Welcome to DAYBREAK Australia.Marty Stroud, what's in Sydney? We're counting down to Asia's majormarket opens. I'm Annabel Jewellers in Hong Kong.And the top stories this hour, Asia's chip and tech stocks set to take thespotlight after and video delivers a bullish sales forecast, bolsteringconfidence in the AI frenzy. Anglo American agrees to talks withlarger rival BHP, opening the door to what could become the biggest miningdeal in over a decade. Plus, we speak live with BNZ GovernorAdrian Orr about the central bank's hawkish hold and why he's still worriedabout sticky inflation.
That's a big conversation coming up aswe continue to watch really the balance of risks when it comes to theseeconomies, deciding when that first easing move will come.We do have a bit more data just coming through right now across the Bloombergwhen it comes to Australia. PMI, these are the numbers.The main flash manufacturing PMI coming in a changed at 49.6 are still in thatcontraction territory. The composite number coming in at 52.6.Also a little bit of weakness from the previous reading of 53.The preliminary services number maintaining a little bit of strengthabove 53, but still a little bit of.
Softening from the previous readingthere as well. So we have seen recently the RBA justresuming that conversation about rate hikes potentially at its previous Maypolicy meeting before deciding, of course, to stand pat.But on these balance of risks, we are seeing some signs that economicindicators are starting to soften here after just a string of tightening.Let's take a look at how all of this is reading through as we look at thefutures picture across Australia and how Sydney is setting up for the start ofthe trading session. We are seeing quite a bit of weaknessexpected there.
We've got Sydney futures down by justabout 1% though even as of course we've seen sort of the big risk factor of ofwhat we saw across markets this week. The investor video forecast shatteringestimates the boom still very much intact, but some of these concernsthroughout the Fed minutes showing that sort of higher for longer narrativeremains very much on hold. We're seeing a bit of a struggle forsentiment today. New Zealand looking pretty flat at themoment. Chicago Nikkei futures will be watching,of course, those air and chip related sectors to outperform.China futures looking a little bit.
Weaker as well.BELL Evan, Heidi, it really is that focus onNVIDIA and the performance that we're seeing after us as well, because you cansee this climb here around 6% at this point.You mentioned some of those key takeaways from the numbers so far,really strong sales, a bullish outlook. We've got a stock split coming through.That's all I want to say there, because we do actually have a lot of coveragecoming up ahead with our team. But let's take a look at what happenedin the intraday session or broader session here, because futures are justcoming online this morning and you are.
Just seeing them again, modestly higher,but fairly rangebound so far intraday. As I said, it actually was a story ofdeclines that came through. We had the Fed meeting minutes comingout telling us that officials really no rush at this point in time to cut rates.We did actually see the two year yield just climbing somewhat, the dollar alittle higher as well. But the action very much what'shappening in after hours today and yes, away from Nvidia, another one quickly tomention is what's happening with Live Nation because actually we're seeingthat stock there dropping as much as 10%.But we do understand that the US Justice.
Department is seeking to break up LiveNation and Ticketmaster. That is a Bloomberg scoop and we'll havemore details on that just ahead. But as we said, really, that emphasisand that attention, everything over the course of this week has come back to invideo. And actually, Bloomberg Intelligencesays the company's results prove the continued strong demand momentum for itschips. Senior semiconductor analyst GunjanSobhani joins us now for more on Kunshan.We know the expectations going into these numbers were sky high, but yetagain, the company seems to have been.
Able to meet those or even exceed them.Yeah. I mean, this has become sort of the newnorm now. We again expectedexactly what happened. However, I want to point out, themagnitude of the beaten raised this time around was a tad bit lower than what wehave grown accustomed to see in the high single digits or double digits.But we think the capital return to shareholders by 10 to 1 stock split 150%increase in the dividend and the free cash flow increase that we have beenseeing should offset if there were any concerns around the growth.And.
How much longer can this extend?Right. Just every time we sort ofmore than impressed by this stock and by the company and by the outlook, is thissustainable? All from the visibility we have, itlooks like it is sustainable. Again, it's very hard.It's a beginning. So you don't see such a story.At least I have not seen this story in the sector for the past 20 years.So something very unique. We are going from visibility of a yearout and at this point the demand signals continue to be strong.Look, their top 40% customer base, which.
Is the top four cloud and Hyperscalers,have increased their CapEx spending for calendar 2024 by 44% and those make upabout 40% of India's revenue. So if you just focus on those who aregoing to spend almost 50% more this year, that alone can drive this rally.We are also seeing significant demand outside of this cloud customer basecoming from consumer Internet companies, sovereign mentalities, which the companypositively guided to being high single billion dollars this year.So a lot more demand from other areas coming in, supporting sort of thiscontinuation of this growth. So for as much as we have visibilityinto 25 and 26 fiscal, we think this can.
Continue.Yeah, it's really that question of where you're at sort of in that demand cycle.This is actually something that Jensen Huang has been speaking about in theearnings call. If we take a listen to what he said.The next industrial revolution has begun.Companies and countries are partnering with NVIDIA to shift the trillion dollarinstalled base of traditional data centers to accelerated computing.And build a new type of data center in factories to produce a new commodity.Artificial intelligence. It's not just about, of course, being,you know, the focus on the data centers.
What else are we hearing about the otherbusiness divisions and also these new chips, for instance, that it's bringingonto the market? Yeah.I mean, just like I said, the growth is now you're seeing sort of starting inenterprises, right? Other sovereign and regional entities.And the next chip, which is the black rail architecture, which we expect tosustain this growth really is not really a chip.It's a system, it's a platform solution. Don't forget there's a big piece ofsoftware offering that they have that's has just started, but we expect almost100% growth in that business as well,.
Which will start showing up insignificant billions of dollars of revenue in the next 2 to 3 years.John, there was talk about sort of new pipeline offerings.Right. Is there any indication that there's arisk of sort of self cannibalization for its products if people are moreinterested in what's to come? Um, I wouldn't say it's selfcannibalization. I would say that there could be sometiming shifts where if you had if a customer had an option to wait a coupleof quarters to get the more better performing product they might decide todo.
So I will remain the supply rep for allproducts, remain constrained so they could very well easily ship that productto another customer who's willing to take that right now.So it could cause, like I said, an intermediate short term, near termtiming shift, but I don't think it should cannibalize any of theirrevenues. That was Bloomberg Intelligence Seniorsemiconductor analyst consensus, Bonnie, there.And let's get more on the broader market analysis and the key takeaways forinvestors, as well as those NVIDIA numbers bringing our guest, DeborahCunningham.
She's CIO of Global Liquidity Markets atFederated Homes and joins us in the Hong Kong studio this morning.And and Deborah, as we were saying, there was so many expectations from alot of investors that that we would see. So rally, perhaps even in video managedto impress the market and also bet that perhaps that it could it could broadenout to other sectors as well. What's your view on that?You know, I think by slightly exceeding expectations and getting to a point thatmaybe is lowering some of the expectations going forward, it allowsfor the market to continue on its pace. But I don't know that it actually causesa huge rally going forward.
I think thatcertainly the outlook from an AI perspective and NVIDIA and other techcompanies allows for amazing assumptions of growth.Given this is a sector that is going to be impacting the education sector, thedefense sector. I'm in the asset management sector.We have various uses that we're using business, social.All sorts. So I think there's plenty of room to go.I'm not sure it's today based on these earnings.What do you see then? Testing.Then.
If you're saying that the rally won't besustained, what's going to be then what? What drives it weaker?Is that your expectations around the US economy?Do you see weakness there in the consumer segment, for instance?I'm not saying that it won't be maintained.I don't think that go too much further. I think it'll it'll be sort ofmaintained at the levels where it is now.Expectations could be, you know, higher if the US economy continues to performquite well. You know, when you look at theemployment situation, there's no real.
Thought process that that will beslowing down at any point in the near term.You know, inflation, the Fed's notes just came out that basically confirmedhigher for longer for a period of time that where we are is going to be theplace we stay at, that it's restrictive enough.They don't need to go higher. They don't need to go lower becauseinflation still has some stickiness associated with it.So I think we're looking more for at least in the initial time framemaintenance rather than continued outperformance.Maintenance, does that also include.
Perhaps a bit of a more of a rotationout of the rate sensitive sectors and maybe taking a better look at or acloser look at value? Definitely value we think is is is onthe upswing there. You know, it was beaten down very farfor a long period of time. And we're now actually to the pointwhere we think that that turnaround is solid and will continue.So, yes, we do think that that value in a broader base of stocks may be whatsustains and, you know, is the next is providing the next leg forward.You say cash remains king? I mean, how muchhow much would that be?.
And I guess in a balanced portfolio atthis point for cash now?Well, you know, when we were in a zero rate environment for such a long periodof time, ten out of 12 years, people got very good at bucketing their cash.So there's operating cash, strategic cash, core cash.And only operating cash at that point remained in the cash sector, very small,probably 5% sector of most people's allocations.Ultimately, though, at this point, I think we have a lot of operating andcore cash in there because rates are at greater than 5%.And to go with that longer dated cash.
Into other sectors at this point, youtake a hit in what you're getting from, you know, kind of a not guaranteed but apretty much solid five plus percent at this point.So I do believe there will be some rotation out, but I don't think it'sdown to that, you know, sort of 5% level that it was in the zero rateenvironment. I think that was kind of a floor.So we're looking at something that's sort of being maintained somewhere inthe 5 to 10% area. You know, speaking ofunusual rate environments, it's been a very busy year and and a bit for Japan,Right.
What sort of expectations have you builtaround what the board will do and how much kind of how exciting this next legof the rally might be, given that we have seen a bit of a pullback and maybesome redirection of flows either to domestic bond markets or to othermarkets, you know, India or China either?Well, we certainly think that there is positive momentum in Japan.And you know, what we've seen from a negative ten basis points to a positiveten basis points from a, you know, official rate perspective is is, youknow, leading that, it's hard to see where it gets to a point.I mean, I think the economy has to.
Continue to be diverse and growing.And, you know, with GDP negative in the first quarter, there's room to grow,obviously, at this point. So they expectations are, again, sort oftempered because of where we think, you know, kind of the diversity and thegrowth is coming from in Japan and more probably you get that diversity in thatgrowth when you go more broadly into other Asian sectors at this point.And what are those other Asian sectors that you're looking at, in particular inHong Kong? Now, you mentioned before that you'vebeen in Singapore. What's standing out to you?Well, it certainly seems like, you know,.
A full employment picture seems to beeverywhere. The consumer seems to be very strong inmost regions. China definitely is has slowed down, butseems to have reached kind of a bottom plateau and is starting to pick back upagain. So I'm not sure there's outstandinggrowth in any particular area at this point.But we're also very long in a business cycle.So, you know, just to be able to maintain and keep going, I think is isproof of, you know, a recession or something that is, you know, negativefrom a growth perspective being on the.
Horizon.It's not great outstanding growth that we're looking for, but more broadlydiversified across the region, maintained growth.All right, Deborah, thanks so much for your time this morning.That was Deborah Cunningham, the CIO for Global Liquidity Markets at FederatedHermes. And you can get a roundup of the storiesyou need to know to get your day going. In today's edition of DAYBREAK.Of course, that focus very much on Nvidia, as you can expect.It's available on day be go on the terminal.It's also available on mobile in the.
Bloomberg Anywhere app.We'll have more ahead on DAYBREAK Australia.This is Bloomberg. India decides.As the votes come in. Can Prime Minister Modi win a thirdterm? And what direction will India take next?With a focus on the economy, social divisions and climate change actionsthat will influence the global story? Bloomberg's Haslinda Amin is live inDelhi, bringing you the latest updates as election results from the world'slargest democracy are revealed. Coverage starts June 3rd on BloombergTelevision.
Context changes everything. Time for morning calls ahead of the Asiatrading day. Goldman Sachs CEO David Solomon says hecurrently expects that the Fed will not cut rates this year.He still doesn't see compelling data that would support the move.But Solomon adds that the average American is already feeling the pinchfrom inflation. He says that could hide the risk of areal and palpable economic slowdown. Meanwhile, some investors see a weakChinese currency, burnishing the appeal of Hong Kong listed shares over those onthe mainland.
LOMBARDO The air.And you expect Hong Kong stocks to draw in more capital as the local currency ispegged to the dollar. SHIELDS Investors for higher for longerUS rates. Lombard Odia adds that fears of a yuandevaluation could further motivate investors to favor H-shares instead.And this is so Hong Kong investment conferences.Beginning Thursday, we're going to actually hear from Sigmoid Capital'sWendy Chen. She's joining us in the next hour for apreview. We'll also have more in store for you onFriday with special guests that are.
Joining us live in DAYBREAK Asia.And though it is the Bank of Korea decision day today expected to keep thebenchmark rate steady, it's releasing new policy decision in the next fewhours. The central bank may also be revisingits growth forecast higher. Let's bring out Korea economy editor SamKim, who joins us now for more. So, you know, like a lot of theseregional central banks are having to kind of recalibrate what the trajectorylooks like in this last part of the cycle.Right. And potentially, does that includepushing back, easing expectations, given.
That we've seen the rate of growth, someof the other indicators come in hotter than expected one?Well, you're quite right about it. I think the Bank of Korea is one of manycentral banks that have to, like you said, recalibrate their outlook for theeconomy because the economy is just simply doing too well, especially withSouth Korea. The exports are doing very well, betterthan expected. In fact, that's largely because there'sa lot of semiconductor demand. And Korea happens to be the biggestmaker of the memory chips, advanced memory chips that get supply tocompanies like NVIDIA.
And that's really leading to gains inexports and that's helping the economy expand much faster, which means that,hey, the Bank of Korea has no real reason or incentive togo ahead with an early policy pivot. So we're expecting a rate hold todayagain, and we might be seeing that for some time to come, too.Yeah, exactly. That's why I was going to ask here, Sam,is that sort of the expectation that we just stay standing pat for quite aperiod to come for the be okay. Yeah, that's right.For today, it's very likely because the economists that we've surveyed, everyone of the 21 economists we've talked to.
Expect a cut in a rate hole today.Many of them are thinking that a rate cut is going to happen probably sometimein the fourth quarter. You know, Governor, we said earlier thismonth that the BOC might even have to reconsider whether a rate cut is evenneeded this year. We're going to have to watch whether heretract that comment today or even builds upon it.But, you know, for the time being, because the economy's doing so well, itexpanded much faster than everybody forecast in the fourth, fourth quarter.We're thinking that, hey, a rate hole is going to stay for quite some time.So what are some of the other concerns.
For the broader economy that that wouldbe weighing on the mind of the big committee as I make these decisions?I think one factor that could be taken into consideration going forward is thecredit market. You know, there's been a sort of a slumpin the real estate sector with a lot of developers struggling with the debt thatpiled up during the pandemic era. How does that fall unfold in the comingmonth with so much debt that there is going to be a lot of restructuring?If that plays out in a way that hurts the economy, I think the book is goingto be thinking, taking that into considerationas it sort of recalibrate its timing for.
The rate cut, potentially a privatespending slowdown. That could be one concern for the bank.But we're seeing resilience in consumer spending for now.So there there are a few factors, including export slowdown possibly.But for now, things look pretty strong. A career economy out as a sentiment say,with central banks will be speaking with the RV.NZ governor Adrian Orr later this hour. He'll be joining us to talk about what'scoming next for the BNZ after that hawkish hold yesterday.This is Bloomberg. Another story that we're following veryclosely, shares of Live Nation.
Entertainment falling and U.S.trading. Bloomberg revealing a Justice Departmentmove seeking the breakup of the business over antitrust violations.Sources telling us that the case is related to Ticketmaster's unrivaledcontrol of concert ticket sales. A 2010 merger of Live Nation, as well asTicketmaster, has really been the subject of several antitrustinvestigations ongoing. So, you know, this is such aninteresting case, right, in terms of this antitrust suit that we're findingis now upon them and some of the details that we know it's going to be filed inthe Southern district of New York, the.
Dispute will be seeking remedies,including the breaking up of Live Nation.And this is really, according to Bloomberg sources, who have asked not tobe named, given that this is highly sort of confidential information.We did see that big reaction of about 10% or so for Live Nation trading in thelate part of the session. But this really kind of is is just oneof the latest antitrust measures being taken by the Biden administration bill,given that we have also seen cases against the likes of alphabet likes ofAmazon dot com as well. Sothis is the biggest US concert promoter.
So be very very interesting and you knowtrickling down in terms of the you know the huge criticism that we saw over theTaylor Swift tickets in 2022 and the sort of massive demand that we saw andsome of that and how it played out, though.Well, they actually certainly bungled that, which of course, sparked a lot ofinterest in it. The the the massive demand for TaylorSwift tickets that we saw last year. But again, as you said, it it isinteresting when you put it in the context of what we've really seen fromthe Biden administration over the past few years, which is making competition areally key component of its economic.
Policy.And that's why we're seeing these cases, as you said, against companies likeAlphabet's, Amazon as well. But this one here, the latest and as yousaid, Live Nation, the biggest US concert promoter, it merged with theticketing giant Ticketmaster back in 2010.There were a lot of different provisions around that deal.It seems like the companies, perhaps according to the DOJ, violated some ofthose conditions of the deal, and that's really why that investigation is comingabout just now. So we'll see, of course, as we as wesaid, what happens from the US, DOJ.
Given right now it's a Bloomberg scoop.Yep. And we'll continue to watch that.Of course, lots of concert goers will be very interested in what's going on thereas well. But take a look at how U.S.futures are ticking along at the moment. Was it a little bit of optimism?S&P futures said it was very interesting reaction or was it a non reaction acrossthe equity side when it comes to the big video numbers?But we did have techs sort of up in late hours.So the bulls really just being emboldened by another set of, you know,all round stronger numbers, the momentum.
In that trade.This is Bloomberg. You're watching DAYBREAK, Australia andthe top political stories that we're tracking this morning.Israel is recalling its ambassadors to Ireland, Norway and Spain after thethree countries backed recognition of a Palestinian state.They plan to formally recognize a Palestinian state compromising Gaza andthe West Bank. Joining around 140 other nations thatalready do so. The move underscores how Israel's waragainst Hamas in Gaza is focusing attention on the issue of Palestinianstatehood.
Taiwanese opposition lawmakers are setto make a final push on Friday to pass a bill aimed at reining in a newpresident, launching his administration. The move is likely to inflame tensionson the island after protesters gathered outside the legislature this week tovoice their anger. They say the amendments could be used toundermine the new government. UK Prime Minister Rishi Sunak has calleda snap general election for July 4th. It sets his Conservative party up for abruising six week battle, trying to stop Keir Starmer's Labour Party from takingpower. Labour's lead opinion polls by about 20percentage points since Sunak took over.
From Liz Truss in late 2022.Now is the moment for Britain to choose its future, to decide whether we want tobuild on the progress we have made or risk going back to square one.With no plan and no certainty. Earlier today I spoke with His Majestythe King to request the dissolution of Parliament.The King has granted this request and we will have a general election on the 4thof July. Let's take a look at our commoditiesoffering, of course, is big rally at the same largely driven by copper prices,but also, of course, some of the other enthusiasm that we've seen across otherclasses like iron ore there as well.
Take a look at copper.We are seeing a little bit of a pullback, which is quite interestinggiven just the big run up and the short squeeze that we have seen.That retreat from profit taking a bit of a drop in demand as well.This is really the biggest intraday drop in just about two years.So it has been a pretty fast and serious pull back from those record highs thatwe saw just earlier on on Monday. So clearly, investors taking someprofits off the table. There's also new signs of demandweakness emerging from China as well. But of course, copper is still up byover 20% this year with that big rush of.
Investors worried about the tighteningin that market. Also watching aluminium, we're seeingthat also see a pullback after alumina surged to a minimum, I should say surgedto that 23 month high with the force majeure being declared on a shipmentfrom Rio Tinto. That's also seeing a little bit of aconsolidation in that process. We're also dealing with record goldprices here as well, the dollar firming and that sort of playing there as well.But the gold price still seeing a little bit of upside crude, though, holdingpretty steady at $77 a barrel with them, fairly sort of range bound for that.But those hawkish Fed minutes seeing a.
Bit of a pullback in oil there.BHP is one to watch when trading begins in Australia in the next hour.In fact, in about 25 minutes time, the world's biggest miner has won an extraweek to convince Anglo American to agree to that $49 billion takeover plan fromall is bringing out commodities. Reporter Martin Ritchie about when wewere counting down and wondering if they had enough time to get this done, whatdo we expect in this extra time that there is for reconsideration?Yeah, the saga continues. We thought yesterday it was a case of,you know, walking away or going ahead with the deal.But BHP, as you said, has another week.
Look, the the the thorny question isaround South Africa. It looks like Anglo is no happy with thevaluation that BHP is proposing, but the South African assets of Anglo areproving the most difficult. Part of thisBHP plan is quite complicated. It involves.It involves Anglo spinning off two of its companies, a platinum producer andan iron ore producer that are listed in South Africa before BHP then goes in,buys the whole company that Anglo is concerned that this puts too much riskon the shareholders of those two companies because South Africa'sgovernment might impose conditions on.
Them and that would be unfair to them.So it looks like this extra time has been granted by Anglo to sort of let BHPperhaps come up with some kind of other structure, some kind of other plan.So it is a little complicated. And it's interesting also that thedeadline day, May 29th, is also now the date of a South African election.It's becoming a quite a political issue in South Africa as well.Yeah, well, that's what I wanted to ask about, Martin, Because.Because the approval is required for any deal here are likely to include thosefrom South Africa as well. So is this as we're seeing in the US,for instance, that the Nippon Steel.
Proposed takeover, the US Steel?Do you think it's likely to really factor into to election politics?I think the South African government has declined to make any comments at all.There have been some figures in South African politics more generally who havesaid they're personally opposed to the deal.I think BHP has said before they would prefer to wait, waited until after theelection to do this. It is a complicated time to beengineering a bid for companies that have has a very longhistory, more than a century in South Africa.But they're their hand was forced.
So it's really all eyes on on the SouthAfrican businesses. And what BHP does with the structure ofthis deal to ameliorate this concerns. That's what we're looking for now overthe next week. Right.And Martin, how much would they potentially realistically need to waiton this front? Because isn't there the argument that,well, they could also just wait and over the next few years, you would imaginethat there's going to be greater competition and maybe a higher valuationafter the restructuring has happened. The.We've already had three bids.
The last one, as you said, 49 billion.All of them rejected by Anglo. I think the signals that BHP is sendingout so far is that the this is final, that valuation is final.Anglo, we think is is also I think we're happy with the valuation, but it's thestructure that's important to the point of waiting until later until Angloitself is restructured. It has its own plan.The look, if BHP doesn't make the bid now, it might be the Anglo's valuationtwo years from now is much higher and they've missed the opportunity to to doit this time round. I think that's probably the logic thatthey're going for their.
That was our commodities reporter MartinRitchie there. And a quick check of markets herebecause we're just under 20 minutes, over 20 minutes away from the opens forSydney, Seoul and Tokyo. And the outlook today actually forequities is fairly mixed. There was a few different themes that wetracked overnight. Firstly, of course, you've got the invideo numbers after the bell here. That stock is rising around 6% yetagain. The company, even though the bar is sohigh, they managed to jump over it. So it's a really exceptional numbers.They're coming through in a really great.
Outlook.At the same time, you also had the Fed meeting minutes and they were discussingthat need for for the Fed to stay high for longer.And that's really what we've been hearing from Fed speakers over thecourse of this week as well, but factored in as well into those Fedmeeting minutes. So a couple of different themes we'retracking intraday. The session continuing, of course, tomonitor what's happening with Chinese equities in particular because we'veactually got them poised to deliver their best quarterly returns in morethan five years.
A currency perhaps not quite the samestory. There are some questions around capitalflight, but part of that optimism around Chinese equities very much coming downto what we're hearing around the property sector.And and now we're actually understanding that China's mega-banks are alreadyurging their branch managers to lend to state owned companies buying up unsoldhomes. It indicates Beijing sense of urgency toimplement a real estate rescue package that was unveiled this last week.Stephen Engle is achievable. Asia correspondent And Steve, what do weknow at this point in time about this?.
It is underscoring the urgency.Absolutely. I mean, one of the biggest complaintsabout the government's efforts to put a floor on this property crisis has beenit's been a piecemeal approach from one, and it hasn't necessarily borne thefruit of the policy yet. And also the implementation has beencriticised. So why have we not seen a floor beingput on it yet? Because confidence keeps dropping,contracted sales keep dropping and defaults keep on rising.So this is interesting in that we're hearing from sources that already, youknow, after the PBOC announced last week.
That it would have this nationwideprogram to provide about ¥300 billion, 41.5 billion USD in cheap funding forSOEs, then to go in and buy up the excess inventory that is out there.There's 3.6 billion square feet of unsold inventory of homes in China as ofthe end of 2023 of the highest since 2016.So there's an urgency here. And this story that was a Bloombergscoop late yesterday, essentially saying China's mega banks are urging thosebranch managers to act quickly, essentially to get loans out to so thesetwo so they can buy up those unsold homes.Now, we don't know if this is going to.
Lead to a massive surge in new lending,because, again, they're also being urged to do the proper due diligence andagain, ensure that the funds that are lent out are not used elsewhere.They're going to be used for the intended purpose of buying up unsoldunits on that pennies on the dollar, and then perhaps to turn into affordablehousing where other areas like the stock market could get better returns for.So I'm not implying that that's what these would do, something so nefarious,but it has happened in the past. And Steve, in fact, there was anothergovernment program back in 2022 that offered developers loans guaranteed bythat by the states have that sort of.
Play out.Yeah. So there was a program back in 2022where authorities would basically lend developers with loan guarantees by thisstate backed China bond insurance company.Okay. So that was intended to give supportsignal to developers in the market that they would support developers.But essentially what has happened over the time is it hasn't provided theliquidity necessary to prevent this wave of defaults.Agile is the one of the latest ones. Now Agile.It missed a payment on a publicly issued.
Dollar bond for the first time lastweek, and Agile is one of more than a dozen developers that issued Yuan notesguaranteed through the China Bond Insurance Company.Now, so far, according to Bloomberg Scoop that came out this morning at 7a.m. Hong Kong time, at least 13 privatedevelopers, including Agile, had issued a total of 36 bonds via the program withonly $5 billion raised. That's just a drop in the bucketcompared to the size, obviously, of the liabilities and without a visibleimprovement in contracted sales in China.And of course, sales dropped again in.
April without a sizable increase.Most likely the defaults will continue by these private developers that justdon't have the proper liquidity. So that program in 2022 was which wassupposed to indicate to the investors and to the market that the state wouldcome to the rescue hasn't necessarily panned out.This program that was announced by the PUC last week is a default.Take on that essentially to buy up excess inventories that I mentioned toAnabelle just a minute ago. And that, again, is just showing againthat the policy in 2022 didn't work. Other piecemeal policies have notnecessarily worked to restore confidence.
And improve the sales at thesedevelopers, which is really the only solution to prevent a further wave ofdefaults at this point. Chief North Asia correspondent StephenEngle there. We have more ahead on DAYBREAKAustralia. This is Bloomberg. Take a look at how Kiwi assets aretrading so far this morning. The day after the BNZ, which sort of themain takeaway was they see the cash rate cut starting later in 2025, kind ofjoining the the overall him that we're hearing from a lot of these centralbanks of staying higher for longer and.
Potentially pushing back theseexpectations of easing. This is a picture when we see a littlebit of negativity there when it comes to trading across equities down by about a10th of 1%. Pretty mixed picture here in Asiaoverall, still sort of digesting the big media numbers, but also, again, from theFed, that chorus of higher for longer as well.From the Fed minutes there. The Kiwi dollar is maintaining some ofthe gains. 6103 We do see the big jump in the Kiwileading that G10 space at one point after that decision as well as the risein yields as well.
Well, the ANZ governor says a broaddecline in CPI inflation is not happening across all sectors of theeconomy. The BNZ, as I said yesterday, signallingthat policy will stay tight for longer after keeping rates unchanged for aseventh straight meeting. Joining us now from Wellington is theBNZ Governor, Adrian Orr. Governor.It's always a pleasure to have you with us.And I'll be doing a lot of talking over the past 24 hours or so.And I'm going to ask you for a bit more insight into that decision.And again, that much like the last time.
We spoke, the possibility of furthertightening was again flagged, particularly when it comes to some ofthese elements that you've said domestically have been perhaps moreresistant to monetary policy. I guess the question would be, wouldanother rate hike be meaningful when it comes to getting those aspects ofinflation lower? Another rate hike would only bemeaningful if we thought inflation expectations were getting away on usagain, starting to rise because of the persistence of actual inflation.We know that forward looking inflation is heavily influenced by the currentlevel of inflation.
So so that's our main concern.You know, persistence raises the risks that expectations don't do the jobthat's needed. What we know and we are confident thatwe will get inflation down to the 1 to 3% band.We're just like to make sure we get there soon without risking thatanother blow out in the expectations. You talked about the risk appetite as acommittee and that the asymmetries is the ability to withstand the risk ofhigher inflation. Right.Do you see that increased risk with some of these elements that are leadingthrough to kind of more difficult to.
Shake inflation expectations?Yeah, we're actually quite pleased. We spent a lot of time in the documentwe produced yesterday, really getting down to the nuts and bolts or the ratsand mice of what is left in that consumer price index.The bits that persistent. And we've seen a lot of success ingetting the cost of housing construction down.A lot of other services prices down, goods prices, you know, the easier tomove the bits of the left are insurance. They've all got their own idiosyncraticstory insurance premiums because of what's been happening globally aroundthe extreme climate.
We've got central and local governmentrates rises that are always lagged and lose some indexation left in theeconomy, which is paying off historical inflation.So, you know, we're not surprised that getting from four to 3 to 2 is is muchharder than getting from seven and a half to four.We are showing patience. But, you know, we have to remain highlyaware to any further upward price spikes and what they may mean for price settingbehaviour. We've been trying to emphasize.Right. Continue.We've just been trying to emphasize that.
Have price centers pull their heads andaccept that we are going to be in a low inflation environment.Wage expectations and actual wages have come down considerably.So, you know, we're just working through this this last part of the puzzle.No difference to effectively what you're seeing globally.Tradeable goods prices fell very quickly.And then this home grown domestic stuff is always more sticky.And I get that that sort of non-tradable element is going to be crucial here aswell. But you said that you have limitedtolerance for inflationary surprises to.
The upside.Is that patients kind of almost running out?Do you look at that second quarter CPI print as the one that maybe makes orbreaks that decision to go again or not? No, we're not hinged off any onestatistic and no, patience hasn't run out.What what we are showing is that we've we've got a lot of patients, you know,we projection is to keep the official cash rate at 5.5% until early next year.That we believe that will have inflation back down within the band.And at that point, we can start thinking about normalizing interest rates.That's all on our projection.
The sticky prices that I've talked aboutand particularly over next couple of quarters have been well signaled andthey are in our inflation projections. So they have to be something over andabove that again to really, you know, to to surprise us.And we think the risks are balanced over the period ahead.That matters for us this time next year. You know, without doubt, the economy isperforming below its potential and output gap is opening up.Disinflation is occurring. So, you know, we feel prettycomfortable. But when you starting from a higherinflation position, when you've got low.
Productivity, the central bank has toremain alert. Do you think, though, that given you areseeing those there's cooling trends coming in and you're really getting thatweaker or softer economic data now, even though you have that component wherewhere non-tradable inflation data is still elevated, do you think thatthere's that need to get inflation back to that target band first beforecutting, given there is that lag transmission effect as well?That's exactly correct. And in fact, our projections have useasing interest rates before inflation is back at that midpoint.Because you are right.
You know, we have economic growthpicking up here in New Zealand. And our projections from this quarteronward. But the level of economic activity isstill below the potential. So, you know, we can start to easebefore CPI inflation. Exactly.Hits the midpoint of that target. And that's what our prediction is.We're at 2.9. I think our projections have us around2.9% in the fourth quarter of this year. You know, that's that's that's a toss ofthe coin, whether it's in or out of the one, two, three band.And it's not soon after that that we.
Signallower interest rates beyond that. So what did we do to surprise the marketthat it's not happening next week? And and we've been saying that for sometime. You definitely do seem to have caught afew investors on the hop over the past few months.But. But, Governor, you said that you expectgrowth to pick up. Where do you think that growth is comingfrom and why do you think the New Zealand economy is able to cope withsuch a sustained period of elevated rates?The growth is coming through from.
Government spending, governmentinvestment. We are looking at private investmentstarting to come back. Building consents, etc.have levelled out. And importantly, you know, we've had a2% per annum growth in our working age population, so migration has beenconsiderable. The really tough stuff is thataggregate demand has been rising. Per capita spend has been falling andthe difference is the population has been growing and so that has beenputting the upward pressure on rents, on demand for dwellings, and that's takingconstruction activity back in the.
Pipeline of infrastructure investmentthat's in front of New Zealand is long. And of course the world is opened upagain. So our tourism is finding its feet.And likewise with global growth expected to pick up.Our trade is also growing, so there's lots and lots of economic growth, butthere is that rebalancing from consumption to production.Governor. Governor, last time we spoke to talk,some of the elements that you just talked about, dwellings, the suppliesout of dwellings, rental costs rising if there is a sharper than expected declinein immigration.
Would that meaningfully change youroutlook when it comes to growth? And does that more impact when it comesto the labour market side, when it comes to the inflationary demand side, do youthink? Yes.So, you know, the real challenge is you can't just change one thing and leaveeverything else unchanged. You know, the type of scenario there ofthis migration slowed much quicker than aggregate demand slows quicker and thenwe wouldn't be as exorcised about the level of interest rates.So, you know, when the facts change, your opinion has to change on the waythrough.
But likewise, you know, we continue tohave a dwelling shortage in New Zealand. It's not unique.It's in these countries that have experienced rapidly high immigration andwe need to keep building dwellings public.You know, state housing, public dwellings, private housing, so on and soforth. Housing construction costs have comeright off. We've been successful at achieving that.But rental costs are high because there's still more demand and there issupply for people who don't own their own home but want to rent.Governor, very quickly, before we let.
You go, you talked about fiscal spendingas being one of the outside pressures ahead of the budget.Do you expect that tension to continue to play out?Because we've seen across other economies where the fiscal side hasinadvertently or not really undermined the effect of monetary policy?Yes, You know, it's a global and forever challenge.The the synchronized monetary and fiscal policy is extremely difficult.We've been fortunate here in New Zealand over the last couple of years.Government spending as a as a proportion of of potential output has beendeclining.
And that means it has beendisinflationary. It has been helping the Reserve Bank, ithas been just inflating on the way through.That is still the expectation from the official projections to date.Of course, we'll wait to see what the budget has.But, you know, in the absence of that fiscal discipline, then, yes, monetarypolicy would have more work to do. So, you know, we're going to have to seewhat, if any, additional government spending restraint will be and theimpact of tax changes. Governor, really great to have you withus.
Governor Adrian Orr there.
