5 things to start your day: Europe

Good morning. The Bank of Japan raised its benchmark interest rate. Two former US Treasury secretaries warn global challenges loom. And HSBC

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Good morning.  The Bank of Japan raised its benchmark interest rate. Two former US Treasury secretaries warn global challenges loom. And HSBC's Quinn signs off on a high. Here's what people are talking about. Please note: Our email domain is changing, which means you'll be receiving this newsletter from noreply@news.bloomberg.com. Update your contacts to ensure you continue receiving it -- check out the bottom of this email for more details.

BOJ raises rate

The Bank of Japan raised its benchmark interest rate and unveiled plans to reduce bond buying, in actions that underscored its determination to normalize policy. The policy rate increased to around 0.25% from a range of 0 to 0.1%, according to a statement Wednesday. It also said it would reduce its monthly pace of bond buying to around ¥3 trillion ($19.6 billion) in the first quarter of 2026. In taking these steps, Governor Kazuo Ueda showcased his will to proceed with normalization after years in which the bank pursued an ultra-easy policy that included the world's last negative interest rate until March.  Coming hours before the US Federal Reserve is set to meet, Ueda's hawkish tilt may spell a turning point for the beleaguered yen, as traders position for a narrowing of the US-Japan interest rate gap. Fed officials are likely to move closer to lowering rates from a two-decade high by signaling a potential reduction in September. The US central bank's Federal Open Market Committee will keep its benchmark rate in a range of 5.25% to 5.5%, a peak reached a year ago, according to economists surveyed by Bloomberg News.

'Dark shadows' loom

The two US Treasury secretaries who navigated the nation through the global financial crisis said the next administration will inherit a vibrant economy with "dark" challenges, calling on politicians to address the fiscal deficit and safeguard market competition. "The president's also going to inherit some dark shadows — it's a very dangerous, much more complicated world to navigate," Timothy Geithner said. His predecessor at the Treasury's helm, Henry Paulson, said that government debt is a "dark cloud" that, "if not checked, is ultimately going to destroy our prosperity." Both pointed to protectionist pressures and risks of overly strong government policies designed to lead to particular business outcomes, along with the trajectory of debt, as areas of concern. Geithner said a responsible fiscal policy will be important over time in protecting the dollar's role in the global system.

Quinn's successful exit

Noel Quinn signed off his final quarter as boss of HSBC Holdings Plc by announcing the return of a further $3 billion to shareholders as the lender reported earnings that beat expectations driven by rising income from global banking and markets. HSBC's pretax profit for the three months through June rose to $8.9 billion, according to the statement, compared with the company-compiled estimate of $7.78 billion. The London-based lending giant is preparing for the leadership transition at a critical time, which Quinn has described as an "inflection point," as it strengthens its Asian roots in a strategic pivot. It has disposed of major businesses in the West, including its French and Canadian operations, and has redeployed capital to particularly Southeast Asia and China.

L'Oreal's sales slump

L'Oréal reported sluggish sales growth in the second quarter as the world's biggest maker of beauty products suffered from weakness in China. L'Oréal's American depositary receipts fell as much as 2.8% in New York trading and its Paris-listed shares are down 13% this year through Tuesday's close. The company said sales rose 5.3% on a like-for-like basis, less than the 6% gain expected by analysts. Sales in North Asia, the region that includes China, fell by 2.4% in the three months ended in June -- worse than estimates and the fourth straight quarter of declines in a region which accounts for about a quarter of L'Oreal's revenue. Bucking the trend, Prada SpA sales jumped as the Italian fashion group continued to see strong growth. Prada has been outperforming its high-end fashion rivals thanks to the success of its products among Gen-Z consumers and extraordinary growth rates at sister label Miu Miu, where retail sales jumped 95% in the second quarter.

Microsoft disappoints

Microsoft's Corp.'s Azure cloud-computing service posted a slowdown in quarterly growth, disappointing investors anxious to see a payoff from huge investments in artificial intelligence. Revenue from Azure, Microsoft's main growth engine in recent years, rose 29% in the fiscal fourth quarter, compared with a 31% jump in the previous period. About 8 percentage points of the increase in the recent period was attributable to AI, up from 7 percentage points in the prior quarter. Microsoft's shares fell about 4% in extended trading, paring earlier losses of as much as 9.1%. Separately, Intel Corp. plans to eliminate thousands of jobs to reduce costs and fund an effort to rebound from an earnings slump and market share losses. Intel, which is scheduled to report second-quarter earnings Thursday, has about 110,000 employees, excluding workers at units that are being spun out.

Coming up

Today's data include CPIs from France, the Eurozone, and Italy, Turkey's June trade balance and German July unemployment. Later in the day we have US July employment change and the Fed rate decision.

What we've been reading

This is what's caught our eye over the past 24 hours. Goldman's Solomon sees up to two Fed cuts in 2024 'Dr Doom' Nouriel Roubini looking to launch his first ETF Harris wipes out Trump's swing-state lead in election dead heat UK confirms record £1.5 billion budget to support green power Starbucks in-line earnings ease fear of a bigger slump China factory activity shrinks for third month in hit to growth Airbus reviews space division as CEO puts all options on table

And finally, here's what Mary is interested in this morning:

The British pound has been incredibly resilient over the past month, gaining against all G-10 currencies except the yen and Swiss franc. The Bank of England looms large with economists looking for a cut while the swaps market still sees the likelihood as slightly better than a coin toss. Even if the BOE delivers its first rate reduction, that may not be enough to break the currency's resilience. Sterling has proven to be a standout not only because nominal and real rates are attractive, but because it has also benefited from political stability especially in light of recent events in France and the US. May's GDP showed the UK economy accelerated at a faster-than-expected pace and the unemployment rate remained steady. Traders have seemingly held back from fully pricing in an easing for August because of concern stickiness in core and services inflation will encourage hawks to block a cut. But if the new government is forced to increase taxes to plug a fiscal hole, then the Bank of England will need to counter that fiscal tightening by either reducing the pace of bond sales or commencing interest-rate normalization to avoid choking off tepid growth. Fiscal and monetary policy coordination may not always be the norm, but it would set the UK currency even further apart from its peers. Mary Nicola is a macro strategist for Bloomberg's Markets Live team, based in Singapore.

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