U.K. INFLATION FALLS TO 15-MONTH LOW BUT ANALYSTS WARN OF RISES AHEAD

[00:00:00]The CNBC app, global market [music] news in one place. Customizable sections and personalized alerts. Stocks tracking, [music] interactive charts and market insights, all in your hands. Stay connected. Stay informed. [music] Download the CNBC app today.

[00:00:19]A very warm welcome to Squbox Europe.

[00:00:21]I'm Steve Sedwick with Ben Bulots and these your headlines.

[00:00:25]UK inflation data is hitting the wires and I can tell you just having a quick look that uh uh June services CPI up 3.6%. The headline figure though has come in at 2.6%.

[00:00:39]Uh that is in line with some expectations I've seen. Uh some were looking at 2.7%. So relatively tame the inflation hitting the tape as new prime minister Andy Bernham vows to practice fiscal discipline rolling back VAT on electricity bills and facing calls to extend [music] tax breaks for young workers. The PM saying his aim is to raise living standards.

[00:01:03]>> We need to be a cost of living.

[00:01:11]Uh, three tankers carrying Saudi oil are forced to U-turn in the Red Sea amid Houthy threats as a new front opens [music] up in the US Iran conflict, putting further strain on crude supplies and pushing prices higher.

[00:01:28]Samsung is reportedly in talks to invest up to€1 billion euros in French AI firm Mistral in a fundraising round that could value the startup at around 20 billion.

[00:01:40]Santandere says it is on track to meet its targets for the year after underlying net profit jumps by nearly a fifth amid higher revenues [music] and two months of contributions from the British lender TSB. We'll hear from the CFO later this hour.

[00:01:57][music] [music] Despite your best endeavors, young bulos, I got the numbers out in the headlines. [laughter] So, let me tell you how this works, ladies and gentlemen. Ben, and I'm I'm a left-hander who puts my notes on the right hand side. You're a right-hander who puts your notes on the left hand side. I was trying to get the flashes out literally. You move your notes inadvertently. I appreciate that to hide the flashes literally as I'm trying to break them into headlines.

[00:02:35]>> It was not intentional.

[00:02:36]>> I know it wasn't. It was very funny. We got there eventually. Good morning to you.

[00:02:40]>> Good morning to you too.

[00:02:41]>> UK June core CPIX energy, food, alcohol, tobacco up 2.6%.

[00:02:47]Reuters poll was up 2.5%. It's the core figure. Okay. Uh but the overall June CPI up 0.1% on the month in line with expectations. June core CPI X Oh, I love this. X Energy, food, alcohol, and tobacco. Is there anything left? I hear you say was up 0.3%. That was mildly higher than the up two. 2% expected. I I I kind of want to do RPI, but I always have Paul Donovan from UBS's words in my head. Oh, RPI is useless. So, anyway, I'll do it anyway. It was up 3% on the year as well. So, I think it's fair to say that the inflation data was pretty much in line with expectations, Ben.

[00:03:25]Yes, indeed. And that will come as a relief, I suppose, to someone in particular, the new prime minister, Andy Bernham, who has held his first cabinet meeting, telling his newly appointed colleagues that they need to be a cost of living government. Bernham announced early on Tuesday he intends to cut VAT on electricity bills, but questions remain over how that will be funded.

[00:03:47]Addressing his colleagues in Downing Street, Mr. Burnham outlined the scale of the task ahead. We need uh to every day think well what can we do just to take that little bit of pressure off people's shoulders just to give them that little extra sense that help is coming so they can have that bit of bit of hope uh that things are are getting better and that's the mission that we've got to set ourselves uh together. We need to be a cost of living government and getting that cost of living uh down looking for all possible ways of of doing that. I talked yesterday outside uh in Downing Street about uh bringing back hope.

[00:04:32]>> Well, I hope you're all not all feeling seasick after looking at the camera work. I mean, I think if you're going to televise these, sir, you need slightly better camera operators, dare I say it.

[00:04:42]Um, I'm sure our camera operators here at CBC can give you a few tips as well.

[00:04:46]Anyway, the newly appointed prime minister is already coming under pressure to extend a tax break for businesses employing people under the age of 25. The call is coming from the House of Commons Work and Pensions Committee, which argues that cutting employer national insurance contributions for all employees under that age would boost employment. uh unemployment among the 18 to 24 year olds now stands at an almost 15% level.

[00:05:12]That is a 12year high. Let's get to Heta Atta who is chief economist at St. James's Place. Lovely to see you. Good morning to you.

[00:05:19]>> Good morning.

[00:05:20]>> Well, let me ask you a very uh open and broad brush question. Um, so far, do you think that Andy Burnham is going to be different from the other six prime ministers post Brexit and actually get the debts down, stick to fiscal rules, and grow the economy?

[00:05:38]>> That's an incredibly difficult question to answer, isn't it?

[00:05:41]>> Yeah, we don't really know, do we?

[00:05:42]>> No, we don't. Um, we still have, I'd say, quite little in terms of policy announcements. um the new chancellor, little bit of cost of living announcement yesterday, but in terms of the really big picture stuff, we really don't know.

[00:05:58]>> So, I was dismayed by yesterday's 45p cut to annual electricity bills in the form of a VAT cut. Not because people don't need the car. I think people are struggling out there as well. But I thought it was very performative. I thought it was it was making a measure on day one when actually the real work isn't going to be as flashy and headline driven. The real work is actually getting the government spending down across as many departments as possible so that the cost of financing UK government debt uh and and therefore interest rates as well can can come down because the guilt yields will come down as well. And and I I I made the point yesterday on the show that we trade at a massive premium to equivalent and some economies what I didn't think even were equivalent on the continent and we therefore households in the United Kingdom and the sovereign pay vast amounts more for borrowing whether it be on mortgages whether it be on fiscal spending as well. If we do the the unflashy stuff then the other stuff can come.

[00:07:00]>> I take a slightly different view on the cost of borrowing for the UK. So if you actually adjust for the fact that the bank of England interest rate is say much higher than the ECB interest rate and you adjust for any currency risk etc guilt yields look pretty much in line with US treasuries and German buns. So at the moment doesn't look like there's any sort of particular premium but yes if inflation could come down and if the bank of England could reduce rates then that will bring guilt yields down and cost of borrowing. Sorry, I I don't understand what is the risk that is um negating the fact that we are trading at over 100 basis points higher than the Italian BTPs rather than forget about the buns.

[00:07:43]>> Well, our interest rate, Bank of England base rate is higher. Why is that? So that well because we have higher inflation.

[00:07:49]>> It's not just because >> I think that's a large chunk of why >> it's not just because of that is it?

[00:07:52]It's because there are huge concerns about the fiscal position and there are huge concerns uh about the management of the UK economy, isn't it? We didn't try we didn't trade at a higher guilt level during the quasiqartang Liz trust budget uh because of purely inflation and we didn't do trade at a premium under Rachel Reeves purely because of inflation. There's a lot of other stuff going on >> at that point in time. Absolutely. We saw fiscal stress and that was that was more evident in the guilt market back then. I don't think we're seeing that quite to the same extent currently. So I think a lot of it is explained by Bank of England policy and we could have lower interest rates if inflation came down but again I don't think the current situation in the Middle East is conducive to that.

[00:08:36]>> Fair enough. Um, in terms of what he could do on tax, >> um, it it looks like sort of raising the personal allowance level, the tax-free personal allowance, um, is is going to be tricky in terms of of how they fund that. Um, what what do you think are the tax measures that that you'd like to see that would help um, give UK economic growth a shot in the arm?

[00:09:03]So I think the the tax measures that are likely to have the biggest impact are ones that are incentives for businesses.

[00:09:10]Um as we discussed as you mentioned we have high employment taxes that's disincentivizing uh employment particularly for young people. So that the needs as we call them you know not in employment um education or training that's getting very high now. So about 14%. If you don't have the incentives for businesses to hire people um and also to make capital outlay, so investment, we're we're going to be stuck in a rut of low productivity, low growth, and therefore low job creation. That's where the focus needs to be.

[00:09:47]>> I'm just intrigued. So in the bigger bigger context of one of the other things the the things that we talk about very often on the show which is AI even if you give firms an incentive in the tax system to hire more people if they are already moving in terms of replacing lower level entry jobs with automated processes however attractive the tax system is it's never going to be as cheap as using a gentic AI or you know an automation system instead of a human.

[00:10:16]I think the the evidence so far suggests that AI whilst it's obviously developing very fast, it's enhancing existing tasks, not creating new work. So the chance of it displacing workers for a very long time, I I think that's limited. um at the margin it may be making it a little bit cheaper to invest in a bit of AI rather than say some young inexperienced person but actually as with all technological waves you know there will be new work that then gets created and new jobs that get created. M I mean the the measure you mentioned about um trying to incentivize businesses to take on workers through more attractive t taxation um regime is one thing. In terms of the the the bigger picture thing of what the city needs to ensure it stays competitive on the global stage to make it an attractive place to make London an attractive place to list to grow to scale a business. What are the the big headline things you think the chancellor John Healey needs to do?

[00:11:21]>> I think it's pretty nebulous because many chancellors have tried. If it was really obvious, I think [laughter] it may have been done by now. Um I think you know it it is actually a combination of different things that just reduce the policy uncertainty. So we've just had say you know seventh prime minister in the space of you know such a short amount of time will already lost count of how many new chancellors we've had in that time as well. Um what we need is a reduction in policy uncertainty and that will also incentivize businesses to list here but to make those long-term commitments. Um but let's also put it in context. UK economic growth, our potential growth, it's probably around 1% and we we kind of we try and compare ourselves to the US where you know they have stronger population growth, they have stronger investment and their their kind of natural run rate of growth is probably >> double what what we have. So we also need to recognize that a 1% growth rate is probably a not a bad outcome for for the kind of um underlying fundamental setup of the UK economy.

[00:12:35]>> Andy Burnham has said that he will stick to the fiscal rules um but has also said he will look for rigal room flexibility within them. Do you think the bond markets will accept that or will they look at that and think you're abiding by the rules maybe in letter but not completely in spirit and and punish him as a result?

[00:12:54]>> I think um what we've seen before is when chances but up against that fiscal headroom and use that um you know to the limit then the tiniest growth miss the tiniest uh overshoot on inflation calls into question how much wiggle room there is. and then we get into that horrible situation of speculation thinking about are we going to see another round of tax increases. So I don't think there is actually that much wiggle room. So I've seen some estimates suggest that the OBR's 23 billion estimate of headroom back in March has been eroded quite significantly. So maybe it's half of that now. So using up say 10 billion, what do you do next time that there's a small growth miss? um you can't stick to the fiscal rules if you're if there's no tolerance there at all.

[00:13:44]>> Um very quick word. Um your clients, our viewers, they tend to be medium to high net worth individuals as well. I think that's fair to say. Um and they certainly have a um they're trying to be very active on on on on observing, you know, how they minimize their tax bills, which is nothing wrong with that at all as well. Um do you think their tax bills are going to go up?

[00:14:04]Well, the latest projections from the OBR obviously were was for the tax burden in aggregate to go up. Um, and within that what we've seen over actually decades now is that the tax system has become even more progressive.

[00:14:19]So the highest earners are paying an everinccreasing share. Again, we still don't know enough about the the current policies, but that seems to be at least some of the direction of travel from from the um speculation in terms of whether it's 50p tax rate. Maybe that's been walked back, but I don't think anyone uh is going to be ruling anything else.

[00:14:41]>> So, I know we're going to move on. We got to guess, but 50p equals 52p. Well, we shouldn't be stupid about this because I only ignore the fact that we already paid 47p if you were if you're an additional top rate payer because I I think there again disingenuous from v various governments who say, "Oh, it's 45p." But it's not 45p, it's 47p, isn't it?

[00:14:58]>> Yeah, that's right.

[00:14:59]>> Hel, thank you very much indeed for that. Uh, Hetel Meta, who's chief economist at St. James's Place, Ben, moving on.

[00:15:06]>> Yeah. And if you want more on the UK situation, it's well worth checking out Ian King's latest newsletter. It's out now this week focusing on foreign takeovers of UK listed companies or as he puts it the great British selloff.

[00:15:20]And still to come right here on the show, Santandere's net profit rises 17% as the lender says it's on track to meet its [music] targets for the year. We have the latest after the break. Plus, President Trump threatens [music] an attack on Iran's Pickax Mountain nuclear site. More on that later this hour. And we'll be joined by the CEO of Axon [music] Nobel as the company reports its latest earnings. That interview at 7:40 this morning, London time.

[00:15:59]Executive Decisions is the new podcast from CNBC where I [music] ask powerful leaders about their decisions that changed everything. I'm Steve Sedwick and here's the CEO of Seaman's Energy, Christian Brook.

[00:16:11]>> Business leaders should not stay quiet in a world which is super complex. We sit in a privileged position and we have to use that to ensure that the society remains prosperous, stable, successful.

[00:16:23]>> That's executive decisions with me, Steve Sedwick. [music] Get it wherever you're listening to this.

[00:16:35]>> [music] >> All right, there's many things going on, but let's let's say there three things going on at the moment. One is the oscillation that we're all seeing over uh semiconductors and technology related stocks as well. And what a lovely roller coaster for all of you on a daily basis that is. Yesterday's move on the US markets was a northerly direction for the NASDAQ and for technology stocks and semiconductors as well. A second thing of course is we're all keeping an eye on what is going on with the war with Iran and the oil prices continuing ticking up as well which is a bit of a negative for the market. What was a positive though um was without doubt the earning season and we're only in the foothills of the earning season but a couple of companies reporting yesterday the likes of 3M which beat and the shares rallied around about 7%. Um GM also up around about 5%.

[00:17:27]So the earnings beats are actually slightly more than the historic levels at the moment. We normally beat at somewhere between 68 and 73% as well.

[00:17:35]We're beating at around about 88% albeit with only a sampling of 66 out of 500 companies that have reported so far.

[00:17:42]Alphabet and Tesla are still to come uh in the next 24 hours. Let's take a look at the Asian session and where we are on the key indices there. Um wow, look at that. A rather tame performance from the Cosby which has just been extraordinary in some of its big moves. Maybe some of that clampdown on the leverage plays having a bit of an effect there. trading up 7/10 of 1% at 6796. Elsewhere, the NIK is down. The Hang Sang down 1.2%.

[00:18:11]European futures look like this. On the equity front, we are called higher across the board.

[00:18:19]The Spanish lender Santandere says it is on track to meet its targets for the year. That's after second quarter net profit gained by 17% to€3.8 billion e, which is slightly better than forecasts.

[00:18:31]I'm delighted to say that Joseé Garcia Cana, the CFO of Santandere joins us live on the show now. Um, just explain for us where that uh that increase in profit came from.

[00:18:45]>> Good morning. Um, this is the first quarter where we incorporated TSB.

[00:18:51]Although in the numbers TSB it's a relatively small uh amount. Most of the improvement comes from the 12 million new customers that we added in the last 12 months. Uh in addition to obviously the operating leverage that are digitalization what we call internally one transformation means for the bank.

[00:19:16]This ended or this resulted in NI up 7% year-on-year for the first half with fees up 9% that we are increasing fees per customer. Cost to income was 42% as a consequence of the fact that costs were actually down in absolute terms and cost of risk was flat. So the bottom line as you said increase the the recurring bottom line in the first half uh was 7.3 billion euros increasing 15% year on year. Um, now if let's say a a new incoming prime minister saw these figures and thought, "Blime me, these banks are doing pretty well, they could they could weather a bit of an extra tax uh burden in order to to pay for investment and and infrastructure to boost the UK economy." How how concerned are you about this idea that's been floated in the UK?

[00:20:12]>> We've been in the UK for over 20 years.

[00:20:14]We are the largest uh investor in the financial sector in the UK and one of the largest investors in the UK as a country. We just as I mentioned incorporated TSV into Santandere. Uh so we believe that the UK is a great country to uh do business in and to operate. This is early days. The government is being formed as we speak uh is forming as we speak. And uh in any case, as we've mentioned in the past, taxes that are um let's say that target a particular sector or a particular group of companies generally distort the economy and in the case of the banks, this is particularly important because of the role that banks play in the growing in the growth of the economy. So am I correct to take it that you would caution Andy Burn and the prime minister against such a move?

[00:21:13]>> Well again we believe companies individuals must pay the right amount of taxes but the tax regime must be let's say homogeneous and must be fairer to all participants.

[00:21:28]>> All right. Um Jose first of all my my colleague has missed the big story and that is congratulations to Spain. Oh my goodness me. Well, we're all very very pleased to see you do well, of course.

[00:21:39]So, fantastic. I mean, that is the the great story actually on football. Why don't I just go there as well? Does it have any effect on on people's appetite to go out and consume and do actually take on more Santandere services?

[00:21:51]>> Well, thank you. It was wonderful to see Spain win the championship. I think the team did a great job and we are all the Spaniards are very very proud of what the team achieved. In terms of economic impact, we don't think it will have a massive economic impact. It will be uh negligible. But again, this is a good feeling. Uh it's good feeling for Spain and uh and it's great to see Spain winning the championship.

[00:22:15]>> Yeah. Yeah. I'm I'm I have to say if England can't win it, then I'm very happy that Spain did as well. Um look, let me move on and one of your biggest markets, of course, Brazil. Big Latan market. Tariff threats left, right, and center. Who knows what's going to happen electorally as well. How's Brazil fairing?

[00:22:32]very well indeed uh given the fact that rates are not normalizing as fast as we thought. Rates are around 15% close to 15%. Which means that real rates are around 10% and obviously this is you know putting pressure on the economy despite which the economy is doing very well and we are actually doing very well. We earned a return on equity in the country of close to 15%. With NI expanding, cost of risk under control, it was in terms of countries, it was the second largest contributor to our profit in the first half.

[00:23:10]>> Yeah. And I and I guess I probably should just go northwards then as well.

[00:23:13]You are headquartered in Boston, I understand, for your US group. Uh um over $165 billion in US assets as well.

[00:23:24]Um what about that operation? Is that performing as well as Brazil and elsewhere?

[00:23:29]>> Yes, as as you know we are uh waiting for the approval for the Webster acquisition in the US. We got the OC approval already and yesterday the ECB gave us the approval uh on their uh from from from their side. We are still waiting for the Federal Reserve approval which is on track. uh from the beginning we expected Webster to be uh part of the bank in the second half of the year. uh so very much on track the business is doing very well uh as as as you see with with all the components of the P&L doing very very uh well and the return on equity we got in the US was 13% which is the highest ever that we have achieved in the country. So even before the Webster acquisition and the integration with Webster, our US operations are doing very very well.

[00:24:21]>> Very good. Um look, whether it's United States, Brazil or indeed back here in Europe as well, interest rates are higher than everybody would have thought they would have been at the start of the year because of various factors, tariffs to a certain degree, but certainly because of the war with Iran and what that's doing to a whole host of prices as well. It's very lazy for this journalist and other journalists to say, okay, higher interest rates, better net interest income, better net interest margins as well. Of course, it comes at a cost as well and it potentially comes at a cost of delinquencies. How does the equation look to you at the moment, Jose, in terms of higher interest rates and what that's doing economically?

[00:25:01]>> For the past six months, we have been living in very volatile times. from the trade uh situation to the war in Iran has been a very volatile few months despite which the economy is being very resilient and this resiliency is demonstrated in labor markets. Labor markets are very very strong. New jobs are being created and employment remains very much under control and this is the key variable for asset quality. So what we are seeing is raising rates is good for NI. We are monitoring very closely obviously the credit quality of our different businesses but so far there are no signs of of asset quality deterioration. In fact in nine out of our 10 main countries asset quality improved in the last 6 months relative to last year.

[00:25:49]>> Can I just ask you why you think that is and if you're surprised by that? I'm surprised by it Jose as well. I look at some of the financial tensions. as I look at some of the gearing uh and and I would expect a slight deterioration in credit quality and increasing delinquencies. Why are we not seeing it this time round?

[00:26:05]>> Again, because people are keeping their jobs and new jobs are being created. And yes, it's true that we are talking about higher rates but from relatively low levels. In Europe, rates went up from two to two and a quarter, maybe go up to two and a half. These are really low levels. So if people keep their jobs and interest rates are at these levels, maybe a bit higher, their capacity to repay their debts remains intact.