Daybreak Weekend: US PCE, London Climate

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1:45This 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 look to the Fed's preferred gauge of inflation and how it could affect policy going forward. I'm Nathan Hager in Washington. I'm Caroline Hipkitt here in London, where we're looking ahead to London Climate Action Week. 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.

2:34Good day to you. I'm Nathan Hager. We begin today's program with some key economic data in the U.S., and we are getting a lot of it this week. The Federal Reserve's preferred gauge of inflation comes out this Thursday, along with an updated reading on economic growth at the start of the year, along with a slew of other readings to help us get set for the flood of data. We're joined by Stuart Paul, U.S. economist for Bloomberg Economics. And I'd have to think, Stuart, after what we heard from the new Fed chair Kevin Warsh last week about the commitment to price stability, the PCE has got to be really top of mind.

3:09Is that how you see things right now? The PCE will be top of mind. What's good, though, is that CPI and PPI are used as the primary input for PCE inflation. So even going into last week's FOMC meeting, central bankers had a pretty good feel for what we're likely to see in this upcoming personal income and outlays and PCE inflation report. And frankly, all the data that are going to be included in this report, which covers everything from income to spending to consumer price inflation, based on the personal consumption expenditures basket, all of that data is basically going to affirm the relatively hawkish stance that we heard from Kevin Warsh and that we saw in the dot plot released by the broader FOMC.

3:55Okay, so for those who might not be closely keeping score on what's fed into PCE, I think from the CPI and PPI data you alluded to, we are still well above target when it comes to the Fed's 2 % rate that it's shooting for, right? Absolutely. So we're expecting to see about 0.5 % monthly headline PCE inflation. That's going to boost the annual PCE inflation rate to about 4.1%. Now, core inflation is a little bit more tame, about 0.4 % core inflation on the month, and that'll boost the year-on-year rate to about 3.4%. So, still a significant overshoot, even by the Fed's preferred measures. Okay, so how are we looking then at the trajectory for inflation right now?

4:44Now that we have something of a resolution in the Middle East, the oil is starting to flow through the Strait of Hormuz, does that affect how you as an economist are thinking about the overall trajectory of inflation at this point? I actually think that the May inflation readings and the PCE inflation rating is the last real inflation reading for the month of May. I think that those May numbers are basically going to be the local peak that we see for inflation. I'm expecting to see some disinflation coming in June and thereafter. And as you mentioned, the memorandum of understanding the reopening of the Strait of Hormuz both help.

5:23It should reduce the energy price pressures that have been boosting headline inflation and even bleeding into the core a little bit. But beyond that, it looks like we're past peak tariff pass-through. If you rewind the clock a year, it feels like a lifetime ago. But we were thinking about Liberation Day. We were thinking about the implementation of tariffs. We saw a major spike in the average effective tariff rate, which had been boosting core goods prices over the last year. But now it seems like that's starting to fall out of the year-on-year inflation measures. We're starting to see some moderation in core goods prices.

5:59We're also seeing firms face a little bit of pushback when they try to pass through higher core goods prices to consumers. So all told, we have those two factors in play, mostly on the good side, where falling energy prices in June and favorable base effects as we pass through peak tariff pass through are going to result in a little bit of disinflation starting in June and then probably continuing throughout the second half of the year. So, of course, barring any sort of escalation or re-escalation of the war in Iran. Certainly. I mean, that's a key wild card. But with all that said, Stuart, I think one of the last times we spoke, you were thinking that the Fed could have a pretty significant room to stay on pause, if not cut in the months to come.

6:52After what we heard from the chairman last week, is that still your view? Look, I think that the Fed's going to do their best to sit on their hands. We definitely saw from the dots. We saw from the forecasts included in the summary of economic projections. We also heard it in the chairman's voice in his near singular focus on price stability rather than employment. All of those looked a little bit hawkish. That's certainly the case. I'll have to concede that point. But one thing that I want everybody to be aware of, to really fully understand that it's not clear to us and it's certainly not clear to policymakers whether we're seeing a lot of cyclical strength driving economic activity or where it's mostly just structural transformation.

7:34So if we're looking at the totality of the data, layoffs and unemployment are low, but hiring is really concentrated in industries that have structural tailwinds like health care, for example. Investment is hot, but that's mostly in industries that are focused on onshoring and participating in the AI build out. Residential construction, for example, is really crummy. We saw that just last week with housing starts. Inflation pressures, as I mentioned, are mostly downstream of tariffs, chip shortages, the Iran war. And so the disinflation that we're getting there, again, it's mostly because of shifts in the landscape more so than any sort of like cyclical factors.

8:14So all of those more structural factors that are affecting the dynamics of the economy rather than extraordinary cyclical strength actually do keep the door open for, you know, a cut. I would not be surprised to see a cut next year. And it all really depends on the trajectory of the labor market in 2027 when that's the case. Thanks for this, Stuart. As always, that's Stuart Paul, U.S. economist with Bloomberg Economics. Let's take a look now at some stocks making news in the week ahead. I'm Nathan Hager here with Bloomberg equities reporter Avalon Purnell, ahead of a few pretty interesting earnings stories in the coming week.

8:51We're going to hear from Carnival Cruise Lines on Tuesday. It's going to be really interesting to hear from them, especially with so many of the headlines around the Middle East driving cruise stocks over the last several months, Avalon? Absolutely. I mean, the potential end of the Iran war and fuel costs will definitely be top of mind for investors as Carnival heads into its second quarter earnings on Tuesday. Carnival shares have been on a roller coaster ride alongside other travel and cruise names, to say the least, since the war started in February. But now with the U.S. and Iran saying that they've reached an interim agreement to reopen the Strait of Hormuz, sentiment is again rising in this hard-hit sector.

9:28Worth mentioning that Wall Street still remains cautiously optimistic about the stock. Stiefel may have put it best, that analyst saying that trading cruise stocks is beyond difficult because you're trading your view of whether the Middle East war will end or not. But they remain buyers of Carnival into their earnings because they believe the company hasn't witnessed any deterioration in customer spending. Bloomberg Intelligence highlighting that investors will look for insight on booking since March when Carnival reported that 85 % of capacity had been sold. Well, like you said, the stock's kind of been all over the map since the start of the year.

10:00What are we expecting from the options market when it comes to how the stock could trade off the back of earnings? Yes, option data that we are seeing at the moment is currently implying about a 6 % move after those results. Okay, so we'll be keeping an eye on Carnival Cruise Line on Tuesday. Along with FedEx, obviously a pretty strong bellwether for the economy as a whole, But I mean, this stock's been through quite a few changes lately. So how's that affecting investor sentiment? Yes. I mean, FedEx, to say the least, will be entering a new era when it reports fourth quarter earnings on Tuesday.

10:32Just this month, FedEx completed the spinoff of its freight division. And it will also be the first earnings call for Claude Russ, who became interim CFO after John Dietrich surprised investors by announcing that he was stepping down at the start of this month. Investors expect FedEx to continue executing despite inflationary pressures and rising fuel costs tied to that war in Iran. Barclays analysts are expecting solid retail performance and also industrial expansion this quarter, given strong macro transportation indicators. Though it is worth noting that Bloomberg Intelligence highlighting with the spinoff in the rearview mirror, FedEx can potentially begin to focus on its longer term financial targets, like pushing its higher margin businesses and also improving European results to lift earnings above its 2029 target.

11:17Yeah, so it'll be interesting to see how that goes. But I mean, this stock in particular has been on a pretty solid run since even before the start of the year. When you have the FedEx freight business in the rear view, how is that expected to affect the performance going forward? Well, going forward, they're hoping that this will allow FedEx to hone in on the really quality areas of its business and help to expand margin. And also worth noting that options data at the moment is currently implying a nearly 7 % move after those results. Although we will also hear from that spinoff later that week as well.

11:51So we'll see how the two go head to head. Oh, wow. So even more reason to keep an eye on FedEx and FedEx Freight. Not only that, on Thursday, we're going to hear from Darden restaurants. I mean, every time I think about Darden, I think about Olive Garden. But I mean, I'm always surprised by how many restaurants are under the Darden umbrella, not just for casual dining, but fine dining as well. Yeah, you're absolutely right. Darden is the parent company behind popular chains like Roof Chris, Longhorn Steakhouse, and my dad's personal favorite, Cheddar Scratch Kitchen. Oh, nice. We will be gaining some more visibility on the American Consumer Thursday when Darden reports fourth quarter earnings.

12:31Worth noting that they do continue to outperform the S &P 500 consumer discretionary sector, and investors are expecting the print to keep that trend going. City analysts writing that they expect another solid quarter marked by comparative growth continuing to outpace the industry. Raymond Jaynes expecting a strong fourth quarter, noting that solid casual dining segment trends in recent months. And also worth noting that options data at the moment is currently implying about a 4 % move after those results. Okay, so maybe a little bit of a pop there. But you have to wonder when there's so much talk about a K-shaped economy, whether consumers are thinking about pulling back some on some of the more discretionary sides of the economy, whether a company like Darden could see a hit from something like that if people are thinking, well, maybe I would rather stay at home and cook for myself rather than go out for a nice meal for a change.

13:25Absolutely. And I mean, it's also not just that. We're also thinking about the impact of GLP-1s on various restaurants. Obviously, fast dining, fast food is going to be very impacted by GLP-1s, especially as they continue to grow in popularity in the U.S. But for companies like Adarden Restaurants, analysts have said they're really looking for some of these chains to launch more smaller plates. more chicken options for customers who are looking for a healthier option on the menu and are really conscious about protein. And so that will also be something to be interesting to keep an eye on as we see the report later this week.

13:59That's Bloomberg Equities reporter Avalon Purnell. Coming up on Bloomberg Daybreak Weekend, we'll look ahead to London Climate Action Week. I'm Nathan Hager, and this is Bloomberg.

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15:55I'm Nathan Hager in Washington. Later in the program, we'll get you set for some important economic data coming out in Australia this week. But first, the world's facing an uptick in extreme weather events, and Europe is no exception. While one of the hottest World Cups on record is underway on this side of the Atlantic, Europe is enduring a fresh wave of weather warnings, and it's having an impact on climate resilience, energy security and everyday life. For more, let's go to London and bring in Bloomberg Daybreak Europe anchor Caroline Hepger. Nathan, would you believe it? The UK, which is rarely known for hot weather, now faces its second heat wave in a matter of weeks.

16:31Yellow weather warnings have been issued across Europe, And here in London, it's spurring a national debate about renewable energy, housing policy and even the role of air conditioning. While the Iran war has already spurred inflation across the continent and focus minds on our collective dependence on fossil fuels, Europe and the world must now grapple with another cost. The 20 trillion dollars, which Bloomberg Intelligence estimates, will have to be spent on extreme weather over the next decade. Initiatives like the upcoming London Climate Action Week will look to harness the power of London for global and local climate action.

17:10Sherry Hickok is the CEO of Climate Impact Partners and says that the kind of engagement from local government and the business world is needed more now than ever before. Despite some political backlash to the idea from opposition political parties, she says there's actually been a surge in corporate climate investing. I think what we see in the continued growth in the commitments is that it isn't a short-term gain. So as you said, corporate commitments are up 72%. We have now 72 % of the global Fortune 500 with at least one climate goal. That's three times since 2019. That was Sherry Hickok, the CEO of Climate Impact Partners, they're speaking to Bloomberg.

17:55But will that be enough to combat the panoply of looming threats from heat waves to drought to flood risks and food shortages? Joining me now to discuss is Bloomberg's weather and climate reporter, Joe Wirtz, and Bloomberg's Green reporter, Olivia Rudgaard. Welcome to both of you and thanks for taking the time to speak to us. Joe, let's start by thinking about the heat wave looming in Europe right now. What does it mean for the environment and for the economy? Right. So that heat wave is building right now in France, really. It's kind of where things are really starting to cook over there. And this is one of these high-pressure systems that we saw earlier in late May.

18:38So a very similar setup. And they are looking at some really scorching temperatures. And also, day after day after day of really warm nights, too. They call these tropical nights. These are when temperatures don't dip below 20 degrees at night. We could be in for days of that in France and in Paris there. And, you know, we're already seeing some market ripples from this. You know, the rivers in France are starting to get warm. They use those rivers to cool nuclear plants. And when those river temperatures get hot, they can't produce as much nuclear energy and they have to limit output. So EDF in France has already said they might have to start limiting power at these plants.

19:16And so the effects of this heat are already starting to trickle in. Yeah. Gosh, that is surprising, isn't it, that the impact is so significant? I mean, we know that productivity drops, for example, when it gets very hot. There's also the risk of fire, of wildfires in Europe, which we often see over the summer. And then deaths increase as well because of the heat. So there are lots of consequences, aren't there, for people. There's also, there's been quite a lot of talk about the El Nino effect. Now, that is actually not very familiar to a lot of people in Europe. It's something that affects other parts of the world more.

19:52That could shave trillions of, you know, very fragile global economy. It's expected to be really, really strong this year. Why and what is it? Yeah, this is a lot of people aren't familiar with it because it's actually pretty far away geographically from Europe. This is an area of the Pacific Ocean that is warming up. It warms up on these kind of seasonal cycles and we're in for one of these seasonal cycles. But it's happening on top of warming that has already occurred as the climate's getting warmer and through climate change. And the projections are that this El Nino could be potentially unprecedented.

20:26We're looking at a potential record breaking heat. And this weather pattern, even though it's cyclical, it has global ramifications. It affects weather patterns all over the world. It shifts rainfall, increases heat in some areas, makes it less rainy in some areas and more rainy in others. But this is happening on top of inflation that's already occurring, largely due to the war in the Middle East. And, you know, big impacts, especially in food systems and agriculture, drought, wildfire, severe flooding in some areas. So, yeah, the last one, the last big one in 2015 and 2016 was like$7.6 trillion hit to the economy here.

21:10So, yeah, we're approaching that now and it's officially on and it won't peak for months to come. So this is the backdrop then to London Climate Action Week. I'll also add that the backdrop, of course, is the World Cup as well. And there's expected to be very, very high heat at many of those matches. Again, that's difficult for some European football playing nations and a lot of weather warnings there, too. but I wanted to pick up with you Olivia on what Joe was saying there it's not just about heat it's also about water and it's about flooding and we've been writing a lot about the unseasonable weather that we've been having here in the UK but it's kind of an example of what is happening in many countries we've had this record setting May in terms of the temperatures but now a very very wet June it's not just kind of heat waves and air conditioning we're thinking about it's also the flood risks too.

22:04Yeah absolutely and I think the thing that you see in the UK is what was historically a sort of very temperate climate that moved within you know specific parameters most of the time to something that's become a little bit more dramatic so we see these much bigger swings from you know we had over 30 degree temperature heat waves I'm sorry I'm in Celsius rather than Fahrenheit. Okay we'll forgive you. Yeah in May which is very unseasonally hot and then you know it swings away again and we get really really heavy rainfall and that is climate driven because you know for every degree of extra warming in the atmosphere it means that it can hold that much more moisture and so when we do get those summer downpours they are heavier than they historically would have been and the other thing i think that's interesting in the uk and also you know other places that were not used to this type of dramatic climatic shift is that our infrastructure and our buildings are not well adapted to this to this level of heavy rainfall so you see the risk of surface water flooding is rising really significantly at the same time as we're paving over a lot more land and that increases that risk on top of the extra rainfall and this is something that insurers increasingly are very concerned about you know it comes down to even a garden level thinking about how people are managing you know their own garden space increasingly people are paving it over you see more astroturf around putting in driveways which maybe makes their life easier but insurers are actually very concerned about that as a as a risk that accentuates the impact of surface water flooding and can cause you know really significant property damage and and really traumatic experiences as well for people affected by it yeah i've been very interested to read your climate change newsletter the content that you put out regularly on those issues the paving over of front gardens in london i mean it's down to the micro level but but this is where you see kind of climate change really writ large.

23:54Joe, another area that has been fascinating, we were talking about how unusual it used to be to have air conditioning in London, but now it's becoming much more common. And maybe this is also something that in many more cities is becoming more common. I mean, AC in the United States takes up a huge chunk of energy consumption. It's becoming much more common across Europe and elsewhere. You know, it is becoming more common here. It's becoming more common across Europe. We've seen installation rates across Europe. Adoption of AC installed in homes and businesses is low in the UK, but people's interest in cooling down when these heatwaves hit is very high.

24:32We saw a huge jump in purchases of these portable air conditioning units and fans. You know, at retailers here in the UK, you know, at Curry's saw like a 2 ,700 % increase and portable air conditioning sales year over year during that May heat wave that we just had. John Lewis saw an 800 % surge. While the adoption rate and installation rate of these air conditionings is pretty low in buildings, when that heat hits, people will spend money to stay cool. But surely that's massively inefficient, Olivia. I mean, and there is the push-pull, isn't there, between climate change policy and then what people actually do when the heat hits?

25:15Yeah, so part of the problem in the UK is that we just haven't designed our buildings really in any era, including the modern era, to cope well with heat. And so, you know, it doesn't actually take a huge amount of heat for people to start to get really uncomfortable, sometimes in homes and other buildings as well, things like care homes and hospitals. That was one of the things the Climate Change Committee really highlighted. And, you know, the current building policies, especially in London, really try and dissuade people from getting air conditioning. You have to, in a lot of places, you have to jump through hoops.

25:46You have to get planning permission. If you're a leaseholder, you own a flat. It can also be quite complex. And so what people are actually doing is going out and buying these portable systems, which are the types of ones that Joe references that you can buy from Curry's or John Lewis, which are, as you say, much less efficient than a real kind of fixed system. So in some ways, we sort of currently have the worst of both worlds because people are still, they need to be cool. and their home or whatever building they're living in is not well adapted. So they're having to do something. But doing something that's more sort of fixed and permanent is quite difficult.

26:20Just tell us a little bit about the politics in the UK. I mean, climate change is a reality in countries around the world, including in Britain. But there is still climate denialism, isn't there? How have you seen that, Olivia? Yeah, well, I think a lot of people thought that we'd sort of vanquished climate denialism in the UK. and that's not currently the case because, you know, like a lot of places, there's been a rise of more populist politics. And here that is particularly expressed in the Reform Party and, you know, their policy around climate change. We interviewed Richard Tice on the Zero podcast.

26:55My colleague Akshat Rathi interviewed him a few weeks ago. And, you know, he is very dismissive of the human impact on the climate. And his argument is really, well, we should just adapt to it. You know, we should forget trying to cut emissions. you know it's too expensive it's a waste of time we should just spend loads of money on adapting to it the problem with that is that if we kind of allow climate change to run away and you know we get temperature rises we're already on course for way over 1.5 degrees of temperature rises by mid century you know even more than that adapting to that it's like sort of trying to fill up a bucket that's got holes in it you're really trying to keep up with something that is is happening on a scale that we're just not used to as human beings.