Federal Reserve Meets; Apple to Post Earnings

FED announcement of their policy tomorrow when we talk. When we talk FED and all the intricacies of the FED and what it means for the rates market, there is absolutely no one better to speak to than Ira Jersey. Ira is a b I rate strategist for Bloomberg Intelligence. He joined us on the phone. Ira, thanks so much for joining us. Okay, we're gonna get let's say we get that twenty five basis point cut tomorrow. Then everybody's gonna really focus on the language of chairman Pal. What

do you expect to hear from the chairman? Yeah, I think the chairman is Yeah, it's gonna be tricky for him, and you know, trying to discount what he's gonna say is going to be difficult, primarily because a lot of the data that we've had the last three weeks or so has been relatively good, where some people are even questioning whether or not they should be cutting rates at all, and they and they will cut interest rates basis points that would be that the real shock would be if

they didn't. So so the question is are they gonna Are they going to hike more? And the answer is probably, excuse me, cut more? Like more that would be that would be amazing, But um that you know, are they going to cut more? And uh, and what's the magnitude and the pace of that? So you know, if it's starting in June, we thought maybe they'd cut a couple of times and then wait a little while and then and then um, cut a bit more if they had to, say, in early. But but at this point it's it's not

obvious that they're going to have to. So I think that he's going to need to be pretty neutral in his statement, saying basically like we're going to be very data dependent, and that might not be enough for risk assets to really um to really be upbeat after that, because I think a lot of risk asset markets, whether it's at his in equities have really been reliant on the idea that the FED is going to cut you know, three or four times, which is what the market has

has continued to price. Well, that's exactly my question, is it it feels like the markets set up to take anything that j. Powell does or says is hawkish because it's not going to be a fifty or seventy five basis point cut. Yeah, I think that's right, Alex. You know that. So if they cut twenty five now and then he hints it they're going to cut in again in September October, but don't necessarily expect there to be

a prolonged easing cycle. So say, you know, as much as the market is currently priced, which is basically for four cuts by the middle of next year, Um, I

think that risk assets take that badly. Now do they take it badly in that they reprice a couple of percent and then you know, find a new equilibrium or it doesn't wind up being a prolonged down trend because I think, you know, ironically, if the FED hints like I just mentioned that they're going to cut twice and then and then stop for a while, if that means a two percent or three percent repricing in the SMP five.

I don't think that the FED cares. I think that that maybe is actually good right from from the FED standpoint, and that's what kind of what they would hope for. But if it winds up starting a downtrend in risk assets, you know, wider credit, lower equities, that's the type of thing that then you wind up pricing it back in.

So there's weird feedback loop that the markets might actually generate for the FED, which, um, you know, in an environment where the the economy is modeling along that the Feds looking at the markets for some semblance of what expectations are for the future, and right now, you know, expectations for the future isn't okay, but not great economy. So you know, in that environment, UM, little changes can

mean a lot to monetary policy makers. So are we We had a guest on earlier today who was suggesting that the FED should bring quantitative easoning back onto the table. Do you think that is an option that they would consider? It is? I I think that they won't really consider that until after they cut you know, four or five times, so basically until the FED funds y it's closer to one percent. I don't think QUI is an option now.

Something that they could do and something they will do starting the middle of next year at the latest, if not even a little bit earlier, is they'll start to increase your balance sheet just to keep reserve levels constant.

So there's this very technical thing that goes on where currency in circulation is usually rising, and as it's rising, that means that some other liability that the FED has, such as reserves, continually go down, and they the FED has stated that they have a policy of keeping ample reserves in the system, and in order to keep ample bank reserves in the system, eventually they're going to have to start increasing their balance sheet again to do that um and I think that they have to do that

sometime in the third quarter of next year, and they might even do it a little bit earlier. So that is kind of a dovish ish thing, which I think will you know, make the markets happy, particularly risk asset markets, because I kind of don't understand the dynamics. It's it's a it's an optics issue I think more than anything. But that could be something that's helpful that's not really QUI.

Some people are gonna call it QUI. It's not que though, And you know, we have a lot of work that we've done, so terminal users can check out b I rates and find some of our information on on the FED balance sheet and how we think that will develop over the next year and a half. We love the shameless plugs era. We do it all the time. Um. So when you say it's not que like than than than, what is it? I mean, in essence is providing the

more immity in the market. It's standard monetary policy. I mean people don't realize, but prior to the two thousand seven financial crisis, the Fed's balance sheet increased by about three to five percent every year. So going back to that same type of environment where the Fed's increasing its balance sheet incrementally every single month in order to keep reserve balances constant, would not be that Dutch, just typical monetary policy. It's not que right, the FEDS balance sheet.

You know, everyone says, oh, it's so big now, and it was a trillion dollars before the before the crisis. Yes, before the crisis it was a trillion, but it was only four billion. So the thing is is like over that, over that twelve year period more than doubled. Right, So it's not a that's right, and that wasn't called quantitative easing, right.

Quantitative easing is large scale ass of purchases that are a large portion of both the market and also the size of the fed's balance sheet, where you're actively increasing the amount of reserves that are in the system, not keeping them confident, which is what we're talking about. Our Jersey, thank you so much. As always, when we talk Fed, we need to talk to Ira Jersey. We will wait to see what the FED does tomorrow. Clearly we will

be all over that that Bloomberg Radio. Ira Jersey, senior rate strategist for Bloomberg Intelligence, joining us on the phone. Time to check in with Bloomberg Opinion. We're join by Bloomberg Opinion columnust Shira over Day, who's giving us a

little preview of what we might see from Apple. So again kind of you know these quarters for Apple, they're really interesting for investors trying to get a sense of how well this company is making the transition from really a a phone and iPad company to maybe something a little bit more in terms of the services and so on. What are you gonna be looking for Shure when the

company reports tonight. Yeah, I think that those are important details about revenue has been declining and is expected to continue to decline for Apple's iPhone business in this quarter.

And I think what investors are watching is both how much can they fill in at least some of the gap from other products things like you know, Apple watching air pods and also that services business, as you said, which includes things like App Store downloads and Apple Care warranties, uh, and the revenue that the revenue sharing payments that they get from Google and things like that. The other thing

that investors are looking for is anything about China. That revenue from China has been declining significantly the first half of Apple's fiscal year, and the question is will it get slightly better going forward? And the commentary about China is going to be very closely watched, as will anything that Apple says about moving bits of their supply chain out of China and what the impact of that is

going to be on the company's costs. So what are the chances that Apple says any of those things, meaning that they're gonna be like, look look at all the pretty service revenue, Look at how much that jump by double digits. Blah blah blah. Oh iPhone sales, Yeah, they're gonna be really strong in the replacement cycle. Was Apple

actually gonna say? You basically just channeled Tim Cook that is yeah, that is exactly what they say is yeah, yeah, iPhones blah blah blah, the foundation of our billion dollars in annual revenue. Look at this, look at this beautiful services revenue. And that is the message that they're sending. But look, I've said this before and I'll say it again that there's no way for things like you know, App Store downloads and Apple Music subscriptions and and the

upcoming television service. There's no way that can fill the gap from declining iPhone revenue if that continues to decline. And if you look at the smartphone market at large, that is the trajectory of the smartphone market. It's unit sales of smartphones are expected to decline globally for the third straight year in two thousand nineteen. This is a trend that it seems, at least in the near future,

to continue. Uh. And Apple has not really addressed those broad trends in the smartphone industry and whether it can kind of buck those. It's interesting the timing of this earnings call is very coincidental, I guess, with the U S trade to get delegation over in Shanghai negotiating potential trade deal. And no company arguably is more exposed or certainly a poster child for good or bed trade relationships

between the US and China than Apple. What do you expect Apple to say about what they're doing to kind of deal with the uncertainty with China? You know, at least so far in the in the last few earnings calls, Apple has been pretty optimistic about the US and China resolving their trade disagreements in some sort of amicable way. Um, we'll see if that happens. Right. Apple so far has been relatively immune from some of the tariffs that the

US has imposed on goods coming from China. So there are not yet tariffs on smartphones, for example, which is at least by units, very important for Apple. We'll see if that changes. Um, and yeah, I agree that it will be interesting to see what Tim Cook in particular says about those trade talks and whether he sees some resolution and how what is in the stock and that, like, who's the marginal buyer that's going to come into this

equity tomorrow. It's it's really hard to know that Apple has been I think it is now at or near it's all time high in terms of pevaluation. So this stock, like many box in two thousand nineteen, is pretty expensive, and I do wonder, right, people who aren't already in the stock, what do they need to see from the company that will change their mind. I mean, the story

is not changing. That iPhone revenue is probably going to continue to decline or maybe increase marginally, and so I think the question is if you get in, it's a belief, a bet that they can find some new product or service that's gonna fill in the gap more from that declining iPhone revenue. How about use of cash? I know, uh, they have dollars of cash and marketuple securities on the balance sheet. What are they doing with the cash? They're

going to give it to a SoftBank? The vision seriously, they have so much cash that they can give some of it to SoftBank and have plenty leftover to do lots of things. I think Apple's made clear they have two hundred plus billion dollars in gross cash. They've made clear for some time that eventually they want to get to some sort of cash neutral position, and that means they're probably gonna give a lot of it back to shareholders in the forms of dividend and particularly share buy backs,

which they've already been pretty aggressive on. So I assume that that will continue. Thanks very much, Bloomberg Opinion, Thomas Shira over Day, Thank you so much again giving us your thoughts on Apple. I'm sure we'll be talking to you after they report this week. We have a whole host of economics data, um you know, coming out, probably highlighted by the jobs report we will get on Friday. One question is how strong is the consumer? We know

the consumer has really been driving this economy. How much is left for the U. S. Consumer? To get a sense of that, we turned to Lynn Franco. Lynn is a senior director of Economic Indicators and Surveys at the Conference Board, and our own ulnas Ulieteva from Bloomberg Economics joins us as well. Lynn, what did your data show

you today for the latest report. We had a nice rebound in July following June's decline, so it seems that consumers have put that escalation and trade and Tower of tensions behind them, and they're focusing back on the fundamentals, which is really employment. We had a pretty good report and I think we're expecting another strong report this week.

How does a consumer factor in things like trade or the debate over the dollar for example, or things like that we talked about all the time in the financial markets. It doesn't seem to impact the consumer that much. It's really the fundamentals, you know, wage growth, employment growth, that's really what's driving confidence. And what we're seeing here is there.

You know, they're assessing both current conditions very favorably, and they're very optimistic that the economy is going to continue expanding, So that should translate into strong spending in the next two quarters. So, Julian, we know that how strong the how important the consumer is to the economy. What is your sense of bloomerk economy as it relates to can the consumer continue to drive this economy given where we're seeing maybe some weakness in manufacture, not just in US,

but more so outside of the US. Is a consumers still strong enough to continue to drive this economy forward? Absolutely. I think today's reports both on consumer confidence and earlier on personal income and spending really support this notion that consumers will continue to drive economic growth in the second half of the year. So if you look at the profile of personal income and particularly wage and salaries growth in the second quarter, we saw continued acceleration in that profile.

And the July reading on consumer confidence that is, you know, basically the best reading this year, UH, suggests that we will continue to see personal income and consumer confidence driving personal spending higher. Lynn, what are the elements that go into the higher consumer confidence number? But you guys measure well, take a look at current business conditions and employment conditions

and those are coming in very strong. And then we took take a look at consumers expectations six months down the road in terms of business conditions, employment and their income prospects there and it's just very strong across the board. So, as Elena said, it's the highest reading this year, and we think that the in terms of growth and consumer is going to continue to be a very strong pillar

despite other pockets of weakness. And looking at the details, Lynn, if you look at the jobs plentiful and jobs hard to get, UH, that actually suggests that we might see a decline in the unemployment rate in the upcoming report on Friday. So jobs hard to get increased a little bit in June, but they fell again in July, and that tells me that maybe there was something about like some temporary hiring and just hard hard to get jobs

in such tight labor market. But it seems like it's abating and we can see another decline in the end of limit rate. Eleen, I can't let you come into the studio without asking you about the FED tomorrow. How important is lower interest rates or the prospect of lower interest rates for the consumer and consumer confidence? Is that a big factor? I think we already see a lot um. You know, the interest rates have been very low, and

you already see that in mortgage rates for example. So mortgage rates already declined quite a bit, but unfortunately didn't really left home sales that much. But you know, it's supporting consumer spending like auto sales and things like that. I think that's where you see the impact of lower interest rates. So Lynn, going forward, you said that you know you feel like the consumer can continue on this path.

Does it get better though, because I'm wondering, like what the incremental gain can really be from this point, and if we be tied into GDP growth that's going to be steady as she goes versus better well, in terms of GDP, we're probably expecting the economy to grow somewhere around two or a little above two cent um. You know,

we just had spending coming at four point three. I don't think we're going to get much stronger than that um, but I think we can stay around those strong levels maybe you know, two and a half three and a half percent in terms of spending UM. And and also in terms of you know, getting back to the Fed and interest rates, the percent of consumers who expect interest rates to get higher was the lowest reading we've seen

since uh, you know, two thousand and twelve. So it's already baked in that the Fed is likely to cut rates. Lin Franco, thank you so much. Lynn Franco is a senior director of Economic Indicators and Surveys at the Conference Board, joining us as she does regularly with that data from the Conference Board and Elena Estulia Tieva Bloomberg Economics always uh welcome in this studio to get the sense that get the latest on kind of you know, what's going

on in the economy. How strong is the economy. How long can the economy continue to go? We have the SMP up about this year. The question is where do we go from here to get some clarification, get some guidance. We turned to Matt Malee, equity strategist at Miller Tabak. Uh, Matt, thanks so much for joining us. Start off real quick, what do you think we're gonna get from the Fed tomorrow? Uh? Yeah, I'm kind of with the consensus twenty five basis points.

I don't think we'll get the big fifty uh anything. It's not out of the question, of course. Um. But the big question is going to be the big thing we're gonna look for, of course, is in the uh uh in the press conference, when Charon Powell will get a little more in accordant with guidance. And we've been talking about earnings reports recently, and the more important thing has been the guidance. I think that's gonna be the

same for the Fed. If they signal, you know, if they signal is kind of a one and done thing, especially if it's only twenty five basis points, that's gonna be I think kind of get some investors off guard. However, if they do indicate that they're gonna uh do it another time and maybe even a third time this year that would be viewed as positive. So how you position then? Well, right now, it's it's so weird because we're at this

key uh level in the in the stock market. I mean, we we're talking about, hey, we make a new records and it seems like, oh my gosh, the stock market has been unbelievable. Well, I mean it is or has been, but for the last eighteen nineteen months, we keep getting up near this three thousand level and then we break to a new high, but only a slight new high, and then roll back over. This is basically the fourth time we've done it, uh, and it's still only a

slight new high. So uh, if we can get further mind kind of magic numbers thirteen sorry, three thousand thirty on the SMP because I would give it a three percent uh move above it's so high. But you know, it's it's if we fail again, it's going to be a big concern. So I guess my way I plan it right now. It's kind of weight on the sidelines to see what happens. I'm you know, uh, the one thing, it's two things the number one. Still looking at some of the defensive names in case it doesn't, in case

some market rolls over. But also look at gold because it's already broken out key a resistance level. And uh, if we can move above fourteen fifty, it's going to be a real breakout for the for the for the yellow metal sometat. I was reading some of your recent research and uh, I see your noting that, in your opinion, you think there's a meaningful decline in the stock market over the next over the near future. It's much more possible than most people are thinking right now. What kind

of gives you that thought, Well, there's a couple of things. Well, two things that stand out to me is I worry about why why the FED is really getting involved in this an insurance rate cut, what you know, interest rate cut. Why would they need to feel the need to do that. Is there's something that they're seeing. And the thing that really concerns me most of all is the action in the European banks. There's been a huge divergence in the

European banks, especially over the last few months. I mean, we have the you know, this big sell off in the fourth quarter of last year, throughout the throughout the world, and of course we've all rallied uh strongly off those levels of the US market stuff. Uh uh, I'm sorry, uh, from those lows. The European market is up seventent from

those lows. And yet the European banks are unchanged, and over the last few months they've sold off in a severe way and they're testing those lows from back in December. What's going on there? We know about the situation with Deutsche Banker, but we don't know all the details there. And I just when you get that kind of major divergence between the bank stocks in Europe and not just the the US stock market, but the European stock market overall,

it tells me something's wrong out there. And uh, I'm worried that that kind of surprise could cause the market to pull back in a in a in a meaningful way. I'm not calling for a major bear market, but uh, it's just something out there that concerns me. So the trade has been like by utilities, by those dividend proxy stocks like reads et cetera. Um, have you seen the

earnings that back up paying up for those defensive sectors. Now, that's that's the one one concern that I have, especially for like the utility stocks, which are you know, a very very expensive on historic basis. The one thing with some of the on the dividend paying stocks, it depends on of course what you see, but you get a Procter and Gamble that comes out with some pretty good earnings. And the thing on the dividend paying stocks, I believe

with the market. So you know, whether you think the market's going higher or not, it is still we'd all agree as the least extended to a degree on a valuation basis. And if you get some of these stocks not just to pay a good dividend, but have a record of increase in their dividend on a consistent basis for many years, uh, you're in pretty good shapes be In other words, they should be able to participate on the way up if I'm wrong. Uh, and yet but protecting nicely and pay you to wait, uh if if

the market comes back in. However, having said that, the key area to watch right now and in terms of groups of the technology stocks, we've seen this great rally in the semi conductor stocks. Uh, they're bumping up, are actually broke to a slight new high. If they can follow through more, that's going to be very, very bullish, and it'll mean my concerns about a short term pullback are long. Uh, really keep an eye on the semi because there's been a great leadership group for for decades,

but particularly in the last year or two. So that we're about halfway through this earning season. Here would have been your takeaways both from the earnings, maybe some of the outlook that we've had from some of these reporting companies. Well, the one thing is that I've really found is that as much as it some of the you know, the high profile names have done have some great earnings reports and some and some good guidance. Overall, however, it's been

a you know, an okay earning season. I mean, the thing is, as it always happens, in the estimates were lowered so much that of course we're they're being beaten and that's great, but it happens every quarter. I mean, I don't care how good the earnings are. They they always beat expectations. The question is what are we going to get for the full year? And the full year guidance has been coming down all year long. Fourth quarter people were looking for a big pick up on the

fourth quarter of ten or eleven percent. That's now down to about five percent five point three. Uh So, the and as we've halfway through this uh earning season, those that for I'm sorrying future guidance hasn't come up at off anything has actually come down slightly. So as good as the headline numbers are, I'm sorry for the big profile names, the overall earning things has been only okay. And it concerns me that, you know, the valuation levels

are tough. I mean, everybody talks about what don't fight the FED because they can create a good multiple expansion. The problems you still need good earnings. Uh multiple expansion can't do it by itself so quickly. Just just to round it out here, Um, what sector is most vulnerable? Well, it's funny I mentioned that one of the things that could be the most beneficial here would be the technology stocks. The problem is it could also be the most vulnerable

if they don't fall through. And uh so, it's it's kind of a That's why I say you gotta step Sometimes it's good to just sit there and wait to

see what happens. You need, you don't need to you know, you can miss the first couple of percentage point moves because if the technology stocks roll over in a meaningful way anytime in the near future, they're most vulnerable because, especially in the semi conductor area, they don't have the big underlying fundamental growth that some of the other groups have. So uh and I said talking about kind of both

sides of my mouth. But that's why it's such a vital point or critical point, uh in the star market right now. And that's why it's also critical for this the technology stocks. Matt Millie, thanks so much for joining us. Matt as an equity strategist at Miller Tabac, joining us on the phone. Thanks for listening to the Bloomberg P and L podcast. You can subscribe and listen to interviews at Apple Podcasts or whatever podcast platform you prefer. Paul Sweeney,

I'm on Twitter at pt Sweeney. I'm Lisa bram Woyit's I'm on Twitter at Lisa bram Woyds one before the podcast. You can always catch us worldwide on Bloomberg Radio.