A pause, but not a pivot. Here at Bloomberg headquarters in New York, I am Romaine Bostick, counting you down to the close. Coming off of the latest decision by the U.S. Federal Reserve, the FOMC holding rates at 4%, one meeting after the September hike, while upgrading its description of economic growth to a strong pace and repeating that inflation remains elevated. Markets are treating that as a hold with a hawkish edge. No major surprise, no major moves in the market. Stocks pairing up earlier gains. Longer-term Treasury yields elevated, the two-year yield lower, the dollar flat. A big question: whether it is an every-other-meeting hiking cycle, or higher bond yields and tighter financial conditions are already doing enough of the Fed's work to let it wait.
Lisa Cook and Beth Hammack saw another quarter-point increase today. The internal debate is not whether inflation is a problem, but how quickly the Fed needs to respond. Chair Kevin Warsh tried to split the difference, saying the policy is beginning to work and tighter credit conditions have moved the conversation. He also said there are no firm conclusions about the next policy move. Translate that for what you will. Some see December as live, with the Fed not promising anything yet. Here is the Fed chair.
We believe eight meetings per year is the right number. But in 2027, one meeting will focus exclusively on broad monetary policy strategy, with either a vote on the federal funds rate or a policy statement anticipated. On the employment side of the dual mandate, conditions are quite positive. Yet Americans are still dealing with inflation that has been running above the committee's objective close to six years. The overwhelming consensus, the overwhelming judgment, is that what we have done in this monetary medicine is starting to work some, but there is no firm conclusion. We will deliver price stability. That continues to be the case.
Fed Chair Kevin Warsh, as we count you down to the closing bells. We want to bring in the CEO of DWS Americas. Great to see you here in studio. I want to start off not just with what Kevin Warsh said, but something he alluded to at the last meeting: this idea of having guidance — not guidance, having a little bit more judgment in what the Fed does and when they do it. As an investor, you hear all these other Fed members. Are you getting enough clarity on what they are doing?
The way I look at it is, the Fed passed the rate, not the fight. Headline inflation is at 3.7. Most of that is oil. The core is creeping up around 2.6. The Fed cannot pop oil, but we can stop it from becoming expectations. That is the job now. The Fed sets the short end; the long end still depends on debt, doubt, and data centers.
On the long end of the curve, what we are seeing is a different story than the shorter end of the curve. I assume you have to bridge the gap?
Absolutely. For the past 15 years, we had rates that ended up — until recently, the equity markets were dancing like teenagers. The fixed income and bond market was sending sobering messages. Now investors are getting paid to be patient. Cash pays. Bonds pay. We saw outflows of about 14 billion euros into our cash products. But we need to be careful. Cash is actually the waiting room, not the strategy. I do two things: invest in quality income, and diversify from the one bad index. Geographical diversification is exactly that. It is not a bet against one country or the U.S., it is the best for resilience.
Diversification along the Treasury curve, which would put some money somewhere along that curve in a meaningful way?
I would say be cautious. Let's wait to see what the bond market is going to do over the next several days.
Where do you find diversification? You said geographically.
7500 is a brilliant bet on the digital economy. But Europe is a great bet on the physical one: banks, industrials, defense, energy. And as I mentioned, Europe for the first time is actually spending on itself. Germany announced they are putting in 500 billion euros in infrastructure, defense spend will be above 3.5 percent of GDP by 2029. When you add the pension reform that will become live in January, that is a story to watch because Germany is known for their savers — they will be investors. They will learn to invest. We are very bullish on Germany.
It is your market. Strong, though some of the nations surrounding it are not so strong. Any other developments we have seen from France, Italy, etc., does it alter your view?
Not yet. We think it is confined, and a lot of the elections are playing into it. But we are watchful. We do not react. We have long views.
I'm curious about your flows, a lot going into cash. In the Americas, I saw something like 10.5 billion euros coming in. A lot of that was in cash and short-term instruments.
I think we had an amazing report today. We had about 30.9 billion euros for the quarter, 66.7 year to date. That is more than in any full year we had since our IPO. For the U.S. businesses, it is also very exciting as well. Certainly, we told them market outperformance fees came early on this year. But it is the management fees that compound. Up over the nine months with the cost being down, I will take these kind of quarterly results any day.
What exactly is DWS and DWS Americas trying to be? Most want to pass strategies. We see outflows in active strategies. Your flagship, I think, now is higher in terms of its assets.
If you remember our earlier conversations, that is why we are betting. And gateway to Europe is exactly how we are playing it. Over this year, we expanded our capabilities in our currency hedge products and products that focused on global and international investing. That is why we know Europe and international clients. We have access to every single region with investors on the ground.
There were flows into one of your main high-yield products. Does it suggest more risk appetite than what the cash tied would say?
Yes. I think investors' risk is returning a bit. That is a positive. Also in the U.S., we have a strong real asset infrastructure and real estate business. I'm beginning to see interest despite the rates halting.
DWS Americas, which you are going through another rebranding beginning next month. What does it signal? Is it less of an un-American story?
No. I'm excited. In 2018, DWS made sense. They are an active brand and it will stay as such. But look what happened over eight years: 12.2 trillion euros in assets under management. We more than quadrupled assets. We expanded capabilities across alternatives, real estate, private credit, and bringing that under one name — Deutsche Asset Management — signals our heritage, which is German. It will be fantastic. I'm looking forward to November.
Great to have you here, we will talk again soon. The CEO of DWS Americas, as we keep the conversation going. We want to bring in the professor of public policy and economics at Stony Brook University. I want to bridge the gap to something Hepsen was getting on: this idea of diversification that we have seen geographically and where people are putting their money. There are a lot of people that look at what is going on in the U.S., whether it is where inflation is, Fed rates, and the disconnect between those two combined with the fiscal situation in Washington. Do you see any potential improvement for our policy situation relative to the rest of the world?
When you say improvement, I assume you're talking about the fiscal outlook. I would just point out: if you look at the U.S. economy, we are growing faster than all of our peer countries in the G7. There is no question, we are the best-performing economy in the bunch. Some might say in spite of the deficit and the fiscal outlook; some might say that has something to do with it — that we have a lot of fiscal support. The deficit is huge, 6.5% of GDP. It's not the most productive deficit I've seen in my life. $2 trillion, half of it just going to interest. That interest is income. We had Diane on earlier today, she talked about how every single rate hike means more fiscal expenditure, more spending on interest. What she did not mention that is important is the money doesn't just disappear — it is income to all of those bondholders. So at least some of the support for the economy is coming from the fiscal side. If you start talking about making adjustments to fiscal, you have to be careful about just how far and where you try to pull back. I would argue deficit reduction with inflation running as hot as it is made sense in the current environment. I don't think we see it coming down the pipe.
What about the rate hikes themselves? You believe the rate market and what happened today was a one-off and the Fed will hike again. Do those hikes have the potential to become inflation in and of themselves?
Sure. Scott Bessent said so before he became Treasury Secretary. He said, here's a country that has been negative, zero for a very long time. Don't be surprised as the Bank of Japan comes off of zero if you don't see the Japanese economy start to accelerate because there is so much debt. When you have a large stock of debt and a lot of it is short-term — this was pointed out this morning — those rate hikes are fiscal expansion. That is what they are. There is a large direct fiscal impulse coming from those rate hikes.
Fiscal expansion, some would say fiscal redistribution. I think overall, in aggregate, I understand what you are saying and the data backs it up. That does not mean everybody in this country is benefiting.
Who is the interest income going to? The top of the K. So you hit it right on the head. I would say this is a significant regressive form of fiscal stimulus.
How do we break free from it, or does it not matter?
The president is saying rates should be lower. Someone like Stephen Miran is saying rates should be lower. There is a way to thread the needle to get to fiscal reduction, consolidation on the fiscal side through rate cuts which bring down the interest expenditure, which strengthen the deficit, which could cool to some extent at the margins some of the inflationary pressure from hundreds of billions of dollars of additional interest income that the Fed is adding to the economy every single year. It adds up to trillions over time.
It almost seems like you can make a case, a more cautious stance by the Fed where it goes next might be more sound, running out of force in raising rates and bringing inflation down.
It is a blunt tool, and the Fed's own survey — I know Chairman Warsh thinks financial conditions are tight and he looks at yields and that is evidence conditions are quite — but the Fed just surveyed businesses last week. 81% of the businesses that responded said interest rates aren't a factor when it comes to their investment decisions. They are essentially unimportant. It is a very small sliver of the business community that says interest rates are a factor when it comes to investment. I think let's get the supply side eased up and lower rates will do that. Guys like Stephen Miran have a point, and I think the president, for different reasons, also has a point.
Stephanie, good to have you. Professor of public policy and economics at Stony Brook University. We did not get a chance to talk about wages, but that is a part of the backdrop as there is a focus on the health of the consumer and consumer spending. A little earlier today, I caught up with the CEO of VF Corp. This is a bit of a turnaround story. A bit idiosyncratic, but there are broader issues the CEO is having to deal with. He stopped by to talk about that. Here's what he had to say.
Our business continues to accelerate. We read the bottom line by a lot. So we are having good momentum across almost all of our brands. We expect it to get stronger even through the years. We are in a good place.
You have done a lot with regards to turning this company around: repaired the balance sheet, cut costs, narrowed the portfolio. The biggest unresolved issue is still Vans. There was movement in the most recent quarter. Overall, talking about a brand still in decline. Where do you anticipate you might get back to positive growth?
Down, first half of the year. You kind of do the math, they will see us go positive some point soon. We are excited about the Vans brand and product. We put out so much more innovation and it will keep coming. We are dealing with more new products, iconic and the new styles and things. A lot of good stuff is coming, a lot of brand heat, search interest is up. We are in a good place.
You talk about the inroads you were making with the resellers and existing partnerships you have had, more shelf space devoted. Is it because of an effort you made directly, or are the changes taking place overall with regard to trends?
It is all about great products. We sell through our own channels, e-commerce, brick-and-mortar. We can go directly in. Our selling process happens about six to nine months later. They are also seeing our brand heat online, on social media, etc., so there's a lot of interest in the new product starting to come in.
Those retailers, are they giving you more prominent shelf space and display than what you had before?
It is a combination. More shelf space in some cases, different products in most cases. Even more stores themselves at other places.
What exactly are the customers returning to with regards to the styles? You mentioned some of the newer styles. Are they gravitating to the new styles, or is it the old-school traditional silhouettes Vans was known for?
The old black-and-white old school, the checkerboard, are always going to be popular with a subset of consumers. We are bringing so much more new stuff that it is in the old-school structure. Those users in the new generation are discovering old school, or you can tear off the outside — a souvenir where you have graphics on the outside of the shoe. And we are also offering new silhouettes. We have a loafer that is comfortable as a sneaker that you can skate in. We have a lot of new things for everybody.
You have done a couple of collaborations that has also generated more interest. Do you plan to do more of that, or were they one-off opportunities?
They are a regular part of our business now. We just did this one at ComplexCon, the biggest sneaker event in the world. We had to shut down our booth, it was so popular. We put it online and it sold out in five minutes. They generate a lot of interest. A lot of new structures and designs that we can bring into our mainline over time.
Let's talk about the other brands. The North Face has carried you for some time and continues to do well. Give me a sense of what innovation, styling changes are needed or that you might have in store.
Innovation is the lifeblood of any business. We need it, we have it, we will keep bringing it. We just relaunched from a summer series all the way into our lifestyle brands. And we have a new one that is completely reversible. You can wear it in the street and the summit and look different in both places. A lot of stuff coming, but a lot of new categories we can go into. We are barely scratching the surface on the categories. We are just getting started. I'm wearing North Face pants. You could never tell except they have a nice logo. A lot of good stuff coming and a lot of good footwear.
How do you balance out the technical aspects of the North Face gear? You can ask the same about Timberland, with the more fashion-lifestyle consumer that I think for a lot of us has come to dominate the face of that brand?
There has to be a performance story that runs through everything we make. You might not be able to see it always, but there is some performance angle and there will always be. But we realize how important style, color, everything is to consumers. We want to make sure we continue to expand our footprint. People like Tim Morrison, movie coming up the next week about it, but really don't respond or do that. So we are going to cover the full spectrum.
Give me a sense of pricing power, particularly in a consumer environment. We are hearing a lot more about consumers. Earlier this year, it was about this K-shaped economy with the bottom pulling back. We are getting evidence some folks in the more luxury consumer might be putting their wallets away. Give me a sense of how you are addressing that into the holiday season.
I wish I had given you that question or take credit for it. I love where this company is. I came here because it is not luxury. We have these brands that are very affordably priced, but the brand strength is almost as strong as luxury brands. We have affordable luxury that caters well to the K-shaped economy. If you are on the bottom, you can afford it — they are cool products. If you are on the top of the curve, we can sell elevated products.
Are you seeing consumers that were not existing customers trading over into your ecosystem from other places?
Absolutely. There's a concept called high and low. Luxury and affordability, we kind of fit in both camps. We absolutely bring in new users left and right.
With regards to your costs, supply chain issues, is it largely under control? I know those numbers are not necessarily lower than a year or two ago, but are they manageable?
Yes, they are very predictable. What I would say about tariffs is they affect everybody equally, which they do. It is something you can just deal with through cost management, pricing in very strategic ways, so it is very manageable.
The CEO of VF Corporation, off of their earnings and giving interesting insight. We want to stay on that and through the lens of restaurants. Jersey Mike's, shares up after delivering a top and bottom beat for the third quarter. Joining us in studio is the CEO of Jersey Mike's, Charlie Morrison. Basically your first full earnings report since going public here. Sales up about 3%. That is good. Is it sustainable?
I think it is. Another consecutive quarter of same-store sales for the year, driven primarily by traffic growth. If you look on the long term, this will be our 21st consecutive year delivering positive same-store sales growth, which no one else in the restaurant space can say.
Give me a sense: since the quarter has ended, what does traffic look like? I don't know if you can give me a hard number, but give me some sense as to what the momentum is.
We don't disclose our traffic numbers versus our average check or the effect of price increases, but we have taken a strong position on building traffic in the brand over the entire year. We have been less focused on price. We took a little bit of price, whereas the market has taken a lot of price over the past few years. We decided to focus on the healthy side of growth, which is traffic, building sequentially quarter over quarter.
With pricing, how aggressive can you be with it, particularly in an environment where you hear the stories about consumers becoming more stretched or more selective where they spend?
Some people feel like you can take any price. Value is really the play. We are taking a little bit of price. That is natural and healthy for an organization. But the consumer is very value-conscious. Our focus is on value. We are offering value not just by way of discounts, but featuring our products in a meaningful way. A price point consumers love. We generally have a fairly high-end menu, genuine price point, people enjoy that. A couple of things we're doing: a mini bundle which pairs a sub with chips for that price point. Value is the key. It doesn't have to be through price.
I'm curious, you talk about the premium price point. When I walk in, I see the menu price. You have been offering ways that get priced down a little bit. Does it eat into the margins?
It has not eaten into the margins. A couple of different promotions: a chicken salad sub over the summer that was value-priced. Basically, we relaunched Mike's Hot Italian, a product off of the hot grill. A big, broad audience in terms of who it appeals to. Margin-accretive for our franchise owner. They don't know if their food cost is better year-over-year than it was a year ago.
Talk about the growth, the footprint growth of Jersey Mike's. More than 3,000 stores now. You and management have talked about the idea of 7,500. That is huge.
That is the white space for the U.S. We opened 80 in the most recent quarter and anticipate the trend of about 300 stores a year for the foreseeable future. Over time, we think the white space in the U.S. is 7,500. Another 7,500 store opportunities for the global footprint.
Let's stay in the U.S. for a second. There is a lot of stores, and I'm curious how you go about sourcing locations so that you are not in a situation where one is cannibalizing the other.
We don't have that problem. We have plenty of white space. We mapped the entirety of the U.S., identified 1,600-plus distinct trade areas we committed with franchisees for long-term development over the next five years. None of those really impact the existing stores. Cannibalization in our business is very minimal.
Are you worried about growing too fast? Your previous job, and one of the criticisms was Salad and Go grew too fast, that led to the issues that led to its problems. Is it a concern?
Not at all. Jersey Mike's, we have been opening the last three years, 300 stores a year. We anticipate continuing that. The international footprint, we are only in Canada today. We will open in the U.K. in the coming weeks, and more global markets ahead of us. That type of growth, we are well built for it.
Your average unit volume, about $1.4 million. You have a $2 million goal. That is a gap from where you are now and where you want to go. How fast do you get to $2 million?
We have not put a time number on that. We are above $2 million already in our system. We know what right looks like. Part of it is getting the franchise owners out and developing the catering business. We are going to build the brand around a digital marketing strategy that invites a broader consumer base in and increases frequency. Today we get a lot of sales from a fairly narrow group of customers. We know there are a lot of people, generally younger, more diverse, spanning the spectrum of income. We are attracting those customers into the brand. That will build their frequency and it will lead us to the $2 million average unit volume.
Charlie Morrison, CEO of Jersey Mike's, fresh off of the company's earnings report as we count you down to the closing bells. Just about a minute and a half away from the bells. Let's bring in Ken Shinoda. We have been talking on the show today about the consumer, the health of our economy, and we have to overlay that with what we learned from the Fed, which is what? Did we learn anything?
The meeting was boring today. He doesn't want to say anything. They should have hiked. Inflation is above their target. You have an economy that is strong, up towards 6%. They should have moved. It was priced in that they were not going to do anything. Now they have to move in December.
And you think they will do that?
Absolutely. The market is pricing a very high probability of a move in December.
And there is discussion that there's a disconnect between what the Fed is doing and what is coming out of Kevin Warsh's mouth. He talks on inflation, even if they do a hike in December, it does not necessarily mean the inflation battle is won. How much more do you want to see?
I think they probably need to do another one by March of next year. If we look at inflation, the housing market is kind of going sideways. The job market is balanced. They are still contributing to inflation. On top of that, we have energy prices, oil over $100. And the capex from the hyperscalers and data center infrastructure continues. That is all pressure on inflation that will still be here with us.
A question about AI, and for our viewers: closing bells modest across the board with no weakness in the transport sector. We expect earnings from a couple of the big hyperscalers, Microsoft and Alphabet. There has been talk about the state of AI financing, both in public and private markets. I know you and your colleagues have been — cautious might be the word — when it comes to this space. Have you grown more concerned based on the developments over the last few weeks?
There has been so much issuance out of the pipeline. Spreads have finally started widening on tech and these data center names, even more so on the riskier names. The neo-clouds like CoreWeave, where you have bonds that used to trade at eight or nine yield, now in the mid-teens. This is what we have been talking about over a year. We avoided exposure. We did not have zero, but we tried to limit the exposure we thought was priced expensively. The higher-quality stuff is getting more normal, still not necessarily cheap yet. Now you see the market sniff out problems in the other players.
Ken Shinoda, portfolio manager at DoubleLine Capital. A slew of earnings crossing the Bloomberg terminal in the after-hours trade, including from Microsoft. The company reporting EPS of $4.92. The street was looking for roughly about $44 billion. Capex number below estimates: 39.37 billion dollars, the street was looking for $46 billion. Revenue upbeat: $93 billion, the street was looking for roughly $91 billion. Adjusted EPS of $4.89, the street was looking for $4.73. Azure revenue, currency-adjusted, coming in up 48%, the street was looking for up 45%. A beat on several key metrics. The number below what the street was looking for, which could potentially be a good thing. Alphabet earnings crossing the wire. Shares moving in the opposite direction of Microsoft. The knee-jerk reaction is lower. The company coming out with the main headline that capex in the most recent quarter, 51.36 billion dollars, that is below street estimates. Street was looking for capex of about $56 billion. As far as the top and bottom line numbers, EPS coming in at $2.12 per share, lower than a year ago. Revenue coming in on the nose of street estimates at about $127.5 billion. Operating income looks a little bit light. Revenue, $111 billion, on the nose of what the street was looking for. Google Cloud business, cloud revenue $30.7 billion, that is above what the street was looking for, $29.1 billion. Shares now down about 7.5%. Microsoft shares up about 6% in the after-hours trade. Joining me for the next hour is Mandeep Singh, global head of technology research at Bloomberg Intelligence. Start with Microsoft and Alphabet, investors pushing these stocks in two different directions.
Looks like Alphabet had a bigger miss. Anytime search misses, you know the company will have a tough time with sentiment. It is no surprise to see the stock reaction. Cloud had a very strong quarter, 100% growth. Clearly they missed on the search side as well as YouTube. Pretty much the entire Google Services segment seems to be light. That is why you see that reaction.
We will get to it on Gemini reaching one billion users. Does that matter?
It matters, but right now they are not able to monetize it. That is why I think they seem to be missing on that number. With Edge, we knew the challenge would be: ads is not the answer to monetize engagement, it is more transaction-based. That is where someone like Muse or Instinct is taking some of that search query volume from Alphabet.
