Markets Face Central Bank and Earnings Volatility

**SPEAKER_1** (0:02)
Bloomberg Audio Studios, Podcasts, Radio, News.
This is the Bloomberg Surveillance Podcast. Catch us live weekdays at 7 a.m. Eastern on Apple CarPlay or Android Auto with the Bloomberg Business App. Listen on demand wherever you get your podcasts or watch us live on YouTube.

**Tom Keene** (0:27)
Isabelle Mateos y Lago joins us with BNP Paribas, but I want to take a moment here with just bulletproof academics out of ENA, Sciences Po and of course, her work at Cambridge as well. Just a wonderful synthesis of things here. All talk, no action. Are we going to see from a central banker to the world on Wednesday? All talk and no action.

**Isabelle Mateos y Lago** (0:51)
Good morning, Tom. I think of the four central banks making decisions this week and last week, the Fed is perhaps the least unlikely to stick to just talk.
Although our base case remains that they also do nothing. However, there is a case to hike and several of the FOMC members have been making it and so it will probably be one of the most good family fights that Kevin Warsh has been talking about. But on balance, my base case is they don't act either on Wednesday. And we get some stern talk about commitment to deliver price stability and being prepared to act.

**Paul Sweeney** (1:33)
Isabelle, we do have energy prices pulling back today, but of course they're much higher than everyone would like them. And that leads to the discussion of inflation here. What's your underlying view of inflation out there?

**Isabelle Mateos y Lago** (1:46)
Well first of all, on energy prices, I think what's been happening over the last two weeks, that when the strikes resumed and now some instant relief, even though the situation in the Strait hasn't really changed in terms of ability of oil to flow out, what it's telling us is we're unlikely to get meaningful inflation from energy prices for the foreseeable future. And the sharp decline that we saw in June was probably excessive.
So that's number one. And so that means all the central banks have to look at what are the other drivers of inflation. And that's where we were a bit more concerned about the situation in the US than say in the Eurozone or in the UK where there are no other meaningful drivers of inflation whereas in the US you see much more broad-based inflation drivers.

**Tom Keene** (2:40)
Isabelle, Ed, you're Denny, I'm Bloomberg Money on Friday, partitioned America into supply side dynamics and demand side dynamics. Can you do the same in Europe? I mean, are these supply side shocks in Europe?

**Isabelle Mateos y Lago** (2:57)
Well, in the US you see much more, well, you see both. You see demand and supply but principally demand.
Remember that US being a net energy producer doesn't face the supply angle to the same degree whereas in Europe, it is principally a supply shock. Demand has been resilient but it's not per se, a driver of inflation in the way that we're seeing it in the US.

**Paul Sweeney** (3:27)
So, Isabelle, in Europe, what is the sense of the consumer there? How is the consumer faring across Europe these days?

**Isabelle Mateos y Lago** (3:37)
Not great.
The consumer is facing, at least as far as the second quarter is concerned, purchasing power has been knocked backwards. If you believe the ECB projections for the year as a whole, the consumer will still be a little bit ahead in terms of purchasing power. However, consumption is growing at about half the pace it normally does. And what's been sustaining the resilience of growth that we've seen is really the corporate sector and, in particular, the manufacturing sector, which has been supported by the defense industry and by resumption of construction activity, infrastructure in a number of economies, especially Germany. And the consumer sector in Europe has been relatively weak. And we expect that's going to remain that way until we get significant relief from energy prices.

**Paul Sweeney** (4:30)
So on that front there in terms of business and state investment here, we had when the Trump tariffs came out initially in his first year of the second term, Europe really stepping up on some of their infrastructure spending, their defense spending. How has that played out?

**Isabelle Mateos y Lago** (4:49)
Yes, so the tariff shock in the end has been quite manageable for Europe. And in fact, of course, at subsectoral level, I don't want to say nobody's been impacted, but at the end of the day, exports to the US have remained pretty resilient. And more importantly, Europe is shifting to a more domestically driven growth story with very historically large stimulus out of Germany, which took a bit of time to kick in, but now is going at full steam, defense and infrastructure principally, but also the rest of Europe investing in AI, investing in defense, and that's really sustaining domestic demand very meaningfully.