Daybreak Weekend: The Future of the Fed, UK Private Markets, Miran's Impact Overseas

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1:24prisoner looking at what's at stake when Australian Prime Minister Anthony Albanese meets with President Trump on the sidelines of the UN General Assembly. 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.

1:57Tom Busby:Good day to you. I'm Tom Busby, and we begin today's program with a look at the Fed's 25 basis point cut to the federal funds rate this past week, what it means, and whether some upcoming data will support the two rate cuts the Fed has penciled in for the rest of this year. For more, we're joined by Edward Harrison, senior strategist and author of Bloomberg's Everything Risk newsletter. Fed policymakers, in a nearly unanimous vote, lowered the federal funds rate by a quarter point this past week and signaled we could see two more rate cuts before this year is out. In your opinion, did the Fed make the right decision and why?

2:32Yeah, I think that, Tom, the economy is slowing. And so that is the right decision just for insurance purposes as an insurance cut. But there was one member of the Fed who thought they were playing catch up so much that they should probably go with 50 basis points as opposed to 25. He was a complete outlier, not just in terms of the dissent. This is Stephen Moran, who is actually in the White House on leave while he's at the Fed. But he also was very much an outlier in terms of his projection for the interest rate at the end of the year, which he put at lower than 3%.

3:15Tom Busby:Which would mean several rate cuts of 50 basis points or more. That's not what the rest of the Fed is looking at. And so I think the thing that was most demonstrable is the fact that there was only the one dissent from someone who's very associated with the White House. All of the existing Fed officials went along with the 25 basis point cut, which would suggest that any attempts to erode the Fed's independence are likely to be stymied. And this is the first indication that that's the case. Well, let's talk about what really drove this, and that is a weakening U.S. labor market. And boy, have we seen some kind of frightening stats in the last couple of weeks, like 911 ,000 jobs, a correction in the year leading up to March.

4:04Tom Busby:What does this tell us about how the Bureau of Labor Statistics surveys are done, or does it tell us more about real weakness in the U.S. job market? It tells us more about real weakness in the U.S. job market because basically what the BLS does is they collect the data that's available to them at the time, and then later, based on other data like filings for taxes and things of that nature, they can update the data. And what they've done is they've updated the data from March of 2024 through March of 2025 and found that there were 900 ,000 fewer jobs that were created over that year time span than we had thought, which says that the Fed's rate cuts from 2022 to 2023 acted with a lag that was more severe.

4:56The act of those rate hikes, rather, from 2022 to 23, that was worse than we had anticipated based upon the initial numbers. So the Fed was basically playing with a lot of data that wasn't correct. And so they're in the process of re-evaluating how weak the labor market is.

5:22Tom Busby:And that's not it. Not just those corrections, but black unemployment soaring under this president, 7.5%. Underemployment is rising. College grads with engineering degrees can't get a job. And it looks like right about now we're going to start to see the impact of all those federal workers that were laid off back in April. Their six-month severance deals coming to an end now. You hit it right on the head, Tom. I think that all of those things are coming together in a way that show that the economy, just from the labor market perspective, is weaker than we had thought. And it will continue to weaken.

5:57And the average Fed official is looking at three rate cuts for the year. That is not only this cut, but the next two meetings for this year. And then they're going to continue to cut rates in 2026. And mind you, this is why inflation is above target at 3%. So that's how alarmed they are at the state of the economy, that even though the inflation rate is high, they still feel like in order to avoid a recession, they need to cut.

6:29Tom Busby:And inflation, now we're going to get another read this coming week with August PCE, forecast to be 2.9%. That is well above the Fed's longtime target of 2%. But also, will we know and when will we know the real impact of the Trump tariffs on inflation? I mean, we haven't seen, and the Fed admits it hasn't been very bad yet, but is it coming? Yeah, the question is, when is it coming? From all indications, really, foreign companies have not paid the tariffs. What's really happened, for the most part, is the lion's share of the tariffs have been eaten by the companies. They found ways to get their costs down and to keep their margins up, even though they've absorbed the costs.

7:20But part of the reason that they absorbed the costs was because they thought perhaps the tariffs would be lesser over time. There would be rollbacks, but that's not happening. And so we're seeing increasingly that these tariff costs are being passed on to end consumers where they can be. And so we should expect some level of higher inflation between now and the end of the year, and probably even beyond that. So it's going to be an ongoing process how long we get this new inflation. But it's clear that if we already have inflation near 3 % and it goes higher, then it's going to be well above the Fed's target, even as they're cutting.

8:06And so that's the danger, and that limits how much they're able to support the labor market.

8:13Tom Busby:Well, we're going to find out about the economy with a final read on Q2 GDP out this Thursday and personal spending and PCE inflation data out on Friday. Our thanks to Edward Harrison, senior strategist and author of Bloomberg's Everything Risk Newsletter. Well, next we turn to the U.S. airline industry, which saw a tremendous rebound in summer travel demand, but some carriers appear to be doing a lot better than others. For more, we're joined by George Ferguson, Bloomberg Intelligence Senior Analyst for Airlines, Aerospace and Defense. Well, George, let's start with that rebound in travel that we saw this past summer.

8:47Tom Busby:How was it and can that momentum continue for these carriers? Look, I think what we saw this summer is continued strong demand for those premium travelers. And so, you know, we heard a number of airlines give us updates as they went into the Morgan Stanley Laguna Beach conference. And, you know, really, I think what we heard is we heard improving demand. And we did hear some of that improving demand, even at the low cost carriers. I think this challenge is they still have so much excess capacity. It's going to be hard to capitalize as much as they'd like on it. But I think really, you know, the story that we got coming out of Laguna is and we're seeing in the broader economy is that the well-heeled consumer is continuing to, you know, take their vacations, fly to Europe, spend a bunch of money.

9:51And that's been good for the United Deltas Americans. And we're continuing to see there's probably too much capacity in the low-cost world. And we've seen bumpy results at companies like Spirit, which declared bankruptcy again, Frontier, JetBlue, again, all indicative of some of the weakness down in what I'd call maybe the basic economy traveler. So I think this summer sort of reinforced that trend. 3Q is always a great quarter, not quite as good as 2Q for airlines, but two of the best quarters for them. We're hearing noise about more demand in what they call the shoulder seasons, 4Q, 1Q. So I think, look, we'll really see how well airline demand is holding up as we get into that 4Q and 1Q season.

10:49and people really have to want to get out there and travel and have a full budget to keep going. But again, I think the rap is, yeah, the well-held travelers came at it again. This 3Q had to get their vacation in Europe, spent up for some premium seats to get across the pond, and it's probably going to help out those big full-service carriers.

11:09Tom Busby:Right, the big legacy carriers. But let's talk more about the ones, you said Frontier, JetBlue, and Spirit, which again filed for bankruptcy, still flying. But what happens? Who is going to benefit when Spirit finally winds down? And it looks like it will unless somebody rescues it. Who's going to benefit? Is it those other carriers or will the big ones? So, I mean, look, I think everybody benefits, right? The big full service carriers, again, American Delta United, they have been subsidizing, let's call it some of that back of the airplane demand, some of that basic economy demand with their nice premium income.

11:52And so if they don't have to subsidize as much, that's obviously going to help them. But I think the real benefactors are going to be the low cost and budget carriers. So I think you'll see that ripple through the Jet Blues, the Frontiers, the Southwest more, even though Southwest model is going to sort of full service world. I think that's where you're going to see more of the gains. And look, I'll just say Spirit Airlines is relatively small. We don't see it going away yet. I was talking to my colleague, Phil Brendel, who does distressed analysis right before we got on this discussion. And he's saying, look, Spirit could linger in bankruptcy for a while, but right now they are starting to cut routes and they're starting to cancel gate contracts and things like that.

12:47Bear in mind that they're going to cancel those assets where they're least productive, right? And so we're going to see a pickup again in the low cost world from this, but they're going to take those routes that just weren't working well anyways, that maybe nobody should be flying to, or at least fewer people should be flying to fewer airlines and cancel. So I guess what I'm trying to tell you is I would moderate my expectations on Spirit alone. I still think more capacity needs to come out of this market, but it should, again, help the low cost more.

13:22Tom Busby:Our thanks to George Ferguson, senior analyst for Airlines Aerospace and Defense with Bloomberg Intelligence. Aerospace and Defense. And coming up on Bloomberg Daybreak weekend. Are private markets in the UK entering their golden age? I'm Tom Busby, and this is Bloomberg.

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14:18Tom 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 big announcement out of Australia. But first, private markets fast attracting exposure from investors seeking shelter from public volatility. It comes as some policymakers are tracking the situation with alarm, while others, including President Trump, are clearing the way for private domination. It's a discussion that will likely be on the agenda as industry heavyweights gather in Paris for the International Private Equity Market Conference.

14:51Tom Busby:For more, let's get to London and bring in Bloomberg Daybreak Europe anchor Caroline Hepker. Tom, from as early as January this year, commentators and market watchers have been hailing the beginning of a golden age for private markets, thanks to vast pools of capital controlled by rich families poised to pour into illiquid assets. Now, nine months into 2025, that prediction hangs in the balance. Despite industry giants from KKR to Blackstone targeting the world's wealthy to fuel the next phase of growth for private equity, economic circumstances and geopolitical uncertainty have challenged growth.

15:31There is a new source of capital, though, that may be about to arrive. regulation and compliance have driven an unprecedented wall of US retirement money into private assets, according to a report from Bloomberg Intelligence. The top 20 US pension funds alone hold about half a trillion dollars of private market exposure, the analysts found, with some having doubled their allocations to unlisted investments over the past decade. It is a development that could supercharge a sector with an already bright outlook, according to Tristram Leach, partner and head of investments for credit and hybrid in Europe at Apollo.

16:13Clearly, we feel that the risk return is more compelling in private credit than in public markets, especially at the moment. And so the idea that you'd want savers to be denied the opportunity to benefit from the incremental return that's available seems to us bizarre. So certainly making those products available to a broader swathe of the market is something that we feel strongly about, be that the wealth market or be that working with institutions to make those products available.

16:46Tom Busby:How does that work? I mean, how are those conversations going about trying to get that expanded base opened? We have been advocating for the availability of private credit and for the attractiveness of that as a product from the top of the house. And I think there's a pretty widespread discourse around how attractive that product is and certainly the relative value versus public markets. Yeah, of course, the flip side to this is the discussion of systemic risk. And over the past year, you've had increasing discussion from the likes of Moody's and the IMF saying that private credit does pose this systemic risk.

17:22Is that fair? Are we going to see some funds collapse? What's interesting is that what we just discussed was the relative value of private credit versus public credit looking attractive, and yet you don't see these same points made about public credit markets. We've noticed liquidity in public credit markets declining. So, for us to focus exclusively on private credit markets as a place where all the risk is doesn't make sense. Are you going to see funds, a differentiation in fund performance? I think you are. You know, the last 20 years have been an environment where there hasn't really been a very deep cycle in credit markets.

18:00And so you've seen very highly correlated performance across the private credit industry. I think you're certainly going to see an environment where you see dispersion in credit outcomes and you probably also see dispersion in manager outcomes. Apollo's Tristram leech there. But despite that optimism, some are concerned. Officials from the US Securities and Exchange Commission have long called out the potential risks for markets going dark as companies favour staying private over a public listing, allowing them to bypass traditional disclosure and governance requirements. So is this the new age of the private market?

18:37What could the consequences be? It's something I've been discussing with Bloomberg's private equity reporter, Swita Gopinath, ahead of a major gathering in Paris this September. So the last EPEM event, so this is last September, we heard predictions of the end of private markets golden era. Has that actually come about? Unfortunately, yes. When interest rates were low, when financing was cheap, private equity was in this golden era, right? because they could pursue all these leverage buyouts. They could return capital to investors. They could fundraise at a fast clip. All of that has died down pretty much, thanks to interest rates more than anything else.

19:17And also a difficult deal-making environment. It's not as easy to exit or monetize assets as it used to be. That's partly because the IPO market has been semi-functional for the last 18 months. It's slowly beginning to pick up now. Deal-making exits via M &A have been difficult as well. So PE firms have not been able to return cash to their own investors. which means investors don't have cash to invest in new funds. It's sort of a vicious cycle. But with US interest rates beginning to go down, do you think the bust might be temporary? Will we see a bit of a momentary surge or not? Yes, I think there are signs of a pickup.

19:57Low interest rates certainly help. The IPO market is sort of beginning to bubble back up. M &A activity is gaining steam as well. So all of these are good signs. But at the same time, we have large LPs saying we don't want as many relationships as we used to have with GPs. We want to be really selective of the funds we invest in. So say LPs who used to invest in two dozen or three dozen firms are now saying we're going to focus on the top five or ten, which means the largest firms, the Blackstones, the Polos, KKRs, will still do well. But what happens to those in the middle or in the bottom rung of the market?

20:34A bit harder there, maybe. In a regulatory sense, it's thought that Trump's deregulation drive has pushed private markets forwards. Is that happening in Europe? It's yet to trickle down to Europe for sure. But the opening up of 401k, the opening up of retail money to private equity, to private capital is definitely a good sign. Europe is making strides in a similar direction. The UK government is also talking about opening up savings to private investments. regulation is really moving in favour of the industry. Yeah, there's been lots of talk of that, hasn't there, under Chancellor Rachel Reeves in the UK.

21:12Is there resistance to pension funds, increasing private exposure, you know, worries about what that means, transparency and so on? There are worries to be sure because private companies obviously don't disclose results every quarter. There isn't the kind of transparency, as you say. But at the same time, in the UK especially, a lot of parallels have been drawn to the Canadian pension system. If you look at OTPP, the Ontario Teachers Pension Scheme, for example, there's a feeling that you have these teachers out in the middle of Canada who have better pensions than anyone working in the City of London.

21:50So all of these efforts are being made to equalise that, I suppose. Well, it's taken them a long time though, hasn't it? in terms of when that was set up and the amount of time and the size of the fund. So, you know, you can understand, you know, all of those caveats. But yes, maybe a slightly envious eye being cast at the success stories here and maybe how they can be emulated. In terms of European firms then and also at this event, what do you think is going to be on the agenda? Maybe Europeans looking to try to catch up with the US? What's going to be on the agenda at the actual event, do you think?

22:26There's been a lot of European exuberance this year, to be sure. That's because people are getting a bit fed up with the volatility in the US. There are also worries about investing in the US, about having money locked up in the US because of changing tariff and trade regimes. So there is a lot more positivity about Europe. People are talking about capital flows into Europe for the first time in decades, maybe. So European firms will really be looking to cash in on that momentum and change sort of that exuberance into actual fund commitments. In terms of the specific funding needs for Europe, that, of course, is around infrastructure and defence spending.

23:04Can private markets fill that kind of gap? In recent days, Mario Draghi came back to Europe to give a big speech about his recommendations for the European markets about opening up and trying to generate growth and investment in Europe. Do you think the private markets can fill some of the gap? Yes, but private markets are certainly hoping they can and are pretty much betting they can. Blackstone has committed about 500 billion of capital to Europe on the whole. Apollo is spending about 100 billion in Germany alone. So on the infrastructure side, it's sort of, I guess, slightly easily done. But in defense, because historically, a lot of their own investors, a lot of their own LPs have been prohibited from investing in defense assets.

23:48A lot of work is being done behind the scenes to change sort of wording and prospectuses and so on. Hmm. And in terms of whether the private markets are recession-proof or more recession-proof than other markets? I guess they would like us to believe they are more recession-proof, but I don't know that it's true, because a lot of these businesses at the end of the day are tied to the real economy. And what about the concerns of regulators and the idea of markets going dark, as it were, with little information about these businesses? I mean, it's caught up particular investors here in the UK in the past, hasn't it?

24:23So there's also even this idea that President Trump has been talking about of for listed companies that they wouldn't have to actually report every quarter to Wall Street, but there may be a six month cycle is better. So there's a lot shifting in that regulatory space, isn't there? Yeah. Listed companies certainly do talk about sort of onerous regulatory requirements. And having to list every quarter obviously increases transparency, but it has its detractors as well, the practice, because there's this idea that companies sort of tend to meet analyst estimates and then bump forecasts just based on what analyst expectations are, that it's not really indicative of their underlying growth per se.

25:07And also when you talk to companies that are private and looking to go public, the one thing they always cite as a hurdle is this regulatory requirement to list, to sort of disclose reports every three months. So I don't know if loosening that requirement perhaps might be helpful in terms of bringing more private companies public, in terms of bringing more private companies to the IPO market, certainly. But at the same time, lack of transparency isn't good. Investors need to know what they're putting their money in. So there needs to be a degree of financial disclosure. So what do you think is going to be the outlook then for private markets?