Daybreak Weekend: Fed Preview & Tech Earnings, Bank of England Decision, Japan's Golden Week

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1:58I'm Nathan Hager in Washington. I'm Caroline Hepkitt in London, where we're looking ahead to the Bank of England's rate decision as the Middle East upends Europe's plans for growth. I'm Doug Krishner, looking ahead to the Golden Week holiday in 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.

2:36Good day to you. I'm Nathan Hager. We begin today's program with the Federal Reserve. The central bank's latest two-day policy meeting kicks off this Tuesday for what may be the final rate decision under Chairman Jerome Powell on Wednesday. Bloomberg International Economics and Policy Correspondent Michael McKee will be in Washington, D.C. for the decision and Powell News Conference. And Mike is here with me now. I always ask you what your question to Chairman Powell is going to be at the news conference. I dare to ask whether it's going to be, what are you going to do, Jay? Is that where you're going?

3:11You know, I know you're going to ask me what the Fed's going to do, and they're not going to do anything. They're not going to raise or lower interest rates. In terms of policy, right. And there's no new economic projections, and there's no new dot plot. So it could very well be that that's the first question somebody asks is, where are you going from here? Powell has already said that he will stay on as chairman pro tem of the Board of Governors, and he would stay on as chair of the Open Market Committee, which makes the interest rate decisions, because he was elected by the Open Market Committee in January to a full year term.

3:51So they don't have to do anything. They just continue on. And so he would continue on in that role until Warsh is confirmed. And members of the Open Market Committee and Board of Governors have said that once Warsh is confirmed, then they will elect him as chair of the Open Market Committee. All right. Well, let's talk about the decision itself on Wednesday. You mentioned that there's probably not going to be any change in policy, no changes to the outlook as well. What is the policy environment for the Fed right now? Given all the uncertainties around what's happening in the war in the Middle East, what that could mean for inflation, what it could mean for the labor market as well.

4:35They will always tell you under any circumstance that their monetary policy is well positioned to handle whatever happens. That's sort of a standard line. But in this case, it's true. There does seem to be a general consensus that there is still tight monetary policy. may not be very tight, and there's disagreement over how tight, but if you're going to have inflation, where they are now is not a bad place to be to try to cut off as much as you can. You can't do anything about oil prices, but getting into other parts of the economy. And the economy seems to be moving along pretty well. We are not seeing a lot of hiring, but we're not seeing a a lot of firing either.

5:21We're still seeing reasonable average hourly earnings and consumers are still spending. And of course, business spending on AI type stuff is very strong. So at this point, they're sort of right where they want to be. So they don't need to do anything one way or another. And given this is the last official policy decision under Chairman Powell, How would you sum up the Powell legacy? After all the fights with the president, the fights with inflation after the pandemic and after tariffs, how do you sum up a Powell Fed? I think he did a very good job of managing the Fed and following two very academic chairs who were much more steeped in the economics that goes into these decisions.

6:12But he is a consensus builder. He is a very genial person to get along with. So he was able to pull the committee together. there. We went for a very, very long period with no dissents until we got into the last year, maybe, of this when they started moving rates again. And so I think he'll be seen as a fairly effective chair. Now, there are some, obviously, blots on his record. They were slow to recognize that inflation was not transitory in 2021. And they did move quickly after that. And they also have had a difficulty with their communications. They switched to saying more than just maximum employment, we want maximum and inclusive employment back in 2020.

7:04And that helped contribute to the inflation because they let inflation get a little higher to do that, and it got out of control. And also then they haven't really figured out how they want to talk to the markets. The dot plot has a lot of problems with it, and there is a lot of Fed speak out there. Kevin Warsh wants to rein it all in. But on balance, Powell gets very strong marks from people, especially over the last year or so when he's had to defend the Fed against the president. He gets a lot of praise from people within the Fed for doing that. Thanks for this, Mike. Looking forward to your coverage on Wednesday.

7:45That's Bloomberg international economics and policy correspondent Michael McKee, ahead of the April rate decision from the Fed Wednesday afternoon, 2 p.m. Wall Street time. Of course, we will have complete coverage across Bloomberg Radio and Television and on the Bloomberg Business app. Let's take a look now at some stocks to watch in the week ahead. I'm Nathan Hager, joined by Bloomberg Intelligence Global Head of Tech Research Mandeep Singh, because it really is all about tech this week. I think we're hearing from, what, five of the MAG-7 when it comes to earnings. And a lot of them are just this Wednesday.

8:19Right, Mandeep? They are. And look, I think what Tesla has shown us is, you know, CapEx increases are still a big focus in terms of what these companies are doing around the AI infrastructure build out. And so that's a common thread across all of them. Yeah, absolutely. Well, let's start off with one of the biggest names. Microsoft is one of them that's reporting on Wednesday. We just heard this past week that they're offering voluntary buyouts to a bunch of their workforce. What does that tell you about what we could get when it comes to the earnings? Look, I think with Microsoft, clearly the stock has been under pressure because of their open AI partnership and, you know, just the way it's evolving.

9:07And when it comes to the top line growth, I think what investors are waiting for is what kind of lift they are going to see in their Azure segment from all these AI workloads. I mean, last quarter, Google had that 10 percentage point gap where Google grew 48 % and Microsoft was 38 % growth. So Microsoft really needs that lift in that Azure growth line. And that's where I think investors will be comparing them against the likes of Amazon AWS and Google Cloud. And to me, that's what they need to show that they can deliver on that Azure growth numbers. Are you expecting that we're going to hear much more from Microsoft about their CapEx plans after what we heard from Tesla?

10:00I mean, they were a big part of that$650 billion number we heard from the hyperscalers just a few months ago. Yeah, I wouldn't be surprised if that number is revised upward. Now, it won't be a big revision, but clearly as things stand, everyone seems to be compute constrained. That's what we have heard from Anthropic and these leading labs. And Microsoft, if they are able to show that sequential acceleration and Azure growth, that could be the justification to raise their CapEx. But otherwise, I think the stock may react negatively if they end up raising their CapEx. Also Wednesday, we're going to hear from Google Parent Alphabet.

10:43They're a big part of this CapEx story as well. And they just came out with a new generation TPU chip. Where is Google Cloud in the AI race, Mandy? Yeah, Google Cloud clearly has seen an acceleration. And so I expect this quarter to be the growth in Google Cloud to be closer to 50%. And look, they've just launched two new chips, TPUs, one for training, the other one for inferencing. And they signed that big deal, 3.5 gigawatt deal with Anthropic and Broadcom. So from that perspective, there is a lot of momentum they have with their chips and cloud, and their margins in the cloud business also seem to be expanding.

11:31The only thing which I'm not sure about is their search business because there are puts and takes. I mean, clearly, there is some search volume pressure because these chatbots, whether it's OpenAI or Enthropic Cloud, they are taking some volume of search queries away from Google. At the same time, they don't really have an ads kind of surface to their queries. So from that perspective, Google should be insulated. But I will be curious to see how they end up doing in their core search business in terms of the top line growth. I keep seeing Google Gemini try to sneak into my search results as well.

12:13Where do they factor in when it comes to some of the other chatbots? Yeah, so Gemini will not show you any ads. It's purely subscription driven, although Gemini is what's powering their AI overviews. And that's where Google could show a lot more engagement with their searches. And so in turn, that could translate into better ads growth. But clearly, Gemini is the model that's powering all of their LLMs across the family of apps, whether it's YouTube or Search or any other surface they have. So from that perspective, Gemini's standalone contribution may not be that much, but clearly it's influencing all the family of apps that Google has.

12:57And also Wednesday, we get earnings from Meta Platforms. They're guiding for, what, 30 % revenue growth? Is that right? It's phenomenal, the upward revisions we have seen on Meta, partly because they have used their compute capacity for their ad recommendation systems. So the expectation is the ad pricing will probably be very strong for someone like Meta, which is able to target the ads much better than anyone else in that digital ad ecosystem. And that's what's driving the expectation for 30 % growth. But look, they've raised their capex. They've talked about how they're releasing a new model, and that will help improve the ad targeting and engagement further.

13:44So high expectations, but they seem to be doing quite well in terms of that top line growth in digital ads compared to everyone else. Happy Tech Wednesday, Mandeep. Thanks so much. That's Mandeep Singh, Global Head of Tech Research for Bloomberg Intelligence. And coming up on Bloomberg Daybreak Weekend, we'll look to another big central bank decision this week from the Bank of England. I'm Nathan Hager, and this is Bloomberg.

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15:48Deutsche Bank. 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 get you set for the Golden Week celebrations on the way in Japan. But first, the economic shock spreading from the Middle East is catching up with central bankers across Europe. The Bank of England meets next week, and despite a weak jobs market and sluggish UK growth, people suspect policymakers are turning hawkish. A renewed surge in oil prices driven by conflict between the US and Iran is what's making rate setters worry.

16:24Let's get more from Bloomberg Daybreak Europe anchor Caroline Hepker in London. Nathan, Sarah Breeden has said the UK may be in for a rocky ride over the next few months. The economist and deputy governor of the Bank of England thinks the conflict in the Middle East could cause shocks to growth, inflation and interest rates all at the same time. She's not the only one. The hawkish shift in rhetoric from Bank of England policymakers was so stark at their last meeting, Governor Andrew Bailey took to the press to directly talk down the markets. That's getting ahead of where the committee is, frankly.

17:00The committee was very clear, and it was obviously a unanimous vote this time, actually, that the right thing to do was to hold. The right thing to do is to pause, to take a very close, you know, keep a very close watch on what's going on. But also, this is a very volatile situation. I think by the next time we meet, which will be, you know, our next decision is at the end of April, a lot will have happened. And I can't predict what I can't possibly none of us can predict what it will be. But it is a very volatile situation. So I would caution really against getting ahead of that position, which is we held this time.

17:32Andrew Bailey speaking there. But the UK's high reliance on gas imports and difficult fiscal position means many are wondering what the central bankers will say when they meet next week. Joining us now is Bloomberg's chief UK economist Dan Hansen and Alice Gledhill, our FX and rates reporter based in London. Welcome to both of you and thanks for your time. Dan, what is the state of the UK economy going into this Bank of England meeting? So we've had since the bank last met, I mean, we have obviously had the meeting in March, but since the bank last put together a forecast, which was in February and obviously prior to the war, we've had quite a lot of information.

18:10And I would say it's been on, it's probably been on the hawkish side. So you've had some information about GDP that's shown the economy is growing a little bit faster. You've had some PMIs that showed the economy took a hit in March, but perhaps rebounded a little bit in April, which is obviously really interesting against the backdrop of the war. And we've also had data on the labour market that showed, I think prior to the war, that you could argue the labour market was stabilising. There may have been a hit in March. And finally, of course, you've had CPI inflation, which has picked up as many economists expected because of what we've seen in oil prices that has fed into fuel prices.

18:52So going into the meeting, the Bank of England you're looking at it and you're thinking the economy is is probably in okay-ish shape there's probably some slack in the labour market but we know there is this shock coming down the pipeline and what the thing I would say about it particularly thinking about the demand side of the economy is that we know the hit is going to be felt most by households and the story of the past few years is that households have been have experienced a lot of shocks, but they've also been very cautious. So I think the bank has got this real challenge when it's putting together its new forecast between capturing this big inflation shock, we know that's coming, but also the demand side is the real uncertainty, and how big a hit the economy is going to take.

19:39If you read our forecast, read the IMF forecast, it's fairly substantial. And I think that's a really important framing for how the bank would then respond to the shock. Yeah. And given all of that uncertainty, there's also the other point that has to be made that unlike the Federal Reserve, the Bank of England doesn't have the kind of strict dual mandate. But there is obviously a worry about the impact on growth, if we get a much more hawkish MPC, the concerns about the labour market, at what point do they start to weigh on the Bank of England? Yeah, I mean, that balance is crucial. So I think if you think about how this shock might permeate through the UK economy, we know we're going to get a big rise in energy bills and also in fuel costs.

20:26we're seeing that already. What will be most important for the Bank of England to judge is whether those shocks feed through into wage setting, into price setting in the Bank of England vernacular, its second round effects, that's what they call it. And the interesting point here is that the extent to which those second round effects can materialise stems, or is very closely linked to the state of the labour market. So if the labour market's tight, workers can bid up wages, firms feel confident about passing on higher prices, so they give in to those higher wage demands. I think the situation we find ourselves in at the moment, though, is a different situation where you have a loose labour market, and particularly Governor Bailey has been talking about firms telling him that they have very limited pricing power.

21:20So I think actually that's a very important consideration. And it goes back to my answer to the first question, is that this is looking very much like a trade-off for the Bank of England. And I think the bar for hiking interest rates into this shock is much, much higher than it was, say, in 2022, when the labour market was tight. Obviously, the inflation shock was bigger, but the key point was the labour market was tight and there was an imbalance between supply and demand in the economy. Let's turn our attention to the gilt market. and what investors and traders think about this. Alice, this is the focus of your work.

21:56We know that guilt markets have been very volatile and have reacted quite strongly to the Iran war. How do you see the setup for the guilt market ahead of the Bank of England's meeting? It's a fascinating one because there's been such a U-turn in terms of where the market was kind of coming into March and before the war to where it is now. So I think before the start of March, before the US struck Iran for the first time. Markets were expecting, I think, around two interest rate cuts this year. And that was a key reason why people have been piling into guilt. So it was a really popular trade before the war.

22:30I think what we've seen since then, and this is really a global story, it's not just the UK, but traders flipped to pricing in interest rate hikes because of the worries around inflation. We've seen a pullback from some of the more extreme levels. So I think at the worst of the route earlier in March, We saw as much as four interest rate hikes priced from the BOE this year. We're back to about sort of 50 or 60 basis points. There's sort of two, maybe three interest rate hikes this year, starting from sort of the middle of the year. I don't think anyone thinks they're going to hike this coming week.

22:59For gilts, it's, yeah, it's an interesting one. I mean, we've seen a massive sell-off. Gilts have been hit worse than peers like US Treasuries, BINs even. And I think there's a few reasons for that. I think partly there's sort of technical reasons. So they were this really popular trade before the war. So I think naturally you've seen more selling. But also gilts are just what we call a high beta asset class. They're just particularly sensitive. They tend to sell off more compared to, you know, sort of boons or oats, for example, like French government bonds. So I think that's part of it as well.

23:33I think right now the market is just waiting to see sort of what the Bank of England says on Thursday. They, you know, lots of the points that Dan spoke to there. So that's, yeah, that's definitely the next focal point for the market. OK. There's also the view about whether the Iran-linked inflation shock is really even something that the central bank can address or whether actually the bigger issue is the government's fiscal position, given that they are under pressure, will surely continue maybe to be under pressure to support businesses and households as energy prices go up. Yeah, exactly. The market is so sensitive to the UK fiscal story.

24:11And I think that's partly, you know, it does have a lot of debt, it does need to get it down. But I think it's also sort of a spillover from the trust scenario back in 2022. I think what's interesting this time around is not just in the UK, but you've seen this across continental Europe as well, is that governments are trying really hard to be restrained in their fiscal responses, kind of how much they increase public spending. I think they're just trying their best to try and ride the war out, because we saw back in 2022, 23, the inflationary impact of sort of heavy public spending to support economies through an energy supply shock.

24:49So, so far, we've seen the long end of the gilt yield curve, which is more sensitive to sort of fiscal pressures, hasn't massively underperformed the short end. If anything, actually, it's been shorter dated bonds that have been hit worse. And that's because of the repricing we've seen in terms of interest rate hikes for this year. I think going forwards, if the government has to start announcing sort of more fiscal support for households or businesses, if that indicates that we might get more borrowing, then yes, I think we'll start to see that filter through to gilt markets more. Okay, that's interesting, Alice.

25:19Dan, a thought for you on how you are thinking about the economic impact of the Iran war. I suppose everybody is also looking to historic precedents. I mean, we've mentioned 2022, there are other previous energy price shocks. How do you think about that as you go about your analysis of the UK economy? yeah so i think you know 2022 is very sort of it's uh you know it's the most recent one we've had and it's one that a lot of a lot of people um go back to is it the right is it the right one to look at i'm not sure and it it comes to it comes back to some of the reasons we've sort of mentioned at the start i mean first of all the scale of the shock i mean you only have to plot um gas prices to see the difference in the scale of the shock that we're facing it's much much smaller and thankfully, thankfully, it's much, much smaller, at least so far.

26:11And that's, you know, that's clearly, that's clearly good news. And I think the other difference is the backdrop of the labor market and the backdrop for the economy generally. I mean, I said, at the start of the year, there seems to have been a bit of a turnaround and the economy is sort of holding up. But if you look at the level of GDP, rather than thinking about growth, you know, the economy is below what we would call its potential level. So there's spare capacity in the economy. That again, is very different to 2022. So I think, you know, there are sort of various channels through which this impacts the economy, some of which we have a very, I think I would say a very good handle on, the direct impact of higher energy prices on inflation.

26:53I think for me, the big uncertainty is one, how much of this feeds through, as I was talking about second round effects, feeds through to wages, the sort of baseline is that there isn't much feed through because of the state of the economy. And the other thing is about consumers and how they respond to this. And it goes to what Alice was saying, you know, if the government steps in with fiscal support, it's going to change the dynamic again. That's what changed the dynamic in 2022, where there was this massive fiscal support, not just in the UK, but all over Europe. And that changed the dynamic.