Mum’s The Word: Kathryn Rooney Vera on Fed’s Second Meeting under Kevin Warsh, Plus Earnings Breakdown (Live Replay)

Episode Summary

Executive Summary: The discussion centered on the Fed’s surprise hold, Catherine Rooney Vera’s call that it would not hike, and what a less transparent Fed means for markets. The conversation then shifted to mega-cap tech earnings, where Microsoft’s strong cloud/Azure growth and huge AI capex contrasted with Meta’s weaker earnings, softer guidance, and rising costs. Both hosts argued AI infrastructure remains a real but increasingly selective trade, with semis and hyperscalers facing high expectations, while inflation, yields, and Fed credibility remain the key macro swing factors.

Main Topics: Fed decision and credibility (Priority: 5/5): Catherine argued the Fed’s decision to hold was consistent with market pricing and that the bigger issue is the Fed’s long-term credibility after years of missing its inflation target. The bond market reaction suggested investors are increasingly skeptical the Fed will follow through with hikes. A less transparent Fed and curve-driven signals (Priority: 5/5): The speakers emphasized that the Fed is reducing forward guidance and shifting risk pricing from statements and pressers into the Treasury curve. This means more uncertainty meeting-to-meeting, and markets must infer policy from yields rather than Fed communication. Inflation outlook and rate-hike timing (Priority: 4/5): Catherine laid out a path in which inflation remains above target, with possible hikes later in the year or into next year if monthly CPI/PCE trends stay hot. Shelter moderation was encouraging, but she argued one soft report does not restore 2% inflation. AI, productivity, and macro growth (Priority: 4/5): A major theme was whether AI can lift productivity enough to absorb inflation and support higher trend growth. Catherine argued AI adoption and capex are real but not yet broad enough, and that the economy still needs wider diffusion beyond the semiconductor/data-center boom. Microsoft and Meta earnings as a read-through on AI spend (Priority: 5/5): The hosts dissected Microsoft’s strong Azure growth and very large capex versus Meta’s weaker EPS, rising costs, and only modest capex guidance increases. The market reacted more positively to Microsoft and negatively to Meta, reinforcing that not all AI spend is being rewarded equally. Semiconductor and hyperscaler positioning (Priority: 4/5): They discussed semis such as AMD/ARM, Lam Research, KLA, SK Hynix, and the broader AI supply chain. The view was cautiously bullish on semis as long as capex and monetization hold, but they noted the trade is becoming more selective and vulnerable to valuation or growth disappointments. Commodities, energy, and gold as hedges (Priority: 3/5): Catherine reiterated a bullish view on gold as a hedge against policy credibility risk, while taking profits more cautiously on energy after a strong run. Oil and fertilizer inputs were flagged as inflation risks, especially amid geopolitical disruption.

Key Arguments: The Fed’s hold was the right call because market pricing and economist consensus leaned toward no hike, and the market reaction suggests bond investors doubt the Fed’s willingness to tighten. Less guidance from the Fed does not mean easier policy; it means policy uncertainty shifts into the yield curve, raising volatility and borrowing-cost uncertainty. A persistent inflation problem would force hikes later this year or next; Catherine’s base case was one hike this year and additional hikes next year if inflation stays elevated. AI is not a bubble in the classic sense if the spending is tied to profitable enterprises and real infrastructure, but the trade needs broad monetization to sustain valuations. Microsoft’s Azure growth and capex justify some optimism on AI infrastructure, while Meta’s weak operating-income trend and anemic capex guide are less convincing. Semiconductors can still work if capex remains strong and AI monetization broadens, but expectations are now so elevated that even good reports may no longer generate outsized stock reactions. Gold remains attractive as a hedge against policy credibility risk, whereas energy looks more mature and may warrant profit-taking after a strong year.

Data Points: Fed hike probability before meeting: ~30% priced by the market - Used to explain why Catherine’s call that the Fed would hold was contrarian but ultimately correct. Treasury curve reaction: 30-year yield rose; 2-year yield fell - Described as a steepener, signaling skepticism at the long end and lower near-term hike expectations. Fed inflation target miss: 5+ years - Catherine said the Fed has missed its 2% target for many years, damaging credibility. Inflation print scenario: 0.2% month-over-month implies ~2.4%-2.5% annualized - Catherine used this to argue the Fed may not need to hike if inflation stays subdued. Inflation threshold scenario: 0.3% month-over-month average would imply at least one hike - Her tactical framework for when policy tightening becomes necessary. Average nonfarm payrolls: ~36,000 over the past 12 months - Catherine argued labor data must be interpreted differently because immigration/participation dynamics have changed. Microsoft revenue: $90 billion - Reported as above the ~$87 billion expectation. Microsoft operating income: $40.6 billion - Quarterly operating income reported by Microsoft. Microsoft GAAP net income: $35.8 billion - Quarterly GAAP net income reported by Microsoft. Microsoft GAAP EPS: $4.81 - Compared with an expectation around $4.20 on the hosts’ discussion. Microsoft non-GAAP EPS: $4.74 - Not including gains from OpenAI and other adjustments. Microsoft property & equipment additions: $35.8 billion - A major capex-related figure that fed the discussion of very large AI infrastructure spending. Microsoft total capex discussed: ~$41 billion - Including $35.8 billion property/equipment plus $5.6 billion finance leases. Microsoft Azure growth: 43% YoY - Highlighted as the key AI/cloud growth metric inside Microsoft’s results. Microsoft cloud revenue growth: 27% YoY - Broader cloud growth including less AI-intensive services. Meta EPS: $6.18 - Below the expected $7.22 and below the median/high estimates discussed. Meta revenue growth: 28% YoY - A solid revenue line that was outweighed by margin pressure. Meta costs and expenses growth: 55% YoY - The hosts flagged this as a major concern. Meta operating income: $18.7 billion - Down from $20.4 billion, implying an 8% decline. Meta capex guidance: $130-$145 billion for 2026 - Raised only modestly from a prior $125-$145 billion outlook. Meta next-quarter revenue guidance: $61-$64 billion - Compared by the hosts with a market expectation around $63 billion. Reality Labs revenue: $431 million - Shown as a small revenue base relative to the losses. Reality Labs operating loss: $4.619 billion - Used to underscore the unit’s poor economics. Semiconductor market reaction: Semis down ~4.5% intraday, then additional after-hours weakness - Discussed as markets struggled despite generally strong AI capex headlines. VIX: Below 15, at 12-13 levels - Catherine used low volatility as a signal that portfolio protection was cheap.

Pivotal Quotes: "The risk premium moves out of the statements, out of the pressers, out of FedSpeak ... and into the curve." — Catherine Rooney Vera: Explaining the new regime of reduced Fed guidance and greater reliance on bond-market signals. "Once the market stops talking about the Fed, that’s where he declares victory." — Catherine Rooney Vera: Describing Chair Warsh’s apparent goal of turning the Fed into a more laissez-faire institution. "Meta, it was a horrible quarter." — Jack Farley: His blunt reaction after reviewing Meta’s earnings, margins, and guidance.

Implications: Listeners should expect more rate volatility, less Fed hand-holding, and continued reliance on inflation/yield data. AI remains a real macro driver, but the market is moving from broad enthusiasm to selective scrutiny of monetization, margins, and capex discipline.