Daybreak Weekend: Fed Meeting, Europe Central Bank Decisions, Takaichi-Trump Meeting

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2:32I'm Nathan Hager in Washington. I'm Caroline Hipke in London, where we discuss how Europe's inflation battle may not be over just yet. I'm Doug Krisner, looking ahead to the meeting between President Trump and Japanese Prime Minister Sanae Takeichi.

2:47Nathan Hager: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.

3:11Good day to you. I'm Nathan Hager. We begin today's program with the Federal Reserve. The central bank begins its March policy meeting on Tuesday and issues its decision on interest rates Wednesday for more on what to expect. We're joined by Anna Wong, chief U.S. economist for Bloomberg Economics. And Anna, just looking at expectations in the market, seems like investors are thinking a whole lot of nothing. But what are you expecting under the surface? I'm expecting the Fed to sharply revise up the PCE inflation forecast. So in the December SEP, it was in the mid twos. I think that given where oil price is right now, and it looks like it's quite likely oil price will stay elevated at around$80 at least on average for the rest of this year.

4:05And that would mean that headline PCE should be going all the way up to three-ish. So that would be quite a sharp upward revision. Is that the kind of revision that would cause you to revise upward your expectations for interest rates? Are you thinking that there could be a chance we see an interest rate hike, maybe not at this meeting, but sometime this year? A hike is not in my baseline. We're still expecting multiple rate cuts. Although the chance of a large 100 bps rate cut this year in total. That has decreased the chances for that. Nonetheless, I still think that on the whole, the Fed would be easing because an oil shock tend to boost headline inflation, but it tends to lower core PCE inflation.

4:52Our estimate is that$80 oil would add$650 on average for the household this year. And so that's$650 less that they could spend on other core goods and services. It's very similar to the tariff shock we saw last year. Recall that when Trump announced the Liberation Day tariffs, the stock market plummeted and all the services inflation went down because tariffs are an income shock, a contractionary income shock. An oil shock is very similar. It's also a contractionary income shock. They have less money to spend on movie theaters, on sports admission tickets. The stock market is going to respond by falling.

5:37And all that is going to shave off a couple bips from core PCE inflation. So the only time when the Fed should be responding to the higher headline, but not the lower core measure, is if they fear that inflation expectations are unanchoring. And so far, I think the majority of the FOMC members don't think that's happening. Even the most hawkish FOMC member, Beth Hemmick, in her latest speech at the Monetary Policy Forum last Friday, for which I was in, she also talked about how rates could stay on hold for a while. So even the most hawkish member is not talking about a hike as in a baseline. So I think on the whole, the median FOMC member would write in one rate cut for this year.

6:26But even the markets are dialing back their expectations for any rate cuts this year. What is the market getting wrong? And what do you see that's informing your expectation that we could still see multiple cuts this year? I mean, I would be hesitant to say the market was wrong. I mean, the market oftentimes is very sharp on this. But I think where I differ from the market is that I still think that core PCE inflation will go down. I mean, recall last year when, again, a tariff announcement. I keep referring to tariffs because tariffs and oil shocks are very similar. They are both supply shocks, and they're both transitory if inflation expectations are anchored.

7:08Just like last year. Last year, the market was also thinking that the tariffs are going to boost core PC inflation, and it didn't happen. Because it is an income shock, and it actually lowers core PC inflation. Same for core here, even the Fed's own model. So the Fed has a workhorse model called the Furbus. It's a general equilibrium model. A$10 shock on oil tends to boost headline PCE by 0.3 percentage point. So this is why$30 shock would be 0.9 percentage point on the headline. However, that model also sees that core PCE should be decreasing. It should be deflationary on core PCE, and the Fed should be actually easing, not hiking.

7:54So are you thinking that the bigger risk to the Fed's dual mandate is on the labor market side as opposed to the inflation side, particularly after that surprise drop in nonfarm payrolls that we saw for February? Absolutely. Absolutely. So I think about, you know, as a forecaster, I think about what the Fed will do, not the Fed should do. I just told you that I think the Fed should be thinking about easing rather than hiking. But I think what they would do is that, first of all, the hawks have the upper hand right now. And so they are not going to be pushing for any cuts in the first half of this year.

8:29And what likely will happen is that the labor market will deteriorate rather rapidly in the spring. And going into the summer, we are likely to see the unemployment rate climbing very much like the last two years. And so by June, when they have seen that the worst of the oil shock should have happened also by June, because the oil price should show up in CPI in March and April. And then by June, it should be already kind of coming down. So by June, they would be more concerned. The focus should be shifting to labor market as the unemployment rate climbs. Thanks, Anna. Great having you on with us.

9:07That's Anna Wong, Chief U.S. Economist for Bloomberg Economics, ahead of the Fed's March rate decision this Wednesday. And Powell News Conference, we will have full coverage for you on Bloomberg Radio. Let's take a look now at some stocks making news in the week ahead. I'm Nathan Hager, joined by Bloomberg News cross-asset reporter Denitza Sokova. Earnings, Denitza. Let's start with the one that's coming on Thursday, a pretty big bellwether on economic activity. What are we expecting from FedEx? FedEx, definitely a big one. We actually had a great story this week on the terminal. FedEx has eclipsed their rival UPS, and it has become the largest U.S.

9:46parcel carrier by market value for the first time. Definitely an interesting thing going into the earnings. What we're seeing for this earnings season is that the company raised the low end of its full year adjusted EPS. So now currently it's about$17.80, but it increased the full year revenue growth range to 5-6 % so definitely some optimism there. The company is actually up 24 % this year. The ticker of course is FDX. For FedEx this has been the latest sign that the company's management has won investors over with plans to trim costs, boost margins and spin off its fried business. I'm sure investors will be looking for all that.

10:28Another interesting metric analysts were expecting is FedEx is expected to face approximately 600 million headwinds in the second half of the year. About 265 million are attributed to higher variable compensation. So that's one interesting number that could perhaps weigh on this super positive outlook going into the earnings season. Yeah, to your point, I mean, the outlook has been strong and this stock has been on a tear as well. Does that set the bar even higher for FedEx to outperform? For sure. And obviously, we're in very high market volatility reporting. Even just the basic earnings reports in the current market environment is hard.

11:07Obviously, we talked about UPS and the FedEx competition, and investors have been reacting way more positively to FedEx and have been quite punishing to UPS. So I'm sure those tides could turn quickly. But for now, you know, up more than 20 % this year. Yeah, on a tear, like we say. And a day before FedEx, we're going to get results from Macy's on Wednesday. Of course, we saw this stock drop after Kohl's reported its results this past week. So what should we expect from Macy's this week? Quite the opposite story on Macy's. The company is down 22 % this year. Of course, the ticker is EMA. The last time they reported earnings shares declined rapidly.

11:45Their profit forecast for the quarter was disappointing, even though the earnings report was pretty solid. What we're expected this time is net sales are projected to be around 7.5 billion. Comparable sales are expected to increase about 1 or 2 percent, potentially exceeding the consensus. We're obviously coming into this earnings season with pretty bearish pricing of the company. Blooming Delce is expected to be a strong performance. Sales are projected to rise approximately 7 percent. Everyone will be looking for the earnings call. It's expected to focus on the progress of its makeover. And one thing we've been talking a lot about is the potential sex store acquisition.

12:25So I'm sure everyone will be listening about that as well. Oh, definitely. That's one to scoop up after their bankruptcy, for sure. And before both those names report, Denise, we're going to hear from Lululemon on Tuesday. Talk about struggles. This company seems to exemplify it. Yeah, the company has really suffered a lot. Anything from just so many scandals about different leggings and whether they're transparent or not. to just kind of broader challenges. Lululemon's stocks are down almost 70 % since the start of 2024. Activist investor Elliot Investment Management has amassed more than 1 billion stake in the company.

13:04We had the company founder, Chip Wilson, stepping up his campaign against the company's board in the midst of search of a new CEO. So we have all this tension going into the earnings season. Of course, the ticker is Lululemon. Lululemon updated guidance in January indicating that net revenue and diluted earnings per share for the fourth quarter will be towards the higher end. So definitely some optimism there. They expect between$3.5 billion and a little bit higher than this. Tariff risks, which is what everyone has been looking at. Analysts are saying that tariff risks have been reduced, so that could support the company.

13:42But we have that CEO surge. We have all those candles this year. So it's a high bar for investors to be impressed. Yeah. You know, for all these companies, Danica, you might think that there's a risk around tariffs as well as, you know, some of the geopolitical risk that we're seeing in the war in the Middle East as well. I mean, how could all that play out into some of these earnings that we're expecting this week? For sure. That's adding a lot of tension. I feel so now tariffs has taken a step back and everyone's worried about other things. The consumers are not doing so well. So, for example, Macy's in their last reports, it was all about the consumer.

14:16They said that those low-income consumers are stepping back, but still they're seeing a lot of support from their middle-income to high-income consumer. And I'm sure a lot of those brands and companies we talked about are dealing with the same thing. Are low-income customers coming back? Are middle-income and high-income customers spending enough to compensate for that loss of low-income spending? A lot of reason to keep attention on the earnings this week. Thank you for this, Danitza. Really great having you on with us. That's Danitza Sokova, cross-asset reporter for Bloomberg News. And coming up on Bloomberg Daybreak Weekend, we'll discuss how Europe's inflation battle may not be over just yet.

14:56I'm Nathan Hager, and this is Bloomberg.

15:08So 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. Not noise. Proof of how we can help companies get smarter by putting AI where it actually pays off. Deep in the work that moves the business. Let's create smarter business. IBM.

15:38Nathan Hager:If you follow markets, you know the value of long-term thinking. You plan. You diversify. You prepare for volatility. But even the best strategies can't prevent every bad day. For more than 75 years, Cincinnati Insurance has helped individuals and businesses navigate tough moments with expertise, personal attention, and independent agents who focus on relationships, not transactions. The Cincinnati Insurance Companies. Let them make your bad day better. Find an agent at CINFIN.com. This podcast is brought to you by WISE, the app for international people using money around the globe. When it comes to sending money abroad, many providers claim to offer free fees and competitive rates.

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16:57Plus, WISE runs over 7 million daily checks to catch and prevent fraud. 15 million people already trust WISE to manage their money internationally. Be smart. Get WISE. Download the WISE app today or visit WISE.com. Terms and conditions apply. This 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 discuss what to expect when Japan's prime minister meets with President Donald Trump in Washington. But first, Europe's inflation battle may not be over just yet. After months of progress, central bankers have begun to signal the worst of the price shock was behind them.

17:38But a renewed surge in oil prices, driven by conflict in the Middle East, is complicating that narrative. Next week, the Bank of England and the European Central Bank both set interest rates, facing fresh questions about whether they've really done enough to tame inflation, especially with the memories of the last inflation shock still fresh. Let's get more from Bloomberg Daybreak Europe anchor Caroline Hepker in London. Nathan, at the beginning of this year, the focus had been on the euro rivaling the dollar and whether Europe would try to le pen-proof institutions, including the ECB. But those issues have been overtaken by worries about an inflation shock that could hit Europe harder than elsewhere.

18:18The Bank of England and the European Central Bank go into next week's meetings facing different domestic backdrops, but the same global uncertainty. Earlier this week, we asked Paul Markham, Investment Director and Head of Global Equities at GAM, about what separates the two. Generally, the Eurozone inflationary environment is much more benign than the UK. The UK historically has always been quite a cyclical economy, actually, and one where the potential for inflation has always been a little bit higher. And of course, because of certain labour policies that we now have around the minimum wage and that kind of thing, and the impacts that that has, I think that's exacerbated the problem.

19:03Business costs have risen as well. And, you know, we had never really completely squeezed out the inflationary impacts that came around as a result of COVID and the Bank of England never really quite got on top of that. So I think, yes, it does have another problem now. And I think that the expected rate cuts that were due to come through this year are much less likely to do so now as a result of this spike in energy prices. That was GAM's Paul Markham speaking to Bloomberg Radio. Well, I'm joined now by Bloomberg's chief UK economist, Dan Hansen, and Jana Randall, who runs our coverage of the Western European economy.

19:36Thank you to both of you for being with me. Jana, can I start with you firstly? Really, how is the war in Iran now affecting the eurozone economy? How are people thinking about it? Confidence, of course, is down everywhere across the eurozone, across the wider continent, which is bad for consumption, for investment. and those of course are the drivers of growth that the ECB had been counting on to drive the recovery. Much will depend on how long the conflict lasts but it's probably fair to say that because of higher oil prices, higher gas prices, that energy-reliant countries and sectors are more affected than others and you can add one and one and that puts the spotlight on the German economy yet again.

20:22We've seen some terrible data recently about January, and I really wouldn't hold my breath that things will bounce back quickly after what we've seen in the Middle East. But more importantly, I want to talk quickly about inflation, because the memories of the last inflation shock 2022, they haven't really faded. So the threshold for businesses to pass on higher costs, for consumers to ask for wage increases, that is much lower now. And of course, those are the famous second round effects that turn an external shock into very domestic problems for the central bank. Yeah, indeed. Of course, what's happening in the Middle East is, you know, hugely disturbing and distressing to so many people on a human level.

21:06But we also have to think about it economically, too, this major shock, as you say, Jana. Anna, where do you think it will leave the European Central Bank and therefore the outlook for interest rates, really as leaders around the world kind of grapple with this huge war? So the ECB was essentially done with rate cuts. It had been on hold for a couple of months. And while some people left the door open to another move down, I think it's fair to say that now rate cuts are off the table. And the president herself, Christine Lagarde, was among those saying that the ECDE won't allow inflation to take hold.

21:46Now, you could say that's her job. But in the current situation, that contains a very clear policy message. The upcoming meeting is probably too soon for specific decisions. But it's very fair to say that hikes rate increases are moving on to the agenda. And now it's difficult to say when, how many. If we've looked at market pricing over the past couple of days, traders price between not quite one and two. It moves around almost on an hourly basis. So it's very difficult to project. But I had a chance to speak to Peter Kashimir, the head of the Slovak Central Bank, just before the blackout period starts, before the ECB meeting.

22:28and he was saying a rate hike is potentially closer than many people think. And that is, of course, very different language than just a couple of days and weeks ago when it was very much about we're in a good place, we'll need to see the data. So a lot of people worry Kashmir is not alone. We have heard similar language from other policymakers. So an interesting meeting. We will learn a lot, even though we will probably not see action at that point. But yeah, freight hikes is where the ECB is headed. Okay, so quite a big rethink, as you say, then for Europe. Where does that leave the UK then and the Bank of England?

23:10Dan, turning to you, the main focus for the Bank of England had been the strength or the lack of strength in the UK economy. How has that changed since the start of the conflict? So, I mean, if you go back to February, you had a Bank of England that was, I think, more dovish than almost everyone expected. You had a much tighter vote split around whether or not to cut interest rates. And you essentially had a central bank calling victory on inflation and signalling that there were probably one, maybe two more rate cuts coming over the course of the year and getting down to a neutral level. Now, of course, that means that the Bank of England has started from a different place to the ECB coming into this.

23:49The ECB arguably has got itself to a neutral policy setting. The Bank of England, I think the majority on the committee would argue that policy was still somewhat restrictive. As you say, things have changed dramatically and in a similar way to the trade-off facing the ECB. Inflation, all else equal, if we look at market price inflation, is going to be quite a bit higher than the Bank of England thought. We had the Bank of England thought inflation would get to 2 % in the spring and stay there, essentially, for the whole of its forecast period. If you take market pricing now, you're looking at around a percentage point, somewhere between half and a percentage point higher, depending on when you take a snapshot of the market prices for oil and, importantly, gas as well.

24:29So that's a much different picture to the one we had in February. We haven't really heard from any policymakers around what this may or may not mean for the outlook. But I would just echo one thing that Jana said there, is that the jobs market in the UK is in a very different place. And that means what the Bank of England is facing now is very, very different to what it faced a few years ago, where you had, I think it's not an exaggeration, say a red hot jobs market and inflation going much, much higher. So the trade-off is different. And so the policy response is likely to be different as well.

25:04I think, you know, given where the bank's policy rate is starting, you know, it's much easier to see the bank staying on hold. I think the bar to hiking rates is pretty high at the moment. There's a great deal of uncertainty about how the war plays out and what it means in terms of the Strait of Hormuz and energy supplies, but we know that the UK is perhaps more exposed to an energy shock than Europe is. How would you kind of contextualise that? I mean, we know this war is an exogenous shock. How much could it affect inflation through energy? It's really important to, you know, you draw the path of the natural gas price.