Daybreak Weekend: Fed Decision, Cybersecurity Conference, China Eco

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1:20Bloomberg Audio Studios. Podcasts, radio, news. This is Bloomberg Daybreak Weekend, our global look at the top stories in the coming week from our Daybreak anchors all around the world. Straight ahead on the program, we'll look ahead to the final monetary policy decision from the Fed of 2025 and how that could affect interest rates into the next year. I'm Nathan Hager in Washington. I'm Caroline Hepker in London, where we're looking ahead to the Black Hat Cybersecurity conference in London. I'm Doug Krishner looking at why China's economy is stuck in deflation. That's all straight ahead on Bloomberg Daybreak Weekend.

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2:20Good day to you. I'm Nathan Hager. We begin today's program with the Federal Reserve. The central bank holds its final two-day policy meeting of 2025 this week, issuing its final monetary policy decision of the year on Wednesday. So for more on the path ahead for interest rates, we are very pleased to be joined by Stuart Paul, U.S. economist with Bloomberg Economics. Stuart, thanks for being with us. And it seems as though the market has all but fully priced in that we are going to get a rate cut this week. Did some of the private data that we've seen ahead of this decision sort of shake any of that bet?

2:57I don't think so. When we look at some of the private sector data, including the ADP report showing a pretty cool labor market, and then some of the official data as well, relatively weak manufacturing in the month of September, import prices that were relatively dull when we received those data points earlier last week, all of it basically gave the green light for this rate cut. So I don't think that the Fed is going to be that concerned about whether it can defend its decision to cut when it meets this week. I think that the bigger conversation around the table at the FOMC meeting is going to be what message to send to the markets and what message to send to interested parties out there when it releases its summary of economic projections.

3:44I think that's where we're going to see more division and, in fact, maybe a little bit of confusion. How so? I mean, I guess we have seen sort of diversion of thinking when it comes to where policy should go from even some of the Fed speakers ahead of this meeting. But, I mean, how much of a change could we see in the dot plot? I think it's going to be pretty significant in 2026. And I think that even more important than the dispersion of dots in the dot plot included in the summary of economic projections is to remember that the voters on the FOMC next year are going to be shifting pretty dramatically.

4:24There is going to be a contingent of hawkish regional Fed bank presidents that become voters, and among them are Dallas Fed President Lori Logan, Cleveland Fed President Beth Hammock. Those are some folks who were among the more hawkish and the more vocal Fed speakers over the last several months. And when they become voters, it's going to be all the more important to try to identify which dots they are. And I expect they're going to be among the more hawkish cluster when we look into 2026. A lot of attention has been put toward who the next Fed chairman is going to be. But I think that more important, actually, than who the next Fed chairman is, is this point about division on the Fed, because we're going to see a lot of it.

5:13We're going to see a growing division on the Fed. And we've even heard some concerns raised, I guess you could say, about whether that next Fed chair is going to be able to deliver the kind of rapid rate cuts that President Trump has been looking for. We heard from P. Jim's Greg Peters just in the last couple of days saying even if it is Kevin Hassett, the president's White House economic advisor, he might not be able to get that kind of consensus. How do you see it? I think that's right. I think it's going to be difficult for the next Fed chairman to build a coalition of voters that can show some sort of a united front around the pace of rate cuts.

5:52I think that's going to be true of any Fed chairman. It seems as though a lot of attention over the last week has turned to whether or not somebody like Kevin Hassett, someone coming from the White House, has the credibility that the Fed will remain devoted to its 2 % inflation target. somebody like that has the credibility to keep markets calm. I will say that when the trial balloon was floated a couple weeks ago now regarding Kevin Hassett as the finalist for the chairmanship, he passed the markets test with flying colors. Equities rallied, two and 10-year rates fell. It's exactly what the White House wants to see.

6:30So as much as we've heard chatter over the last week questioning whether somebody like Hassett has the credibility to build a coalition or to maintain the Fed's 2 % inflation target. It seems as though the market thinks he has enough credibility. It seems as though, to me, no matter who the next Fed chairman is, it's going to be difficult to build a coalition. I think that's just the nature of the evolving voting roster at the FOMC right now. So, given the evolving roster, how much attention should the markets be putting on Chairman Powell's news conference after the decision on Wednesday? I think that markets will put a lot of weight on it, basically, no matter what.

7:12He still is the person who will be leading the FOMC for pretty close to six months. And I think that the question is going to be around whether the Fed will maintain any sort of cutting pace in the first half of next year, given the expectation that a new, more dovish chairman will take the reins starting in May. So I think that when we see this press conference from Fed Chairman Powell on Wednesday, the question is really going to be, what's it going to look like in January? What's it going to look like as we get towards the end of Q1 and into Q2? What is the Board of Governors and what are the regional Fed bank presidents thinking about cuts in the first half of next year?

7:54Right now, our base case in Bloomberg economics is for the Fed to move more towards a quarterly cadence of quarter point cuts next year. And that's based on our expectations for economic fundamentals right now. I think that Fed Chairman Powell is going to try his best to not show his hand in any one direction. But again, when we just look at the evolving roster, it's going to be very difficult next year to deliver quick rate cuts, the kind that the president wants. Yeah, it is going to be a fascinating discussion and a fascinating final decision coming up later this week. Thank you for this, Stuart.

8:32Really great having you on with us. That is Stuart Paul, U.S. economist with Bloomberg Economics. We move next to more corporate earnings in the tech space. We hear from two big names on Wednesday, Oracle and Adobe. Let's bring in Bloomberg Intelligence Technology Analyst Anurag Rana for more on this latest round of tech results. Anurag, these are a couple of names that have kind of been hit pretty hard lately around the question about whether artificial intelligence valuations have gotten too stretched. So let's start with Oracle. How high is the bar for their earnings? So I think they have to come out and basically explain that the big backlog of orders that they have from OpenAI, how is that going to get funded?

9:12And how is that going to get recognized into revenue? That is the single biggest question in our mind at this point, especially when you go back and look at the stock chart. It had a massive run-up when the Oracle announced that big order book from OpenAI. But in the last, you could say, two months, two and a half months, there has been a lot of scrutiny in the market as to how some of this is going to get funded. And that, I think, is what has been weighing on the stock. So the management has to come and explain their strategy of data center expansion and where that money is going to come from.

9:50Yeah, to your point, I think we saw in just the last few days a report that the cost of protecting Oracle's debt from default hit its highest level in more than 15 years. I mean, what kind of explanation can we expect for how Oracle can kind of service that? So one of the things you have to think about it is there is a lot of investor demand for anything that's related to data center expansion, because I think people understand that's an area where you are looking at more and more build up over the next several years. So, you know, whether it's private credit or whether it is private equity, a lot of these companies may be able to fund some of that expansion.

10:30But the big question is, you know, at what level? Because one of the things is OpenAI has talked about, you know, several hundred billion dollar investments out in the public for those data centers. So the appetite is not so much. And also remember, Oracle is not the one that's funding a lot of that from their own balance sheet or their cash flow. They go out in the market, they raise the funds with the help of a consortium, and that goes into that special purpose vehicle. It does not impact Oracle's balance sheet directly. But at the end of the day, they are the ones who will be recognizing some of the revenue from it, not just the investors.

11:10So they have to come out and explain a bunch of these things. Where do you see Oracle stacking up compared to some of the other hyperscalers? I mean, we think of the Magnificent Seven all the time. And Oracle, of course, isn't part of that cohort. Is it going to stay behind? So one of the things that we have talked about quite a bit over the last few years, when it comes to cloud computing, there are three big players, Amazon being the biggest one, Microsoft after that, and then Google, you know, the third player. But because of this massive demand for AI infrastructure and AI infrastructure workloads, Oracle has really kicked up and become what we call as the fourth hyperscale cloud providers.

11:50And the big question is, are they each other taking market share from each other? There is a little bit of that going along, but at the same time, the market has expanded very, very strongly because one of the things that you have to do is when you're running an application like ChatGPT, you will be running on a cloud infrastructure. You typically don't run that in somebody's internal data center. Same thing for an enterprise when they are expanding some of these AI workloads. Cloud is usually where it's hosted. So when you take a look at that, the end markets, which is cloud infrastructure, has actually grown quite nicely, which gives growth opportunities for all four vendors and not just one or two.

12:31Let's talk about Adobe now. Looking at a chart on that stock, it's kind of upper left to lower right for the whole year here. So what are the expectations around Adobe's results? Yeah, I think that seems to be a big story when it comes to Adobe that their lunch is going to get eaten up by AI-related tools that are out there, free tools. So when you look at Adobe and you go back a few years before the launch of any large language models, this company used to trade even higher than Microsoft because of high free cash flow, the perception that nothing can happen to some of their marquee products that is Photoshop or Acrobat, etc.

13:12But what has happened is when you're seeing these free products that can create images and videos, investors are worried that their code business is going to get attacked and they won't be able to protect that. Now, when you look at the results, at least in the last three quarters, they have reported decent results. But at the same time, they have not seen any acceleration. And I think that always brings that question mark. So we're going to see that a little bit of the same thing. They're going to come out, talk about how they can grow next year. They're going to talk about their own AI products.

13:47The question is whether that's going to be enough to pacify this fear that's out there in the market that Adobe is a net casualty of AI-related developments. Thanks for this, Anurag. Great having you with us. That's Anurag Rana, technology analyst for Bloomberg Intelligence. And coming up on Bloomberg Daybreak Weekend, we look ahead to the Black Hat Cybersecurity Conference in London. I'm Nathan Hager, and this is Bloomberg.

14:50Thank you.

15:10Hello, I'm Stephen Carroll. I'm in Brussels, where many of Europe's biggest decisions get made. And I'm Caroline Hepker in London. We're the hosts of the Bloomberg Daybreak Europe podcast. We're up early every weekday, keeping an eye on what's happening across Europe and around the world. We do it early so the news is fresh, not recycled, and so you know what actually matters as the day gets going. From Brussels, I'm following the politics, policy and the people shaping the European Union right now. And from London, I'm looking at what all that means for markets, money and the wider economy. We've got reporters across Europe and around the globe feeding in as stories break.

15:48So whether it's geopolitics, energy, tech or markets, you're hearing it while it happens. It's smart, calm and to the point. And it fits into your morning. You can find new episodes of the Bloomberg Daybreak Europe podcast by 7am in Dublin or 8am in Brussels, Berlin and Paris. on Apple, Spotify, YouTube, or wherever you get your podcasts.

16:12This is Bloomberg Daybreak Weekend, our global look ahead at the top stories for investors in the coming week. I'm Nathan Hager in Washington. Up later in the program, we'll preview upcoming data out of China and the health of the Chinese economy. But first, cybersecurity challenges facing Europe are clear. Airports, businesses, financial institutions are all at risk from an increase in cyber attacks by criminals and state actors. That's the black drop to the Black Hat Europe conference in London, which gathers top professionals for briefings on modern day strategies to counter those threats online.

16:45Let's get more from Bloomberg Daybreak Europe anchor Caroline Hepker in London. Nathan, the Black Hat Cybersecurity Conference in London over the next few days will look at the latest trends in cybersecurity. As attacks are becoming increasingly costly for governments and businesses, sometimes into the billions, briefings will be held on how to bolster cyber defence strategies in both the public and private sector. The Bloomberg London Tech Summit recently featured interviews with top CEOs on how businesses can build resilience in a rapidly changing threat landscape. Speaking at that summit, Yevgeny Dibrov, who is the CEO of the cybersecurity firm Armis, who explained why there's been such a surge in interest in the company.

17:33The great demand that we are witnessing right now because of attacks on critical infrastructure, basically all the geopolitical tensions, Russia, Iran, North Korea, everybody, you see a lot of targeting infrastructure, targeting national infrastructure, the most critical areas from airports to grids to manufacturing in the US, in EMEA, we see a lot, UK as well. That was Amis CEO Yevgeny Dibrov being interviewed there by Bloomberg's senior cybersecurity reporter Jordan Robertson. And Jordan is with me. Great to have you on the programme. It has been such an important and interesting year, hasn't it, for your beat.

18:19the era of rapid digital advancement of AI. Can you just talk to us about the elevated kind of cyber threats levels that we're seeing in the UK, in Europe? I mean, you heard it in that interview that you did. It's everything from big companies to personal data to airports, this ahead of discussions at Black Hat. Sure. Yeah. Thanks for having me on. You know, if you take a look at the conference agenda for this Black Hat conference, I mean, first of all, it's a very technical conference. It's technical content for technical people. But the overarching themes are still the same that people would kind of recognize.

18:55And there are two main themes that are happening in cybersecurity right now. One, and perhaps the biggest one, is ransomware. Computer hacks used to be pretty secret things. Companies, by and large, could keep these events secret unless certain data was leaked and they could prove that certain data was leaked, personal information, things like that. But most cyber attacks were secret and companies were allowed to do that. you can't keep secret a ransomware attack because your business stops. And we saw that this year with the attacks on M &S. We saw that this year with the attacks on Jaguar Land Rover, which brought really significant critical operations to a halt.

19:28And this idea of ransomware, which very often is executed by young people, by kids in many cases. You're talking about teenagers. You're talking about young people who connect online and kind of, I guess, get radicalized, if you will, and see this as a real business opportunity. There are millions of pounds to be made through some of these hacks. These attacks are very easy to do. They're extremely disruptive. You can get a lot of money in extortion fees if you're the hacker. So, you know, one of the things that the cybersecurity industry, including this conference this coming week, you know, is really focused on is, you know, technically, how do you get ahead of these attacks?

20:05Like, are there technical countermeasures you can put in place to repel ransomware attacks? And it's a really hard problem because it's not so simple as saying there's a bad actor on my network. Therefore, they're not allowed to do anything. Bad actors routinely impersonate real users or steal credentials of real users. So if you're running a large network, the biggest threat to your network is going to be somebody on your network that is using credentials that belong to your employees. So very, very hard problem. There are no easy technical solutions. But that's one of the themes of this conference.

20:39And another, which is kind of a perpetual theme, you know, ransomware is here to stay. And one of the things I like to describe is that we didn't have ransomware before we had crypto. Like we have crypto and now we have ransomware. And the two are interrelated because prior to crypto, it was really hard for hackers to get paid. They would sell data on the dark web and, you know, they'd have fake bank accounts. And it was very, very challenging to actually collect revenue from your hacks. But now that you have digital currencies, that's what's facilitating all of these attacks and making it easier for making it possible for criminals to get paid.

21:16The other side of the ledger are espionage attacks, as you heard the Armist CEO talk about, which is now that everything is digitized from obviously from telephones to cars to transportation networks to the power grid, everything will have a digital footprint. So every country on the planet has intelligence services that's trying to build up their cyber capabilities to potentially disrupt their adversaries. And that can range from hacking into a power grid and not doing anything, but positioning yourself so that if there is some sort of armed military conflict, you can flip a switch and turn off the lights.

21:53And those are the threats that people are trying to protect against. Yeah. And wow, that's a kind of head spinning list, isn't it, in terms of the threats that are out there. And you mentioned a little bit about the difficulties of how businesses come up, specifically businesses with strategies to try to counter these attacks. Maybe we can talk about that a bit more. Because the thing that was extraordinary about the JLR hack in the UK was that the government agreed to an emergency loan for Jaguar Land Rover so that it could pay its suppliers. They were worried about the fallout across the UK.

22:27And so that is something very novel as well. The Jaguar hack was very significant in many ways, and we did some pretty great coverage of it. And as you mentioned, the most significant aspect of it was the UK government stepped in and underwrote an emergency$2 billion loan to Jaguar Land Rover, which, by the way, is owned by a$500 billion foreign conglomerate called Tata. The UK government underwrote that loan to bail out the company. It's not because the parent company couldn't pay. It was the concern that if this breach dragged out, you'd have people out of work for a long time, potentially forever, if the factories had to close.

23:07And it's the first time to our knowledge that we've seen a government underwrite a rescue of a ransomware victim, especially to this degree. Governments will often send their cyber experts into these critical companies, nationally important companies, to help them investigate breaches. But, you know, now that the UK has kind of gotten into the business of underwriting the rescue packages for a ransomware victim, you know, it raises this question of precedent. It's like, is this what we're doing now? And what are the implications of that? And I mean, to be clear, this is a loan that needs to be repaid.

23:41But when if you're a ransomware operator and you're a hacker, this is the best news you could have asked for. because you know and you are basically guaranteed that the companies that you are hacking will survive long enough to potentially pay you. And that's what they're after. Yeah, if they disrupt things enough that there would be a payday at the end of it. Yeah. You've also covered the threats to banks and critical financial infrastructure of particular interest, I imagine, to our audience. How would you quantify and characterize the increase in hacks, especially from China, but maybe other countries?

24:19Yeah, this is such an interesting topic because whereas ransomware is in your face, I mean, security experts describe ransomware as an exit strategy. The exit strategy is announcing to the world that this has happened and then demanding payment. So everybody sees a ransomware attack. These attacks on the financial system, however, that we've been writing about largely are designed to be totally invisible. And what hackers in those cases are after is not disruption. In fact, it's the opposite. What they're after in those cases are intelligence, are information about how the financial system works, who's under investigation, who's under investigation for sanctions and things like that.

24:54You know, powers of the government, whatever government that is, US, UK, wherever, governments have extraordinary powers to sanction individuals. And foreign governments that may be targets of those investigations are extremely interested in understanding who's on that list, who's being investigated, What information do they have? So there's so much, you know, our reporting this year focused largely on the U.S. Treasury, which has suffered a series of very devastating espionage attacks in recent years. And what we looked at was how does the U.S. Treasury, which has a large cybersecurity team, which has a great budget for cybersecurity, an increased budget, you know, for this kind of work, how do they keep getting hacked at a very deep level by Russia and China in particular?