Daybreak Weekend: US Tech, UK Budget, BOJ Decision

Nathan Hager previews the Federal Reserve’s two-day meeting and asks Bloomberg economics correspondent Michael McKee whether the central bank could surprise markets with a rate move. McKee says the odds are small: most Fed officials, particularly voting members, have said they can afford to wait, and Kevin Warsh’s recent remarks gave markets no reason to expect a hike. Markets are therefore pricing in no change. A surprise increase would also leave Warsh having to explain why the Fed acted after signaling that it would not. The difficulty is that inflation is not clearly moving in the Fed’s desired direction. McKee expects possible dissent from Cleveland Fed President Beth Hammack and Dallas Fed President Lorie Logan, who have argued that rates should already be higher. The Fed had hoped to see more data after its previous hike, but the latest data may make the decision to wait harder to defend. Core PCE inflation, the Fed’s preferred measure, had been improving on a three- and six-month annualized basis, but economists expect both measures to rise significantly in the latest reading. Headline inflation is being pushed higher by energy and food costs, including fertilizer and supermarket-price effects linked to disruption around the Strait of Hormuz. Core inflation is also rising because services prices and wholesaler and retailer margins are widening. McKee’s conclusion is that the Fed faces a hawkish hold: no move, but a difficult explanation for why it is waiting.

Hager turns to Bloomberg Intelligence technology research chief Mandeep Singh for a preview of earnings from Alphabet, Microsoft, and Amazon. Singh expects all three hyperscalers to discuss accelerating cloud growth and to revise capital-expenditure expectations higher, following large spending plans from companies such as SpaceX and Meta. The crucial investor question is whether higher spending is accompanied by visible returns rather than simply another promise that monetization will arrive later. Singh distinguishes the hyperscalers from Meta, whose stock was punished when it raised its capital-expenditure forecast. Microsoft Azure, Google Cloud, and Amazon Web Services have a combined backlog exceeding $1.5 trillion, with substantial demand coming from OpenAI and Anthropic. Because these companies already operate large cloud businesses, Singh believes they can show revenue and margin benefits from the spending. Google Cloud has gained market share, helped by vertical integration across its own chips, models, and infrastructure. Anthropic has committed roughly $750 billion in spending, with about one-third associated with Google, while it also has more than $100 billion of commitments with Microsoft Azure. AWS remains a major business but has lost share from its former position near 50% of the traditional cloud market as specialized “neo-clouds” emerge for AI data centers. Singh says high-double-digit growth is still sufficient at this scale—roughly 90% growth for Google Cloud or 40% for Amazon’s approximately $150 billion business would be impressive. Strong cloud growth with stable margins and evidence of return on capital spending could calm concerns about the AI trade and differentiate these companies from Meta.

The program previews the UK’s annual budget, with the government trying to avoid the kind of bond-market reaction associated with recent fiscal problems elsewhere in Europe. Chancellor John Healey says the priority is protecting the economy’s resilience, controlling spending, reducing the deficit and lowering the high borrowing costs inherited from previous governments. Asked whether the government will rely more on higher revenue or lower spending, Healey emphasizes spending control as part of a plan to restore fiscal credibility. Bloomberg’s Matthew Burberry says the government faces a difficult inheritance: higher interest rates, hotter-than-expected inflation, rising welfare costs, and a larger government debt-interest bill. Phil Aldrick says the budget’s practical focus will be giving households and businesses “breathing space,” particularly through energy support. Bloomberg Economics expects support to be targeted and temporary, and prefers measures that directly suppress prices—such as a VAT reduction on electricity bills—over broad household handouts that could worsen inflation. Other expected measures include a bank tax, an online-sales tax affecting large retailers such as Amazon, and relief from business rates for high streets. Aldrick also describes the government’s devolution agenda: regions could retain more income-tax and business-rate revenue, giving local authorities an incentive to pursue growth because they would keep more of the resulting receipts. The budget is expected to be relatively restrained rather than another major tax-raising event. The longer-term risk is credibility: departments face roughly £24 billion in spending pressures, and Healey appears to expect them to find savings through reprioritization. If those pressures are not addressed, bond markets may conclude that the government’s promises do not add up.

Doug Krizner reports that economists surveyed ahead of the Bank of Japan’s meeting do not expect a rate hike this week, although more than 80% expect one in December. Bloomberg economist Taro Kimura says the likely outcome is a “hawkish hold.” Japanese inflation excluding fresh food is around 2.1% year over year, while inflation excluding both fresh food and energy is about 2.4%, putting both measures above the BOJ’s 2% target. Even so, the BOJ’s current price pressure is broadly developing in line with its July outlook, and an October increase would be a second consecutive hike after September’s 25-basis-point move—something not seen under the modern framework established in 1998. Kimura says a back-to-back hike could unsettle markets, especially because yen carry trades and stock markets are already vulnerable. His forecast is for additional 25-basis-point increases in December, March, and July, taking the policy rate to 2%. He views 2% as close to Japan’s neutral rate because it matches the inflation target while accounting for Japan’s low potential growth. A more aggressive BOJ could also conflict with Prime Minister Takaichi’s pro-growth fiscal plans by increasing the government’s interest burden. Kimura forecasts Japanese growth of 0.5% in 2026 and more than 1% in 2027. He says AI-related demand provides an offset to high crude-oil prices because Japan supplies semiconductors, chip-making machinery, and data-center components. The yen’s recent strength reflects some unwinding of carry trades tied to global AI-stock weakness. That volatility could make the BOJ more cautious, especially given institutional memories of criticism that its 2000 tightening helped end the zero-rate era too early. Kimura believes Japan has largely shaken off its deflationary mindset, but inflation expectations are not likely to overshoot easily because of that history.

The episode closes with Barclays APAC CEO Juddip Khanna, speaking at the Barclays Asia Forum. Khanna says Asia accounts for about 5% of Barclays’ overall revenue and roughly 15% of aggregate investment-banking trade revenues in the region. Barclays has a large investment-banking operation and a smaller but rapidly growing private-bank business. Japan is important, India is strategically significant and has Barclays’ second-largest concentration of human capital after the UK, and Singapore, Hong Kong, and China remain central to the regional strategy. Khanna describes China as too large for any global investment bank to ignore and calls India a growth market. Asked how India can stop international capital outflows, he rejects a single prescription and instead argues for consistently doing the basics well. That means continuing the reform agenda, responding to international investors’ concerns, reducing friction around measures such as the securities transaction tax and capital-gains tax, and making foreign direct investment easier through a stronger “ease of doing business” environment. His conclusion is that capital will return through many incremental improvements rather than one dramatic policy change. Khanna says India needs to implement more of these reforms consistently, while Barclays continues to treat the country, Japan, China, Singapore, and Hong Kong as important parts of its Asia-Pacific growth strategy.