Daybreak Weekend: US PCE, Iceland Eco Conference, Australia CPI

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1:47This 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, we'll look to some key economic data in the U.S., along with more earnings in tech. I'm Nathan Hager in Washington. I'm Caroline Hepkitt here in London, where we're asking how central banks should respond to growing global economic anxiety. I'm Doug Krisner, looking ahead to the latest reading on consumer inflation for Australia. 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.

2:39Good day to you. I'm Nathan Hager. We begin today's program with some key economic data in the U.S. The Fed's preferred gauge for inflation, the PCE Price Index, comes out this Thursday, along with April readings on personal income and spending. For more on the numbers and what they could mean for Fed policy, we're joined by Stuart Paul, U.S. economist with Bloomberg Economics. Of course, we saw those hot April readings on consumer and producer prices. Are the PCE numbers, do you think, going to be any different, Stuart? They're also going to be hot. We're expecting about 0.4 % month-on-month headline PCE inflation.

3:16That'll push the year-on-year PCE inflation rate up to about 3.8 % from 3.5 % in March. So, still far too hot for comfort for the Fed, that's for sure. Yeah. Is it just these elevated energy prices that are driving things for this index? You know, even in the core, it's going to be hot. We're expecting core inflation to inch up to about 3.3 % from 3.2 % prior. look, there's some energy prices that bleed into the core. For example, in airfares, there's also a little bit of a quirk this month where shelter prices basically jump. It's all downstream of data collection issues during the government shutdown last October.

4:01So it's going to be an elevated core reading. The annual pace of core inflation also just still too hot for comfort for the Fed. And the bottom line really is that spending is continuing apace despite the fact that elevated energy prices are weighing on households and are effectively bleeding households a little bit drier than usual because they have to spend more at the pump. Even though energy prices are really causing a little bit of an issue for households, household spending is continuing apace so the Fed can afford to wait. It can afford to sort of keep its foot on the brakes a little bit.

4:44It doesn't need to hike to address energy-induced inflation. Instead, it can afford to wait to watch whether inflation pressures start to broaden. I don't expect to see that in this personal income and outlays report and PC inflation report, But still, just inflation too high for comfort, spending continuing apace, and that's all reason for the Fed to remain on hold. So, is that going to be reflected in what we get from the actual personal spending and income numbers as well? And what's the trend right now? Are we seeing the trend shift toward, I don't want to say it, persistent inflation? Well, so the personal income element that we're going to get in this report on Thursday is going to show about 0.5 % month-on-month growth in personal income.

5:30Remember, we had a very hot jobs report, a lot of hiring, a lot of wage growth. That personal income in tandem with elevated tax refunds, also paired with positive wealth effects, those are all supporting spending right now. So we're going to probably see spending on about a 0.5 % month-over-month pace in the month of April. It's not as strong as in March, which was mostly driven by gasoline prices and gasoline spending. But it's still hot income, hot spending. Households are weathering the storm created by higher energy prices. And so the Fed's going to be on pause for the foreseeable future.

6:11For the foreseeable future, you're not expecting that we could see hikes anytime soon then? No, I don't think so. The Fed has this balancing act that it needs to deal with right now. It's two different risks. The first is that low and even negative real aggregate labor income growth means that there will come a point in time where households do have to tighten their belt. We will get to that point in time at some point. The other risk that the Fed has to contend with is that low real interest rates fuel a credit-induced expansion. So that would be inflationary. That's exactly what the Fed does not want to see.

6:54I think that right now the Fed is betting on the former risk, that a relatively cool labor market through time will prevent inflation pressures from broadening. And that's really what's going to matter. So the Fed is going to lean towards that risk and is going to, I think, stay on hold rather than try to tighten financial conditions. Remember, financial conditions are already tightening a little bit. And for every move that we see upward in interest rates in the market, the Fed can afford to wait a little bit more because markets are doing the heavy lifting for the Fed by tightening financial conditions.

7:34The Fed doesn't have to rush to tighten financial conditions itself if the market is already doing it. Well, what is the risk of a potential policy mistake if the Fed does stay on hold for a long time? Well, so it's exactly that issue, is that markets don't do enough of the heavy lifting, and the Fed is too slow to move, and that we start to see relatively low real interest rates lead to a credit-induced expansion. that would really be the policy failure that the Fed runs the risk of dealing with. But I don't think that that's something that we would expect to see the Fed trying to address or trying to get ahead of, perhaps even this year.

8:21Thanks for this, Stuart. Good having you on with us. That's Stuart Paul, U.S. economist for Bloomberg Economics. Let's take a look now at some stocks-making news in the week ahead. I'm Nathan Hager with Bloomberg Equities reporter Avalon Purnell. Even more tech earnings as the season winds down. We're going to hear from Salesforce Wednesday, Avalon. Investor sentiment doesn't look all that great for this stock. What's weighing it down? You're absolutely right. AI and future growth will definitely be top of mind for investors as Salesforce heads into that third quarter earnings report. Investors will be looking for greater clarity on Salesforce's second half growth acceleration outlook.

8:59Many analysts across the street were saying that at this point, it doesn't look like they're going to be able to reach the very high bar that they've set for themselves. And part of that is based on the question marks that remain on how exactly their business is going to continue as AI continues to get more sophisticated. They were definitely an early victim of the SaaS apocalypse, as some of our reporters were calling it. So definitely something that we'll be keeping an eye on. Well, talk a little bit more about how high the bar is right now and why it might be so tough for Salesforce to hit it.

9:31Yes, absolutely. So those gross margins for the second half of the year are very much a key concern as increasing AI investments are expected to eat into operating margin. Also important to note that Bank of America had a great note out. They reinstated coverage of the firm with an underperform rating, noting that the company is facing an AI-driven reset as companies that typically would have gotten contracts with them are either easing off or choosing to wait. And that's also causing a lot of issues for Salesforce. A lot of question marks about how exactly a slowdown in new contracts as heightened geopolitical concerns driven by the Iran war and also longer sales cycles are going to impact companies like Salesforce.

10:10So a little bit more of the software story to be told this week and a little bit more of the broader tech story as well, because we're going to hear from Dell on Thursday. After all we've heard from the computing names this quarter, what are we expecting from Dell? Absolutely. Dell is also facing a very high bar heading into earnings next Thursday. Investors will be looking for the tech companies, AI and server results to meet a fairly high hurdle. Worth noting that ahead of the results, analysts at Morgan Stanley and Bernstein have already boosted price targets. So clearly some people on the street think that they're going to be able to reach that high bar.

10:46Meanwhile, though, UBS does have a great note stepping to the sidelines and saying that they are going to go ahead and downgrade the stock to neutral, saying that investors are largely already pricing in Dell's AI server demand and they don't necessarily see a ton more left to do. So Bloomberg and Telling just had a really great note out as well saying that they expect the print to illustrate strong demand momentum across all of Dell's business segments. Well, even with that sort of divided investor sentiment going into this print, this stock has had an amazing run so far this year. Does that raise the bar even more for Dell to sort of outperform for analysts and investors?

11:21Absolutely. And I think that's really reflected in the options data, which currently at the moment is implying an 11 % move after those results. Obviously, that could be to the upside or to the downside. But considering they've had a lot of really good news, even this past month, they announced that they had added another 1 ,000 customers for their key AI product line in the past quarter. And now that they're at around 5 ,000 clients for its AI factory, and they're counting companies like Eli Lilly, which I cover very extensively, Honeywell, and also Samsung among its customer base. So that's definitely going to influence some investor sentiment and continue to make the bar higher and higher.

11:57Yeah, you got to think about so many of these companies feeding into the AI story, whether it's pharma or anything else. I don't know if we can say that for Abercrombie & Fitch when they report on Wednesday. What are we expecting going into their results? It's a really good question because analysts remain fairly mixed heading into that print. Raymond James has already trimmed its price target on expectations based on their expectations that it's going to have softening trends at Hollister, which for those unfamiliar, Abercrombie & Fitch does have a brand geared towards younger consumers, those teens and tweens at Hollister.

12:33Jeffrey's also writing that decelerating data has been a key concern for investors and is likely weighing on shares. Abercrombie & Fitch has been a company that we've had in focus for the past couple of years as they've been in the middle of a wider turnaround. They very much got a lot of upside as teens and tweens got really interested in the 90s and early 2000s clothing styles. But now there's a lot of question marks as fuel costs increase, whether those customers are still going to be going to Abercrombie & Fitch or if they're going elsewhere. It's definitely something investors will be keeping in mind.

13:04Making me feel old about the 90s trend coming back. I remember when Abercrombie & Fitch was a tip for teens and tweens. But at any rate, we're going to hear from a lot of other retail names as well. Not just Abercrombie, but Gap is reporting and Dollar Tree. Could they give us a different sense of what we can expect from the consumer? Absolutely. It's really going to be a question of how is a consumer across a very wide spectrum of price points like a Dollar Tree, like Gap and even Abercrombie & Fitch, how exactly is a U.S. consumer faring? We already know from Abercrombie & Fitch, they were very early to say that they are expecting those headwinds from the Iran conflict on its business, from those extra fuel costs, and also customers being pinching their dollars, to say the least, as gas prices increase.

13:52But it'll be really interesting to see if companies that are geared more towards the lower end of that price spectrum, like a Dollar Tree, will see a little bit of upside. Thank you for this, Avalon. Great having you on with us. That is Bloomberg equities reporter Avalon Purnell. And coming up on Bloomberg Daybreak Weekend, we'll look at how central banks should respond to growing global economic anxiety. I'm Nathan Hager, and this is Bloomberg.

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16:17Eligibility and qualification requirements must be met. Additional restrictions may apply. Please speak with a business banker for more information. JPMorgan Chase Bank, N.A., member FDIC. 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 our program, we'll look to a key inflation reading in Australia. But first, in the coming days, senior policymakers and academic figures from the world of macroeconomics gather in Iceland to discuss the evolving role of central banks in today's landscape. This year, the Reykjavik Economic Conference is set against the backdrop of geopolitical tensions and persistent inflation worries.

16:57So how will central banks respond? For more, let's go to London and bring in Bloomberg Daybreak Europe anchor Caroline Hipker. Nathan, as a net importer of energy, Europe's economic growth forecasts have begun to be cut, inflation is expected to rise, and governments have little ammunition to shield their citizens and businesses from the Middle East shock. The Secretary General of the OECD is just one voice raising concern. Matthias Cormann, speaking on the sidelines of the recent Group of Seven meeting, said the challenge for central banks will be to deal with the combination of elevated inflation risks and weaker economic activity as they weigh possible interest rate increases.

17:41The Paris-based OECD became the first major international institution to warn in March that the Iran war would fuel price increases and dampen economic activity. Since then, a bond market rout has injected urgency into the situation, forcing ministers and central bankers to reckon with growing policy challenges from the shock of rising oil prices. The increasing uncertainty is something at the forefront of Iceland's central bank governor, Ásgeir Jónsson, who is hosting the event. We've seen inflation expectations rise, although the situation in Europe is different. The market is cooler, there is a slow growth.

18:24But the main problem is that the oil price development is very difficult to forecast. You have a lot of central bankers assembling here next week. Can you just briefly tell me what's ahead, what you're expecting? from that meeting or from that conference? Iceland is just between Europe and America. And in this conference, we have both academics, mostly from the US, and policymakers. And now also chief economists from the main banks, main commercial banks. That was Iceland's central bank governor, Ásgir Jónsson, speaking to Bloomberg's Ragnhild Sigurdardotter. This ahead of the Reykjavik economic conference that is taking place in the next few days.

19:08And joining us now for more on the event and the macroeconomic backdrop is Bloomberg's Director of Global Economics, Jamie Rush, and our Iceland-based reporter, Ragnhild Sigurdard. Ragnhild, what can we expect? So the Reykjavik Economic Conference is happening now for the third time and we will have central bank governors and academics along with economic leaders from all over the world and they will gather and discuss the current economic situation and its main challenges. I should say it does come against the backdrop of major and sudden geopolitical shocks that have been changing the inflation calculus for central banks globally.

19:45So that will obviously be discussed and there's a really high profile lineup of central bank speakers including multiple Fed presidents. There's the governor of the Reserve Bank of India, Sanjay Malhotra, and the Bank of England's Andrew Bailey and many others including from Europe, scandinavian countries and so on jamie so the conference does come at a particularly challenging time for the global economy and as ragnar hilda was describing there will be a lot of important central bank leaders and economists there so what do you think are the kind of major hurdles that central bank governors are thinking about right now well i think for all central bank governors that is it's a difficult time because they're faced with the worst kind of shock that they can have one that makes the economy weak and inflation high so they they ought to be trying to support the economy through the shock but they can't because they're worried about inflation and so for them balancing what to do in this sort of environment is extremely uncomfortable they'll be occupying all of their thoughts um and uh and they'll be hoping to get the decision right because their careers will be uh won or lost on this yeah ragnarhilda what do you think is going to emerge?

20:58Do you think that there will be common themes? That's a big question, isn't it? Europe, for example, is a major energy importer. Other parts of the world, it might be a slightly different story. How much consensus? What are people going to be discussing? The major topics are likely to revolve around the oil price and geopolitical uncertainty. Tariffs will be discussed, as well as currency and how monetary policy will need to react to these varying factors. They will be, I'm told, they will be talking about currencies, for instance, and how they can both work as buffers and amplifiers of shocks, and the pros and cons of bigger currency areas, the effects of interest spread between different currency areas.

21:40One of the things that will also be discussed is how tighter regulation for financial institutions are leading to financial services being provided outside of the banking sector. And there is currently a concern over the growth of private credit and lending that's happening away from the underwriting standards of the banks or public bond markets. So this is a trend that can essentially increase economic fluctuation rather than diminish it. Yeah, okay. So lots then for people to think about. Jamie, we seem to be at a pivotal moment also because of the uncertainty around the inflationary shock, around how that's going to be dealt with.

22:18We've started to see downgrades to European economic growth, deterioration in terms of PMI type data and the worry that inflation is going to start rising. How much is that going to weigh on central bank governors and how are they going to try to respond to some of these threats? Well, I think the initial feeling was or the hope was that the conflicts would be over quickly, the strait would open and things would get back to normal. And of course, that just hasn't happened. So Central Bank has basically started off by saying we need time to assess the data and see what the lay of the land is. That's reasonable.

22:56Well, the lay of the land is becoming clearer and it's not looking very good. And so they're now moving towards acting. And so acting means trying to signal that they are credible actors and probably hiking or at least cancelling any rate cuts that they'd had planned. So I think that's how things are evolving. Do you think that central bankers and economists are preparing for a longer closure of the Strait of Hormuz or at least trying to signal, anticipate that they might be ready were that to happen? Well, I really think they ought to be. If you look at the negotiating position of Iran and the US, they are very, very far apart.

23:37If you take into account the views of Israel as well, not at the negotiating table, but the Israeli view matters, then they're even further apart. and of course irani leverage just increases as the midterm elections in the u.s get nearer so i don't think there's any particular incentive for them to reach a deal so yeah central bankers should be thinking this could be a prolonged conflict oil could be missing from global markets 20 percent of oil be missing uh how are we going to respond and they should be thinking about that in advance of time not waiting for it to show up in the data ragnar hilda you've been speaking to the Icelandic central bank governor what are the particular issues for Iceland and his assessment of the uncertainty around the backdrop economically well Iceland has been battling high inflation for quite a while now and that's the central bank has been struggling to bring down so you know Iceland being a small open economy we are very dependent on what happens in the rest of the world we are dependent on decisions that are being made on both sides of the Atlantic with the Fed and the ECB, but obviously just all macroeconomic developments also will factor in in Iceland.

24:48So I think they are just watching very closely. They stand ready to hike if needed. I think this is a very critical moment this summer for Iceland to bring inflation down. So I would say they stand ready to react as needed. Yeah. Jamie, in terms of that question then about European policy how much will it be determined by the US Federal Reserve that's also been a major issue in bond markets hasn't it in terms of the recent run-up in rates? Yeah I mean the answer is not much I think the I mean first of all the US is just in a different position from Europe right as it's not a net exporter really but it's neither an import or an exporter of crude so it doesn't have the same economic consequences.

25:35There's politics happening in the US, which isn't happening here in Europe. So you wouldn't want to follow the Fed playbook if you think that there's a political element to the decision making. So I don't think there's a big read across from what's happening in the US to ECB or Bank of England policy. But of course, global bond yields, they're determined globally. So we will be seeing some of that co-movement in in bond pricing and indeed tightening of financial conditions. That's interesting because we're going into a new era with the Federal Reserve under new leadership. It's also noteworthy when you mention politics that the US Treasury Secretary, Scott Besson, is very active.

26:20I wonder what your thinking is around maybe those US central bank governors, what might they be thinking about and discussing? What will be their perspective as they visit Iceland? It's a tricky one isn't it? So we don't know very much about the new Fed chair and exactly how he's going to interact with the rest of the governors and that'll be the key relationship to follow. Will he be able to persuade them that they shouldn't hike? That seems to be the question in markets at the moment. Meanwhile our US team think that actually despite all the Hormuz related, oil related inflation that actually there's some reasons to think that inflation may be coming down on a more sustained basis.

27:03And that would actually argue for cuts. So there's lots, we'll see how it will unfolds, but we will certainly be monitoring that very closely. How concerned are you about the kind of current picture in terms of the deterioration of the economy in Europe, if I can ask you that broad question about where we are for consumers and businesses in Europe? Well, the economy is not exactly going gangbusters. So coming into this, the labor market wasn't all that strong. But I think there are some reasons to be optimistic. Because if you think back to 2021 when oil prices, gas prices went up, well, even since then, actually a lot of resilience has been achieved in the European energy sector.