Fed Holds Interest Rates Before Microsoft and Meta Report Earnings

Bloomberg Audio Studios, Podcasts, radio News.

This is Bloomberg business Week Daily reporting from the magazine that helps global leaders stay ahead with insight on the people, companies, and trends shaping today's complex economy. Plus global business, finance and tech news as it happens. The Bloomberg Business Week Daily Podcast with Carol Masser and Tim Steneveek on Bloomberg Radio.

It is the fifth FOMC decision of the year, that's for sure, and it was an interesting one. Got to say, first of all, FED officials as expected, leaving interest rates unchange, downgrading their view of the US economy. It's assigned policymakers could be edging closer to lowering barring costs.

But gotta say we moved around a bit in terms of expectations.

Governors Christopher Waller and Michelle Bowman voted against the decision in favor of a quarter point cut.

You kept pointing this out to me.

Yeah, it's the first dub descent going back to nineteen ninety three for the FED.

So is that right in thirty years?

Yeah, nineteen ninety three, So it's pretty wild. So one thing that I noticed about what Jay Powell said We're going to get to some of his comments in a second, but I just want to He was asked what their conversations were about the descents. He was like, I'm going to let them speak about it in the coming days, so you will hear from them. So stay tuned.

Blackout period stops on Friday, so we're going to hear stuff.

Hey, what we should point out?

Man, It was kind of an interesting meeting at today's press conference with reporters.

Fetcher J.

Powell covered a lot of.

Ground, a lot of ground, and what he said was one of the better meetings of the US Central Bank.

Inflation has been running somewhat above our two percent longer run objective. Recent indicators suggests that growth of economic activity has moderated. The moderation in growth largely reflects a slow down in consumer spending. Inflation has eased significantly from its highs in mid twenty twenty two, but remains somewhat elevated. Higher tariffs have begun to show through more clearly to prices of some goods, but their overall effects on economic

We don't do that in advance, as you just heard a lot from the FED chair today, certainly in his statement as well as the Q and A with reporters. So it's made for an interesting trade because we definitely have stocks off of our highs of the session. We've seen rates bounce around as well, I think, initially moving a little bit lower and then bouncing back up. So there's a lot for investors and traders to take in from this FED meeting.

Yeah, there really is. Let's bring in Karen very Para, managing director and head of I Shares US fixed income strategy at Blackrocks. She joins us from San Francisco. It is the world's largest asset manager, had twelve point five to three trillion dollars in assets under management at the end of the second quarter. Karen joins us once again from San Francisco. Karen, did the FED get this right?

I think so.

So we were just like also watching the press conference here on our trading desk, and I think that their main message was we're keeping rates on hold because inflation is still above target, and that would speak to really keeping a little bit more restrictive. So I think this is actually a good thing in the long run for investors because they're still getting higher levels of interest rates, they're able to reinvest and keep the fixed income asset

I love that you went right there.

I mean, anybody who's a bond investor, I mean at this point has to coming off of this press conference, with all the pressure that the FED chair has gotten from the President of the United States, have to think that, Okay, this guy is going to do his job no matter what.

Yeah, I think that's right.

I think we're just so focused here on the long term trends and meeting to meeting, we're going to see i'd say a lot of price action in the bond markets. But I think it's really important to think long term and whenever we're you know we're looking to the next meeting, as you highlighted September seventeenth, there's still a chance they're gonna cut at that meeting, but they've still got two.

More on the calendar.

And if we just take a look at the dot plot from June, we saw a couple of governors. Two governors favorite three cuts, and I think we now know who they are, But then the other eight favored about two cuts, and that's still what the bond market is pricing in. So I think anybody looking at at the short term focus, they can probably still use that as a barometer.

So you say there's a chance that they'll cut at the September meeting, you don't think that's a done deal at this point.

It's hard to say.

I think, especially Chairman Pal's comments during the press conference, we're really telling is that they don't want to get ahead of themselves. We actually got core PCE coming out tomorrow, and that's also been trending about two point seven percent. I think that's an important number to watch, and we're seeing a lot of investors you are slowly starting to move back into fixed income assets even with some of

You know what's interesting too, Diane Swank and our FED coverage earlier today, noting that we had an inflation print today, reminding us where we saw inflation in both goods and services. I am curious to throw on top of that tax cuts targeted spending by the legislation that just passed in Congress, expectations on more deregulation and AI making companies workers, if you will, more productive. That sounds to me like it's stimulative policies.

I think that's really the trick is finding the balance between some of the good data that we are getting and some of the productivity gains.

We've seen positive wage growth.

I think there's been even though the GDP print came out higher than expected, there was a lot of noise in that, just with imports and exports. But I do think the economy is pretty strong, and the Feds just trying to get back to that neutral rate and figuring out.

The timing of that is really the tough part. So there's a lot of investigation.

No, I get it, there's a lot. So is it smarter in your view?

And it sounds like this is where Jay Powell is leaning to make sure that inflation they really do have under control. You don't want to make the mistake of cutting and then having to kind of backtrack and re raise rates because of inflation taking higher.

That's right. I think their weight and see approach is going to be the playbook for the rest of the year.

So no more rate cuts.

No, I think they're just going to wait and see what the data is telling them. So I mean, I think personally we'll still get one or two cuts, probably in the back half of the year. So that really speaks to those October December meetings. The Fed did not want to take September off the table either, so I think they left a lot of optionality open during this meeting.

What would make you change your mind about September over the next month and say essentially that September will definitely see a right cut.

I think a couple of factors.

If we see some of those inflation prints coming in lower than expected in a meaningful way. I think if the trade deals solidify and we get some teriff rates that are not expected to be passed through with inflation, because that's still the big uncertainty out there.

And just to make sure I have this clear from you, are you are you certain that the next move by the Fed will be a cut and not necessarily an increase.

I don't think it'll be an increase.

I think that's that's not really what's being priced into bond markets, and I think a lot of the discussion around the cuts is really just trying to move it back towards that neutral rate and not becoming more.

The reason now, yeah, sorry to cut you off. We only have about a minute left. The reason I'm interested in that is because we haven't necessarily seen the effect or the impact of tariffs make their way into numbers. And what economists tell us is just wait, just wait, just wait, it'll happen. But it hasn't happened. So if that does happen, does that change the trajectory of the Fed?

I think, if anything, it just keeps them on hold for even longer because I think they're going to be reluctant to do you have done a couple of cut a few cuts already and then and then make it hike. So I think it'll it'll really just come down to the data and how quickly they can model that. And I think that was something that was highlighted in the press conference today.

Just to wrap up, because we talked a little bit about I think where you were finding either opportunities or suggestion to investors. But going back to a FED that and a FED share that understands is mandate, understands what the FED ja our's job is, understands what the fomc's job is, and the Federal Reserve in terms of monetary policy and what global investors expect.

Having said that.

You feel pretty confident maybe going longer out in terms of buying into the US treasury market and just quickly that about thirty seconds.

Yeah.

I think rates remaining high are good for investors. I think stepping out of cash if cash rates are projected to come down, locking in some of those bond yields are really good for investors. I think getting your duration back towards called the three to seven year. Part of the curve is probably prudent for a lot of investors right now. Her overweight cash.

Great stuff, Karen, thank you so much busy, We know for you as well as for us, but really appreciate you carving out some time for us. Karen Vera Perry, she is head of US. I share his fixed income strategy over at the massively.

Black Rock. I mean, what are we talking about?

Massively massive blacks twelve.

Point fifty three trillion in assets under management that was at the end of the second quarter.

You're listening to the Bloomberg Business Weekdaily Podcast. Catch us live weekday afternoons from two to five pm Eastern. Listen on Apple CarPlay and Android Auto with the Bloomberg Business app, or watch us live on YouTube.

All right, everybody, we've got meta platforms, Microsoft, both aut with earnings.

Those are the big ones.

There's a lot that are out there, but we want to get to We've got great team coverage here at Bloomberg and also some great outside voices, So let's get to it. With Dan Ives, he's managing director and senior equity analyst and global head of Technology research at Webbush Securities. We're going to start with meta. Let's talk about it. The stocks up about eight and a half percent of year in the aftermarket. What do you like and what don't you like? Do you not like anything?

There's nothing not to lie.

I like.

Look it speaks to you go through this AI revolution.

It's in this next stage of growth and all the money that you're seeing these big tech players at BACS now you're ultimately starting to see some of those differdence get being And then about the advertising growth and of what we saw with alphabet, what you see with meta subscriber growth.

I mean this it's goldilocks, you know for tech.

How does meta harness AI to make money? Apart from making its advertising more efficient, it's about.

The billions of users.

It's about going forward, how they're going to monetize AI.

They're not just spending to spend.

They're going to be able to monetize from an advertising perspective.

When you think about the billions of users.

They have, that's how do they do that?

Though?

Dan, and the reason Zuckerberg right now is what i U is like a wartime CEO.

It's the view that when you.

Think about AI today, this is just the beginning. You're gonna and you're going to have AI driven search, You're going to have sort of the future.

That Meta alphabet are going to play huge pieces in the advertising piece.

But I want to go so it's just advertising that that's where they're going to make all their money back. We know that they have been on such an aggressive AI talent grab and you know Meta has so you.

Need hundreds of millions of dollars. Yeah, like pay individuals.

So there that's all gonna pay off the return on in beginning.

Okay, advertising advertising just to begin When you think about full what I've used sort of like FULLYGI and it was like the Holy graw. What Meta is trying to build? What every big tech player is trying to build. Meta is basically, we're going to create a whole nother.

Company over the next decade. That's what they're spending on.

This is what I'm still waiting for, like you know Meta platforms. Look, no question, this was an incredible quarter. The stock is up nine point three percent in the after hours. Just to repeat the numbers. Second quarter earnings per share a huge beat, seven dollars and fourteen cents. The estim was for five dollars and eighty nine cents. Second quarter revenue a huge beat, forty seven point five billion dollars. The estimate was for forty four point eight

And you have to think about it, like, what's the future in terms of robotics, in terms of software, in terms of how AI is going to play a role in the every day of a consumer. I mean Meta is thinking not in the next year, three, five, eight, ten years out.

I want to bring in man deep saying if I may of our Bloomberg intelligence team.

I don't know if it's too soon. I know you're going through.

All the numbers because I want to bring into the conversation with Dan, good quarter killer quarter, How do you see it for better?

Yeah, I mean there is a sequential acceleration in ad impressions as well as at pricing growth, and to my mind, that is a sign of them applying AI to boost engagement. Obviously, the user growth has been almost the same every quarter, four to five percent, So the fact that impressions grew eleven percent is a sign that people are spending more

Do you agree with Dan?

I think JENNYI use case is quite prominent. We keep hearing about coding agents customer service. Here is the precise use case for META, and that is what they are showing in their ad pricing numbers.

Dan, come on in I saw you you're saying something that sounds.

That sounds like a bullish Man Deep. I mean that's like on the man Deep scale. That's that's pretty both.

I like that. Hey, Dan, I noticed something striking today when I opened up Instagram. I was searching for a video from Mike Birbigli, a comedian who I really like. And what I noticed when I was just I was just looking for his profile. When I typed in his name, what appeared was as an AI answer about a biography of who he was. Information about him?

Is the goal?

What is the vision for Instagram? Is this going to be metas super app?

To some extent, they're basically creating a super app, I mean, similar what you see in China, but an AI driven super abb that's and you start to go through that, you look in at a four digit stop.

They tried to do this years ago with David Marcus on the messenger side Man Deep. It didn't necessarily work. It was supposed to be payments and and everything. Is that still, in your view an area of growth for the company here or is that strategy gone?

I mean, right now it feels like they have a lot of runway with ads and there is a clear use case for JENNYI with ADS, I mean, they still have to fix the model. So I think the advantage that they have is really they are the best when it comes to at targeting and with everything that's going on. I mean, they have the surface area to apply GENAI. But look when it comes to payments and other areas, they still lack the diversification of a Microsoft or a Google.

Dan.

You know, it's funny because I was thinking about that because we you know, we talk about all of these companies and I think about the hyperscalers like an alphabet. We've talked about that a lot in Mandeep, about just all of their different platforms and how much data that gives them to make their model smarter and smart smarter. I mean, Dan, is it going to be okay for Meta to be kind of a one trick pony, even if I mean it's a massive one trick pony.

But is it enough?

Well?

I mean, like, look, I think if you think about going to packing scale, of course I can vidio the top Microsoft and you'll get these numbers just just unbelievable.

In terms of you across the board. You look at Meta, Yeah.

You call it one trick pony ish, but that's but they're going to significantly expand that over the coming years.

I mean, at least for now, there is no proof. I feel they are under earning by twenty percent because of all the losses in reality labs. The Street doesn't care because their ad business is really going gangbusters. When the ads slow down and the comps will get tougher and there will be a point when ads will not grow twenty percent, that's when I think the question will be asked, why are they losing twenty billion dollars on reality labs because it's not me making any money.

When will it start making money?

Dan?

And does it matter?

I mean, look, that's it's gonna be okay, it's gonna be a while. But like the whole point is right now, that's background noise, Like you know, there's like Street wants them to continue to invest in vast builders further out and at the end of the day that is going to come into the fold. But you're not right now

We'll see it with Amazon as well. Like it's an arms race.

I mean. The one other data point I would want to bring in is token counts. So Google and Microsoft have shared the GENII consumption, the token count We don't know how much metas models are being used. Yes, there, AT targeting is great, which is why AT pricing was such a solid number this quarter. But at the end of the day, if you're investing seventy billion dollars in Capex, you want to see your model being used and the open ser strategy work. We have no proof points of that.

Dan, I know you got to go, but thirty seconds, last question for you, what's the one question you'd ask Mark Zuckerberg tonight?

Ookay, It's really about Capex trajectory, because I think that's even though that was slow a bit, they're putting as they continue to spend, you know what, that shows confidence and as we saw on alpbet. That's what we've seen in Microsoft, and that means it continues to be I think it's the AI revolution, is the AI party. It's ten pm, was nine pm, party goes to four am.

Hey, listen, before you go, I know we said last question, but not that we lie. But you know you here in your dan Ives Microsoft you said that was also a big, big, big killer report. I mean the stock was just crazy in the aftermarket's up about six point eight percent.

Scotti Scheffer like results, right. I mean the point is like massive beat on cloud. You see more and more of these use cases, these hyperscalers, those are the best indicators. That just shows where the next spending in AI is going. And that's why right now, if you're a tag bear, you're in hibernation mode in that cave and you can find AI in the spreadsheet.

Pretty crazy, pretty interesting. Hey listen, we know you're busy.

We know you're bouncing around and got stuff to do, but always got to get some time with your Danives Managing director and senior equity analyst of at web Bush Securities also Globe Ahead of Technology Research.

What would be your number question?

Though?

Man deep to ask on the call.

Because I think it's interesting what you said about the information we get from Alphabet. Do they never answer those questions in terms.

Of do you have to come care the token Isaiah. The reason why Alphabet and Microsoft are more upfront is because they have a cloud business where they are monetizing the consumption and that's what's driving the cloud revenue and the AI portion of that. In the case of Alphabet, they don't have a cloud business meta sorry Meta, yeah, And so in their case, you know, it's all internal usage. They don't rent their GPUs or the AI infrastructure to

Like what it's costing right to juice what they're doing.

You know what it's costing because they are spending you know, seventy billion dollars in capex, But in terms of what is the utilization because this kind of infrastructure depreciates very fast, you're going to write it off in the next three years.

I just want to remind everybody where we've come in the last few years with meta platforms. There was a lot of talk in late twenty twenty two of leaving this company for dead. When they made their pivot to the metaverse, shares were trading at eighty eight dollars.

Now it's back to the IPO. Oh sorry, yeah, I.

Mean, but I mean even a recent history. Right, it's up six hundred and eighty six percent since then. That doesn't include the surge in the after hours, which if it holds, will be a new record for meta platforms tomorrow.

Yeah.

And look, when people were you know, selling the stock at eighty dollars, then they didn't really factor in you know, meta's engagement. So what's really brought them back in such a big way is people are still spending over an hour and a half across their family of apps, so that's sort of engaged. And look, that's where the real risk comes in. So chat ChiPT now is about thirty minutes across its daily active users, which is much smaller

All Hell's Man deep Man, deep seeing of course, with our Bloomberg Intelligence team. He is Bloomberg Intelligence Globalhead of Technology Research. Be sure to check out his research on the Bloomberg when it comes to Meta, so appreciate it.

You're listening to the Bloomberg Business Weekdaily podcast. Catch us live weekday afternoons from two to five pm Eastern. Listen on Applecarplay and Android Auto with the Bloomberg Business app, or watch us live on YouTube.

And then we've also got Microsoft. That stock is up about seven point nine percent here in the aftermarket, and that one some really really strong numbers as well, quarterly cloud sales profit exceeding expectations. They say they brought in more than seventy five billion dollars in the past year.

In terms of its cloud.

Business as the company continues to commercialize AI services.

Tim, We've got a great group of folks, a great duo to talk Microsoft and more. I want to bring in Greg Halter, director of research at the registered investment advisor Carnegie Investment Counsel. They've got about six and a half billion dollars in assets under management. I also want to bring in Bloomberg Intelligence senior tech analyst anurog Rana. He joins us from our Chicago bureau. Greg, Just for some context, Microsoft is the largest holding. Is it the

Thank you, Tim, and thanks for having me. We do not count the dex fund holding positions in that number. If you look at our latest thirteen filing, Microsoft is the largest individual stockholding at Carnegie.

All right, so Microsoft investors certainly like it. In the aftermarket. As we mentioned Greg, the stock is definitely soaring up about seven eight percent. Now as I speak, what jumps out at you?

I think the Azure growth thirty nine percent versus the thirty four percent expected that is huge. I'll also point out that their EPs beat of eight percent plus is the best in seven quarters. Usually they do beat. I think it's been now only three times four times over the last forty five periods they have missed on earnings, and this is a larger point of exceeding the estimate that they've had in seven periods.

All right, I want to bring it. You like it? All right, Anna rag Grana, I want to bring you in here. I'm not sure.

I think we all went into this week with a little trepidation over everything that was coming at investors, including some of these big tech earnings. But this certainly investors like what they got from the company, and certainly with the outlook. What's your take here, what's important for investors to learn off of this release?

You know, I would go what our other guests said. I mean, the acceleration in Azure is pretty impressive and one of the things I think it's going to do.

Well, that's what I want to just follow Ana Argic. You know, our preview of all of this was Microsoft Meta investors are going to be scrutinizing over the AI spending bench. So from Microsoft, clearly do you We are clearly seeing the ROI when it comes to that AI spend.

Yeah, both on the top side and you know, they are doing extremely well on the expense management side, because what happens is when you're seeing a rapid growth and Azure, which has a relatively lower gross margin than the rest of the Microsoft business, profitability does get dented with. In addition to all the AI investments that they are making, what they did this time was, you know, year over

Also, Hey, Greg, I want to bring you back in here looking at the Azure growth here. The company reported better than expected growth in its cloud business, the Microsoft saying it brought in more than seventy five billion dollars in the past year. The company continues to commercialize AI services.

I don't know that you can say it's one hundred percent paying off. The reaction to the stock indicates that investors believe that it will. You know, this stock was coming into the report at thirty four times earning, so a lot has to go right, and it appears that a lot is going right. So yes, you know, we've done a look at their CAPEX and R and D over the last ten twelve years or so. It's not like this is new. It's just that the numbers are big.

Hey, I do want to point out too that we see Amazon shares up about two point seven percent here in the after market, shares of alphabet Or down about four tenths of a percent. But of course Amazon reporting along with Apple tomorrow, Anna rog I don't know, is there any any cause for concerns or things that you want to question or would question with the c suite following Microsoft's release here?

No, I think I would talk about the headcount growth for next year. You know, what are they baking because it's been almost two years where they have added very

All right.

Going to leave it there, folks, Thank you so much.

Enter rog Rana, senior tech analyst with Bloomberg Intelligence out there in Chicago, and Greg Halter are thanks to you as well, director of research at the registered investment advisor Carnegie Investment, with the latest on Microsoft and Meta.

This is the Bloomberg Business Week Daily podcast, available on Apple, Spotify, and anywhere else you get your podcasts. Listen live weekday afternoons from two to five pm Eastern on Bloomberg dot com, the iHeartRadio app, tune In, and the Bloomberg Business app. You can also watch us live every weekday on YouTube and always on the Bloomberg terminal.