM LATE. RIGHT NOW, BOTH ARE STRUGGLING WITH PRODUCTION ISSUES. THEY ARE TRYING TO RAISE PRODUCTION RATES. AT THE SAME TIME, THEY ARE STRUGGLING TO GET THE AVIONICS AND ENGINES TO WORK. WHERE BUILDING THAT INTO A BUSINESS CASE THAT DELAYS ARE THERE. WE WILL GET COMPENSATION FOR THOSE DELAYS AND AIRLINES WILL HAVE TO MAKE DO WITH WHAT THEY HAVE. WE ARE ALSO EXTENDING A LOT OF LEASES. SOME ARE SET TO EXPIRE THIS YEAR AND NEXT YEAR BECAUSE AIRLINES ARE BEING DEFENSIVE AND WANT TO MAKE SURE THEY HAVE ENOUGH LIFT. ALMOST EVERY LEASE WE HAVE THAT IS COMING UP FOR EXPIRATION IS GETTING EXTENDED. GUY: YOU TALKED ABOUT THE STRONG DEMAND FOR TRAVEL RIGHT NOW. DO YOU THINK THAT'S SUSTAINABLE? > > YES, DURING THE PANDEMIC, THERE WAS THIS PSYCHOLOGY THAT BUSINESS TRAVEL WILL NOT RECOVER -- THAT BUSINESS WILL TRAVEL WILL NOT RECOVER. WHAT WE ARE GETTING FROM THE AIRLINES IS THE BUSINESS CLASS AND FIRST CLASS ARE RUNNING AT HIGH LEVELS. GUY: IT SORT OF PREMIUM LEISURE TRAVEL. > > IT'S HARD TO TELL BUT BUSINESS TRAVEL IS RECOVERING. AND LEISURE TRAFFIC HAS RECOVERED MUCH FASTER. GUY: IS THERE A DANGER THE AIRLINES ARE OVER ORDERING NOW? > > YES. GUY: HOW SIGNIFICANT IS THAT DANGER? > > THERE IS A MENTALITY ORDERING JUST TO PROTECT FUTURE SLOTS. WILL ALL OF THOSE AIRCRAFT DELIVER AS CURRENTLY CONTRACTED? WILL MANY GET DEFERRED. WILL AIRLINES OPT OUT OF THE AIRCRAFT OR SWAP WITH OTHER BUYERS? GUY: IT'S A RATIONAL THING TO DO NOW. > > LOOK AT IT AS A DYNAMIC ORDER BOOK, IT'S NOT JUST STATIC. GUY: WHY DO YOU THINK THIS INDUSTRY HAS WOUND UP IN THE PICKLE IT'S IN? > > FIRST OF ALL, WE HAVE HAD FREQUENT FIVE YEARS WERE AIRLINES WERE EXTREMELY CAUTIOUS. THEY HAVE LAID OFF A LOT OF PILOTS, A LOT OF ENGINEERS, THEY CUT BACK ON INFRASTRUCTURE, INVESTING AND MAINTENANCE FACILITIES. NOW IT'S A CATCH-UP MODE. THE DEMAND IS MUCH GREATER THAN WHAT THEY ARE ABLE TO SUPPLY. IT'S A GOOD PHENOMENON. GUY: WHAT'S THE LESSON TO LEARN FROM THAT? > > NOT TO OVERREACT BECAUSE IF YOU OVERCOMPENSATE, YOU WILL GET HARMED DURING THE RECOVERY. GUY: DO YOU THINK THAT'S SOMETHING THAT WILL BE LEARNED? THE DANGER RIGHT NOW IS THE INDUSTRY GOES FROM A STANDSTILL DURING THE PANDEMIC TO A HUGE BOOM AND THEN SLOWS DOWN WEEKLY ONCE AGAIN. > > AREA GROWTH SLOWS DOWN BUT WHAT IS NEGATING THAT TO SOME DEGREE IS WE HAVE A PLACEMENT CYCLE. AIRCRAFT AT 25 OR 30 YEARS OF AGE, NUMBER WIDE BODY AIRCRAFT, EVEN IF AIR TRAFFIC GROWTH SEEMS TO TAPER, THERE IS A BIG REPLACEMENT CYCLE. GUY: THEY ARE BEING REPLACED BECAUSE THEY DON'T FEEL SUSTAINABLE? > > LOWER MAINTENANCE COSTS AND IN MANY COUNTRIES NOW, THE OLDER AIRCRAFT, YOU HAVE TO HAVE ADDITIONAL TAXES AND LENDING FEES ARE HIGHER SO THERE IS AN INITIAL COST BESIDES FUEL THAT ARE BEING OPPOSED BY AIRPORTS AND GOVERNMENT AUTHORITIES. GUY: THE IDEA IS TO RENEW THE FLEETS > > PROGRESSIVELY. GUY: DO YOU THINK THESE GOALS ARE ACHIEVABLE? > > PERSONALLY, I THINK IT'S A VERY TOUGH GOAL TO ACHIEVE. I THINK THE INDUSTRY WILL DO EVERYTHING IT'S -- EVERYTHING IT CAN TO GET IS AS CLOSE AS PASSABLE -- AS POSSIBLE BUT I WOULD NOT BE SURPRISED IF IT WAS FIVE OR 10 YEARS. GUY: WHAT KIND OF DEALS ARE YOU TALKING ABOUT? > > WE ARE SEEING AIRLINES THAT PROJECTED MAYBE IT 3-5% GROWTH IN 2023 COMPARED TO 2019. THEY ARE NOW SAYING WE HAVE 15-20% GROWTH. DEMAND. THEY NEED AIRCRAFT IN THE SHORTEST POSSIBLE TIMEFRAME. THEY WANT CURRENT LEASE IS EXTENDED THEY ARE NO LONGER ASKING FOR DISCOUNTS ON EXISTING AIRPLANES. . THEY ARE ASKING FOR CAPACITY GUY: IN THIS ENVIRONMENT, WHAT DO YOU DO? WILL YOU KEEP ORDERING? DO YOU SAY THIS MARKET IS GETTING CRAZY NOW AND I WILL BACK AWAY? > > WE ALREADY HAVE A BACKUP LOG OF ALMOST 400 AIRCRAFT. GUY: GIVEN WHAT'S HAPPENING, YOU WILL TAKE A LIST PRICE RIGHT NOW? > > WE STILL HAVE SOME PRICE PROTECTIONS WE ORDER THE LIMITED NUMBER OF ADDITIONAL AIRCRAFT BASED ON OUR EXISTING CONTRACTS. WE WILL NOT JOIN THE HERD IN ORDER PLANES FOR 2030 AND SO ON. GUY: YOU THINK THOSE SLOTS WILL ULTIMATELY OPEN UP AGAIN? > > EXACTLY. THERE WILL BE AIRLINE FAILURES, THERE WILL BE LEASING COMPANIES AND OTHERS WHO WANT TO DISPOSE OF ASSETS. I'M NOT WORRIED WE WILL BE FOOD IF AIRPLANES. GUY: LISA: GUY: FANTASTIC TO GET YOUR INSIGHT. THANK YOU VERY MUCH INDEED. ANNA: THANKS VERY MUCH. THEY WERE TALKING ABOUT HAVING A LONG HISTORY IN THE AVIATION SECTOR. IF YOU ARE INTERESTED IN THE AVIATION SECTOR AND AIRSHOWS, THE PARIS EDITION NEWSLETTER IS AVAILABLE TO YOU. IT WILL CONTAIN ALL OF THE NEWS COMING FROM THAT EVENT AND ALL THE DEALS BEING DONE AND ALL THE ANNOUNCEMENTS BEING MADE AND THE CONVERSATIONS TO BE HAD THAT ARE AVAILABLE TO YOU ON THE BLOOMBERG WEBSITE. LET'S GET TO SOME OF THE ITEMS ON OUR AGENDA NEXT WEEK -- THIS WEEK. THE U.S. IS CLOSED DUE TO A HOLIDAY AND THAT'S WHY WE HAVE A SPECIAL EDITION WEDNESDAY WE GET THE LATEST INFLATION PRINT. 8.4% IS THE TARGET. THE FED NOMINATION HEARING WILL CALM AS WE GET THE RATE DECISION FROM THE BANK OF ENGLAND. FIVE RATE FROM HERE ARE STILL PRICED IN TO THE GUILT CURVE. WE WILL GET THE BANK OF ENGLAND TAKE ON THAT LATER THIS WEEK.

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