Daybreak Weekend: Fed Decision, Trump UK Visit, BOJ Policy

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1:44Tom Busby: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, a look ahead to this week's long-awaited interest rate decision from the Federal Reserve. I'm Tom Busby in New York. I'm Caroline Hepker in London, where we're looking ahead to President Trump's second state visit to the UK. I'm Doug Krisner with a preview of next week's rate decision from the Bank of Japan. That's all straight ahead on Bloomberg Daybreak Weekend. On Bloomberg 1130 New York, Bloomberg 99.1 Washington, D.C., Bloomberg 92.9 Boston, DAB Digital Radio London, Sirius XM 121, and around the world on BloombergRadio.com and the Bloomberg Business App.

2:38Good day to you.

2:39Tom Busby:I'm Tom Busby and we begin today's program with a decision on rates from the Federal Reserve this Wednesday. All signs point to a 25 basis point rate cut. But could the central bankers go even bigger? And how does the Fed see inflation, the labor market, and other fundamentals of the U.S. economy? For more, we're joined by Michael McKee, Bloomberg International Economics and Policy Correspondent. Well, Michael, thank you so much for being here. Let's just start with what you expect the Fed to decide this week, how you think sentiment will be split among the voting members of the FOMC, And what does the Fed see as far as inflation, their dual mandates of inflation and the labor market?

3:18Well, a lot of interesting questions there, which is something that I hadn't been able to say going into a lot of Fed meetings in recent months. The Fed is probably going to do its 25 basis point cut. The data that have come in suggests that the economy is weakening on the labor mandate side. Still an issue on the inflation side, which will keep them from doing 50 basis points. But the question is, what do they do after the September 17th meeting? And that's where we may see some market moving or things that will cause the markets not to move, if you get what I mean, in the sense that if the markets are expecting something, there's a potential for surprise.

4:03And that is, what do they think the path is going forward? Is the inflation that we got this past week enough to warn them off of saying anything specific about October and December, those Fed meetings? And what does the dot plot say about next year and the path of rates going forward? Do they lower the terminal rate? Do they say that rates are going to go even lower than the markets had anticipated, which they have said is about 3 %? So there are a lot of open questions out there that people are going to be asking, and the idea of what they think about inflation is going to be a good question for Jay Powell.

4:45Tom Busby:Well, let's talk about inflation, because last week we got a couple of reads. We got producer price index, which actually surprised to the upside a little bit. Not much, down one-tenth of a percent. Consumer prices, though, a little bit hotter than forecast, higher costs for housing, And, of course, food, not good news for this president, who insists the food prices have been plummeting on his watch. What were your big takeaways from that CPI read in August? Well, there is a political component to it in that food and gasoline prices were up significantly. And so that's not going to be a good look for the president.

5:18But what was really interesting is it wasn't so much the goods prices that went up as the services prices. The goods prices we expected to rise because we thought that tariffs would leak into the data. But things like furnishings, household furnishings, only up a tenth of a percent. Toys were down eight-tenths of a percent. But we saw service prices, particularly for things like airline fares, lodging away from home, those went up significantly. And if service prices are going up unrelated to tariffs, that's an inflation problem that the Fed will have to address in a different way than the way they would think about it in terms of tariff-driven inflation.

6:04So they're going to have to keep a close eye on this, which is why I think to answer my own question that I posed about what do they do for October and December, I think they kind of punt on giving serious guidance on that because they'll want to see more data between now and then.

6:19Tom Busby:Did you see any other good news as far as inflation? Yeah, in some areas of service prices, medical care services were down a tenth of a percent, recreation services down two-tenths, and people thought that those would be areas that might rise because they had risen in previous months' service price increases. In this case, they did not. So it's not an easy thing to say what is causing the service price inflation to rise, and that's something the Fed is going to want to investigate. Well, let's talk then about the labor market, which every sign we're seeing, it continues to weaken. And just this past week, we got a near four-year high on jobless claims.

7:03Tom Busby:What's your read on that, and what does the Fed see? You need to take it with a little bit of caution, because the last week before this past week, when the jobless claims were tallied, was the week with Labor Day. And a holiday is always difficult to seasonally adjust for the Department of Labor because the holidays move around. So in this case, we can look at it with a sort of a jaundiced eye, say this is something to worry about if it continues. The Fed's two-day policy meeting kicking off this Tuesday, a decision Wednesday followed by a Jerome Powell press conference. Our thanks to Michael McKee, Bloomberg International Economics and policy correspondent.

7:40Tom Busby:We move next to corporate earnings from the shipping and logistics giant FedEx coming out on Thursday after Wall Street's closing bell. Just ahead of the industry's peak holiday shipping season, how a rise in cost, worries about U.S. consumer spending, and the end of de minimis exemptions on small package shipments into the U.S., all impacting the company. For more, we're joined by Lee Clasgow, Bloomberg Intelligence Senior Transport Logistics and Shipping Analyst. Lee, thank you so much for joining us. You know, FedEx coming off a very solid earnings beat for the spring's fourth quarter, saying it successfully slashed$4 billion in cost.

8:15Tom Busby:It plans to cut a billion more this fiscal year. but FedEx and the whole industry now facing a lot more headwinds. So what are you expecting to see in this week's earnings results? Yeah, it's going to be tough. They're facing a lot of headwinds. A lot of those headwinds are related to the kind of more protectionist stances from the Trump administration. One of those, which actually had bipartisan support back in the Biden days, was getting rid of de minimis exemptions, which really allows lower valued goods to be imported into the United States. without facing any duties or tariffs. And that floor was at$800.

8:52And so what that did is allowed a lot of e-commerce providers outside the United States to directly ship to consumers. So if you bought that thing, that skirt or T-shirt from Sheen or something off of Team U or even off of the Amazon marketplace, some of that stuff might have been originated in China. and it's going into the United States and kind of avoiding custom duties because of that loophole. And they got rid of that loophole for imports that are going into the United States from China and Hong Kong in May. They also got rid of that loophole for everyone else at the end of last month. So we're really going to start to see the impact.

9:36And FedEx kind of doesn't report on a calendar basis. They have their own physical basis. And, you know, we heard from UPS already and they said, you know, for two months of their quarter that they reported, which this will be included in FedEx earnings, is that, you know, their China to U.S. business was down pretty significantly. And we expect that read through to apply to FedEx as well. And then, you know, FedEx is also dealing with, you know, a weaker industrial economy. I mean, people don't really think of FedEx as a trucking company, but they're actually the largest less than truckload provider.

10:14That's a business that they're looking to spin off, but they still operate it. And it's really tied to, you know, industrial production, ISM. And the ISM has been, you know, contraction territory for, I believe, 31 out of the last 33 months. So, you know, that's going to definitely weigh on tonnage. So, you know, volumes are really facing headwinds, whether it's their parcel, international parcel business or their, you know, less than truckload business and FedEx freight.

10:43Tom Busby:Now, these are big changes, right? I mean, we could really see a significant hit to earnings. Maybe not in this report, but certainly in the next one. Yeah, you know, I think all eyes will be on, you know, any guidance that the company is able to offer. companies in my world have been less apt to provide guidance, at least longer term guidance, just because of the uncertainty tied around the trade policies out of Washington, which has created a significant amount of volatility and uncertainty. We'll see kind of where management thinks they're going to be. My guess is that they probably will provide, if any, insight maybe into their second quarter, just again, given that everyone's crystal ball is quite foggy and cracked right now.

11:32Tom Busby:Yeah, yeah. Well, let's talk about something you brought up is the possibility of spinning off FedEx Freight. But FedEx had a couple of initiatives, Drive and Network 2.0. How have the company cut costs and shed businesses? How has that impacted the business? And what is there left, besides FedEx Freight, to cut? Yeah. So, you know, looking at FedEx as a whole, you know, they're doing a number of initiatives. You mentioned driver network 2.0 that are trying to take out costs of the network because what they really need to do is they really need to restructure their networks to the new reality.

12:10You know, the old reality would be, you know, 100 envelopes go to a lawyer's office and that FedEx driver would pick up another 100 envelopes to be delivered. And that kind of density really helps with margins. And, you know, fast forward to today, we're all buying things from Amazon or wherever, and we get one package per day. And those deliveries are extremely expensive, and that's been really weighing on margins. So, you know, we're not going backwards. We're going forwards. It's probably just going to be more B2C traffic relative to B2B traffic. And so they're making changes, and those changes include increasing automation, reducing overlaps in networks.

12:50They're combining, you know, slowly combining their ground and air networks, something they've been really, you know, they push back for a number of years about doing. And then they're finally now leaning into that. And what I would say is that some of the benefits that they're generating from these changes, we're probably not going to really see them that much. Because to really see them, you need good volume growth. You need that operational leverage that you're going to get. So I suspect, you know, when things do turn around, you know, again, the big question is when you are going to see that flywheel start operating in that that operating leverage generating better margins than they are today.

13:32But the problem is that FedEx and its competitor to UPS kind of show me stories because they're both undergoing these kind of restructurings. And we really have to see, A, how these companies look coming out of these restructurings from an operational standpoint when I'm talking about restructurings. And then also, B, what does that new network from a profitability standpoint look like when volumes are back on track for growth?

14:00Tom Busby:A lot to look forward to. FedEx fiscal first quarter earnings out this Thursday after Wall Street's closing bell. Our thanks to Lee Clasgow, Bloomberg Intelligence Senior Transport, logistics and shipping analysts. And coming up on Bloomberg Daybreak Weekend, President Trump heads to the UK. I'm Tom Busby and this is Bloomberg.

14:28This episode sponsored by Minky Couture. Fair warning, bring a Minky Couture blanket home and it may instantly become the most wanted seat in the house. That's the magic of Minky Couture. Minky Couture created the original soft Minky blanket, trusted for premium quality and custom styles. One touch and movie nights, naps and cold mornings suddenly revolve around who got to it first. Shop now at MinkyCouture.com. That's Minky, M-I-N-K-Y, Couture, C-O-U-T-U-R-E dot com. Go to MinkyCouture.com and get your Minky Couture blanket now before everyone in your house claims it is theirs. As markets move and headlines break, what matters most is context.

15:11A Bloomberg subscription gives you unmatched reporting, sharp analysis, and powerful tools that help you connect the dots. Visit Bloomberg.com slash podcast offer to learn more.

15:25Tom Busby:This is Bloomberg Daybreak Weekend, our global look ahead at the top stories for investors in the coming week. I'm Tom Busby in New York. Up later in our program, a look ahead to a monetary policy decision from the Bank of Japan. But first, just a few weeks after President Trump's personal visit to Scotland, he's headed back to the UK, where he's expected to mix royal mingling with important geopolitical discussions on a three-day trip. But the visit takes place under the shadow of the sacking of Peter Mandelson as the UK's US ambassador for previous links to disgraced financier Jeffrey Epstein.

15:59Tom Busby:For more, let's go to London and bring in Bloomberg Daybreak Europe anchor Caroline Hepker. Tom, Britain's ambassador to Washington, Peter Mandelson, has recently been removed from his post after further revelations about the extent of his relationship to the late paedophile financier Jeffrey Epstein. That decision comes only days before President Donald Trump's state visit to Britain, the UK ambassador to Washington usually playing a key role in those events. And it complicates what is an already carefully choreographed few days. It's an event that will be important to UK Prime Minister Keir Starmer, who has prioritised good relations with Donald Trump since taking office just over a year ago, stressing the importance of Britain's defence and security alliance with America and taking care not to openly criticise Trump's tariff policies.

16:56When Starmer visited the Oval Office back in February, he brandished the King's invitation to Trump, which the US president called an honour, describing King Charles as a beautiful and wonderful man. Those overtures appear to be paying off, at least in part. The UK became the first country to sign a tariff reduction deal with the US in May, with some of it already implemented. However, some tensions remain. For example, steel is an area of issue. UK officials are still working to secure a deal that would remove the 25 % US tariffs on the sector, as talks drag on for months after Prime Minister Starmer and President Trump agreed a broader tariff cutting plan.

17:41There are also geopolitical issues too, with the potential to spark turbulence in the so-called special relationship. The US ambassador to Israel said last month that the UK and France have handed victory to Hamas by announcing intentions to recognise a Palestinian state. The visit also takes place during a testing time at home for Starmer. He's facing scandal within his own party and he's battling challenges from the right-wing party Reform UK, who have proven popular in the polls. The group's leader, Nigel Farage, recently visited the White House at the invitation of Donald Trump. Bloomberg's London bureau chief, Ruth David, explains why that trip spoke volumes.

18:26That photograph of him standing with President Trump, I mean, a photo speaks more than all of the reams of coverage, right? To have that kind of backing and to have that kind of support globally, we saw Tony Blair going to the US. We're seeing Nigel Farage. And the question is, where is Keistama? And I know Donald Trump is coming to the UK later. But it definitely seems to be like Farage is riding on a high. That was Bloomberg's Ruth David speaking there to Bloomberg's Tom McKenzie and Guy Johnson. So will the honour of a royal banquet be enough to curry the favour of President Trump? It's something I've been discussing with Bloomberg's political correspondent Ellen Milligan.

19:08Ellen, just firstly, what are we expecting to see President Trump do on this second state visit that he's paying to the UK? Yes, I mean, this has never happened before. The only other US presidents who have had a state visit were Barack Obama and George Bush. But no other president has had two state visits. This one will be a bit different from the last. First of all, it will be hosted by King Charles. The last one in 2019 was obviously hosted by the late Queen. The other big change is that it will be primarily hosted at Windsor Castle because Buckingham Palace is undergoing renovations. So there will be the usual traditional state banquet, the exchange of gifts between the king and queen and the president and the first lady.

19:56Usually they have some kind of private meeting either over lunch or tea when the president first greets them. Then they'll have this banquet where we're expecting a lot of famous businessmen and celebrities as well as the broader royal family to be there, like Prince William, who Trump has also met before. And then after all that pageantry, there'll be the political portion where Trump goes to visit the Prime Minister in his countryside estate at Chequers for a bilateral meeting. Huge opportunity then for the UK to be front of the queue, you know, to show off what they want to offer, I'm sure, in terms of business ties.

20:40Keir Starmer will surely be trying to use this as kind of bargaining power. What do you think is going to be his main message? Yeah, I mean, the Prime Minister is effectively using the King as his chief diplomat and it's already paid off for the UK. I mean, you'll remember the moment where Keir Starmer visited the White House in February and brandished this letter hand-signed by the King himself inviting the President over to the UK again. And that, I think, in large part has been why Trump and Starmer have managed to establish a close relationship despite their political differences. And, you know, the UK was the first country to sign a trade agreement where they avoided the same level of severe tariffs that other allies did.

21:30Trump was also hosted by the UK in Scotland a couple of months ago. That was a private visit, but had very much a political element where he was mostly promoting his golf courses, but also had a meeting with Starmer and with the EU's Wunderlein while there as well. So it's already paid off for Starmer. I think he's hoping that other deals could be struck potentially on tech, potentially on AI, although the state visit will mostly be about the royal element rather than the political one. Absolutely. It seems, I think, to many observers in the UK, a bit like a Netflix movie. Letter to the King could have been the title.

22:10And it was also seen as quite a savvy move by the British Prime Minister by some voters, because President Trump's still deeply unpopular, isn't he, amongst a lot of voters. and yet there's also an edge to voters in the UK that they understand the UK has to try to do well by obviously you know one its biggest ally in the world in terms of how we should expect then the negotiations to go do you think that there are going to be specific things that Starmer can perhaps gain from this maybe on steel as you say which is still got levies from the US I mean Britain managed to get what has been seen as a better trade deal than a lot of other countries.

22:55Yes, that was the big element on steel that was missing from the trade deal that they signed back at the G7 in Canada a couple of months ago. And that still hasn't been resolved. We've now got a new business and trade secretary in the UK. And I know that the government is pretty desperate to get that sorted. whether that will happen at next week's state visit. I think, you know, I'm not hearing much optimism on that. The briefings are more around a kind of agreement on quantum or AI or tech, some kind of deal in those areas. And there's been reports that various tech billionaires are coming over with Trump to join him in the state banquet as well.

23:43So I think the focus will be on that. dangers what are the dangers in this state visit it lasts several days i mean we're expecting some level of protest by some groups in the uk and also there it's a double-edged sword the relationship a close relationship with president trump we've seen some global leaders humiliated i suppose what are the pitfalls people are thinking about there are actually a lot of dangers and and the government officials I've been speaking to who have been involved in the planning for the state visit are really, really worried about it. The primary thing is that just days after Trump departs, the government is expected to recognise the state of Palestine at the United Nations Assembly.

24:33The UK-US approach to Israel is one of the big opposing differences, and the US administration including Marco Rubio have very much condemned the UK and France's and Canada's plan to recognise Palestine so that will be a moment of peril potentially if that's brought up I mean the other thing is Trump isn't afraid to insult various political allies of the Prime Minister I mean even in Scotland he was asked about London Mercedee Khan and made very disparaging remarks, which Keir Starmer had to interrupt to remind the president that he was a friend and political ally of Keir Starmer's. And there are other elements as well.