Rates Debate Heats Up, UK Bank Tax Coming, Luxury’s Unsold Secrets

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0:09 This is the Bloomberg Daybreak Europe podcast. Good morning. It's Friday, the 16th of October. I'm Caroline Hepka in London. Coming up today, Fed Chair Kevin Walsh keeps markets guessing on interest rates as Andrew Bailey and central bankers from the ECB play down inflation fears. The UK Chancellor gets ready to raise taxes on banks to fund cost of living support and shore up the public finances. Plus, trading places.

0:35 The EU prepares powers that could shut Chinese goods completely out of the single market. And we look at why luxury brands will soon have to disclose how much unsold stock they shred or burn. Let's start with a roundup of our top stories. Fed Chair Kevin Walsh has stuck to his mantra of giving markets no clear steer on interest rates ahead of this month's meeting. Speaking at the IMF, he said he won't prejudge the decision.

1:03 At the Federal Reserve, we made very clear that we would deliver price stability, and we removed a dose of accommodation about a month ago.

1:11 I don't prejudge meetings.

1:12 I don't believe in saying now what I might do at the meetings that we have in the balance of this year. But that was the situation.

1:22 You just disappointed half of the audience.

1:23 I know. They can all turn it off.

1:26 It's a new chapter at the Fed, and we're not in that business anymore.

1:30 Okay, well, we haven't switched anything off, of course. Rate hike bets fell during his remarks, while the S & P 500 and Nasdaq futures hit session highs, as Walsh also called AI a major boost to productivity. Kevin Walsh is among a host of key central bankers who have been sharing their thoughts at the IMF summit as fears over rising prices grow. However, the Bank of England Governor Andrew Bailey said that he sees little evidence yet of of inflation becoming embedded here in the UK.

2:02 We've got the first round effects of energy prices. We've got inflation just over 3%. The question for us is, what are we seeing and what do we expect to see in terms of it passing through into indirect effects and then into second round effects? And two things on that. One is it's early days, so we mustn't really form any very strong views on this, I think, because it's too early. But to the extent we have seen evidence, it's quite subdued.

2:28 Andrew Bailey added that the UK economy is proving to be more resilient than the central bank had expected. And at the ECB, Governing Council member Olli Renn echoed that message. Speaking to Bloomberg, Finland's central bank chief had this to say.

2:43 Growth outlook in Europe is better today than it seemed at the beginning of the year. European economy has shown resilience. Growth is not brilliant maybe, but pretty good and has improved in the course of this year.

2:59 Olly Wren added that policymakers will have more information on growth and inflation ahead of the final rate decision of the year. The ECB has raised interest rates twice this cycle, with investors now focused on the 17th of December decision. France's finance minister says that high borrowing costs are helping to keep lawmakers focused on repairing the public finances. The sell-off in French government bonds reflects concern that France is not cutting its deficit fast enough with debt at around 118% of GDP. Roland Lescure told Bloomberg that the turmoil is helping to focus political minds.

3:39 We have two guardrails that allow the budgetary discussion to stay on course. One of them is what we call Article 49.3. We can change the budget compared with the one we tabled in two weeks ago. We can put it in front of parliamentarians and say, take it or leave it. If you don't like it, you have to make the government fall.

3:59 Roland Lescure there, as the French Parliament began debating next year's budget, the government's bill includes 43 billion euros of measures aimed at reducing the deficit, but reaching a compromise could prove difficult with Parliament deeply divided and a presidential election six months away. Here in the UK, the Chancellor of the Exchequer, John Healey, is set to raise taxes on banks in order to stabilise the public finances. Bloomberg understands that the levelling is one of the major measures that Healey has asked the Independent Office for Budget Responsibility to evaluate ahead of Budget Day. It comes after the Chancellor talked up the sector in an interview with Bloomberg yesterday.

4:43 These are a really important part of the British economy. They're a part of the jewel, if you like, in the British economic crown, a big contributor to the economy and, you know, an important part of our business.

5:00 But speaking to reporters after that Bloomberg interview, Healy added, that said, I've got decisions to take in the budget and I'll set those out in two weeks' time. Indonesia's stock index has fallen by the most since 1998 after MSCI said that the country no longer merits emerging market status. The Jakarta Composite Index fell 8% at the open, triggering a halt before falling a further 3%. Bloomberg's Anthony Stevens says that there is a risk that Indonesia gets ejected from the index below that as well.

5:39 That raises the prospect of it being uninvestable even by active investors who are not following these indices passively, right? If you have a mandate, an equity market mandate across Asia Pacific, you cannot invest in things that are not in any index. So that is one doubt. And you're seeing that in the Indonesian index, it's down 11%, but a lot of the foreign-owned names are already limit down, which.

6:01 Is 15% in Indonesia. Anthony Stevens, as the MSCI is now consulting on whether to classify Indonesia as a frontier market on a standalone basis. MSCI says that there are significant concerns around market dysfunctioning, including suspected coordinated trading and a lack of enforcement. To that in stocks news. Elsewhere, three children and one teacher have been killed by a shooter at an Oregon school. A seven-year-old child and a teacher were also taken to hospital with injuries, according to police chief Mike Krantz.

6:38 This is a terrible tragedy, and we are working hard to investigate this incident and get as much information as possible out to the public. These things take time, and we appreciate your patience as we work through this very difficult process.

6:53 Mike Krantz, police chief in Bend, Oregon, during a press conference yesterday evening, he went on to say that the suspect, a 16-year-old Bend resident, was followed into the school by a member of the community and killed before police arrived. The school district is cancelling all activities and city leaders will brief media again later today. Now, in some trade news, the European Union is preparing to create new trade powers that could shut off access to the single market. It is part of a fresh push to cut the bloc's trade deficit with China. Here's Bloomberg's Min Min Lo.

7:30 We are already hearing from sources that the EU is looking at coming up with new measures, including a sort of kill switch that will allow them to quickly eject firms and countries that are attacking the EU economy. And of course, this is primarily targeted at China with the Tweet campaign. deficit ballooning with China. We just got those trade data out this week for September and EU's deficit with China has hit a record $ 35 billion in September.

7:58 China's exports grew by 36% on year in September and so this has been an ongoing issue.

8:06 That was our China correspondent Min Min Lo. EU leaders have asked the European Commission to develop a proposal by the end of the year. A senior U.S. official says that President Trump did not order any limitations on Ukraine's access to SpaceX's Starshield satellite technology. Now, it follows accusations from Ukraine's President Zelensky that restricted access led to civilian deaths.

8:32 Heather Connolly from the American Enterprise Institute says that the rift between the U.S. and Ukraine is deepening.

8:39 We've definitely entered a new chapter here in this week, and it's the combination of the president's decision to purchase Russian diesel, the slowing down of Starlink and the, you know, not giving the Ukrainians information of incoming Russian missiles. And I think the fact that President Zelensky now is in a desperate situation. He does not have the air defenses.

8:59 Right.

9:00 And we've just seen just the intensification of these Russian Shahid missiles. drones, these jet-powered drones. And, you know, no leader would sit idly by as they're continuing to be attacked.

9:11 That was Heather Conley, Senior Fellow at the American Enterprise Institute. It comes as the EU is aiming to fast-track approvals for a satellite venture to rival SpaceX. It's called Project Bromo. Now, those are a few of our top stories. Let's think about the markets then. Reaction to Fed Chair Kevin Walsh being so sort of upbeat and optimistic about AI's impact on the economy in the U.S. that helped to bolster stock futures.

9:36 U.S.

9:36 Stock futures are now up by almost two-tenths of 1% for the S & P 500 and NASDAQ. We're up seven-tenths of 1% for the U.S. stock's 50 futures. We've also seen a rebound in Asia stocks. Chipmakers recovered after a sell-off yesterday on Wall Street. And so, we see gains for the MSCI Asia-Pacific Index currently up by 1.6%, the Nikkei 225 up by 1.6%. as oil prices are down, but still trading above $ 105 about for Brent crude futures.

10:14 Those are the markets. In a moment, we're going to bring you a special report on the luxury industry, shredding clothing, something that may come to an end soon. Before that, though, another story that's caught my attention today and a lot of people's attention Tesla has finally shown off its new generation of Roadster. This is an electric vehicle that can fly in inverted commas. Commentators losing their minds over the air thrusters along the lines of it can actually freaking fly. Well, sort of. The demo model drove up a ramp. It did a kind of barrel roll flip. other performance stunts using air thrusters that have been developed in partnership with SpaceX engineers. The Roadster is not expected to go into

11:00 production until 2028. The flying version reserved only for a select few, only for invite-only buyers, and it isn't approved for public roads. And yet, amongst all of this, it's absolutely going to be the water cooler, the coffee break discussion, I think, of the day. To anyone of a certain age or just Michael J. Fox fans out there, it feels like Back to the Future has come to life.

11:24 Who is biffing this tale? Even the advertising looks like the movie theatre posters, the cars with the lights in the back. It's certainly futuristic. Will it fit into a London car parking space? It is fascinating. Look, it's the new generation of EVs. And also on price point, they're competing now, these new electric vehicles. So the Roadster is one of them. Just fascinating. We have a Bloomberg story on it for you. So I'm going to put a link to it in our podcast show notes. And you can enjoy the demo as I did today.

11:54 Right.

11:55 It is the end of the IMF World Bank meetings in Bangkok, which saw the fund upgrade global growth. And in the final few hours, a discussion between the Federal Reserve Chair, Kevin Walsh, and the Managing Director, Kristalina Georgieva. Lisa Brown-Ritz is in Bangkok. Walsh has talked about a massive investment surge in the US, the AI boom striking, given the investor anxiety that we've seen about AI in recent days. They couldn't actually settle on a name, though, for it. The industry's artificial intelligence versus President Trump's superintelligence.

12:31 Georgieva suggested non-human intelligence, Lisa.

12:36 Lighthearted moment at a time when Kevin Warsh is in a rather awkward position as the senior ranking US official here in Bangkok representing US policy as someone who doesn't want to say anything about policy one way or another to give forward guidance other than broad sweeping frameworks. Nonetheless, short, he was talking about how the massive investment surge in the US really was driven by artificial intelligence as well as other industries and how that was giving the US more tailwinds than maybe in other places. That said, he didn't.

13:10 Say much that people wanted to hear.

13:12 People wanted to know, how does he view the fact that inflation metrics have come in hotter than expected over the past reads this week in the United States? He wasn't gonna comment on that. He made that very clear. He did, though, really talk about international cooperation, how globally central bankers seem to be facing the same kind of pressures of rapid inflation and that there was a global tightening cycle underway that he welcomed. But we didn't learn that much other than that he is in a rather awkward position as sort of chief diplomat for the United States at a time where he wants to say as little as possible.

13:47 Yes, that was interesting, wasn't it? Lisa, you've also spoken to the UK Chancellor John Healey, and it looks like a higher UK bank levy is coming in the budget. That will be of great interest to our UK listeners.

14:04 He wasn't going to comment about anything when I tried to get him to really explain what kind of bank levy there was. He said that would go into the realm of speculation, and speculation around tax policy has gotten us into trouble before in the past.

14:19 So he made that very clear.

14:21 What he did say- was that the big banks in the United Kingdom are the crown jewel of the country. And he was talking about the importance of attracting business at a time where there were questions about the fiscal sustainability of the budget. So really not giving much sense, but kind of giving a nod to perhaps some of the conversations that he also wouldn't reveal anything about that he's been having with some of the leaders of some of these banks that have been highly critical of some of those plans for the taxes, most notably from Barclays and JP Morgan.

14:52 Yeah, absolutely. And of course, we have to watch out for actually what comes on the 28th of October. But yes, Barclays and JP Morgan have been very critical, you know, warning against any increase in the bank levy in the UK. Okay, let's talk about then the energy shock, the fallout from the wars. Now, this is the common challenge, isn't it, for countries around the world. And one of the big talking points at the IMF World Bank meetings, in terms of The warnings that the IMF had for governments about deficits, what do you take away from this meeting overall and what the message from the IMF was? So there are a couple of.

15:32 Takeaways, not only from the IMF, but in conversations that I've had with a lot of people. Number one, the shock that we're seeing with higher oil prices in the wake of wars in a number of different places is one of a number of sequential inflationary shocks that we have seen and that we will likely continue to see.

15:49 And that this is a very new regime for policymakers to be grappling with. That's the sort of base benchmark understanding for a lot of people here. Second thing is a real questions about the two sided risk of artificial intelligence. The idea that there is the risk of the debt overhang being particularly pernicious and maybe some of the influence of the actual investment is not being as positive or as productivity inducing as people expect. That's second, the third and this really was IMF managing director Kristalina Georgieva's big message.

16:24 The risk in debt right now is with developed markets, not developing markets. And that ultimately, there is a fear that any kind of disruption in developed market bond markets could infect the rest of the bond universe beyond. And that I think is really an underlying fear at a time where fiscal concerns are preeminent and supply shocks are ongoing.

16:49 And I think that that's kind of one big piece. But the overall message is that despite all of that, there has been an incredible amount of resilience in the global economy.

16:57 Yeah, fascinating. Also, there were a lot of ECB speakers and they also reflected that, didn't they? So it's worth mentioning Olli Renn, for example, the Finnish central bank governor, ECB governing council member, also talking about this, that actually that they are not seeing second round impacts in terms of inflation, which I think is sort of worth noting.

17:20 Yeah, it sort of suggests that maybe the ECB won't have to do quite as much if there isn't necessarily any kind of runaway in inflation expectations. We heard something similar from Klaus Knott, who is in the running to take over as ECB president. He was saying something similar. That said, There is a feeling here in Bangkok that Europe is in a bit of trouble right now and needs to change a number of things to attract investment and to improve productivity and the dynamism of the economy.

17:52 And that this is sort of a key pivot point for the continent. And that is something that a lot of people have been talking about.

17:59 Yeah.

18:00 And Lisa, thank you. Lisa Brownfield, co-host of Bloomberg Surveillance in Bangkok. They're on the IMF World Bank meetings. Thank you. Stay with us. More from Bloomberg Daybreak Group coming up after this. Well, speaking of Europe, let's turn our attention to luxury goods companies. They sometimes destroy products that they can't sell in order to keep retail values high. But new European regulations mean that that soon may all be revealed in terms of what they shred and burn. Angelina Rasque is our luxury reporter in Paris and joins us now for more on this story. Angelina, how much do luxury businesses destroy goods and how did all of this come to light?

18:49 Yes, hello, good morning. Absolutely. I mean, in terms of the data, it's quite hard to find.

18:57 But there's a piece of data from a European Environment Agency. And they say that in 2020, between 4 and 9 percent of all textiles products in Europe were actually destroyed even before use. And this issue of destroying unsold goods in the luxury space came to the spotlight a little bit more this year because there was a trial in Hong Kong that involved Chanel. regarding facts that took place a decade ago. But still, it was very revealing. Basically, former warehouse workers of Chanel were caught 10 years ago trying to conspire to steal goods that were meant to go to the shredder. And in the sentencing, the judge wrote that basically Chanel would destroy between 10,000 to 20,000 20,000 fashion products once every three to six months using

19:54 their shredding machine.

19:55 And why is that?

19:56 Because luxury goods, typically they try to avoid doing heavy discounts because doing heavy discounts really hurts the aura around their brand.

20:07 So that was the practice.

20:08 I mean, Chanel said that these numbers no longer reflect the current practices as they've all adopted more sustainability commitments.

20:20 But still, that was very revealing.

20:22 Yeah, absolutely. The judge wrote that so clearly. It gave some parameters and numbers. Well, what do the new rules mean? How tough and watertight are they going to be? Yes, indeed.

20:35 So basically, the EU has adopted from July this new regulation that bans the destruction of unsold goods, and it follows a French regulation that was adopted four years ago. I mean, basically, you're no longer meant to destroy unsold goods, and that applies for all, I guess, the fashion industry, not just the luxury.

20:57 But there are some loopholes, and I For instance, handbags, which are.

21:02 Critical to the industry because they carry the highest margin, are excluded from this new regulation.

21:11 So this is an essential piece of the business.

21:16 If you have also a garment whose logo is very hard, because you will be spared the destruction of that garment if it's hard.

21:28 To take off the logo from that good as well.

21:30 And if you, let's say, also have put a product for sale via charity or donation and it hasn't sold within eight weeks, you can also end up destroying it.

21:43 So there are different loopholes.

21:44 The main difference with the French regulation that was adopted four years ago is that France enables recycling, whereas.

21:51 Now the EU law no longer.

21:54 Allows recycling because it's considered destruction. So there's actually quite a lot of debate when it comes to people that we've spoken to whether recycling equals destruction.

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