Fed Holds Interest Rates Before Microsoft and Meta Report Earnings

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1:39Carol Massar:Bloomberg Audio Studios. Podcasts. Radio. News. This is Bloomberg Business Week Daily. Reporting from the magazine that helps global leaders stay ahead. With insight on the people, companies, and trends shaping today's complex economy. Plus, global business, finance, and tech news as it happens. The Bloomberg Businessweek Daily Podcast with Carol Masser and Tim Stenevek on Bloomberg Radio. It is the fifth FOMC decision of the year, that's for sure. And it was an interesting one. Gotta say, first of all, Fed officials, as expected, leaving interest rates unchanged, downgrading their view of the U.S.

2:19Carol Massar:economy. It's a sign policymakers could be edging closer to lowering borrowing costs. But got to say, we moved around a bit in terms of expectations. Governors Christopher Waller and Michelle Bowman voted against the decision in favor of a quarter point cut. You kept pointing this out to me. Yeah, it's the first double dissent going back to 1993 for the Fed. So is that right? In 30 years. Yeah, 1993. So it's pretty wild. So one thing that I noticed about what Jay Powell said, we're going to get to some of his comments in a second. But I just want to he was asked what their conversations were about the dissents.

2:57He was like, I'm going to let them speak about it in the coming days. So you will hear from them. So stay tuned.

3:02Carol Massar:Blackout period stops on Friday. So we're going to hear stuff. Hey, what we should point out, man, it was quite an interesting meeting at today's press conference with reporters. Fed Chair Jay Powell covered a lot of ground, a lot of ground. And what he said was one of the better meetings of the U.S. Central Bank. Inflation has been running somewhat above our 2 percent longer run objective. Recent indicators suggest that growth of economic activity has moderated. The moderation in growth largely reflects a slowdown in consumer spending. Inflation has eased significantly from its highs in mid-2022, but remains somewhat elevated.

3:36Higher tariffs have begun to show through more clearly to prices of some goods, but their overall effects on economic activity and inflation remain to be seen. Basically, this was quite a good meeting all around the table. We have made no decisions about September. We don't do that in advance.

3:51Carol Massar:As you just heard, a lot from the Fed chair today, certainly in a statement as well as the Q &A with reporters. So it's made for an interesting trade because we definitely have stocks off of our highs of the session. We've seen rates bounce around as well. I think initially moving a little bit lower and then bouncing back up. So there's a lot for investors and traders to take in from this Fed meeting. Yeah, there really is. Let's bring in Karen Veripera, Managing Director and Head of iShares, U.S. Fixed Income Strategy at BlackRock. She joins us from San Francisco. It is the world's largest asset manager, had$12.53 trillion in assets under management at the end of the second quarter.

4:31Karen joins us once again from San Francisco. Karen, did the Fed get this right? I think so. So we were just also watching the press conference here on our trading desk. And I think that their main message was we're keeping rates on hold because inflation is still above target. And that would that would speak to really keeping a little bit more restrictive. So I think this is actually a good thing in the long run for investors because they're still getting higher levels of interest rates. They're able to reinvest and keep the fixed income asset allocation on track. And so I think for a lot of investors watching the Fed, one of the things that they should take note of is really if these inflation prints are going to continue to come in a little hotter than they expect, maybe you should consider adding some inflation-linked bonds to portfolios.

5:16So we're seeing that being a big trend, people really refocusing on adding inflation protection back in.

5:21Carol Massar:I love that you went right there. I mean, anybody who's a bond investor, I mean, at this point, has to coming off of this press conference with all the pressure that the Fed chair has gotten from the president of the United States have to think that, OK, this guy is going to do his job no matter what. Yeah, I think that's right. I think we're just so focused here on the long-term trends and meeting to meeting. We're going to see, I'd say, a lot of price action in the bond markets. But I think it's really important to think long-term. And whenever we're looking to the next meeting, as you highlighted, September 17th, there's still a chance that they're going to cut at that meeting, but they've still got two more on the calendar.

5:59And if we just take a look at the dot plot from June, we saw a couple of governors—two governors favored three cuts and I think we now know who they are but then the other eight favored about two cuts and that's still what the bond market is pricing in so I think anybody looking at the short-term focus they can probably still use that as a barometer. So you say there's a chance that they'll cut at the September meeting you don't think that's a done deal at this point? It's hard to say I think I think especially Chairman Powell's comments during the press conference were really telling is that they don't want to get ahead of themselves.

6:31We actually got core PCE coming out tomorrow, and that's also been trending about 2.7 percent. I think that's an important number to watch. And we're seeing a lot of investors are slowly starting to move back into fixed income assets, even with some of the uncertainty here. There's still about$7 trillion sitting in money market funds, earning those overnight rates. And then we're slowly seeing people allocate back into more core fixed income exposures, even international bonds, rather than just sit in cash. And they're trying to get ahead of the Fed meeting, And that's what we're seeing money move towards.

7:02Carol Massar:You know, what's interesting to Diane Swank in our Fed coverage earlier today, noting that we had an inflation print today reminding us where we saw inflation in both goods and services. I am curious to throw on top of that tax cuts, targeted spending by the legislation that just passed in Congress, expectations on more deregulation and AI making companies, workers, if you will, more productive. that sounds to me like it's stimulative policies. I think that's really the trick is finding the balance between some of the good data that we are getting and some of the productivity gains. We've seen positive wage growth.

7:42I think there's been, even though the GDP print came out higher than expected, there was a lot of noise in that just with imports and exports. But I do think the economy is pretty strong and the Fed's just trying to get back to that neutral rate and figuring out the timing of that is really the tough part. So there's a lot of investigation.

7:59Carol Massar:No, I get it. There's a lot. So is it smarter in your view? And it sounds like this is where Jay Powell is leaning to make sure that inflation they really do have under control. You don't want to make the mistake of cutting and then having to kind of backtrack and re-raise rates because of inflation ticking higher. That's right. I think their wait and see approach is going to be the playbook for the rest of the year. So no more rate cuts? No, I think they're just going to wait and see what the data is telling them. So, I mean, I think personally we'll still get one or two cuts probably in the back half of the year.

8:33So that really speaks to those October-December meetings. But then the Fed did not want to take September off the table either. So I think they left a lot of optionality open during this meeting. What would make you change your mind about September over the next month? And say essentially that September will definitely see a rate cut? I think a couple of factors. if we see some of those inflation prints coming in lower than expected in a meaningful way. I think if the trade deals solidify and we get some tariff rates that are not expected to be passed through with inflation, because that's still the big uncertainty out there.

9:05And just to make sure I have this clear from you, are you certain that the next move by the Fed will be a cut and not necessarily an increase? I don't think it'll be an increase. I think that that's not really what's being priced into bond markets. And I think a lot of the discussion around the cuts is really just trying to move it back towards that neutral rate and not becoming more. The reason. Yeah, sorry to cut you off. We only have about a minute left. The reason I'm interested in that is because we haven't necessarily seen the effect or the impact of tariffs make their way into the inflation numbers.

9:37And what economists tell us is just wait, just wait, just wait. It'll happen. But it hasn't happened. So if that does happen, does that change the trajectory of the Fed? I think, if anything, it just keeps them on hold for even longer because I think they're going to be reluctant to have done a few cuts already and then make it hike. So I think it'll really just come down to the data and how quickly they can model that. And I think that was something that was highlighted at the press conference today.

10:02Carol Massar:Hey, just to wrap up, because we talked a little bit about, I think, where you were finding either opportunities or suggestions to investors. But going back to a Fed that and a Fed share that understands his mandate, understands what the Fed's job is, understands what the FOMC's job is in the Federal Reserve in terms of monetary policy and what global investors expect. Having said that, you feel pretty confident maybe going longer out in terms of buying into the U.S. Treasury market? And just quickly, about 30 seconds. Yeah, I think rates remaining high are good for investors. I think stepping out of cash, if cash rates are projected to come down, locking in some of those bond yields are really good for investors.

10:42I think getting your duration back towards, call it the three to seven year part of the curve, is probably prudent for a lot of investors right now who are overweight cash.

10:50Carol Massar:Great stuff. Karen, thank you so much. Busy, we know, for you as well as for us, but really appreciate you carving out some time for us. Karen Vera Perry, she is head of US iShares Fixed Income Strategy over at the massively BlackRock. I mean, what are we talking about? Massively massive black rock. $12.53 trillion in assets under management. That was at the end of the second quarter. So there's a lot of noise about AI, but time's too tight for more promises. So let's talk about results. At IBM, we work with our employees to integrate technology right into the systems they need. Now, a global workforce of 300 ,000 can use AI to fill their HR questions, resolving 94 % of common questions.

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12:26Carol Massar:All right, everybody. We've got Meta Platforms, Microsoft, both out with earnings. Those are the big ones. There's a lot that are out there, but we want to get to it. We've got great team coverage here at Bloomberg and also some great outside voices. So let's get to it with Dan Ives. He's Managing Director and Senior Equity Analyst and Global Head of Technology Research at Wedbush Securities. We're going to start with Meta. Let's talk about it. The stock's up about 8.5 % a year in the aftermarket. What do you like and what don't you like? Do you not like anything? There's nothing not to lie I mean like Look it speaks to You go through this AI revolution It's in this next stage of growth And all the money That you're seeing these big tech players CapEx Now you're ultimately starting to see Some of those dividends get paid And then you think about the advertising growth Similar to what we saw with Alphabet What you see with Meta Subscriber growth I mean this It's Goldilocks you know, for tech.

13:22How does Meta harness AI to make money apart from making its advertising more efficient? It's about the billions of users. It's about going forward, how they're going to monetize AI. They're not just spending to spend. They're going to be able to monetize from an advertising perspective. When you think about the billions of users they have, that's - How do they do that, though, Dan? And the reason Zuckerberg right now is what I view as like a wartime CEO, it's the view that when you think about AI today, this is just the beginning. And you're going to have AI-driven search. You're going to have sort of the future.

14:08That meta, alphabet, are going to play huge pieces in the advertising piece.

14:17Carol Massar:But I want to go – so it's just advertising that that's where they're going to make all their money back. We know that they have been on such an aggressive AI talent grab and Meta has. I mean hundreds of millions of dollars. Yeah. Like pay for individuals. So that's all going to pay off. Their return on investment. That's just the beginning. OK. Advertising. Advertising just the beginning. When you think about full – what I view as sort of like full AGI. The holy grail, what Meta is trying to build, what every big tech player is trying to build. Meta is basically looking to create a whole other company over the next decade.

14:58That's what they're spending on. This is what I'm still waiting for. Meta platforms, look, no question this was an incredible quarter. The stock is up 9.3 % in the after hours. Just to repeat the numbers, second quarter earnings per share, a huge beat,$7.14. The estimate was for$5.89. Second quarter revenue, a huge beat,$47.5 billion. The estimate was for$44.8 billion. Third quarter revenue,$47.5 to$50.5 billion. That's the outlook. The estimate was for below that at$46.2 billion. But Dan, I want to look with you years out when the hardware that they're working on, that they're spending billions of dollars on, will start paying dividends.

15:43What does that future look like for meta users and for meta investors? You have to think about it like what's the future in terms of robotics, in terms of software, in terms of how AI is going to play a role in the everyday of a consumer. I mean, meta is thinking not in the next year, three, five, eight, 10 years out.

16:07Carol Massar:I want to bring in Mandeep Singh, if I may, of our Bloomberg intelligence team. I don't know if it's too soon. And I know you're going through all the numbers because I want to bring you into the conversation with Dan. Good quarter, killer quarter. How do you see it? Yeah, I mean, there is a sequential acceleration in ad impressions as well as ad pricing growth. And to my mind, that is a sign of them applying AI to boost engagement. Obviously, the user growth has been almost the same every quarter, you know, four to five percent. So the fact that impressions grew 11 % is a sign that people are spending more time on their family of apps.

16:45And then the ad pricing going up 9%. That, to me, is the real tailwind because that was the risky part. Chinese advertisers like Timu and Sheen pulling back because of the de minimis rule changes. That didn't happen. That didn't show up in the numbers. And look, when it comes to applying AI, I mean, small advertisers are now connecting Meta to their CRM systems. And actually, that is what's driving the ad targeting and efficiency. That wasn't the case before. That has been enabled by Gen AI. So that's why you see that. So you agree with Dan? I think Gen AI use case is quite prominent. We keep hearing about coding agents, customer service.

17:27Here is the precise use case for Meta. And that is what they are showing in their ad pricing numbers. Dan, come on in. I saw you're saying something. That sounds like a bullish Mandeep. I mean, that's like on the Mandeep scale. That's pretty bullish. I like that. Hey, Dan, I noticed something striking today when I opened up Instagram. I was searching for a video from Mike Birbiglia, a comedian who I really like. And what I noticed when I was just looking for his profile, When I typed in his name, what appeared was an AI answer about a biography of who he was, information about him. What is the vision for Instagram?

18:10Is this going to be Meta's super app? To some extent, they're basically creating a super app. I mean, similar to what you see in China, but an AI-driven super app. And you start to go through that, you're looking at a four-digit stock. They tried to do this years ago with David Marcus on the messenger side, Mandeep. It didn't necessarily work. It was supposed to be payments and everything. Is that still, in your view, an area of growth for the company here? Or is that strategy gone? I mean, right now, it feels like they have a lot of runway with ads. And there is a clear use case for Gen.AI with ads.

18:53I mean, they still have to fix the model. So I think the advantage that they have is really they are the best when it comes to ad targeting. And with everything that's going on, I mean, they have the surface area to apply Gen AI. But look, when it comes to payments and other areas, they still lack the diversification of a Microsoft or a Google. It's still a one-trick, I mean, albeit a$200 billion company, but still dependent on ads.

19:23Carol Massar:Dan, you know, it's funny because I was thinking about that because we, you know, we talk about all of these companies and I think about the hyperscalers like an alphabet. We've talked about that a lot, Mandeep, about just all of their different platforms and how much data that gives them to make their models smarter and smarter. I mean, Dan, is it going to be OK for Meta to be kind of a one trick pony, even if it's I mean, it's a massive one trick pony. But is it enough? well i mean like look i think if you think about it like on a pecking scale of course like nvidia at the top microsoft and you look at these numbers just just unbelievable in terms of across the board you look at meta yeah you call one trick pony ish but that's but they're going to significantly expand that over the coming years no i i mean at least for now there is no proof.

20:12I feel they are under earning by 20 % because of all the losses in reality labs, but the street doesn't care because their ad business is really going gangbusters. When the ads slow down and the comps will get tougher and there will be a point when ads will not grow 20%, that's when I think the question will be asked, why are they losing$20 billion on reality labs? Because it's not making any money. When will it start making money, Dan? And does it matter? I mean, look, it's going to be a while. But the whole point is right now that's background noise. In other words, street wants them to continue to invest and invest, build this further out.

20:54And at the end of the day, that is going to come into the fold. But you're not right now in this arms race in big tech. You are a laser focus on who's going to be the winner. And that's what we're seeing from Microsoft to Alphabet to Meta. You know, obviously, you know, across the board, we'll see it with Amazon as well. Like, it's an arm's race. I mean, the one other data point I would want to bring in is token count. So Google and Microsoft have shared the Gen AI consumption, the token count. We don't know how much Meta's models are being used. Yes, their ad targeting is great, which is why ad pricing was such a solid number this quarter.

21:37But at the end of the day, if you're investing$70 billion in CapEx, you want to see your model being used and the open sales strategy work. We have no proof points of that. So I still believe they have the most uphill task in terms of showing ROI on the CapEx besides their family of apps. And that's still the case. Dan, I know you got to go, but 30 seconds, last question for you. What's the one question you'd ask Mark Zuckerberg tonight? Look, I think it's really about a cat-backed trajectory, because I think that's your shit. Even though that was slow a bit, they're putting, as they continue to spend, you know what that shows?