Daybreak Weekend: US Tech, BOE Decision, BOJ Meeting

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0:40This 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 ahead to the next Fed meeting and big tech earnings. I'm Nathan Hager in Washington. I'm Caroline Hepco in London, where we're discussing the outlook for the Bank of England against a backdrop of renewed conflict in the Middle East and a new UK government. I'm Doug Krishner looking ahead to next week's interest rate decision from the Bank of Japan.

1:32Good day to you. I'm Nathan Hager. We begin today's program with the Federal Reserve. Kevin Warsh and company begin their latest two-day policy meeting this Tuesday with the interest rate decision to come Wednesday. Here to get us ready for it is our man in the room for the Fed's policy moves, Bloomberg International Economics and Policy Correspondent Michael McKee. And it's really interesting, Mike, leading up to this decision, it seems like the markets It's pretty split on which way the Fed could go. Is that the way Kevin Warsh likes it? It's going to be interesting to see how he characterizes all of this when he does get to the news conference, which, by the way, he is going to have.

2:11Okay. We were able to confirm that because they always send out a reservation form for reporters to say, yes, we're coming. So we got that. So we figured that he's going to hold the press conference. Now, the question is, what's he going to say? And there is, as you mentioned, a growing debate about that. The markets are beginning to get more worried about inflation. We've now got$100 Brent oil. This week we had Google come out with a very large spend on AI, and the Fed's been worried about short-term demand caused AI inflation. And on top of that, tariffs are back. So there's a lot of reasons to think that in the near-term future, we're going to have more inflation, which then has people in the bond markets especially pushing yields up to account for that.

3:05And we've heard from Warsh himself since he took the reins, well, even before he took the reins, that he's not satisfied with where inflation is right now. He's not declaring mission accomplished when it comes to getting back to the 2 % target. What does that tell us about where the lien could be? That's an interesting question because there's sort of two camps at the Fed right now. Well, three if you put Kevin Warsh by himself because he says he's not participating in the forward guidance stuff. But there's the camp that is okay with raising interest rates if they think the inflation danger is growing.

3:46And that's a very large group of people. And then there are people like Beth Hammock of Cleveland, Lori Logan of Dallas, Jeff Schmidt of Kansas City, who think that the Fed has been behind the curve on inflation in terms of their target of 2 % for five years now. And it's about time that they get that done and that the longer they wait, the harder it just gets. And then people start to anticipate that inflation will be higher. So they say we're not tight enough because inflation is not going down to 2 % and we think we should raise rates right now. So if there's enough of a concern in the first group about those who are worried about if inflation picks up, we could hike, then you could see a movement to do that.

4:34Probably the most likely scenario is that you get some descents, maybe Hammock, maybe Logan, maybe both. But we could have a surprise. And talk a little bit about what the potential economic impact could be if we do get that surprise, if the Fed decides to deliver an interest rate hike this week. What could the impact be in terms of economic growth? What could the market impact be? Well, it will probably be disparate. In the equity markets, it could certainly be a concern because we have all these tech companies and software companies and all of the people who are leading the markets making these big bets on AI and the capital spend for that.

5:18And if they have to pay more in interest to borrow for their dividends, then it's going to hurt. And you could see a decline in the equity markets. In the bond markets, what we've seen in the last week or so is a big increase in yields. And so the bond markets have pretty much priced in the idea of a rate cut. They don't have to react as much. What you'd be looking for there is in the longer end, are they pricing in more cuts, more increases after they did one? So it's going to be a kind of a different reaction in different markets. As far as the economy is going to be concerned, it's not going to have a big impact because 25 basis points, it'll take time to get into the economy.

6:06The bond markets have already adjusted borrowing costs, so you wouldn't notice it as much in your day-to-day life. We've talked about the price increases around the chip supply crunch, the tech sector inflation, as well as this growing risk of war-driven inflation as well. Is Federal Reserve policy an effective tool against either of those kinds of price pressures, Mike? That is kind of the counter argument to the idea that the Fed should do something because inflation is too high. The Fed can raise interest rates all at once. It's not going to bring down the price of oil unless it were to throw the economy into recession and we didn't all go to work.

6:48The Fed can do that and it's not going to change the view of people that AI is worth spending money on because there's a payoff in the long run. So at this point, it may have an impact because over a longer period of time, that would slow economic growth and hopefully that would bring down some inflation. But mostly inflation is supply caused at this point, and it's difficult to have an impact on that with monetary policy. So that's the argument for why they might not do anything. Well, Mike, looking forward to the Fed decision, looking forward to seeing you back in D.C. this week. That is Michael McKee, Bloomberg International Economics and Policy Correspondent, ahead of the Fed decision this Wednesday, 2 p.m.

7:30Wall Street time. We will have full coverage, of course, for you throughout the day on Bloomberg Radio. Let's take a look now at some stocks making news in the week ahead. I'm Nathan Hager, joined by Mandeep Singh, Global Head of Tech Research at Bloomberg Intelligence, because it is another big week for big tech earnings. Correct me if I'm wrong, Mandeep, but I think we're hearing from, what, three more of the four major hyperscalers after we heard from Alphabet this past week? We are indeed. And look, we know Microsoft hasn't done well in the past quarter. And they will be, for me, one of the big ones.

8:07Amazon and, you know, Apple and Meta as well. All these companies have had a decent quarter. So from that perspective, I think their expectations are really low. I would say it's Microsoft. And for me, Google had a slight increase in their full-year CapEx for 2026. They raised it by about 4%, and they said 2027 CapEx would be significantly higher. And so from that perspective, it'll be interesting to see what Microsoft and Amazon end up doing as well as Meta. Absolutely. Well, let's start with Microsoft. As you say, probably the biggest player of the three major hyperscalers we're going to hear from this week.

8:54After we heard from Alphabet,$205 billion, that increase on the top line in terms of their forecast for capital expenditure for this year. If we see similar numbers from Microsoft, what kind of a market reaction could that Spark mandate? Actually, I expect a negative reaction if they significantly raise their capex. And I feel the bar is now quite high with Alphabet going over$200 billion for this year. So with Microsoft, the challenge is they don't have the vertical integration that Alphabet has with Gemini and their TPU systems, which that Google has highlighted could be a separate line of business.

9:37So from that perspective, you know, Microsoft has to show Azure growth and that Azure growth has been more like around 40 percent. Google posted cloud growth of around 82 percent in their second quarter. So from that perspective, there's a lot that Microsoft has to prove in terms of both the cloud growth rates that have been trailing and also how else they can monetize that CapEx beyond their cloud segment growth, as Google has shown with TPU systems and how they are deploying their own Gemini model on top of it. And when it comes to Meta also reporting on Wednesday, if they see a major increase to their capital expenditure, it's a little bit different, isn't it, in terms of how they deploy that kind of spending?

10:24Yeah, I said it was a bigger bar for Microsoft. For Meta, it's even higher because they don't even have a cloud business. So in the case of Microsoft, at least they have a cloud business where Azure segment would probably see accelerating, sequentially accelerating growth. In the case of Meta, it all has to show up in their top-line ads business, which we have seen from Google. The search business didn't accelerate. It was really their cloud business that went from 60 % growth to over 80 % growth. So Meta doesn't have a cloud business. And so if Meta comes out and says they are raising their CapEx for second half, I totally expect a negative reaction going by how the market has reacted to the Google CapEx increase.

11:14How do you see Mark Zuckerberg's strategy when it comes to AI deployment right now, particularly after all the spending Meta's done, just building a super intelligence team and all the partnerships that it's gotten into? Yeah, so look, they've released a new model, the Mew Spark model. They're looking to monetize that through API use and also get into cloud rentals like the NeoClouds. That will be very interesting for me who the buyers of MetaCompute could be because we have seen SpaceX rent their compute to Google. And Google did say that, you know, because of the third party compute rentals, the margins may actually go down.

11:58So in effect, we expect maybe Google may end up renting compute from Meta in the near term. It would be interesting if that happens. And I think there are speculations that Meta wants to get into cloud rental business. That's where it could be a new line of business for them to, you know, justify any CapEx increase that they may have during their earnings call. In the time we have left, Mandeep, I'd be curious to get your view as well on Apple. They report Thursday, maybe not a hyperscaler along the lines of Meta, Microsoft or Amazon. But how do you see Apple's results coming out? I mean, they have a new CEO.

12:39They have been at the receiving end of all these memory and the component price increases, which they have passed on to their or they plan to pass it on to their customers in terms of higher prices. I think even though expectations are for mid-teens, double-digit growth, it'll be hard for them to come up with any upside given price increases are a big part of that top -line growth. So given the CEO change and the price increases, I think it'll be hard to see any big positive surprises coming out of Apple. Really appreciate the perspective as we get ready for the firehose of tech earnings this week.

13:23Mandeep Singh with us there, Global Head of Tech Research at Bloomberg Intelligence. And coming up on Bloomberg Daybreak Weekend, we look ahead to the Bank of England's next rate decision. I'm Nathan Hager, and this is Bloomberg.

13:45As markets move and headlines break, what matters most is context. A Bloomberg subscription gives you unmatched reporting, sharp analysis, and powerful tools that help you connect the dots. Visit Bloomberg.com slash podcast offer to learn more. this is bloomberg daybreak weekend our global look ahead at the top stories for investors in the coming week i'm nathan hager in washington up later in the program we'll look ahead to a monetary policy decision from the bank of japan but first in the coming days we get the bank of england's decision on interest rates that says uk inflation hit a 15 month low in june but the renewed conflict in the middle east means ever present energy price concerns so how will the BOE navigate it all?

14:31Let's go to London and bring in Bloomberg Daybreak Europe anchor Caroline Hepker. Nathan, the Bank of England faces inflationary pressures from the Iran war, a loosening jobs market and sluggish economic growth. It also must get used to a new administration in number 10 and number 11 Downing Street. Prime Minister Andy Burnham has promised a new economic model for the UK and measures to tackle the cost of living. His chancellor, John Healy has signalled room to manoeuvre on tax and spending, but he's also spoken about the need for fiscal credibility. Here he is giving an inaugural address to staff at the UK Treasury.

15:10I'm still burning with a passion about this institution as a force for stability, for security, for growth, a force for a successful Britain. John Healy, the new UK Chancellor and former Defence Minister, speaking there. So all sunshine and roses for now, but this Chancellor faces all manner of challenges and pressure to deliver quickly on economic growth. And while markets widely expect the Bank of England to hold interest rates at 3.75 % on the 30th of July, the energy shock from the Iran war keeps the UK's inflation expectations elevated. So how will the Bank of England chart a path through this period of change, conflict and volatility?

15:59Joining me now is Bloomberg's UK economy reporter Tom Rees and Bloomberg's chief UK economist Dan Hanson. Dan, can I start with you? The UK has seen inflation pretty elevated for some three years. Things seem to be improving a little bit in June. Does that change the picture for the Bank of England's decision next Thursday? Well, I think it definitely makes their decision a little bit easier because inflation has come in quite substantially below their forecasts. And that's obviously, for any central bank, that's good news. Of course, the challenge at the moment for the bank and at this sort of juncture is that you've got inflation and the data not throwing up any red flags.

16:42Good news. On the other hand, re-escalation in the Middle East. And that is obviously a significant issue for the Bank of England and all central banks because oil prices have risen. Importantly for European central banks, gas prices have risen significantly as well. And you sort of add those two things up and you've got this picture where in the near term there's no rush to do anything. But you've got to keep your options open because we just do not know where this is heading into the second latter half of this year. So I think if you look at market pricing, they're betting on an interest rate hike as early as September, which is the next meeting after July.

17:20Equally, if you look back two months from where we are now, a lot has changed. So a lot can change in two months. That's the point. So I think big picture is the bank can afford to stick with its wait and see approach. But it's certainly not going to be sort of saying it's all clear. We can think about, you know, potentially go back to where we were prior to the war and think about when we can next cut interest rates. They're very much in a wait and see holding pattern. OK, Tom, the Bank of England governor, Andrew Bailey, well, he said pretty much that at the beginning of this month, that it was too early to consider interest rate cuts.

17:53I mean, warning that households are yet to feel the full effects from the Iran war. In terms of this conflict and the energy shock, it has resumed and re-escalated. When do you think households are going to start to feel that leg higher? So they could feel it relatively soon in terms of petrol prices. Well, they've already started increasing again in response to what we're seeing in oil markets since that re-escalation. I think what Bailey was referring to at that moment was the July increase in the price cap that we've just had. You know, that price cap that sets kind of household gas and electricity bills.

18:31So we've only had inflation data up to June so far. So because the UK has this kind of unusual price cap that gets updated every three months, it sort of delays the impact of the changes that we've seen in energy markets. So that price cap went up 13 % in July. That adds about 0.4 percentage points to inflation. You know, we had some new estimates from Cornwall Insight that showed that the price cap might go up a little bit more later in the year. So he was referring to that impact. But obviously, there's other ways that this war can kind of feed through to consumers later on. the kind of delayed effect, you know, particularly businesses, you know, start to pass on their higher energy costs back to consumers.

19:13In terms of the other data that we've had out in the past few days, it's also about the labour market. Do you think that that reinforces the case for a hold in terms of interest rates? Because wages obviously are very important too. Yeah, so the latest labour market day was quite interesting this week, you know, it was kind of showing that the number of employees on company payrolls, which is what economists are looking at most in that release currently, has been broadly flat over the last couple of months. That could be showing that the downturn in the labour market that we've had in the last couple of years is beginning to fade.

19:45That data comes with a big caveat that is revised quite often and quite heavily. But the most important thing for the BOE is that demand for labour is very weak. Vacancies are around their lowest since 21. Private sector pay growth is lowest since 2020. So the BOE kind of hopes So that's enough to contain any of those second round effects to inflation. You know, if that affects where, you know, workers trying to compensate from, you know, their losses from inflation, try and bid up wages, the labour market being weak sort of contains that risk. Dan, the Bank of England doesn't currently have a labour market remit, though.

20:22So what do you think about the soft jobs data and what it means in terms of the meeting for the Bank of England in July? I mean, I agree completely with Tom that you're right. They don't have a labour market remit like the Fed does. They don't have a dual mandate. So they're not thinking about full employment. But the consequence of where the economy is relative to full employment tells you something about the outlook for inflation. So they do take it into account. And I think it's one of these things that people talk about in terms of adding growth to the Bank of England or the economy as a whole or the labour markets, the Bank of England's mandate.

20:56Would it really change the path of interest rates? I'm not sure it would, to be honest with you. I think they think about the labour market a lot. The path of the labour market is very much linked to the path of the economy. So all of those things are interlinked. They all speak to each other. And the result is inflation, effectively. I mean, to answer your question, again, it's another reason to think they won't move. The economy is weak. The labour market is loose. That, as Tom rightly said, makes it less likely that workers are able to bid up wages in response to higher prices. And so it makes it less likely that we get this dynamic that economists talk about, this wage price spiral dynamics, where prices go up, wages follow.

21:36That makes inflation stickier. And that was the problem we had in following the 2022 shock, is that we experienced that in 2023 and 2024. I think the chances of that happening this time are far, far lower, not least one, because the labor market's loose. Two, the shock is far smaller relative to 2022. And three, interest rates are in a much better place. The 2022 shock interest rates were far, far too low. Right now they're in what we call restrictive territory. So monetary policy is still bearing down on the economy. More broadly, Tom, with this new government coming in, Andy Burnham and John Healy, I mean, we've had a few phrases, haven't we, from Burnham about his vision, a new economic model, the biggest changes in the last 40 years, a circuit breaker.

22:25They are interesting phrases. They don't give us that much in terms of policy. How do you think that in the context of the Bank of England decision and of monetary policy, we should be thinking about Burnham? Yeah, so we've had quite, I would say, mixed messages on how radical this government is going to be. You know, like you said, we've had Burnham talk about new economic models and rolling back, you know, the last 40 years, etc. Then we've also had him talk about being very prudent with public finances. For the bank, it very much depends on not only what Burnham does, but if Burnham is prudent, sticks with largely small tinkering like the VAT cut on electricity bills, and he pays for that largely by cutting elsewhere or raising tax a little bit, I'm not sure it massively affects the central bank's thinking.

23:11And, you know, the BEE has sort of signalled in the past that it's minded to look through these sort of measures on energy bills, you know, even if it does improve the kind of mood music around interest rate decisions. We would obviously be in different territory if he, you know, if they do push things into, you know, the more radical territory. You know, he's talked to the idea of finding more flexibility within the fiscal rules. It's hard to know exactly what he means by that. And I'm not sure he knows himself. but you know people have interpreted that as you know using a bit more leeway provided by the debt rules you know using the UK's public financial institutions like the National Wealth Fund that sort of thing so yeah it's a wait and see on that front.

23:54Yeah I suppose it just depends what those policies actually are Dan. John Healy has though criticised previously the Treasury as a dead hand on dynamic government so again it's another phrase that has gotten people's attention? Do you think that he's going to run Treasury very differently? How do you think about the new administration in this context? I always find that amazing, this idea that the Treasury doesn't want economic growth and everything it does is to stop economic growth. The reason the Treasury acts the way it acts is to put a break on decisions that are politically oriented and trying to buy votes.

24:29And fiscal prudence is a is a very important component of a stable economy and therefore economic growth. In any case, rant over. I think in terms of the Burnham-Healey dynamic, I think John Healey's got experience in the Treasury many years ago, but he was in the Treasury before. I think the dynamic between the two of them is very much going to be, he is going to, I would say, enact whatever Burnham's platform proves to be. And I agree with you both, it's not completely clear, but whatever that proves to be, Healy's going to be charged with enacting that through the Treasury. So the one big question I think he has and the big tension is around defence spending.

25:08Of course, he quit the Starmer government because of a lack of funding for defence. He'll need to find that money and it looks like he's going to want to find that money as well. And Tom alluded to there, that means really difficult decisions because it's a lot of cash that's needed to get defence spending up to even 3 % of GDP and then up to 3.5 % of GDP. So that's the thing that I think is probably his biggest challenge, but that would have been any Chancellor's challenge coming in because we knew that they have to be really, really careful. We've already seen a bit of a response to using the flexibility in the fiscal rules.

25:45We've already seen this idea of a tax cut floated and then taken back on income tax, raising the personal allowance. So they need to get their messaging right. So perhaps no change from the Bank of England in terms of the rate decision, but all the focus really on the politics and the policy of a new set of leaders here in the UK. Dan, thank you so much for being with us on the programme. That is Bloomberg's chief UK economist, Dan Hanson. And Bloomberg's UK economy reporter, Tom Rees, really appreciate you coming onto the programme in just the days ahead of the Bank of England's interest rate decision.

26:20Thank you. I'm Caroline Hepker here in London. You can catch us every weekday morning for Bloomberg Daybreak Europe beginning at 6am in London. That's 1am on Wall Street. Nathan. Thanks, Caroline. And coming up on Bloomberg Daybreak Weekend, we'll look ahead to the next rate decision from the Bank of Japan. I'm Nathan Hager, and this is Bloomberg.