[music]

>> Bloomberg Audio Studios. Podcasts,

radio, news.

This is the Bloomberg Daybreak Europe

podcast. Good morning. It's Friday the

22nd [music] of May. I'm Caroline Hepker

in London. Coming up today, the Iran war

upends inflation bets as one analyst

warns [music] the Hormuz closure

threatens a recession rivaling 2008.

European [music] growth buckles under

the weight of the war as energy costs

surge. Plus, why global aid cuts could

be making the growing Ebola crisis in

Africa worse. Let's start with a round

up of our top stories. The US war in

Iran is triggering another wave of price

hikes across a global economy that has

barely recovered from the last inflation

shock. Investors are also starting to

worry about the implications for the

more than $50 trillion market G7

sovereign bonds. Bloomberg Economics

says that the oil shock caused by the

closure of the Strait of Hormuz is

ending the global trend of disinflation.

Higher crude, gas, and shipping costs

are lifting prices across major

economies. The impact is clearest in

North America and in Europe. US CPI is

moving back towards 4% while inflation

in the euro area has risen by around one

percentage point. Ali Dewji is co-CIO at

Rock Creek. The risks just keep

multiplying in terms of what investors

have to think about and interest rates,

um, consumer sentiment, you know, what

is driving inflation. If we don't have

some resolution in terms of energy

prices, we think all of that will

continue to be an increased risk to

portfolios. And it will mean more bond

volatility, which I think investors have

not gotten used to. Ali Dewji speaking

there as Rapidan Energy has warned that

a closure of the Strait of Hormuz until

the end of August would raise the risk

of an economic downturn approaching the

scale of the 2008 great recession. In

its latest note, Rapidan said that if

the waterway remains shut until August,

it would deepen the third quarter supply

deficit to roughly 6 million barrels of

oil a day.

Now, the EU is slashing its growth

forecasts as the scale of the fallout

from Iran becomes clearer. The block now

expects Euro area GDP to increase 0.9%

this year. That's compared to 1.4% last

year. Economy Commissioner Valdis

Dombrovskis says both growth and

inflation are going in the wrong

direction. It basically [clears throat]

confirms what we saw coming, which is

stagflationary shock to European

economy, meaning a simultaneous slowdown

of economic growth and increase in

inflation. Dombrovskis adds, "If energy

prices stay high for longer, growth

prospects for the EU will be roughly

halved both this year and next year."

The commission has called for restraint

from European countries despite the

downturn, fearing a breach of their

fiscal rules.

Confidence among the lowest earning

Britons plunged in May as the Iran

energy shock reaches household budgets.

GfK's consumer spending index shows

those at the bottom are pulling back

from purchases even before the worst of

the shock actually arrives. Chancellor

Rachel Reeves set out a number of

measures to try to ease the cost of

living crisis. First of all, we have

extended the freeze on fuel duty until

at least the end of this year. I

understand how concerned families and

businesses are at the moment about the

implications of the conflict in the

Middle East. This is not a war that we

started. I've been very open in my views

that this war was a mistake, but

regardless of that, it is having an

impact on people here in the UK.

But, the Chancellor has ruled out

universal energy bill support in the

announcement that she made yesterday.

Both Reeves and her Prime Minister Keir

Starmer have been trying to convey a

sense of business as usual despite the

leadership battle with Andy Burnham.

Iran says that there has been progress

in talks with the US, but the country is

also trying to set up a permanent toll

in the Strait of Hormuz. The

semi-official Iranian students news

agency reported the latest peace

proposal from the US has narrowed the

gap between the two sides, but a

Bloomberg interview with the Iranian

ambassador to France revealed that the

country was in talks with Oman about

setting up a toll system in the Strait.

US Secretary of State Marco Rubio says

that would not be feasible. We were in

China last week. We mentioned this about

the tolling. They're against it. No one

in the world is in favor of a tolling

system. It can't happen. It would be

unacceptable. It would make a diplomatic

deal unfeasible if they were to continue

to pursue that. It's a threat to the

world if they were to try to do that.

The conflicting statements on the two

sides make it unclear if they are

actually any closer to a deal. Oil

prices are consistently trading above

$100 a barrel as the world's buffers of

reserves shrink rapidly.

President Trump says that the US will

deploy an additional 5,000 troops to

Poland reversing plans to suspend

deployment to the country. He announced

the news via social media yesterday

citing the election of nationalist Karol

Kaczynski as Poland's president. The

decision marks an abrupt U-turn a week

after the Pentagon paused plans to send

about 4,000 soldiers to Poland even

though some were already on route.

Jovita Neliupšienė, who is the

ambassador of the European Union to the

United States, urged the White House to

uphold its commitments to NATO. The

president requests that the EU does

and European countries and European

alliance uh uh allies in the NATO do

their part. Uh

we are following it through. So, I do

believe that, you know, the strategic

part which US presence in in in Europe

is as well probably the expectation that

uh member states fairly have.

That was the EU ambassador to the US,

Jovita Neliupšienė, speaking there. The

US president also earlier threatened to

pull troops from Germany and suggested

that a broader drawdown of US forces in

Europe after a feud with other NATO

nations over their refusal to help in

the Iran war. Ukraine and its allies are

increasingly confident that Russia's

invasion is losing steam. The country's

growing effectiveness at deploying

drones capable of inflicting heavy

Russian troop losses is being matched by

strikes deep inside Russia. This

alongside an economic slowdown and

internet restrictions is stoking

domestic criticism of Russian President

Vladimir Putin. Bloomberg understands

that some Kremlin officials believe that

the conflict has reached a dead end with

no clear resolution. The news comes as

the US defense agency found a Ukrainian

offensive earlier this year retook about

400 square kilometers from Russia after

thousands of Starlink internet terminals

operated by Putin's forces were

deactivated.

So, those are our top stories for you

this morning. Let's get to the markets.

So, in terms of stocks, we see a big

rally in Asia. The MSCI Asia Pacific

index is up 1% so continuing gains that

we saw yesterday. The Nikkei jumps by

2.7%.

Worth noting a couple of individual

stock moves. SoftBank surging in Japan,

Lenovo climbing to a 26-year high in

Hong Kong. Stock futures for Europe and

the The also very positive. 1 and 1/2

for the US stocks uh 50 futures. This

after Brent crude futures have rebounded

1.7% trading at $104.30.

Gold is edging lower this morning, 3/10

of 1%. 10-year US Treasury yields down a

basis point at 4.56% this hour. Those

are the markets.

Now, in a moment, we're going to bring

you more on whether investors no longer

see inflation as temporary after these

crisis well in the Middle East, but also

COVID and the efforts to contain the

deadly Ebola outbreak. We'll be bringing

you more on that. But, another story has

caught my eye this morning. Bike lanes

with miniature green areas. They're

popping up all over cities everywhere,

it seems. I wonder whether you've

noticed them. These green verges that

incorporate cycle paths help cities with

flood protection, also wildlife

protection in this era of climate

change. It's also because of tight

budgets. Cities can use these

multi-purpose little designs in cities

and pull funding from different pots to

pay for them. Bloomberg's Laura Laker

has been writing about their use in one

city in Wales, in Cardiff, uh about how

some otters apparently have moved into a

section of uh

this sort of greenery along the canal in

Cardiff and that that footage really

sent this kind of ripple of excitement

across the city about it. I love this

story. I get why people see these

patches of greenery as something good.

You know, it's about sustainable

drainage for cities um to try to lower

temperatures, especially as, you know,

London's going to head into this

heatwave over the weekend.

Aesthetically, though, I have some

doubts. They can kind of end up just

running wild. They're expensive to

maintain, and I do think that there's a

danger of councils adding up these tiny

areas of square footage into one big

number, making it sound like, you know,

the greenery maybe the size of a park,

when of course it isn't a new park. Uh

but I thought that discussion, uh which

has has been massively contentious in so

many uh places, is very interesting.

We're going to put a link to it in our

podcast show notes for you to learn more

about it.

Now, to the bond markets next. By way of

Oscar Wilde's famous quote, "To lose one

parent, Mr. Worthing, may be regarded as

misfortune. To lose both looks like

carelessness." Well, investors seem to

feel that way about inflation. One

episode in the 2020s may be misfortune,

but two could be a bad trend. And it is

upending and threatening to upend the

$50

plus market for sovereign bonds across

G7 countries. Our Bloomberg economic

reporter, Mark Schrurs, is in Frankfurt

and joins us to discuss. Good morning,

Mark. Hope you don't mind my little uh

diversion into the literary world to

talk about bond yields. How much have

bond yields moved due to the war in Iran

and also concerns about another energy

price shock?

Yeah, good morning from Frankfurt. Um we

indeed saw uh quite some movement in in

bond markets

in recent days and weeks, and borrowing

costs are surging globally also among

the group of seven countries, so the

major economies.

>> [sighs and gasps]

>> They have reached in many cases levels

we haven't seen since the financial

crisis, in some cases not even since the

1990s. I think we need to separate

issues here. One is the more short-term,

the other is the more medium to to

longer term. In the short term, we have

the US war on Iran that has triggered a

surge in energy costs and is pushing

inflation up globally. And given the

back and forth uh between the US and the

and Iran, it's likely that the conflict

will last longer and keep inflation uh

higher for longer. On the other hand, we

have more medium to longer-term uh

factors. Investors are starting to worry

that inflation higher inflation is here

to stay. And indeed, there are some good

reasons to believe that

the future will bring more volatile and

probably also higher inflation.

More frequent supply shocks. You

You need to remember that the one we see

at the moment is only happening 4 years

after the last one. And and commodity

price shocks have been the biggest

driver of global inflation historically.

And on the other hand, there are some

big structural changes in the global

economy that could lead to more

inflation volatility and higher price

pressures in the future. And investors

want compensation for that. Yeah, okay.

So, then in terms of the sort of main

reasons I mean you you started outline

them a bit there. What are the main

reasons that markets may expect higher

inflation in the future, maybe even

structurally higher inflation actually

going forwards?

Yeah, I would say there are quite a

number of factors at play here and many

present a kind of reversal of trends we

saw in the past when it kept inflation

lower pre-pandemic.

For example, we have the

deglobalization. So, that means

geopolitical tensions and fragmentation

disrupting global supply chains, rising

costs. And it will take It will take

time for companies to to to adjust.

We have demographics. So, the supply of

labor is declining with the ongoing

aging with the aging of societies and

that will likely increase wage

pressures. Mhm. We have debts. So,

rising debt levels, not least public

debt levels, could also generate a kind

of inflation bias, also because it could

prevent central banks from hiking rates

as needed.

And also other factors at play,

decarbonization for example. Mhm. I

would say, to be fair, there are also

other factors like AI where the jury is

still out on whether it will be

inflationary or disinflationary, but

bottom line, I would say there are quite

a number of reasons to believe in or

expect higher inflation in the future.

Yes, that maybe we'll be going in you

know that maybe we're entering a whole

new era. Well, how will central banks

react?

>> [laughter]

>> That's indeed the one billion dollar

question. What will central banks do?

What will happen to to rates? For sure

policy makers are in an increasingly

tricky spot. Short term looking at the

war, you know, we have rising inflation,

we have rising price pressures and that

would call for rate hikes.

But there's also a severe risk of a

significant slowdown of the global

economy of growth and central banks

don't want to worsen that by tightening.

Looking at the medium to longer term, I

would say central banks will have to

defend their hard won credibility,

but it also seems reasonable to to to

expect that there will be enormous

pressure from governments to keep rates

lower given the high debt levels we we

talked about earlier. Yeah. For the big

take we did I talked to to to to to a

guy

Claudio Borio, former head of monetary

department at the BIS or the central

banks of central banks and he said he

would expect that the next decade will

present the biggest challenge for

central banks in decades. It will be

particularly interesting in the US

because you know, incoming Fed chair

Kevin Warsh is under pressure to cut

rates

while the circumstances don't don't

speak in favor of that. So, coming back

to your question, I would say it's fair

to expect that rates will be

structurally higher in the future and

for sure at least for the moment a

return to to zero rates or even negative

rates we saw in parts of the of the

world economy in recent years

they seem very unlikely. Yes, okay. So,

maybe it's a new sort of decade long

trend that we're going into. Mark, thank

you so much for being with me. Very

interesting to get your views. That is

Bloomberg economic reporter Mark Schros

in Frankfurt and you can read Mark's

piece that he has written alongside a

number of other Bloomberg colleagues. It

is the big take story today. Iran war

upends inflation bets in global debt

markets.

Stay with us. More from Bloomberg

Daybreak Europe coming up after this.

Now, the Ebola outbreak in Central

Africa, which the World Health

Organization has declared a public

health emergency of international

concern with no approved vaccine or

treatment, the disease is spreading in a

conflict-ravaged region. Joining us now

is Bloomberg TV correspondent and anchor

Jennifer Zabasajja. Good to speak to

you, Jennifer. Congo suffered its first

known Ebola outbreak half a century ago,

I learned, and it has dealt with 16

outbreaks since. What is the latest in

terms of the extent of this outbreak?

That's right, Caroline. This country it

is no stranger to outbreaks, and as you

were mentioning, we've seen 16 outbreaks

before. This is the 17th. And so,

as of today, we are learning hundreds of

people in the Congo are suspected to be

infected, and at least more than 100

people have died according to the World

Health Organization. Much of the

suspected cases are centered in the

Democratic Republic of Congo. Although,

because this is a rare Ebola strain, as

you were mentioning there in the intro,

the concern really from health officials

is that we had been seeing this spread

going undetected for weeks. And so, we

do know of one additional death that

happened in neighboring Uganda. And the

concern is that this could become a

potentially regional outbreak if if we

aren't able to get to the heart of

some of the the symptoms [clears throat]

around this Ebola strain. And also, some

vaccines and and resolutions around

contract tracing and surveillance. And

so, that is why we are hearing from the

WHO, also the Africa CDC, increasing

the importance of of what we are seeing

right now in in Central and Eastern

Africa. Yeah, and you've been doing a

lot of reporting around this. Earlier

this week you spoke to the Congo country

director for the Danish Refugee Council,

Caitlyn Brady. I wanted to bring our

listeners some of this, uh, giving some

details about the developing situation

on the ground. Have a listen.

So, for at least 2 weeks, it would seem

there were some cases, some deaths

before the alert was raised. And and as

John has said, when health workers

started dying, what we've seen now is a

very rapid response by the government

and also by the health agencies like MSF

and Medic, for example, who are doing

their very best to do the contact

tracing and to identify among those

contacts who shows preliminary symptoms,

make sure those people are isolating.

So, that was the Congo country director

for the Danish Refugee Council, Caitlyn

Brady, that you were speaking to. So,

then how are authorities and charities

and aid groups, Jennifer, helping people

to deal with the spread? I mean, the

early detection, we learned, um, failed

because this is a very rare strain and

it's a very volatile region of the

world.

Right, volatile region, rare strain,

uh, and of course, we should mention,

Caroline, important context is that we

have seen aid decreasing over the past

year, of course, beginning with the US

and ending USAID, but also a number of

other Western governments. That just

contributing to a weakening of

surveillance systems and health systems.

And so, um, this week on our Next Africa

podcast, we we spoke to Caitlyn, who is

in Goma, about the situation on the

ground and really what her and her peers

are are trying to do and trying to step

in in in the absence of some of these

other, um, health agencies and

officials, uh, that, um, had decreased,

I guess I should say, because of some of

the cuts that that we had seen. And and

a lot of the focus that she gets into is

the importance of education in the

population. Um, but then also, um, you

know, everyday

stemming of of virus. So, cleaning of

hands, having a

clean sanitation and water. Um, and

again, this is a conflict-ravaged area,

but also population dense and very

difficult terrain. And so, getting any

sort of

vaccinations or or any supplies that

they need isn't um, as easy as um,

potentially neighboring Uganda where the

terrain is a little bit um, less less

severe and less mountainous, I guess I

should say. And so, we are seeing

officials really just trying to step up

their surveillance, stepping up

education, uh, and doing just about

anything they can in order to keep the

population safe and isolate those who

potentially are showing some signs of

symptoms. And we should note that um,

this Ebola strain, there's still not a

lot that is known about it. And the

concern with with Ebola is that it is is

very fatal. And so, they they want to

make sure that they are treating for the

right strain, especially considering,

and I heard you mention this, Caroline,

there's no vaccine and treatment at this

case. So, still quite an evolving

situation, not just for the region, I

should mention, but also internationally

for a number of health agencies and

countries. Yeah, just very briefly, the

World Health Organization saying that

there's low probability of international

spread, but that doesn't mean there

aren't international repercussions.

Yeah, and we're hearing from the CDC

saying that the risk to the public

remains low, but still we're seeing

international health agencies

stepping up their own surveillance.

We're we've heard the the US CDC

stepping in as well.

And yeah, we we are seeing a number of

countries in the regions continue to

step up testing

and also surveillance, testing of

getting your temperature checked. and

even from the US residents are being

cautioned not to travel or if they have

traveled to the region ensuring that

they are isolated and just tested before

going out into the public. So definitely

becoming an international concern as we

heard from the WHO and really that we

should point out that is to mobilize

resources, which is effectively what we

have been seeing over the past few days.

>> [music]

>> This is Bloomberg Daybreak Europe, your

morning brief on the stories making news

from London to Wall Street and beyond.

[music] Look for us on your podcast feed

every morning on Apple, Spotify, and

anywhere else you get your podcasts. You

can also listen live each morning on

London DAB radio, the Bloomberg Business

app, and bloomberg.com. Our flagship New

York station is also available on your

Amazon Alexa devices. Just say Alexa,

play Bloomberg 11:30. I'm Caroline

Hepker. And I'm Stephen Carroll. Join us

again tomorrow morning for all the news

you need to start your [music] day right

here on Bloomberg Daybreak Europe.

>> [music]