Daybreak Weekend: Jobs Report, European Banking, China's Technology Battle

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1:28This 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 the August jobs report, what it could mean for Fed policy moving forward. I'm Tom Busby in New York. I'm Caroline Hepker in London, where we're thinking about the future of Europe's banking industry. I'm Doug Krisner, looking at the power of the rally in Chinese tech shares and how much steam is left. That's all straight ahead on Bloomberg Daybreak Weekend On Bloomberg 1130 New York Bloomberg 99.1 Washington D.C.

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2:19Good day to you, I'm Tom Busby We begin today's program with the August Jobs Report non-farm payroll numbers out this Friday, 8.30 a.m. Wall Street time. And with another read showing inflation stubbornly high, what could a further possible slowdown in the U.S. labor market mean for the hopes of a Fed rate cut at its next meeting? For more, we're joined by Michael McKee, Bloomberg International Economics and Policy Correspondent. Michael, thanks for being here. Just this past week, we got that July PCE. Another confirmation, inflation not going away. Let's talk about that report, what it means to the Fed, and how important this Friday's August jobs report is going to be.

2:58Well, let's start with the PCE and say that it is important but not definitive for the Fed. It does show that inflation is not going down, and on a year-over-year basis, the core rate actually rose to 2.9 percent from 2.8 percent, which is going in the wrong direction if your target is 2 percent. On the other hand, the month-over-month figures did not show any deterioration. So it really is kind of pick-your-story here. And we know that those who think that we should be cutting rates in September have stuck to that story, and this wouldn't deter them in any way. The rest of the Fed is open to the idea of a rate cut.

3:40In fact, Jay Powell basically opened the door to it at his speech in Jackson Hole. And so they're waiting on data yet to come. And that'll be the jobs report this Friday and the CPI report that comes on September 11th. And the question is, do we see a significant weakening in the unemployment rate? Does it go up? I guess, whether you call that strengthening or weakening, does it go up? And do we see a continued week hiring, the kind of hiring that we saw in the July report and the revisions to May and June? Well, there may also be seasonal reasons for if we see a big jump or a big decline in August, right?

4:24Well, yes, you get into the school year beginning. And ever since COVID, we've had some trouble with adjustments for that. Also, many states have changed their school year beginning times. And a lot of this doesn't have to do with teachers. It has to do with the supplementary workers at the schools, the janitors, the cooks, everybody else. So we may have that issue, but economists and the Fed will look through that and see what's been happening, especially with private sector jobs, and see if we see the same kind of decline. The forecast at the moment is for 75 ,000 jobs to be created, which is not that different from last month.

5:05But we may see that change during the week as we get more data because this is the first week of the month and it's the week where we get tons of data. Yeah. And how about the unemployment rate? Could we see that go a little higher? We could see that go a little bit higher. Right now we're waiting to see what happens with the unemployment rate because the forecast is for it to rise just a little bit to 4.3 percent from 4.2 percent. That is not unacceptable to the Fed. They have expected it to rise. Their forecast is for it to maybe hit 4.5%, but it's a speed at which it moves. So if it's higher than 4.3%, then you're going to have some concern expressed down at 20th and C Street in Washington.

5:52That's a fast jump, yeah, from 4.2 to 4.4 if it went. Now, so we have the CPI coming out. We have the jobs number coming out. But last week, we got some very encouraging news. We got 3.3%, although it's a preliminary reading on GDP, which is growing. Also, consumer spending and consumer incomes. Good news there as well, right? Better good news in the incomes and spending number. The GDP number is for the second quarter, and that ended at the end of June. So now we're two months into the third quarter. So it doesn't tell you all that much. The one bit of good news was that we saw more business investment.

6:28don't have a lot of explanation for that because companies have been telling the Fed and telling us that they're sitting on the sidelines. But they did increase business investment, which is probably a reflection of what's been going on in the AI space. Now, the income and spending numbers were pretty good. Income may be a little less than meets the eye in that it went up, but it's mostly automobile spending on the good side. So the auto companies have said they're going to raise prices when they get to the new model year. So that may be something that has pulled forward some spending. The income numbers were better in that they rose.

7:08But if you look under the hood, the wages and salaries component went up six-tenths of a percent after just a one-tenth rise the month before. So Americans still have money coming in. It's a question of whether they want to keep spending it or not. And so far they're spending it. So far they're spending it. But we also had another number that came in that was interesting, and that was the trade deficit. We saw a big rise in imports again in July, as we did in the first quarter in January and February of this year, ahead of the president's tariff announcement, and now maybe ahead of the tariffs.

7:44That's what we also saw. So companies trying to stock up on lower-priced goods to sell them as long as they can before they have to raise prices. That may be also something that factors into the Fed's decision if they think that definitely inflation is going to rise significantly in the months to come. Now, you are just back this past week from Jackson Hole, the symposium. You spoke to a lot of Fed officials. Great sound. some of them are insisting that the extra consumer costs from the trump tariffs are just a one-time bump and that you know yes it's inflationary yes it's a lot of pressure but it's going to go away a lot of others don't see it that way at all how do you feel about that well historically tariffs have been a one-time bump but historically they've also been applied in a different way congress passes a tariff increase and sets a date and it goes into effect and prices go up on that date.

8:40With Donald Trump, it's been a whole bunch of different tariffs on different dates. Sometimes they're raised, sometimes they're lowered, and the application dates vary. So there's two things at work here. One is the idea that this is going to go on for a while because he's talked about imposing more tariffs on pharmaceuticals and on semiconductors and things like that. So we could see a rolling increase in tariffs. And that would perhaps feed into inflationary psychology that would raise people's inflation expectations. And that's what the Fed doesn't want to see happen. So you have Christopher Waller and Mickey Bowman saying, one-time increase, and we don't have to worry about it.

9:22Other Fed officials saying, yes, but it could feed into this other dynamic that we would have to worry about. Well, a lot of inflationary pressures. We get the CPI in a couple of weeks. The August Jobs report out this Friday ahead of Wall Street's opening bell. Our thanks to Michael McKee, Bloomberg International Economics and policy correspondent. We move now to earnings from the cloud-based software company and Dow Jones Industrial Average component, Salesforce, coming out after Wall Street's closing bell on Wednesday. How has the explosive boom in AI at other software companies impacted Salesforce's growth?

9:55For more, we're joined by Anurag Rana, Bloomberg Intelligence Technology Analyst. Now, Anurag, thank you so much for being here. Salesforce investors have not had a lot to cheer about. Shares are down about 25 % so far this year. As other software companies have invested a lot more in AI, what are you looking to see in its second quarter results? So, Tom, when you look at a company like Salesforce, you know, it is very different than, you know, NVIDIA or CoreWeave or Oracle, frankly, because it's on the application side of software. And in this area, we are still not seeing that level of implementation of AI because even though, for example, Salesforce has some really good products that can help out with their AI journey, the macro spending on technology is still weak, which is companies are not spending at that same level as they were on non-AI tech spending, which is having an impact on the order book of Salesforce.

10:56And that has been the story for the last, let's say, 12 to 18 months. And we think a little bit of that will come back again when they report next week. So what do you think they will say then about growth and demand trends if, you know, maybe they're a little behind in the AI spending and the AI products? They do have AgentForce and DataCloud. But what do you think they're going to tell investors? No, you're right. I mean, they will talk about those two products quite aggressively and how the adoption rate is very strong. And we absolutely believe that, that both data cloud and agent force will do well.

11:30But again, as a percentage of the entire company, it's a very small portion of total sales. On the other side of the equation, we do anticipate them talking about tougher business conditions and elongation of cycles in order to complete orders. And I think that's where those comments would be looking for. There is a particular metric called remaining performance obligations or current remaining performance obligation. And that's an area where it gives us an idea about the growth rate of the orders. They have guided down that number to go down from 11 percent to 9 percent in this quarter. Based on the results we saw from Workday, we think they should be able to do better than that.

12:14But again, till we get this hangover of tariffs and economic uncertainty out of the way, we don't see that number accelerating. And perhaps that can only happen next year at this point. Now, do you see that as more of a broader pullback in spending on IT? Or is it your companies are just spending on other products from other companies? No, no, no. This is absolutely broader. This is not just sales for specific. We say the same thing for Workday. We are seeing the same aspect for consulting companies, whether it's IBM Consulting or Accenture, for that matter. So this is a broad-based phenomenon where companies are being measured in the way they are spending on technology.

12:59And for right now, they are spending more on AI-related products or AI-related infrastructure, which is AI servers and chips and models and trying to set things up. That's where a lot of the spending is going at this point. And what we saw just this past week in NVIDIA's latest earnings, I mean, what does that tell you about AI spending and AI infrastructure spending? Is there a possibility of a slowdown in demand in the future, or is this maybe just a blip? Well, things are looking good for almost the entire ecosystem. And with NVIDIA, obviously, there's a case of elevated expectations and what they did.

13:41I mean, I think the results were pretty good. But when you look at it, Oracle will report over the next couple of weeks, we think they're going to go and talk about a similar increase in order book for them from companies like OpenAI, trying to get more of their cloud infrastructure to train their models. So we do anticipate a good season for companies that are more on the software infrastructure side. I think it's going to be tougher to see what happens on the application side. Well, a lot of growth, a lot of changes. Salesforce Q2 earnings after the closing bell this coming Wednesday. Our thanks to Anurag Rana, Bloomberg Intelligence Technology Analyst.

14:19And coming up on Bloomberg Daybreak Weekend, we hear about the future of Europe's banking industry.

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16:34But first, in the coming days, the banking industry gathers in Germany for a couple of major banking conferences. European banks have seen their share prices on a tear in recent months, But there are tests ahead from US tariffs, political instability and the extent of interest rate cuts. How will insiders navigate the landscape? For more, let's go to London and bring in Bloomberg Daybreak Europe anchor Caroline Hepker. Tom, European banks on the stock 600 banks index have surged since 2022 to a 17-year high versus the lows of late 2022. But there are risks gathering for the second half of this year.

17:10Deutsche Bank and Commerzbank top performers on the index have recently been downgraded by Goldman Sachs analysts. The outlook for the industry is something Deutsche Bank's CEO, Christian Saving, discussed recently on Bloomberg Television. He says there is still a big opportunity for his firm and for others. Well, I do think what we see in this world is with all the geopolitical uncertainties, with all the also economic uncertainties, there is one trend which is the same across the world, that our clients want to have a European alternative to the U.S. banks. We have very strong U.S. banks, very capable U.S.

17:45banks. But in this world of geopolitical uncertainties, they want to have a capable global European player. And there are not so many European banks left with a full investment bank, with a full corporate bank, with a global network in over 60 countries. That's the role we can play. Now, this role we not only want to play because we feel ourselves as a global bank, but it's obviously much easier to do that if you are coming from a country which is economically increasing, which is economically on the right path and which is also pulling now Europe. And therefore, I think we have a unique chance, not only as Germany and Europe, but also as Deutsche Bank, to actually be the one who is facilitating and who is contributing to our clients' growth around the world.

18:30But the diversification also in banking, not only to rely on one bank, but on many banks, and that from a regional perspective, has never been bigger than one. And you touched about diversifying. And just another question to you. Is this buy Europe trend? Is this a lasting thing? Is this something that you're seeing from investors that you talk to that they are wanting to make a meaningful commitment to Europe? And what does that actually look like in terms of numbers from where you're sitting? Well, for the first time, we see, obviously, since the last three or four months, a quite significant reallocation from funds, in particular into Europe.

19:04The interest is huge. Whenever we talk with investors, they really want to understand what's going on in Germany, what's going on in Europe. By the way, already in Davos this year, six months ago, most of the investors said micro, Germany is really good. And with that, they mean the German corporates, the German companies. Macro, you need to do improvements. And that's exactly what we want to try now. Of course, the government stepped up with the fiscal program, but also with the reforms. If we now actually do something, so to say, together, if we march in parallel, we have a huge chance. And then I do believe with further reforms to come, and that is necessary, I do believe that this trend of reallocating funds to Europe will not stop.

19:50If we are not doing further reforms and just rely on fiscal debt, that doesn't help. We need the fiscal reforms. That was Deutsche Bank CEO Christian Savings speaking there. So in the coming days, academics, professionals and leaders from the world of banking and fintech will convene in Germany to discuss topics ranging from preparing for geopolitical uncertainty to optimizing productivity through AI. But just how uncertain is the path ahead? Joining me now to discuss is Bloomberg's EU finance reporter, Nicholas Comfort, and Stephen Ahrens, our team leader for EU finance. Welcome to both of you.

20:26Nick, can I start with you? Feels like back to school, back to conference season, doesn't it? What do you think is going to be on the minds of these bankers and academics and the industry as we get into conference season? In short, I'd say D &D, deregulation and deals, those are the two big things that the bankers will be focusing on. Deregulation is something that affects all of the banks. Regulators like to call it simplification rather than deregulation. But what the bankers are really after is either a wholesale shredding of certain rules or a tweaking of them in order to free up some capital here and there, which they argue they can put to better use, for example, to lending for whether it's renewable energy or defense or technology, whichever your pick is.

21:09And on the deals front, too, yeah, it's I mean, it's not it affects more individual banks. But everyone's interested in what's happening around around BNP, Paribas and Unicredit, especially that's that's what's on people's minds at the moment. Stephen, why has Europe's financial services sector done so well over the past four years? I mean, look at those leading bank stocks are absolutely stellar performance. Absolutely. I mean, the performance of banking stocks for the past four years, and especially since the beginning of this year, has been absolutely stunning. And the reason for that's been the extremely dismal performance of banking stocks in previous years.

21:47As you may remember, there was an era of negative interest rates in Europe for a long time set by the European Central Bank. And that caused a decline of profitability in many European banks. That was reversed in 2022. And since then, European banking stocks have been on a tear, boosted since the beginning of the year, especially in Germany, Deutsche Bank, Commerce Bank, by the prospect of stepped up spending, public spending on defence and infrastructure. So that's kicking a nail and that is probably the broad explanation for this extremely good performance. Yeah. OK. So, Nicholas, what then are the biggest risks going forwards?

22:27Because things don't look quite so bright, maybe, for the second half of this year. Is it the risks of rates not coming down much further? Is it about Fed independence or the hit to economic growth in Europe, maybe, that's going to come from US tariffs? I'd say definitely tariffs. That's the main thing. If you're a chief risk officer at a European bank at the moment, That's the number one thing you've got on your mind in terms of what does it mean for my corporate lending portfolio? The companies I lend to, are they going to be in trouble? Are they going to see losses on these loans because they see a large chunk of their revenue dissipated?

23:11But also, I mean, you can see the positive there as well. I mean, if these companies are going to be investing in the United States, for example, to build new factories, then that's where the chief risk officer's colleagues over in commercial banking would be jumping in and trying to give them more loans. But yes, tariffs is the number one thing which they probably have on their mind. Stephen, we heard from Christian Saving earlier there saying that Europe's banks will fare well because investors could potentially flee U.S. turbulence. Is that true, given recent political developments in Europe and especially in France?

23:48It seems to have been true, at least. So we did see a strong flow of institutional investment out of the US into Europe during the first half of the year, especially after the US administration unveiled the tariffs plan in April. That is now probably something that people will look at. You're right, there is political instability, especially in France. There's also political instability in the Netherlands, a smaller economy but still an important one. And so Europe isn't sort of in the clear. It's too early to say, but yes, I would imagine that people will look at this again. So far we don't have any indications that that flow from US to Europe has reversed.

24:31It's still going on apparently. Nicholas, look, the nice glowing hands that people have acquired maybe over the summer holidays might be starting to fade in September. But the French prime minister reportedly didn't take a holiday. How prominently do you expect the issue of political instability in Europe to be on the agenda as you see it? yeah i mean i saw an interesting analyst note the other day saying sort of that this is i mean it's kind of the the norm we've gotten we've gotten used to at this stage i mean the so in terms of immediate impact on banks from their let's say their holdings of french sovereign bonds i don't think that's something which which is going to be eroding capital levels too much for example um i but yeah i mean maybe more in the in the longer term if you're if you're a bank catering to companies in France, then these companies are worried and these companies aren't necessarily going to be making investment decisions and that they're not going to be borrowing.

25:29They're not going to be doing M &A transactions. And so that's really a threat also to the revenue that banks exposed to France stand to make. But I mean, in terms of real big sort of hard-hitting financial impacts on capital, on their financial strength, I'd be less concerned. So, Nick, in terms of M &A, are we going to see more meaningful consolidation? Seems to always be a kind of waiting game in Europe to see big consolidation cross-border. Yes, definitely. So, I mean, deals in Europe take a long time and they have been, I mean, cross-border deals certainly have been few and far between. I think the experiences of Unicredit shows that you have to be persistent and you have to also have maybe multiple options ahead of you if you want to be doing deals.

26:21With Unicredit and Comments Bank, for example, that seems to be a waiting game over for Andrea Rochelle, the CEO. It could be that we see something happen on that in the months or year ahead. but it's a lot of the stuff which would really support those cross-border transactions that you mentioned a lot of the architecture is missing but then maybe bankers been complaining for a long time so they need to to jump over their shadow as you'd say in German and just and crack on with it if they really want to pursue that growth oh I don't know what the translation of that phrase is into an English idiom um interesting Stephen in terms of the impact though of the political pressure in the US that we're seeing on the Federal Reserve, on the central bank?