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IM manufacturing number, the price is paid. That's something and jumped quite a bit in March.
Also, yeah, exactly, So I'm looking and so that data will break it down in just moments. But I'm looking at also the Jolts data data a little bit lower eight point five million the consensus with like eight point six to eight million. So the Jilt's opening has been a little bit fewer job openings out there.
Yeah, so okay, we all brain paint the brush. We have a slow wing ish Yes, astronomy with inflation still ish high. Tim Feuory is the man behind the ism. He has chaired for the Institute for Supply Management. He breaks down all the data's force. We love giving you this instant analysis of the data as it crosses the terminal. Tim, always great to see you walk us through these numbers.
Now, good morning everyone.
Yeah, a little bit of a disappointment, but you know, don't overreact to it. There's so much emotion around the fifty point fifty one versus forty nine nine.
So we came into forty nine two. We sagged a little bit.
The four elements that I watched for demands, three of those weakened a little bit.
But I think this is just a bump in the road.
I believe we're still on the tract of expansion that we started in January. On the output side, the revenue was good. We're still destaffing, but not as much as we were in the prior months, which I think is the appropriate thing to do. And the big disappointment in this month was really the input side, where the suppliers are still delivering faster, which is a bit of a surprise at this point, and the manufacturing inventory account is still contracting again a surprise.
As you mentioned, Alex. The price is number.
Coming in at almost sixty one is you know, definitely an eye opener. So dit a bit of research on that, and it seems to be all commodity related. It's steel, it's illuminum, it's plastics, and to some extent, crude oil driven, petrochemical driven, but not as much as the basic foundational commodity. So you know, I think we hit a little bit of a bump here, but I still believe that we're on the growth rejectory.
So, tim, do I interpret that price is paid? Again?
It came in at sixty point nine versus a consensus of fifty five point four and number last period fifty five point eight, So the higher prices paid, So I take that as inflationary, right.
Well, it means that in the month people paid more, people paid higher prices than they did in the fire. So you could say that they're faced with higher prices for sure.
And you mentioned him as commodity, so understood that. Okay, commodity pressures can be transitory, but nonetheless walk us through the inventory, production, and new order. So inventories are unchanged, production fell and new orders fell. So is that just that companies have restocked enough and they can hang tight for now or is it an end demand issue?
No, they fell, but they're still expanding, so they slowed their rate of growth. Okay, on the production side, and we had a bit of a surprise I think last month on the production number being so strong from something that was slightly contracting.
I think the prior month or that flat.
So we're still expanding, but it's a bit of a slower rate, so that's positive. On the employment side, we're still contracting, but it is a slower rate, so we're not letting as many people go, which I think is appropriate too at this point. You know, at the end of April, if the second half of the year is going to be stronger than the first, and at some point you got to stop letting people go. And I think we talked about that last month, and I think that's happening now.
So nothing unusual. On the output side.
I think I would love to see a much more robust production number, but it just wasn't to be in April. I remember, April's a pretty strong manufacturing month. It's really the beginning of some pretty heavy outputs. So there's some seasonal factors in here, but I'm not going to say that that's the issue. I think we had a bit of a bump. I'm still optimistic about may you know. The pricing number is obviously concerning. We've had a couple
of months here on growth. It's foundational, which on one hand, you could argue, Okay, that's because demand is coming back and prices are stabilizing and in some cases growing. If that's the case, all right, fine, but you still have to deal with the inflation number.
Great stuff, Tim, really appreciate it. Thanks for the ins analysis. You know you have a busy day for you, Tim Fiory of the ISM Manufacturing team, he's the chair of that ISM Manufacturing coming a little bit light prices pay jumping a to over sixty. Although, Tim trying to even it out, so you know it's a bump. Relax, make it still be good. Let's not overreact.
Yeah, we'll play by her so again, looking for the trend there, but a little bit of a concern there. We'll take a look at it.
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Dennis Lockhart Joints is here, former Atlanta FED President joining us from Atlanta. Dennis, I have to ask before we even start, if you tell me your office is located on Peachtree Street, I'm going to jump out the window.
Is it on a Peachtree Street?
Indeed it is.
See my current office, which is my home, is on Peachtree Street, and it's about five or six miles north of the Fed Office, which is also a tenth and Peach Tree.
See.
I mean before there was Google Maps or I got lost in Atlanta every single time because every single street is Peachtree Road, Peachtree Street, Peachtree.
Avenue, north east, southwest.
I don't know every handle you can put on the word peach Tree is used.
To like, yes, Peachtree, it's it's a phenomenon just specific to Atlanta. I don't know it's I know they've got they've got a secret code down there. Dennis, what do we going to hear from our Federal Reserve today at two pm wall Stree time?
Well, I think, first of all, I don't think the statement is going to break new grounds. So I think it's really a question of Pal's press conference. I think he needs to kind of thread the needle here, come off as a bit balanced. I don't think he wants to encourage any expectation of a near term cut, meaning
at the June and July meetings. But I don't think he also wants to abandon the idea that this year we will see some rate cuts, and to add to that, he probably cannot take off the table the scenario in which there is a rate hike. So to me, he's got to come across as balanced and measured in a certain sense, non committal, which.
I'm sure he's going to try very hard at all the seventeen thousand questions that ask about a hike to do that? How in your experience, and you're taking a look at the economy and the data that's coming in which is showing some softness, How quickly can an economy cool? How soft can an economy get? Knowing the data points we have right.
Now, short of a shock of some kind of supply shock is what we've experienced recently, I think the cooling will be gradual, and it will you know, it will be in a way fighting something that seems to be fueling the current resilience in the economy, and that is that we have a very good employment economy. When people are employed, they tend to have confidence in their income stream,
and consequently they tend to consume. And that's what's as simplistically at least, that's what's driving the current strength of the economy, so we're gonna have to see some consumption slow down, which so far we really haven't seen a lot of.
Dennis, there are some folks out there that are making the argument that the Fed pivot, if you will, in December to a more caution more dubbish tone that actually contributed to some of the inflation we're seeing here in the first quarter of twenty twenty four.
Do you buy that, well, inflation expectations have risen a little bit. That's always a red flag for the Committee. They get concerned when they see expectations rising, and we've seen.
That happen.
That on balance, you know, should be a cautionary note, and you know that means they're going to maintain their posture of I would say slight hawkishness in these circumstances.
To build on that point, I mean, you look at financial conditions Index like it's not tight. So when the Fed says things like we think that we're restrictive enough policy, why do they think that?
I have a very good question. It may very well be a question that they're reconsidering. I think, you know, we just we've seen the economy tolerate this level of interest rates with apparently very little problem. The economy continues to move along very robustly even with the current setting of policy. So it wouldn't surprise me at all if individuals, at least in their fedspeak after the meeting, say that they're not so sure that the setting of policy is
as restrictive as they thought. Now, one thing to keep in mind is the ten year has moved from about thirty ish too or sixty five to seventy, and that's tightening. That's not tightening policy, but that's tightening financial conditions. And we've seen that in the last few weeks.
Yeah, to be fair, I mean, this is why I take notes, Paul, because this was an IRA Jersey thing from yesterday and I was like, that's a brilliant question. I'm stealing it and I'm writing it down.
So there you go.
That's why I do it.
Is there a scenario here for twenty twenty four where there are no rate cuts?
I don't think you can you can dismiss that idea of I don't think it's a base case at the moment, and I don't think the Committee importantly has abandoned the outlook or the view that they will ultimately cut rates later in the year, but I don't think I think it's a non zero probability that there are no rate cuts this year.
So well off.
I mean, I guess two o'clock we'll hear from the Fed here. I guess also that is just real quick. A rate hike, is that something that you think will be discussed or was discussed yesterday and today.
I think at this time they chair pal and the committee overall probably don't want to entertain a rate hikes as they don't want want to create the market aftermath that would occur if there was a serious discussion of that. But at the same time, Palell can't take it off the table because he's got to keep I think the committee's options open to deal with whatever develops in the coming months.
All right, Dennis, really great perspective. Thank you so much. As Lockhart, former Atlanta FED President, joining us from out Peachtree Street, we decided, yeah.
So in the bio page, I mean, it's it's Peachtree and it's p Stree Street, Peachtree Road, Peachtree Avenue, and it's not just that northwest, southeast, northeast, and so literally and you'd be sitting there and you give your the capture an address, and you know, if you didn't have it exactly perfect, he take you to a completely different part of town, oh like forty minutes away.
I mean it was crazy. I'm like, you know he'd be taking me somewhere. It's like, this isn't investco You're like.
This is somewhere very different the things we learn here in Bloomberg Intelligence.
You're listening to the Bloomberg Intelligence Podcast. Catch us live weekdays at ten am Eastern on Affo, CarPlay and Android Auto with the Bloomberg Business app. Listen on demand wherever you get your podcasts, or watch us live on YouTube.
I'm Alex Steel alongside Paul Sweeneymer Live Interactive Brokers Studio right here in midtown Manhattan. This is the Bloomberg Intelligence radio show where we cover all the top economic and financial news for you with a lens through a Bloomberg Intelligence analyst. They have an amazing coverage scope two thousand companies, one hundred and thirty industries all around the world. We also tap our super solid lineup of external guests as well, who really knee deep in all the data that we're
getting the latest is at ism. Manufacturing data disappointing. The Jolts number also coming in a little bit lighter, but yet still relatively strong. Jeffrey Cleveland is chief economist over at Peydon Regal. He joins US now from Los Angeles. Jeffrey, it is FED day. It is a big day. A success for j. Powell would probably be a nothing burger. What kind of burger do you want?
Well, okay, I was hoping for some more excitement. Actually, happy Fed Day to you out. I mean, we're not going to get any move on rates. I don't see a lot of incentive for the Fed chair to try to to try to move markets. Markets have moved towards a more hawkish stance, removing a lot of the policy accommodation that we saw priced in at the start of
the year. So I don't know if he needs to do much, but I was hoping maybe just to stir up something, we could get an announcement on the balance sheet, so put her aside rates And they have been doing this quantitative tightening for most of the last two years, and they said, or at least Chair Paler said he wanted to fairly soon begin the process of slowing the pace of balance sheet contraction, if you can follow that.
So that could be something that's announced today to start in June, or maybe they put that announcement off told June. I don't know, but that's one idea for some excitement today.
So, Jeffrey, from.
Your perspective, looking at the economic data that you see, what do you think the Fed.
Should do.
Nothing at all? I think on the funds rate, they just sit here. Yeah, I mean, there's no compelling case to cut interest rates at this point. That GDP report you know last week, if you exclude some of the volatile components, we still see the underlying pace of growth in this country at around three percent. We think we could get a figure like that at an annualized rate
in Q two, which would be excellent. The unemployment rates low, all the inflation data, all the inflation data in the first quarter picked up relative to what everyone had hoped for. So whether we're talking CPI or PCE or ECI from yesterday right, everything's picked up. So there's no compelling case here to cut rates. I don't know that there would be a it would take a few months. If I'm a policy maker, Paul, I want to see it leans three months of inflation data. That's much cooler than we've
been witnessing. So I think that rules out doing anything for now. That's why I thought the balance sheet would be something they could do with their time in the interim.
We are just talking about this in the previous segment. Why does the Fed and do you agree that the policy is actually restrictive enough? When you take a look at financial conditions, they are so lose. So what gives them the confidence to say policy is at a restrictive enough point.
Well, there's this hypothetical thing they have where they look at the neutral rate, they look at the policy rate relative to that, they say, we must be we must be at a restrictive setting. Lots of bond people will also look at real rates. So if you look at your tips imply your real rates, or you look a nominal yield minus some measure of inflation, it's positive. Now it's been negative for quite some time, so people think
that's a restrictive. I'm a simple man, so I just look at growth, inflation, the unemployment rate, and I think the jury is still out, Alex. It's tbd whether we're actually that restrictive. I just got back from Europe. I was in Germany, a lot of clients over there asking that question, and one thing I said was, Hey, maybe interest rates are just going to take more time to bite. The US consumer is more insulated from rates. We've got
thirty year fixed mortgage for example. Many of my corporate clients, you know, they've turned out their debt and they're earning income on their assets, their savings that they've accrued, So they're actually earning income at higher rates here. So maybe they're more insulated from the interest rate increases that we've seen. So the U economy is very resilient. I think it's tough to make the case. Things are very restrictive at the present.
Jeff we had some Jeffrey, we had some ISM data come out earlier this morning. Forty nine point two was a headline number versus a consensus of fifty. We had Tim Fury, who heads up the ISM, saying he's not too concerned about it. It's a data point. How do you think about just kind of the overall economy here today? Is it strong enough from your perspective that the Fed in fact can just kind of wait, yeah, it is.
You know, I got excited when we jump back above fifty on IC we've been lingering below that. I gotta admit, you know, that was an exciting moment for us. We did a chart of the week on that. But probably the most worrisome aspect of that is m POL price is paid. Ye correct me if I'm wrong, but I believe they leapt back up to sixty point nine on that gage. So again, maybe the real story here. You know, we've had some manufacturing weakness for some time, so that's
not really new. But the resurgence of some price pressures that might be the real story here. And that's consistent with some other price gauges in Q one, right.
And that's something that the FED can't do anything about, Like if that's a commodity pass through thing, if it stays higher, they can't do anything about that. Point in essence, here's my question from earlier. If we don't get a cut this year, could that be seen as a de facto hike.
Well, it's definitely a tighter policy than financial market participants had anticipated. You know, at the start of the year. I remember on this program in January we were talking I think there was one hundred and fifty basis points of rate cuts priced in that definitely had an impact on financial conditions, whether you're looking at a two year yield or a ten year yield. So the consequence of the removal of those rate cuts is, yeah, tighter financial
conditions across the board. But you know, I just keep coming back to it when talking to clients. It's happening for a good reason. It's because growth is holding up. The economy is more resilient. We're talking three percent growth. That's not a terrible environment. I guess if we went back I don't know, five, six, seven years, and I told you we'd wake up in twenty twenty four with three percent growth, three point eight percent unemployment rate, it's
a little bit higher. It's a three percent in place. You would take that deal. I think it would be okay for corporate earnings overall. So I don't know, it's a disastrous scenario here. It's disappointing if you expected a lot of rate cuts, which we did not, So not.
Too disappointed, Jeffrey.
How about the US consumer. We're gonna get some earnings starting next week from some of the retailers. How do you think the US consumers is doing out there because there's boy, there's a lot of crosswinds out there.
It'seah tough, but certain parts are doing okay. How do you view the consumer?
I think, you know, I talked to a little, you know, a lot, a wide range of clients, and some of my clients tell me, hey, I don't care that inflation is cooled off. You know, Jeffrey's it was six percent on this core measure you're talking about. Now it's three percent. You know, big deal prices are still high, Paul, That's what they tell me. It's the price level that I think they're referring to. That's the term we would use, right, and so that's still I think that's still weighing on
a lot of consumers. There are consumers that are seeing pretty good wage gains, but not all and we think you're seeing that show up in some areas. So we're seeing that in credit card delinquencies, We're seeing that in some of the auto delinquency numbers. So it's something more
watching very carefully. I have to tell you though, in aggregate when I see aggregate nominal consumer income still growing at around six percent year on year through the latest month of data, that is pretty good that can smooth over a lot of the other problems that we see out there.
So some signs of.
Weakness, but overall, US can consumer is in still great shape.
I think.
So before we let you go, it is the question jobs Day Friday, what are your numbers?
I think reasonable guest is somewhere around two hundred thousand. Wouldn't be surprised by that, which would be great. We think you only need one hundred hundred and ten thousand jobs to keep a lid on the unemployment rates, so that should keep some downward pressure on the unemployment rate. Another great month of job growth, I think, so we're expecting pretty solid growth to continue here in the April data.
All right, Jeffrey, thanks a lot. We appreciate it. I hope for your sake that it is not an a burger that you can get excited. It does feel like Jay Powell would like it to be a nothing burger, so we'll see if that actually happens. Jeffrey Cleveland, chief economists at Payton Regal, is standing by.
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Al Steele, Paul Sweeney, You're live here in our Bloomerg Interactive Brokers studio or streaming live on YouTube as well as you head over to YouTube dot com and search Bloomberg Podcast and that's where you will find us.
Of course, it is FED Day today.
We'll hear from the feed of two pm Wall Street Time conference with the reporters at two point thirty Bloomberg Complete coverage on Bloomberg Radio and TV at one thirty pm Wall Street Time. Just check in with somebody who I think is going to be paying attention to this meeting. Pria Misrab, Managing director at JP Morgan Asset Management, joining us from New York City via a zoom Pria, thanks so much for joining us here.
I guess what we've heard.
From a lot of people today that Alex and I have been chatting with is the expectations pretty low here that the Fed's are going to try to stay a steady course here. Any chance that they maybe kind of go off script a little bit and maybe be a little bit more hawkish than maybe they had been.
So I think they have to.
Mark to market, meaning in January and March Chepau said he'd like more confidence, or the FED would like more confidence before they can cut trace they have or none of the data should give them more confidence.
So I think they have to acknowledge it.
I would argue Chepau has already acknowledged that, I think repeating that and keeping the market sort and the market's already priced that in. We've taken down the number of cuts that the market was pricing in for this year to now about thirty basis points much later in the year, so the market's already I think priced in a FED that has should not have had more confidence to cut tries. I think reiterating that it be relatively neutral for the market.
I think what I'm watching is does Chair Powel show that he just we need more time, that the FED needs more time to get that confidence, or is his belief that the disinflation process is still underway. Is that belief a little challenged or is he losing faith in that? I think then you can see a much bigger reaction because if the FED starts to get nervous that monetary policy is not restrictive, hikes come back on the table, and I think then no market is really priced for that.
I think risk assets will really struggle if the Fed is document rate hikes. I don't think they're there yet, but there's a press conference and I know he's going to be asked that question, and if he sounds a little more nervous about the hot inflation readings, I think then the market's absolutely going to pay attention.
What is appropriately priced? Then if you're looking at a ten year at four point sixty five percent, you're looking at a two year above barely above five Are these the right levels? What do you do here?
So I think if rate cuts are still on the horizon, and they could be later this year, they could be next year, I think the rates market's actually very well priced for that. I would actually argue that at four seventy on the tenure were near the peak if the FED is not going to hike any further.
I actually think, owning some.
Duration, we've stepped in a little bit, were a little long duration looking for levels to add to that, So you know, I think rates then would be near the peak if the FED suggests that they may be taking rate cuts off the table or heaven forbid talking about rate hikes. I think then absolutely rates can rise some more,
you can breach that five percent level. But as long as they are dangling that rate cut garret in front of the market, I think even if it's a little further out, I think actually rates are start to look fair to cheap. Look at all in eiels, in rest grate corporate you're getting six percent, securitized credit you can
get seven eight percent. I mean you're looking at equity like returns in fixed and so as long as we're not talking about rate hikes and cuts are still on the horizon, I think fixed income makes sense.
Just have to be careful, you know what risk you're taking in terms of credit. But you know, I think rates should be near their peak, and.
That's kind of where I want to go.
Pre I was just wondering when you know, pros like you, when you start thinking about credit risk and maybe taking on more credit risk.
Because I think.
About the performance in the fixed income space in twenty twenty three, against at least my expectations, the best performing asset class was US high yield.
So I'm wondering if I should be taken some credit risk here.
Sure, we've been adding well, we've been adding credit risks really since late last year, once the FED suggested that they were done hiking. That's normally a good sign for risk assets as well as duration, as long as the fundamentals are strong. And that's what I think if you rely on research, we have a ton of research analysts looking.
At fundamentals of the company.
You talk about high yield, the company fundamentals are high yield of investment grade are very strong.
I mean there are those companies.
That are struggling but being extremely careful about the business model, about the balance sheet of you know, even high yield. I think high quality, high heel makes sense. We've been adding that risk. I think the other thing we watch our flows, and we've had significant inflows into fixed income nets. Supply or fixed income has not been that high. I mean, companies have been issuing paper, but really to refinance their debt, that their upcoming debt. We haven't seen the releveraging up
of the corporate sector. It's something I'm keeping an eye out for because spreads are tight. If companies start to re level, I get a little more nervous. But you look at the supply demand picture for high yield, for investment rate corporate, it's strong. Company fundamentals are strong. That would be an argument for as long as the soft landing continues, economic data remains strong, the consumer is strong. I think owning some credit risks, you know, it makes sense.
Owning some duration risks closer to that four to seventy five percent level to make sense as well. So I think both of those risks are are attractive.
Here.
One of our YouTube viewers just kind of wrote in and said, is that the Empire State building out your window? Or is that like a screen saver kind of zoom thing.
Well, right now, it is a screen saver, but no, I thought it was real.
Once the JP Morgan building is up, I'm hoping probably not from my office. I sit there at screens all day long, but I'm sure there will be views from them.
You're gonna get some great views.
And by the way, we're gonna do a remote broadcast from down there when that building opens.
Oh that's exciting. Yes, okay, cool, all right, brio. What if you take into account you mentioned sort of taking on the credit risk, et cetera. How do we think about all the supply that's going to come on in terms of where you may take duration, where risk, where the credit risk then lies. And I say supply, and I mean from treasury, but also in terms of issuance on the corporate side.
Sure, so a lot of issuance has happened.
I think there's been significant pre funding earlier this year, So we are looking for less corporate supply on a growth basis into year end, particularly as we go into the election. But I think as we look at the spread curve, and I'll get to the rate curve in a minute, but the spread curve is pretty flat. So we like owning the zero to five year part of the spread curve just because you know, to take on more additional credit risks, you know, just not getting paid
up enough. So you know, if the spread curve steepens, I might look further out, but I would say zero to five year when we talk about the treasury curve, and that's why we have a lot of supply and there's no pre funding. There's going to be treasury supply as far as the eye can see for multiple generations. Given our deficit outlook, I think there it's important to think about what does the FED do?
And given our.
View that the FED is likely to start to cut rates, we think in the third quarter, a couple of times this year, a few more times next year. I think that zero to five year is attractive, But given that the cuts don't seem to be imminent, I think the five, the three and five year, it's a little more attractive because you know, the negative carry of owning that two
year is high. So I would say owning five year duration and zero to five year credit, that's really I think the sweet spot in the fixed income space right now.
All right, let me bring up an old issue here PRIA. That's the inverted yield curve. We're still inverted two tens thirty five basis points. And I was taught by none of the professor cam Harvey who kind of penned this whole thing that that usually leads to, like always a recession. What's going on there with that yield curve?
So the FED has historically struggled to engineer a soft landing. They did so in ninety five. I think twenty nineteen might have been another case, except we had COVID, so it's really not really a tested period. But here's why people look at the eyelk curve and say that that's a sign of a recession, because it's typically end of cycle. The FED has tightened policy significantly, and then we head into a recession and the Fed then tries to cut traits.
To down to that.
I think they're trying very, very hard to keep the soft landing going. And that's why the talk of rate cuts.
I think they want to.
Take the edge off the market. Start cutting rates. If the earlier they start, the slower they can cut in, perhaps that narrow path to soft landing widens out a little bit. I think that's why the Fed has been preemptive in talking about rate cuts. They're looking at their progress and inflation and saying, as long as we get
a little bit more confidence, we can cut rates. So even though the inverted curve might imply a recession, I think if and it's a big if, inflation stabilizes or goes back bumpy road but goes back into disinflation and the Fed starts to cut rates a little bit, they're going to ease financial conditions enough to keep growth going. And I think then that path you can get that soft landing even in an inverted curve.
All right, we appreciate it. Thank you very much. Good luck with the view. Priam Israel Fixing Come Portfolio Manager, JP Morgan Asset Management is standing byer.
You're listening to the Bloomberg Intelligence Podcast. Catch us live weekdays at ten am Eastern on applecar Play and Android Auto with a Bloomberg Business Act. You can also listen live on Amazon Alexa from our flagship New York station just say Alexa playing Bloomberg eleven thirty.
This is Bloomberg Intelligence Radio. We cover all the news in economic and financial world with our top analyst over at Bloomberg Intelligence. They cover two thousand companies one hundred and thirty industries around the world. They're honestly probably the smartest people that we talked to in this business. Ana Ragrana is one of them. He's Bloomberg Intelligence Technology senior technology analysts. And we're talking Amazon. So that's stock up
doing pretty well. It is up by about three point three percent, having a nice surge yesterday when reported after the closing bell, and it was all because of cloud sales growth and AI demand. Anurag, what was your big takeaway from yesterday and the call.
Yeah.
I think the big spike in AWS profit is something that really alarmed us because you know, that was a number we weren't expecting for I honestly a few years. So if you look at it, AWS margins, operating margins came close to thirty seven thirty eight percent, a little over thirty seven, and that was like eight points or eight percentage points higher than what Street was looking for and fourteen percentage points over last year.
Absolutely phenomenal.
I think that's really what I am hoping that you know, investors are focused on rather than all the other things.
All right ONNROD, give us a sense if we just step back for those those that aren't cloud efficionados, give us kind of the market share layout. How does this market look between some of these big players like Microsoft and Google and Amazon.
So Amazon only plays on the infrastructure layer, which is trying to give people raw material to build their applications, and when that they have a commanding market share over forty percent of the market, and in fact that they have maintained that for a while, I mean, which is surprising because Microsoft has been gaining share on it, you know, for a very long period of time. But from smaller players,
and also the market's growing very much. So Amazon's currently at you know, revenue off over one hundred billion dollars in this market, but over to all tech spending is you know, north of two trillion, frankly, So there's a lot of room to grow for everybody, not just Amazon, but Amazon, Microsoft, Google, you know, even Oracle, I mean, all of them will grow in this market.
So if we take a look at the different layers of how AI kind of plays in too cloud, the one area where Amazon maybe isn't getting as much market share and maybe they're still developing that is the consumer facing side. What can they do there? What is their growth opportunity there?
Yeah, I mean they have a lot of you know, I would say some apps that are working on it. But really the reason why Microsoft is ahead right now in that game is because of open Ai. They have a partnership with open ai and they run open AI's back end, which is when you do a search and chat GPT, Microsoft is running those searchers in the background or you know, the application runs on it, which is
why Microsoft is getting the benefit of it. For AWS, the big benefit is going to come from companies or big corporations when they go out and build their AI applications, there's a high likelihood they're going to choose AWS as much as they're going to choose Microsoft or Google. And that's really what Amazon's betting on.
So you mentioned the margins, high margins at AWS. Can they maintain those margins? What are the risks for those margins?
Yeah, I don't think they can maintain them, only because they have to spend a fair amount of money in order to reduce in order to fulfill the demand expanding in data centers, buying new hardware, buying chips. So I'd be very surprised if you see that number again for
a very long period of time. You know, frankly speaking, I'll be happy with the thirty percent margin for the next several years while they make sure that they're doing the right investments to drive double digit growth rate on their top line.
Let's talk about those investments. So they said they're going to quote meaningfully step up their capex to pay for all this AI infrastructure. But there was no like number given when Meta said that market didn't like it. What was the pass here that Amazon got?
Yeah, but you know, Amazon's basically showcasing that they actually have been doing this successfully in terms of expanding data centers based on the capacity, so you know, before going in, you know, they had close to fifteen billion dollars yesterday in the in the first quarter in terms of capex, and it's going to go up over the next you know quarter, So we think it's going to be north of sixty five billion at this point for all of Amazon, with most of it going to AWS.
But there's a reason for it.
They are getting contracts to fulfill cloud demand or you know, they need to be able to expand that to fulfill that massive cloud demand on a rock.
You know what I did not see yesterday and I released a dividend. What's up with that? They got like sixty to eighty billion dollars of free cash flow?
Yeah, I mean I I you know again, they're going to spend that sixty five billion dollars next year on capex also, so I'm okay with not having a dividend for a while.
I would rather you're a technicals you guys think that if you if you put out a dividend, it's signals that you're no longer a growth story.
Yeah, it's a kiss of death. I'm not a big fan.
No, Microsoft, Google, Apple, they disagree with you.
Yeah, IBM kind of agrees with me at this.
Point that I mean, so, but you know, yeah, go ahead.
Yeah, So look at IBM. I mean, they have a massive dividend yield. I would rather they, you know, they take that money and buy a bunch of new Hashi corpse kind of companies that are growing at fifteen to twenty percent. That will change the face of the company, make them, you know, even more relevant in the tech space than they are right now. So I'm always in that camp that when you are a tech company, you gotta constantly reinvent yourself otherwise somebody will come and eat your lunch.
I mean, on Rock and I, we just fundamentally disagree on this.
We agree to disagree. We go to our separate corners.
Can I ask a dumb question for the two of you, then, is there room for both of you to be right? Like, can these tech companies throw off enough cash they can reinvest in a healthy way and also pay a dividend?
Yes on our own, Yes, yes, absolutely, Alex, I completely agree with that, because what happens is if you go very small token dividend. It opens the doors to a lot of institutional investors that are bound by their charter to only invest in companies that they are dividend. So there is a logical reason to do it. But I'm okay with Amazon's going to take a year or two years to get to that.
Path, all right.
So there's are where where you can both be read.
There's there's a place where we can meet them.
Is there a CAPEX number that you wouldn't like from Amazon? They didn't give a number.
Now, not at this point. The only reason is because we see forward contracts.
As of this morning, when they filed their ten Q, we saw cloud commitments go up twenty nine percent.
I mean that's a very big number.
And frankly, when on the enterprise side, we haven't even seen orders coming for AI at this point. AI orders are only coming in from consumer applications like chat, GBT, people running that. At this point, over the next few years, we should see a massive spike in you know, people creating new applications or companies creating new applications, and that's going to only drive more growth for AWS, Microsoft and Google.
I just punched in Microsoft here. I'm surprised that the stock's only up five percent year to date. I thought it would have been more. Just seems like everything's going their way. What's the Microsoft call here?
Yeah, if you go and look at all these big companies that are supposed to be the big beneficiaries of AA in the long run, they had a phenomenal last year. I mean, it's just you just can't deny it that the last you know, eighteen months have been really good for the entire tech space, whether it's Microsoft or in video or you know, Amazon. So I think there's just that digestion phase at this point to see how things
end up. There's an election coming, the interest rates are going up, so there is a fair amount of unsididity out there that how will demand shape up the in the second half.
And next year.
Okay, we have like thirty seconds left Apple tomorrow, what's your number one thing?
Good course? Yeah.
The only things I want to hear is China and stabilization, and then I'll be sleeping happily. I mean, other than that, it's going to be a bad number for Apple.
Are we going to get that? China and stable is right?
We're going to get a disappointing number Apple, But again its honor. It's just saying it's all about China, right.
But also can you stabilize versus increase? I guess would be the distinction. Hey, on our great stuff. We appreciate you. I am sure we'll be talking to you tomorrow as well. On a rag Rana Bloomberg Intelligence, a tech senior technology analyst joining us on Amazon as well as Apple. Do you think if they have, like China, not growing but flat, that would be goodness?
I think if I were an investor, I would be happy that because my concern is it's a secular declining market simply because they're losing market share.
Yeah, all right, good point.
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