WEBVTT - Oracle, OpenAI Expand Stargate Deal for More US Data Centers 0:00:02.720 --> 0:00:10.600 Bloomberg Audio Studios, podcasts, radio news. You're listening to the 0:00:10.600 --> 0:00:14.560 Bloomberg Intelligence podcast. Catch us live weekdays at ten am 0:00:14.640 --> 0:00:18.560 Eastern on Applecarplay and Android Auto with the Bloomberg Business app. 0:00:18.640 --> 0:00:21.880 Listen on demand wherever you get your podcasts, or watch 0:00:21.960 --> 0:00:23.280 us live on YouTube. 0:00:24.079 --> 0:00:26.320 I think there's a lot of news in the technology 0:00:26.360 --> 0:00:30.040 side of the business on open ai. Open ai has 0:00:30.080 --> 0:00:33.120 agreed to rent a massive amount of computing power from 0:00:33.159 --> 0:00:37.040 Oracle data centers as part of its Stargate initiative, totally 0:00:37.080 --> 0:00:39.159 about four point five gigawats. I don't know what a 0:00:39.159 --> 0:00:41.760 gigawatt is, but it sounds big of data center power 0:00:41.800 --> 0:00:43.480 in the US. So I have no idea what that means. 0:00:44.320 --> 0:00:47.200 And open ai is not. I mean, Bloomberg ais give 0:00:47.240 --> 0:00:48.680 me some stuff, but I need to go to the 0:00:48.680 --> 0:00:52.479 source on a Ragrana technology analysts for Bloomberg Intelligence on 0:00:52.600 --> 0:00:54.160 a rocket. It seems like we're seeing a lot of 0:00:54.200 --> 0:00:57.960 deals getting inked here in the tech space. This open 0:00:58.080 --> 0:01:00.480 this ai story is still moving along at a rate pace. 0:01:00.680 --> 0:01:02.280 Talk to us about what's going on at Oracle. 0:01:03.560 --> 0:01:05.959 Yeah, so this is something we discussed a few days 0:01:06.000 --> 0:01:08.400 ago when Oracle was up you know, sharply at that point. 0:01:08.640 --> 0:01:10.560 They didn't disclose the name of the client, but that 0:01:10.640 --> 0:01:13.280 seems like, you know, as we said, it is open Ai. 0:01:13.480 --> 0:01:15.800 This is part of the Stargate project that came out 0:01:16.160 --> 0:01:18.840 right after the president gard elected at the beginning of 0:01:18.920 --> 0:01:21.399 January or the middle of the end of jan This 0:01:21.440 --> 0:01:23.520 is a big project. It's going to take several years 0:01:23.560 --> 0:01:27.240 to build out. It's going to be very humongous data 0:01:27.240 --> 0:01:30.920 centers across the country and perhaps even globe where open 0:01:30.959 --> 0:01:35.600 ai is basically buying computing capacity from Oracle with the 0:01:35.600 --> 0:01:39.280 help of SoftBank, you know, funding part of that particular project. 0:01:39.480 --> 0:01:41.240 What is your sense of this deal, because we have 0:01:41.319 --> 0:01:44.880 credit ratings SMP saying that Oracle clouds infrastructure and buildings 0:01:44.880 --> 0:01:47.840 free was training cash flow and that the current spending 0:01:47.880 --> 0:01:50.720 pace is hired and anticipated. Is that also the view 0:01:50.800 --> 0:01:51.040 you have? 0:01:52.400 --> 0:01:53.760 Yeah, it's going to be much higher. 0:01:53.800 --> 0:01:56.080 In fact, we think the company gave guidance of about 0:01:56.080 --> 0:01:57.440 capex of twenty five billion. 0:01:57.960 --> 0:01:59.000 We think that's going to be low. 0:01:59.040 --> 0:02:01.640 It's going to be you know, north of that over 0:02:01.680 --> 0:02:03.520 the long term, I mean over the next three to 0:02:03.560 --> 0:02:06.360 five years. Remember, just a few years ago they were generated, 0:02:06.440 --> 0:02:09.000 they were only spending about five six billion dollars a year. 0:02:09.320 --> 0:02:11.760 But frankly speaking, if you really want to play in 0:02:11.800 --> 0:02:15.040 the cloud infrastructure game or AI infrastructure game, you really 0:02:15.120 --> 0:02:18.200 need to spend the money up front in order to 0:02:18.240 --> 0:02:21.240 get those workloads down the road. Microsoft is spending, Amazon 0:02:21.320 --> 0:02:23.840 is spending, and you know, frankly, for Oracles, you know, 0:02:24.080 --> 0:02:26.440 good fortune they actually have a client who's willing to 0:02:26.440 --> 0:02:29.560 pay them ahead of time, or they have an agreement 0:02:29.639 --> 0:02:31.280 so that they can go out and build this data 0:02:31.360 --> 0:02:33.639 center and they can recognize revenue. 0:02:33.639 --> 0:02:34.840 Over the next few years. 0:02:35.280 --> 0:02:38.920 Oracle will develop multiple data centers across the US with partners, 0:02:39.280 --> 0:02:43.200 with sites in several states on consideration, including Texas, Michigan, 0:02:43.400 --> 0:02:47.200 and Wisconsin. Here where does Oracle fit within kind of 0:02:47.280 --> 0:02:49.840 your broader AI theme. 0:02:50.240 --> 0:02:53.440 On a run? Yeah, just about five years ago. 0:02:53.480 --> 0:02:55.440 To be honest, they were pretty much absent in this 0:02:55.560 --> 0:02:58.680 game because their cloud infrastructure was there to take care 0:02:58.720 --> 0:03:01.400 of their clients only, and you know, nobody else was 0:03:01.400 --> 0:03:03.720 renting it from them. I mean there were certain clients, 0:03:03.720 --> 0:03:06.320 but not so big. I think the TikTok deal really made, 0:03:06.360 --> 0:03:09.400 you know, helped them out because TikTok runs on Oracle 0:03:09.440 --> 0:03:10.359 cloud infrastructure. 0:03:10.400 --> 0:03:11.720 They gave them some credibility. 0:03:12.520 --> 0:03:14.320 You know, they've been spending a lot of money to 0:03:14.440 --> 0:03:16.040 expand their data center footprint. 0:03:16.560 --> 0:03:17.760 I think they can afford to do. 0:03:17.760 --> 0:03:21.360 That because they have a very incredible profitable, you know, 0:03:21.440 --> 0:03:24.360 database business where they are the market leaders. They have 0:03:24.360 --> 0:03:26.560 a lot of cloud applications where they generate a lot 0:03:26.560 --> 0:03:30.000 of free cash flow. So they established this business and 0:03:30.040 --> 0:03:32.720 now they're getting the reaping the benefit of it. As 0:03:32.720 --> 0:03:36.440 it relates to let's say AWS, They're still very small 0:03:36.440 --> 0:03:40.040 in size and their infrastructure as a service business. Last 0:03:40.120 --> 0:03:42.680 year day ten billion dollars in revenue as compared to 0:03:42.760 --> 0:03:45.600 let's say Amazon, which is running about one hundred billion 0:03:45.720 --> 0:03:48.960 or so. But this particular customer or this customer and 0:03:49.000 --> 0:03:51.800 a few others by f FY twenty eight will add 0:03:51.840 --> 0:03:54.640 another thirty billion dollars on top of the ten that 0:03:54.680 --> 0:03:58.480 we are talking about. So their cloud business really becomes 0:03:58.600 --> 0:04:01.240 much stronger down the road because of this deal. 0:04:01.760 --> 0:04:04.280 What about Microsoft? Lots of news here too. Their gaming 0:04:04.280 --> 0:04:08.040 division laid off hundreds of employees, and specific to Xbox, 0:04:08.320 --> 0:04:10.240 this is the fourth mass layoff at least in the 0:04:10.320 --> 0:04:12.480 last eighteen months. What is their strategy here? 0:04:13.920 --> 0:04:17.000 The strategy I think is by the CEO saying, listen, 0:04:17.880 --> 0:04:18.839 you use these. 0:04:18.640 --> 0:04:21.520 AI tools, become more productive, and I'm not going to 0:04:21.600 --> 0:04:23.880 hire at the same pace as we used to hire before. 0:04:23.920 --> 0:04:26.560 And I think that is the game now. 0:04:26.880 --> 0:04:29.000 I think this is going to go on and carry 0:04:29.040 --> 0:04:31.239 on to other tech firms, whether it's on the software 0:04:31.279 --> 0:04:34.960 landscape or any of the other subsectors. But I think 0:04:34.960 --> 0:04:37.360 you're going to see this theme recurring over the next 0:04:37.360 --> 0:04:41.200 twelve months where CEO's CEOs are saying, you really need 0:04:41.240 --> 0:04:44.040 to figure out your productivity before you ask for a headcount. 0:04:44.040 --> 0:04:47.080 And I think that is frankly speaking, that's not good 0:04:47.120 --> 0:04:50.200 for the downstream players, people who are selling software packages 0:04:50.240 --> 0:04:55.000 to these companies HR software sales software. But there's not 0:04:55.040 --> 0:04:57.279 a whole lot anybody can do about it at this point. 0:04:57.400 --> 0:05:00.360 Anrag, I know you and Mandeep and your technology team 0:05:00.360 --> 0:05:03.880 have done deep, deep dives into AI, and folks, there's 0:05:03.960 --> 0:05:06.839 lots of great Bloomberg intelligence research out there on the 0:05:06.920 --> 0:05:11.040 terminal and so check it out. But there's some serious 0:05:11.080 --> 0:05:13.279 and deep dive work, some the best on Wall Street. 0:05:13.680 --> 0:05:15.720 If you want to learn about what AI is, check 0:05:15.839 --> 0:05:19.520 that out. I'll tell you what what I say, which 0:05:19.600 --> 0:05:23.120 I don't hear many people talking about this will replace people. 0:05:23.200 --> 0:05:27.400 AI is going to replace people across I think countless industries. 0:05:28.000 --> 0:05:28.880 What do you guys think? 0:05:30.360 --> 0:05:31.880 No, I think that's a very valid view. 0:05:31.920 --> 0:05:34.360 And as I was telling you on the Microsoft's case, 0:05:34.680 --> 0:05:37.800 when we go pre you know, pre chart gpt ERA, 0:05:38.520 --> 0:05:42.440 for every dollar one percentage points increase in revenue for Microsoft, 0:05:42.640 --> 0:05:45.240 that headcount used to grow somewhere around point seven zero. 0:05:45.120 --> 0:05:46.000 Point eight times. 0:05:46.440 --> 0:05:48.400 We're close to a point that it's going to be 0:05:48.560 --> 0:05:52.640 very difficult to see that ratio now because Microsoft revenue 0:05:52.680 --> 0:05:55.320 is going to grow, let's say, over the next twelve months, 0:05:55.360 --> 0:05:58.320 somewhere around thirteen to fifteen percent, but I don't think 0:05:58.360 --> 0:06:00.360 the HeadCount's going to grow anywhere more in four to 0:06:00.400 --> 0:06:04.080 five percent. And that's, frankly, is the asymmetric growth between 0:06:04.160 --> 0:06:09.120 revenue and headcount that's going to recur throughout the entire 0:06:09.200 --> 0:06:13.120 technology you know space, And that's you know, frankly speaking, 0:06:13.440 --> 0:06:15.640 it is good for the shareholders, but not so good 0:06:15.680 --> 0:06:18.960 for if you are a tech worker in this landscape. 0:06:19.240 --> 0:06:21.160 What about the tens of billions of dollars spent on 0:06:21.279 --> 0:06:24.600 data centers and application development. We have Microsoft, for instance, 0:06:24.680 --> 0:06:27.520 pledging that it will put a lid on that cost. 0:06:27.839 --> 0:06:31.680 Are you also hearing that same vibe from other companies? 0:06:31.760 --> 0:06:34.200 And by the way, to paulsepoint, that's kind of sad 0:06:34.240 --> 0:06:35.680 because I hope we still have a job, which is 0:06:35.680 --> 0:06:38.279 why I keep cooking, because I say cooking will not 0:06:38.320 --> 0:06:42.720 be replaced by AI. Back to AIS in Microsoft. 0:06:43.120 --> 0:06:43.560 Yeah, I see. 0:06:43.560 --> 0:06:45.800 For Microsoft, they have already pledged you know, let's say 0:06:45.800 --> 0:06:48.080 over the next twelve months, somewhere close to one hundred 0:06:48.080 --> 0:06:50.920 dollars billion dollars for the expansion of their data center 0:06:51.040 --> 0:06:54.960 and all the AI infrastructure build. That revenue that the 0:06:55.040 --> 0:06:57.080 piece of that growth is going to slow down over 0:06:57.120 --> 0:06:58.960 the next let's say, twenty four months. 0:06:59.000 --> 0:07:01.240 But what we don't know is beyond in. 0:07:01.320 --> 0:07:03.640 F F twenty seven or twenty eight, whether it's going 0:07:03.640 --> 0:07:06.520 to continue that level or not. Right now, it is 0:07:06.640 --> 0:07:09.520 driving some growth for them, but it's also hurting margins. 0:07:09.760 --> 0:07:12.520 All this reveting that's coming up is actually has a 0:07:12.640 --> 0:07:15.560 much lower margin structure than their core business. 0:07:15.600 --> 0:07:17.800 So we really have to see, you know, how. 0:07:17.760 --> 0:07:19.400 They're going to deal with margins, and one of the 0:07:19.400 --> 0:07:21.720 ways they can do that is by reducing headcounts. 0:07:21.760 --> 0:07:24.000 So I think they're going to give guidance. 0:07:23.640 --> 0:07:26.680 By the end of this month when they report results 0:07:26.720 --> 0:07:28.920 for the next their fiscal yer, which is have Fight 0:07:28.920 --> 0:07:31.000 twenty six, and I think that's where they're going to 0:07:31.040 --> 0:07:33.160 see some of the margin benefits of these layoffs. 0:07:33.400 --> 0:07:35.600 And Agrana thanks so much, appreciate it as always on 0:07:35.640 --> 0:07:38.720 our Agrana Senior Technology aannels for Bloomberg Intelligence. 0:07:40.440 --> 0:07:44.160 You're listening to the Bloomberg Intelligence podcast. Catch us live 0:07:44.240 --> 0:07:47.600 weekdays at ten am Eastern on Applecarplay and Android Auto 0:07:47.720 --> 0:07:50.800 with the Bloomberg Business app. Listen on demand wherever you 0:07:50.800 --> 0:07:53.800 get your podcasts, or watch us live on YouTube. 0:07:54.600 --> 0:07:57.000 One of the stories I really enjoyed the most on 0:07:57.040 --> 0:08:00.360 the Bloomberg terminal today is the company I to cover 0:08:00.400 --> 0:08:01.800 for years and years and years and did a lot 0:08:01.800 --> 0:08:05.800 of work with Warner Brothers Discovery. This was a company 0:08:05.840 --> 0:08:09.120 too nay famed media companies put together a few years 0:08:09.160 --> 0:08:12.360 ago to get scale to compete, but they probably don't 0:08:12.360 --> 0:08:14.800 have enough scale even there. So now they are and 0:08:14.840 --> 0:08:17.520 the stock is underperformed since putting that those two companies together. 0:08:17.560 --> 0:08:19.840 So now they're doing what I would have recommended as 0:08:19.840 --> 0:08:22.320 a banker, which is let's take them apart again. But 0:08:22.360 --> 0:08:23.560 part of it is you got to deal with the 0:08:23.560 --> 0:08:26.280 balance sheet. There's a lot of debt there for this company, 0:08:26.240 --> 0:08:27.520 so you have to figure out a way to deal 0:08:27.560 --> 0:08:30.480 with that. Rushmi Basu joins us here Bloomberg News, a 0:08:30.520 --> 0:08:34.640 credit reporter, Rushmi, I loved your story here today talks 0:08:34.640 --> 0:08:39.280 about what JP Morgan, the banker for Warner Brothers Discovery, 0:08:39.840 --> 0:08:42.600 what deal did they kind of craft to deal with 0:08:42.640 --> 0:08:46.360 the debt problem at Warner Brothers Discovery before they could 0:08:46.360 --> 0:08:47.400 even split the company apart. 0:08:48.200 --> 0:08:51.559 In order for the split to happen, JP Morgan needed 0:08:51.559 --> 0:08:56.160 to doruct a restructuring of the debt stack. So basically 0:08:56.200 --> 0:08:59.199 what they did is they provided seventeen point five billion 0:08:59.280 --> 0:09:04.400 dollar bridge, which is biggest bridge, massive, and they use 0:09:04.600 --> 0:09:09.920 those funds to take out existing debt. They cut about 0:09:10.240 --> 0:09:13.880 three point two billion of thirty two point five billion 0:09:13.920 --> 0:09:17.880 of outstanding debt. And it was just a deal that 0:09:17.960 --> 0:09:22.280 really used a lot of distressed restructuring tools and applied 0:09:22.320 --> 0:09:25.120 it to an investment grade company, something we've never seen before. 0:09:25.800 --> 0:09:28.760 Can you talk about how this has the potential to 0:09:28.800 --> 0:09:32.040 set a new president for companies, especially those in investment grade, 0:09:32.160 --> 0:09:34.240 to just renegotiate their debt moving forward. 0:09:34.520 --> 0:09:37.120 So this kind of introduces a new playbook to the 0:09:37.120 --> 0:09:41.800 investment grade community in that it was an unbelievably short consent. 0:09:41.920 --> 0:09:45.240 It was only five days, and it was even shorter 0:09:45.320 --> 0:09:47.720 for some funds because they had to turn in their 0:09:48.160 --> 0:09:52.480 consent within three days given the processing times like they 0:09:52.520 --> 0:09:58.520 were depending on software, et cetera. So really, this deal 0:09:58.640 --> 0:10:02.040 prevented lenders from being able to organize a group and 0:10:02.800 --> 0:10:03.960 fight for better terms. 0:10:04.480 --> 0:10:06.440 How did they get away with that? I mean, if 0:10:06.480 --> 0:10:08.000 I ever tried that back in the day when I 0:10:08.040 --> 0:10:11.640 was at Chase, the bondholders would just smack back at me, 0:10:12.120 --> 0:10:14.160 right back in my face. How did they get that done? 0:10:14.240 --> 0:10:17.280 They really relied on kind of a prison prisoner's dilemma 0:10:17.480 --> 0:10:20.200 in that there were winners and losers created in the 0:10:20.280 --> 0:10:25.080 structure and they kind of stapled it to consent. There's 0:10:25.120 --> 0:10:27.920 no kind of rules around how long a consent can be, 0:10:28.200 --> 0:10:32.480 so they really utilized that deadline to prevent lenders from organizing. 0:10:32.880 --> 0:10:35.320 And also they you know, to Jpmerican's Credit and to 0:10:35.360 --> 0:10:40.280 the other advisors of Acorn Kirkland, they did provide an 0:10:40.280 --> 0:10:42.760 exchange rate that was higher than where the debt was 0:10:42.800 --> 0:10:43.600 currently trading. 0:10:44.240 --> 0:10:45.840 Okay, I see, but still. 0:10:45.640 --> 0:10:48.040 There a loss on the face value, yes, but a 0:10:48.080 --> 0:10:49.520 premium to current trade lot. 0:10:49.600 --> 0:10:52.240 These are investment This isn't junk. I mean these bonds 0:10:52.240 --> 0:10:53.000 were investment grade. 0:10:53.000 --> 0:10:53.440 Weren't they? 0:10:53.520 --> 0:10:53.720 Yep? 0:10:53.880 --> 0:10:56.840 I mean it kind of took investment great bombholder. 0:10:56.880 --> 0:10:59.360 I'm not taking this deal. I just I've never seen 0:10:59.360 --> 0:10:59.880 anything like it. 0:11:00.160 --> 0:11:02.160 No, neither have we. And this is kind of the 0:11:02.200 --> 0:11:04.040 concern in the market that this is going to be 0:11:04.160 --> 0:11:05.880 the playbook that we're going to see for more and 0:11:05.960 --> 0:11:10.319 more investment grade companies. So the distressed kind of mechanisms 0:11:10.360 --> 0:11:12.880 are coming to investment grade. 0:11:12.520 --> 0:11:14.800 But they must be taking a victory lap right now. 0:11:14.840 --> 0:11:18.240 Although we do have the European Leverage Finance Association releasing 0:11:18.240 --> 0:11:20.720 a statement warning that the whole process was quote a 0:11:20.720 --> 0:11:23.640 worrying negative development, and they say that this might be 0:11:23.679 --> 0:11:28.199 coercive in nature. How are others receiving this and will 0:11:28.240 --> 0:11:31.000 it even be a president given warnings with certain language 0:11:31.040 --> 0:11:31.200 like this. 0:11:31.440 --> 0:11:34.720 So they're talking about the anti boycott language, which basically 0:11:34.760 --> 0:11:39.440 prevents lenders from kind of banding together and deciding not 0:11:39.640 --> 0:11:43.040 to take part in a new issuance. So that kind 0:11:43.080 --> 0:11:45.920 of is the first time we've seen that language. And 0:11:46.000 --> 0:11:47.959 you know, as we know in the distressed land. We 0:11:48.080 --> 0:11:51.359 see a ton of like no so called liability management exercises. 0:11:51.679 --> 0:11:55.280 We see groups kind of forming locking arms together with 0:11:55.320 --> 0:12:00.000 these cooperation packs. But this one just basically prevents life 0:12:00.080 --> 0:12:03.680 unders from again coming together and not partaking in a 0:12:03.720 --> 0:12:07.840 new issuance. And you know, eventually JP Morgan is going 0:12:07.880 --> 0:12:09.079 to have to issue new debts. 0:12:09.200 --> 0:12:12.520 So this kind of in what's system again. What was 0:12:12.559 --> 0:12:14.839 also interesting to me was this, you know, huge bridge 0:12:14.880 --> 0:12:17.600 loan that JP Morgan did. Because I know a lot 0:12:17.600 --> 0:12:21.520 of boutique investment banks they're really good at doing these 0:12:21.559 --> 0:12:24.120 debt restructurings and maybe taking some business away from the 0:12:24.200 --> 0:12:26.439 JP Morgans and the Goldman Sachs of the world. I 0:12:26.440 --> 0:12:29.040 guess this is JPMorgan coming back and saying, listen, we've 0:12:29.080 --> 0:12:30.800 got this big balance sheet. It can help you get 0:12:30.800 --> 0:12:31.440 deals done. 0:12:31.840 --> 0:12:34.000 And that's so long ago we reported on a story 0:12:34.040 --> 0:12:36.439 about how JP Morgan was trying to take a bite 0:12:36.559 --> 0:12:40.199 out of restructurings and lmes, et cetera. And one thing 0:12:40.280 --> 0:12:41.880 that we were hearing is that they have the balance 0:12:41.920 --> 0:12:45.200 sheet to do so something that boutique firms may not. 0:12:45.440 --> 0:12:48.040 So this kind of gives them more validation and. 0:12:48.040 --> 0:12:50.120 An interesting thing in your stories you said the whole 0:12:50.120 --> 0:12:53.760 thing was so important, important enough that even Jamie Diamond 0:12:53.800 --> 0:12:56.200 received updates on it. So it's not like this one 0:12:56.280 --> 0:13:01.200 little niche group risking something big. Even the CEO, Yes, 0:13:01.280 --> 0:13:02.320 Kepta breast. 0:13:01.960 --> 0:13:04.400 This front to the top. So this was a big 0:13:04.440 --> 0:13:07.160 deal for JP Morgan and it's bankers, the M and 0:13:07.200 --> 0:13:10.040 A bankers, the capital markets bankers, the restructuring desks. 0:13:10.080 --> 0:13:12.600 This was all right, JP Morgan and the company may 0:13:12.640 --> 0:13:15.080 be doing a victory lap, but at some point in 0:13:15.120 --> 0:13:17.400 the next year, two three, they're gonna have to come 0:13:17.400 --> 0:13:19.320 back to the bond market and these people are going 0:13:19.360 --> 0:13:22.679 to remember, and there could be a price to pay there. 0:13:22.720 --> 0:13:24.760 I know I would hold a grudge if I were 0:13:25.120 --> 0:13:28.280 a bond holder there. So anyway, great story. It got 0:13:28.320 --> 0:13:30.080 a green bee, folks, and that means that it's a 0:13:30.120 --> 0:13:34.440 really really good, cool story, and it's unique and into 0:13:34.440 --> 0:13:36.440 scoopish and all those kinds of things of the journalists 0:13:36.440 --> 0:13:38.560 worry about. Resh me, Bossu, thank you so much for 0:13:38.640 --> 0:13:42.440 joining us credit reporter for Bloomberger's great story right down 0:13:42.920 --> 0:13:46.720 my hallway. And what I did notice is JP Morgan 0:13:46.880 --> 0:13:49.720 actually was the M and A advisor on the deal 0:13:49.720 --> 0:13:52.319 coming together to put the company together, and now they're 0:13:52.320 --> 0:13:53.559 getting paid to take them apart. 0:13:53.720 --> 0:13:54.439 That is beautiful. 0:13:56.559 --> 0:14:00.920 You're listening to the Bloomberg Intelligence podcast live weekdays at 0:14:00.960 --> 0:14:03.920 ten am Eastern on applecar Play and Android Auto with 0:14:04.000 --> 0:14:07.120 the Bloomberg Business App. Listen on demand wherever you get 0:14:07.120 --> 0:14:09.920 your podcasts, or watch us live on YouTube. 0:14:10.960 --> 0:14:13.240 The bond market's certainly taking notice here. I got the 0:14:13.280 --> 0:14:15.080 fun end of the curve up nine basis points on 0:14:15.120 --> 0:14:17.680 the two year. So the bond market cares, which means 0:14:18.200 --> 0:14:21.280 Ira Jersey cares. Ira Jersey, chief US interest rate Strategies. 0:14:21.320 --> 0:14:25.480 Bloomberg Intelligence esconced in that Princeton office. I keep ting, 0:14:25.520 --> 0:14:26.880 we have a nice office here in New York, but 0:14:26.880 --> 0:14:30.080 it's not budgeting at all. My man is comfortable down there, 0:14:30.080 --> 0:14:33.360 and I respect that. Hey, Ira, what did you and 0:14:33.400 --> 0:14:35.920 what did your bond market take away from some of 0:14:35.960 --> 0:14:40.000 all this economic data we had today, including ism, which 0:14:40.040 --> 0:14:41.920 came in a little bit better and expected as well. 0:14:42.720 --> 0:14:42.920 Yeah. 0:14:42.960 --> 0:14:45.840 Well, I think in particular, people were concentrating on that 0:14:45.960 --> 0:14:48.440 unemployment rate as well as the fact that you didn't 0:14:48.440 --> 0:14:51.080 have a signific you know, you had to slow down 0:14:51.160 --> 0:14:53.320 in private payrolls, but you didn't have as significant a 0:14:53.320 --> 0:14:55.720 slowdown in aggregate payrolls, and those were. 0:14:55.560 --> 0:14:56.680 The things that people were worried about. 0:14:56.720 --> 0:14:58.480 So the reason why the two year yield is off 0:14:58.560 --> 0:15:01.360 nine basis points right now is basically we were starting 0:15:01.400 --> 0:15:03.400 to price in for the chance of a July rate cut, 0:15:03.840 --> 0:15:06.120 and that's basically off the table at this point. 0:15:06.200 --> 0:15:08.040 So September is now. 0:15:07.920 --> 0:15:11.200 Priced about three quarters of a seventy five percent chance 0:15:11.200 --> 0:15:13.920 of a September cut. I still think that's probably going 0:15:13.960 --> 0:15:16.880 to be a little bit too early, but nonetheless, you know, 0:15:16.960 --> 0:15:19.760 taking out July meant no nine basis points on twoes, 0:15:19.800 --> 0:15:21.000 and that's exactly what we've seen. 0:15:21.400 --> 0:15:24.040 We have Gregory Faranello, if a mayor of it Security, 0:15:24.080 --> 0:15:26.880 saying the Fed will take the summer off. It's really 0:15:26.960 --> 0:15:31.440 a surprising report. To your point, rate cuts for July 0:15:31.560 --> 0:15:35.720 basical punches zero September is kind of ify. How did 0:15:35.720 --> 0:15:38.000 this shape your view moving forward? Did you immediately have 0:15:38.080 --> 0:15:40.240 to write a report? Did you and your team really 0:15:41.320 --> 0:15:45.440 were surprised and had to reshape or re angle your outlook? 0:15:46.360 --> 0:15:48.280 Yeah, it was, I mean, I guess a little bit. 0:15:48.320 --> 0:15:51.720 You know, you know, the consensus for the unemployment rate 0:15:51.920 --> 0:15:53.360 was for it to go up a tenth and set 0:15:53.360 --> 0:15:54.800 it went down a tenth, and I think that that 0:15:55.000 --> 0:15:57.160 was the single biggest surprise, you know, you know, we 0:15:57.200 --> 0:16:00.600 don't our colleagues over at Bloomberg geconom they own that 0:16:00.680 --> 0:16:04.720 unemployment call, but the you know, I think it didn't 0:16:04.760 --> 0:16:07.160 really reshape our views very much at all, because we've 0:16:07.160 --> 0:16:10.560 been suggesting that we'll continue to kind of muddle along 0:16:10.680 --> 0:16:15.960 with okay, employment situation, with this overhang of tariffs, keeping 0:16:15.960 --> 0:16:19.640 the Fed on hold probably until at least the October meeting, 0:16:19.640 --> 0:16:22.480 which happens in very late October. So we're looking at 0:16:22.480 --> 0:16:25.480 the fourth quarter in our view, before the Federal Reserve 0:16:25.520 --> 0:16:26.800 makes any moves at all. 0:16:27.080 --> 0:16:28.480 Or we'll get enough data, you know. 0:16:28.520 --> 0:16:31.240 You know, I think the market is more sensitive to 0:16:31.320 --> 0:16:33.480 data now thinking that oh, they're going to change on 0:16:33.520 --> 0:16:36.520 a dime. One bad data print means that the Federal 0:16:36.520 --> 0:16:38.840 Reserve may go or not. But that's that's quite frankly 0:16:38.880 --> 0:16:41.960 not the case. And one of the you know, necessary 0:16:41.960 --> 0:16:44.920 conditions for the Fed to cut rates is a weakening 0:16:44.960 --> 0:16:50.240 employment situation. And while it's it's weakening, it's not getting weaker, right, 0:16:50.320 --> 0:16:53.480 So so it's you know, the the we're not yet 0:16:53.520 --> 0:16:55.920 at a point where the FED will feel compelled to 0:16:55.960 --> 0:16:57.960 cut because of the job situation. 0:16:59.080 --> 0:17:02.040 So sent that the market now has maybe a better 0:17:02.080 --> 0:17:04.119 feel on the labor market, and maybe the FED has 0:17:04.160 --> 0:17:07.840 a better feel on the labor market with today's data focused, 0:17:07.880 --> 0:17:12.160 can then maybe move to inflation. What are the expectations 0:17:12.160 --> 0:17:14.880 in the market here. We haven't really seen any inflation 0:17:16.119 --> 0:17:18.840 creep into this market of any note here, which some 0:17:18.880 --> 0:17:21.040 people had feared with the tariffs and so on. 0:17:21.760 --> 0:17:23.960 What's the view there, Yeah, well, there's a couple of 0:17:24.040 --> 0:17:27.800 things going on under you know, underlying some there were 0:17:27.840 --> 0:17:29.520 some when you look at the May data, there were 0:17:29.560 --> 0:17:31.800 some sectors that did see a little bit of an 0:17:31.880 --> 0:17:35.359 uptick in inflation in the good sector, but that was 0:17:35.400 --> 0:17:38.560 offset in large part and will be offset again by 0:17:38.600 --> 0:17:42.159 lower energy prices and as well as rents that are 0:17:42.200 --> 0:17:44.520 starting to flow through. Keep in mind, you know, when 0:17:44.520 --> 0:17:47.800 we talk about rents and owner's equivalent rent, which is 0:17:47.840 --> 0:17:51.520 the housing component of the consumer price index, that will 0:17:51.560 --> 0:17:54.280 continue to fall just naturally because it takes a long 0:17:54.400 --> 0:17:57.960 time for you know, twelve months basically right for rents 0:17:58.000 --> 0:18:00.560 to be adjusted to these new prices. So you're going 0:18:00.600 --> 0:18:03.159 to wind up seeing, yes, it, prices will increase but 0:18:03.200 --> 0:18:06.400 they're increasing at a slower pace. That means that inflation 0:18:06.760 --> 0:18:11.200 is falling. And I think we're in an environment where okay, 0:18:11.240 --> 0:18:14.040 goods prices go up a little, but with energy prices 0:18:14.040 --> 0:18:17.040 and housing prices starting to come down, the only variable 0:18:17.080 --> 0:18:20.080 left is what are service prices doing? And in today's 0:18:20.119 --> 0:18:23.200 report you saw that wages in the services sector were 0:18:23.240 --> 0:18:24.320 a little bit lower. 0:18:24.080 --> 0:18:26.480 Month on month in June than they were in May. 0:18:26.600 --> 0:18:29.160 So yeah, I agree with you, Paul, Like, we haven't 0:18:29.160 --> 0:18:30.960 seen inflation and probably won't. 0:18:30.920 --> 0:18:34.400 Interesting all right, folks, Ira Jersey we know him as 0:18:34.520 --> 0:18:37.239 one of the leading voices on US interest rates in 0:18:37.240 --> 0:18:42.200 Global Wall Street, but he's also our soccer correspondent as well. Ira, 0:18:42.280 --> 0:18:43.320 can you explain to me. 0:18:44.160 --> 0:18:45.800 Club World Cup? 0:18:46.240 --> 0:18:47.720 Where did that come from? 0:18:48.720 --> 0:18:51.800 It was the attempt by FIFA for money grab and 0:18:52.359 --> 0:18:56.159 quite frankly, I think it's underwhelmed. You know, there's in 0:18:56.200 --> 0:18:59.000 the summer you're kind of used to seeing Major league soccer, 0:18:59.040 --> 0:19:03.320 and then you know international tournaments like the Women's Euros. 0:19:02.920 --> 0:19:03.520 Just kicked off. 0:19:03.560 --> 0:19:06.440 That's all the national women's teams in Europe kicking off, 0:19:06.440 --> 0:19:09.200 and we have the Gold Cup here in North America 0:19:09.240 --> 0:19:12.840 where we just saw last night Guatemala lose to the 0:19:12.960 --> 0:19:16.320 United States, and you know, so now we're set up 0:19:16.359 --> 0:19:20.000 for a final in this weekend. You know, the Club 0:19:20.040 --> 0:19:22.840