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Speaker 1: Bloomberg Audio Studios, Podcasts, radio news.

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Speaker 2: This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along

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Speaker 1: Kenleyon, director of Equity Research at CFA, joins us. Now, Ken,

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Speaker 1: what's your big takeaway from the earnings reports we've gotten

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Speaker 1: so far? Hi, You know, I.

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Speaker 3: Think the first supporter sets the base for growth for

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Speaker 3: the rest of this year, and I think the narrative

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Speaker 3: is to be conservative. We certainly have a different economic

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Speaker 3: backdropers for growth. We saw a very healthy loan activity

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Speaker 3: that will accelerate for the rest of the year, not

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Speaker 3: only consumer but really business. And to your point about

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Speaker 3: are the banks going to compete with the Apollos of

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Speaker 3: the world.

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Speaker 4: We saw healthy fixed income underwriting.

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Speaker 3: We also saw off the shelf dusting bank loan syndicates

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Speaker 3: and giving very aggressive pricing, so the direct lending from

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Speaker 3: the apollos and areas is really bought off. So I

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Speaker 3: think the opportunity here is really net interest income is

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Speaker 3: based on rate, but also on volume. Volume is business

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Speaker 3: activity expanding the balance sheet. And that's why I think

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Speaker 3: JP Morgan is guiding conservatively and they're going to exceed

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Speaker 3: expectations if we have a very healthy US economy this year,

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Speaker 3: which we believe.

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Speaker 5: Good morning, Ken. I'm looking at both Wellsfanga and JP

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Speaker 5: Morgan on the provision for credit losses and just before

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Speaker 5: the break as we went to the breaker said one

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Speaker 5: point eight to eight billion at JP Morgan, lesson billion

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Speaker 5: over at Wells Fargo. Still both of these materially lower

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Speaker 5: than the market had expected, and that talks to the

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Speaker 5: uniqueness and the strength of the US economy.

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Speaker 3: It does, and the narratives different than January where there

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Speaker 3: was more concern of recession and also areas that where

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Speaker 3: we could see higher credit risks. So as to my point,

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Speaker 3: as you see the volumes of a healthy US economy,

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Speaker 3: you will see some increases in loan provisions, but it's

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Speaker 3: going to be proportional I will stay.

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Speaker 4: In the normalized area.

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Speaker 3: So I don't think credit risk is a problem, but

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Speaker 3: both bank managements and analysts, you know, we'd like to

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Speaker 3: look at it and talk.

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Speaker 4: About it well.

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Speaker 5: Obviously dividend and buybacks are part of the narrative with banks.

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Speaker 5: We'll hear a little bit more, hopefully later on today

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Speaker 5: from Jamie Diamond on that front. As you look at

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Speaker 5: the banks, we've had this pivot to breadth in financials generally,

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Speaker 5: But where the lead, where's the leadership in the end story?

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Speaker 5: Kem for you.

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Speaker 4: It's a great question.

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Speaker 3: And now we're speaking about investors in terms of when

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Speaker 3: we look at the financial sector, sixty five percent or

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Speaker 3: twelve stocks, six of the largest banks are in there.

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Speaker 4: And also return of capital comes up.

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Speaker 3: With the mid year the June banks stress tests, and

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Speaker 3: you know, we think the banks are very well capitalized.

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Speaker 3: They're also building building up their capital because we don't

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Speaker 3: know what's going to happen.

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Speaker 4: What's called Basel.

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Speaker 3: Three end game, which is getting a lot of pushback

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Speaker 3: from Congress that it's too onerous and has negative impact.

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Speaker 4: For the US economy.

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Speaker 3: So I think what we have here and cf A

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Speaker 3: went to an overweight on the financial sector and the

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Speaker 3: large banks are part of that story. Is because we're

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Speaker 3: going to see very healthy return of capital and probably.

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Speaker 4: We're going to get a glimpse of that at the

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Speaker 4: end of June.

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Speaker 1: Ken You know, sometimes people take a look at bank

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Speaker 1: earnings and they say it kicks off the rest of

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Speaker 1: earning season. Mix it gives it to of what the

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Speaker 1: economic outlook looks like. I'm not clear on whether there

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Speaker 1: is a clear read on the economy going forward in

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Speaker 1: these earnings.

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Speaker 5: Did you get one?

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Speaker 3: I think there is because we did see credit service

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Speaker 3: income still very healthy year over year and sequential, so

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Speaker 3: the consumer is healthy and spending. We'll take a closer

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Speaker 3: look at volumes or transaction activity. We did see in

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Speaker 3: the commercial loan activity midteam growth year over year for

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Speaker 3: JP Morgan. That suggests that we're seeing CEOs more confident

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Speaker 3: for capital raising, whether it be through loan activity or

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Speaker 3: going to the capital markets, which we think in the

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Speaker 3: second half of this year there is a tsunami of

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Speaker 3: capital that has to exit the private equity firms, which

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Speaker 3: is going to benefit IPOs or m and A.

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Speaker 1: Meanwhile, you're looking at in terms of net interest compression

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Speaker 1: that is compelling to me and Menace was talking about

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Speaker 1: this earlier, this idea they've got to pay more for

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Speaker 1: deposits and that deposits are leaving. This really raises a

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Speaker 1: question is is basically you're going to get a more

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Speaker 1: direct read through of that five percent benchmark rate if

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Speaker 1: you just get into a savings account. And this might

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Speaker 1: be somewhat personal, but you know, there's this question of

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Speaker 1: are they going to have to pay up akin to

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Speaker 1: what the regional banks and having had to do for

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Speaker 1: a longer period of time.

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Speaker 4: Totally different businesses. It's an easy narrative.

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Speaker 3: So I mean, if you're a city or JP Morgan,

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Speaker 3: you have treasury services to studio institution, and then of

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Speaker 3: course you have.

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Speaker 4: Small business and individuals.

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Speaker 3: So their relationships are far greater than giving five percent

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Speaker 3: versus you know of a small bank versus four point

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Speaker 3: six percent on a CD. Their relationships are dynamic. And

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Speaker 3: when you look across where deposits are for these large banks,

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Speaker 3: and there is a high percentage to my description that

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Speaker 3: are non interest bearing.

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Speaker 4: That it's a little bit different.

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Speaker 3: So Moini hand, the CEO of Bank in America, always

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Speaker 3: has that's a great explanation for this is we have

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Speaker 3: diversified businesses and in terms of our deposit base, and

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Speaker 3: so also based on the underpinnings of other things that

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Speaker 3: we do in those relationships.

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Speaker 5: Well, JP Morgan certainly has that breadth. Give me your

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Speaker 5: view on this.

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Speaker 6: I reflect back to the start.

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Speaker 5: Of the year, HSBC Wholesale sacked twenty seven percent of

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Speaker 5: the commercial real estate exposure. They were nervous, The world

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Speaker 5: was nervous. We're less nervous now.

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Speaker 7: It takes my mind back.

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Speaker 5: To just before the GFC, who was left holding the

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Speaker 5: baby when it came to know cds's who is holding

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Speaker 5: the baby in terms of C or E exposure that

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Speaker 5: we should be concerned about, or is that a media

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Speaker 5: obsession and not an analyst obsession with C or E.

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Speaker 4: We look very closely at that. And I also cover

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Speaker 4: part of real estate and there isn't a black spawn

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Speaker 4: event here for the large expects.

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Speaker 3: But when you go down and look at the total

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Speaker 3: portfolio of commercial real estate, it's mostly in multifamily.

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Speaker 4: And then when we go down.

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Speaker 3: To office for JP Morgan, it's investment grade borrowers, it's Class.

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Speaker 4: A tower buildings.

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Speaker 3: It might be idiosyncratic, but to Gerard's point, Gerard cassidy earlier.

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Speaker 3: You know, it's under five percent, three percent of the

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Speaker 3: total loans. When you get down to the regional banks

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Speaker 3: are smaller, it becomes more problematic.

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Speaker 4: But because these are not massive consumer.

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Speaker 3: Loans, they'll just kind of extend these loans for two

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Speaker 3: or three years.

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Speaker 4: And work out any problem real estate.

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Speaker 3: But for the largest banks, we all watch it very

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Speaker 3: closely and we look at all the metrics and think

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Speaker 3: that this will be more idiosyncratic, not systemic.

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Speaker 1: Ken Lee and a CFI.

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Speaker 4: You were going to be back.

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Speaker 1: With us in eight am following the City group earnings.

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Speaker 1: Thank you so much for being with us today, right,

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Speaker 1: friend Max Neil Datta joins us now with an answer

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Speaker 1: to that question, is this a pivot point this week

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Speaker 1: or is this something that just is more noise, more

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Speaker 1: bumpiness to the same road to easing policy.

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Speaker 4: Well, I think the latter.

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Speaker 7: I think it's a bumpiness on the path to still

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Speaker 7: a couple of cuts this year. You know, you kind

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Speaker 7: of had to take the data as it comes to you,

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Speaker 7: and certainly what we learned in the last week definitely

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Speaker 7: throws a bit of cold water on the idea that

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Speaker 7: residual seasonality was a big driver for why you know,

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Speaker 7: we sort of missed the boat on inflation the first

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Speaker 7: couple of months of the year because March was still

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Speaker 7: somewhat firmer. You know, the PPI data certainly took some

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Speaker 7: of the edge off in terms of what it means

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Speaker 7: for PC. But at the end of the day, you're

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Speaker 7: talking about core inflation PC inflation likely to be running

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Speaker 7: above three percent over the first three months of the year.

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Speaker 7: So the way I'm thinking about it is, you know,

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Speaker 7: July at the earliest we had, we had three months

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Speaker 7: of poor inflation data, and you're gonna need at least

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Speaker 7: that many months to undo the damage.

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Speaker 4: So lots of things have.

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Speaker 7: To go right, But I think July at the earliest

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Speaker 7: is probably the way I would think about it. If

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Speaker 7: you get another bad inflation number, you just push it out.

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Speaker 7: I mean, Lisa, I do think it's worth reminding people that,

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Speaker 7: you know, the late I mean, you have to kind

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Speaker 7: of go back to first principles in these sort of situations, right,

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Speaker 7: I Mean, we know the labor markets are cooling, we

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Speaker 7: know that inflation expectations haven't really moved if you look

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Speaker 7: at surveys of consumers and households, so at some level

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Speaker 7: that would that suggests to me that consumers are somewhat

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Speaker 7: resistant now to taking on higher prices, and so if

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Speaker 7: this continues, I'd be frankly more worried about corporate profit

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Speaker 7: margins than anything else.

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Speaker 1: Well, now, let's really raise us a question about whether

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Speaker 1: this sort of challenge is a bullish thesis and equity

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Speaker 1: is more significantly than people are realizing. If you do

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Speaker 1: see slowing under the surface, if you do see people

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Speaker 1: pushing back on prices, the inability for companies to pass

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Speaker 1: along things like oil prices and other commodities that are

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Speaker 1: coming up, how much does that really make you less

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Speaker 1: optimistic about what we get in the equity market.

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Speaker 7: Well, I mean, right now, the markets are kind of

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Speaker 7: trading right. At any given point in time, I think

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Speaker 7: you could basically say, you know, the economy is you know,

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Speaker 7: one of four things. Right, we could talk about soft

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Speaker 7: landing sort of you know, solid growth, benign inflation. We

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Speaker 7: could talk about inflationary boom, or you could talk staflation

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Speaker 7: or a recession right deflationary bust. And right now I

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Speaker 7: think the markets are kind of thinking inflationary boom like dynamics.

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Speaker 7: I mean, that's an environment where you know, stocks can work,

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Speaker 7: bonds can. But you know, if you kind of move

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Speaker 7: towards the situation where inflation stays sticky, that begins to

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Speaker 7: erode household incomes, it keeps the FED off on the sidelines,

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Speaker 7: then you're talking about a situation where equity markets will

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Speaker 7: come under more pressure. You know, I don't think we're

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Speaker 7: there yet, but you know, certainly if we can, because

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Speaker 7: I think inflation will cool. But if it doesn't, then

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Speaker 7: you have to be cognizant of that risk.

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Speaker 5: And that's maybe where the bond markets and New Good morning.

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Speaker 5: The bond markets have been trying to price. They did

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Speaker 5: thirty odd basis points in the space of two weeks.

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Speaker 5: We've got a little bit back this morning. We've had

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Speaker 5: a couple of auctions this week which it took more

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Speaker 5: to encourage people to buy the tens and buy the

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Speaker 5: thirties than it has for a long time.

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Speaker 4: Now.

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Speaker 5: That's because of market dislocation. But I'm looking at my

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Speaker 5: inbox from Torsion Slock and he says, we are seeing

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Speaker 5: the first science of US financial stress appear. Trailing treasury auctions,

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Speaker 5: rating agencies issuing opinions about deteriorating fiscal situation and term

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Speaker 5: premium trending higher. What do you make of that? The

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Speaker 5: dislocation of the auctions this week, ad you syncraphic or

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Speaker 5: something more malevolent?

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Speaker 4: I mean, I think.

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Speaker 7: It's I mean, I think financial conditions have tightened. If

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Speaker 7: you look across a different indicators, right the dollars going up,

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Speaker 7: corporate credit spreads of Titan. You know, I wouldn't say

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Speaker 7: that it's a significant dislocation yet. I mean, I still

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Speaker 7: think that, you know, financial market conditions, you know, have

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Speaker 7: largely repriced because inflation has been higher, so you know

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Speaker 7: that's going so in other words, inflation's higher, it's going

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Speaker 7: to take a little bit weaker growth to get inflation

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Speaker 7: back to where the Fed wants it. And so you're

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Speaker 7: seeing financial conditions titan. I don't think it's anything beyond that.

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Speaker 8: Just yet, Neil.

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Speaker 9: We have some more news. We've been reporting all week

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Speaker 9: that this attack potentially from Iran on Israel was going

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Speaker 9: to be imminent, and we have reporting that it's going

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Speaker 9: to be within the next forty eight hours. We've see

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Speaker 9: a few signals from that, whether or not it's the

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Speaker 9: US directing embassy personnel in Israel where they should and

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Speaker 9: should not go friends telling putting certain countries on no

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Speaker 9: travel lists.

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Speaker 6: Last time we spoke, you pretty much shrugged off geopolitics

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Speaker 6: at this point. How can you not say that this

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Speaker 6: is not concerning at all to what is going on

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Speaker 6: when you look at the global marketplace.

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Speaker 7: Well, you don't shrug it off. You just I mean,

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Speaker 7: you take it as it comes to you, right, I mean,

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Speaker 7: in my experience, like changing a fundamental forecast based on

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Speaker 7: what's going on geopolitically is usually you know, by the

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Speaker 7: time you start doing that, usually the crisis is over.

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Speaker 4: That's that's in my experience.

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Speaker 7: Now, what I will say to me, the most interesting

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Speaker 7: thing is just the relationship between what's going on in

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Speaker 7: the energy.

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Speaker 4: Markets and the dollar.

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Speaker 7: You know, historically everyone's thought, you know, dollar down, oil up.

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Speaker 7: But given the US position as a major commodity exporter,

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Speaker 7: and you know, we run a net surplus in petroleum,

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Speaker 7: you're seeing you know, stronger oil prices boost the terms

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Speaker 7: of trade of the US and that strengthens the dollar. Right,

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Speaker 7: So the causality is actually from oil to the exchange

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Speaker 7: rate in the US. I think it matters more frankly

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Speaker 7: for emerging markets or you know, sort of oil importers globally,

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Speaker 7: because not only are they dealing with higher oil prices,

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Speaker 7: they're also now dealing with weaker currencies, and that's going

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Speaker 7: to limit the ability of those central banks to cut

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Speaker 7: interest rates, which has been a reason for some of

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Speaker 7: the enthusiasm and.

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Speaker 4: Global risk appetite.

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Speaker 7: Right, So, I think it introduces a little bit more

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Speaker 7: tighter financial conditions, particularly in the rest of the world,

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Speaker 7: I think more so than the US.

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Speaker 1: Yeah, before we let you go, it sounds like you're

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Speaker 1: a little less bullish than you have been of late.

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Speaker 1: Is that true?

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Speaker 7: Well, yeah, the data hasn't gone my way. How do

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Speaker 7: you expect me to set you know, I mean, you know,

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Speaker 7: you have to be honest with yourself, right, So, but

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Speaker 7: I will just say, I mean, I do think we're Ultimately,

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Speaker 7: when the dust settles on twenty twenty four, we will

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Speaker 7: still be talking about a situation where the US economy

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Speaker 7: is growing and the FED will be cutting That is,

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Speaker 7: you know, I think, still the fundamental story.

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Speaker 1: And honestly, Neil data hasn't gone to anyone's way because

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Speaker 1: no one's been able to gain this out. Remax, Neil Data.

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Speaker 4: Thank you so much for being with US.

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Speaker 1: Bank of America stel Caerry Hall, writing quote, we think

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Speaker 1: the uncertainty overhang may challenge relative performance of the Russell

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Speaker 1: two thousand for now. Given higher for longer rate risks,

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Speaker 1: small is likely to lag large until later this year

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Speaker 1: if and when we get more confidence in cuts. Jill

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Speaker 1: carry Hall joining us now and Jill, this has been

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Speaker 1: always a fascinating discussion. If we're getting this sort of

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Speaker 1: cyclical boom, why are we not seeing it as small caps?

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Speaker 1: You're saying it's completely hinged on rate cuts and if

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Speaker 1: we don't get them, we're not going to get that

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Speaker 1: rebound this year.

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Speaker 8: Yeah, and thanks for having me. I mean, we talked

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Speaker 8: to a lot of investors and I think there has

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Speaker 8: been this year more optimism on small caps. We've seen

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Speaker 8: that in the inflows that we track. But I think

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Speaker 8: in all of the conversations that we have, investors have

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Speaker 8: sort of been looking to the FED as the next

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Speaker 8: catalyst for why the Russell two thousand could could move

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Speaker 8: higher from here. You know, corporates in general, especially when

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Speaker 8: you look at the S and P five hundred, they've.

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Speaker 4: Locked in dated low rate debt.

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Speaker 8: But for smaller companies within the rustle, about forty percent

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Speaker 8: of their debt is either short term or floating rates.

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Speaker 8: So you know, we estimate this could be a pretty

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Speaker 8: significant hit to earnings over the next five years of

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Speaker 8: rates sort to stay high relative to you know, if

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Speaker 8: we see cuts, then this becomes a less detrimental headwind.

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Speaker 1: Jill, forgive me for sort of the hypothetical here, but

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Speaker 1: what does it take to get some sort of fuel

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Speaker 1: to this particular sector. Is it just one rate cut,

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Speaker 1: is it just taking the prospect for even higher rates

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Speaker 1: off the table, or do we need to sort of

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Speaker 1: see the beginning of a protracted rate cutting cycle that

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Speaker 1: could bring some of these expenses interest expenses back into

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Speaker 1: something similar to.

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Speaker 8: The past, right, I mean, I think you know what

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Speaker 8: one cut isn't necessarily just going to solve the problem.

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Speaker 8: I think, you know, given how elevated rates are are,

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Speaker 8: our economists are now expecting that we'll see a cut

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Speaker 8: in December. They had pushed that back from June, and

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Speaker 8: four cuts next year. So I think if we get

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Speaker 8: greater confidence that we're on a path to lower interest

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Speaker 8: rates so that when these companies do have a lot

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Speaker 8: of debt coming due over you know, twenty twenty five,

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Speaker 8: twenty twenty six, and beyond that, that refinancing won't be

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Speaker 8: as big of an impact to earnings as it could

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Speaker 8: be now a great state. At these levels, I think

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Speaker 8: a lot of the macro positives for small caps still stand,

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Speaker 8: the profits recovery. But you know, another risk there is

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Speaker 8: that the profits recovery this year is very back end loaded.

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Speaker 8: Earnings are still going to be negative year over year

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Speaker 8: this earning season. The consensus is looking for small cap

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Speaker 8: earnings to recover to about thirty percent year every year

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Speaker 8: by the time we get to the fourth quarter. So

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Speaker 8: we'll be paying a lot of attention to guidance this

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Speaker 8: earning season. So that could you know, potentially if things

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Speaker 8: do come through, set us up for a better year

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Speaker 8: end rally for small caps if we have confirmation that

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Speaker 8: the back end loaded earnings recovery is coming through, and

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Speaker 8: if we have confirmation that okay, inflation is cooling and

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Speaker 8: the FED is going to cut, which as mentioned is

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Speaker 8: our economists forecast now for December.

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Speaker 5: Still good morning. Looking at the breath trade and the

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Speaker 5: Russell Twoth size and energies at the top there are

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Speaker 5: up over ten percent, and tech and when you look

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Speaker 5: at the commodity complex, we're talking about oil around this

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Speaker 5: desk this morning. Geopolitics is samory the warnings that are there.

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Speaker 5: We're looking at oil, we're looking at copper, We're looking

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Speaker 5: at a some kind of a new cycle within the

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Speaker 5: breadth narrative, within the Russell twoth size and how do

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Speaker 5: you play commodity strength and will it endure?

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Speaker 6: Well?

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Speaker 8: I think you know, the good news around the commodity

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Speaker 8: oriented sectors like energy and materials and industrials is that

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Speaker 8: they are some of the sectors that have lower refinancing

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Speaker 8: risk relative to sectors like real estate that can see

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Speaker 8: a much bigger earning set. So I think within small caps,

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Speaker 8: if you're an investor right now, you want to be selective,

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Speaker 8: and some of these commodity oriented sectors are one way

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Speaker 8: to do that because they will benefit from from higher

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Speaker 8: commodity prices, you know, manufacturing GDP improving, but they're less

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Speaker 8: sensitive to refinancing risks. So that's one area that we

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Speaker 8: see as relatively better positioned within SMID and we'd stick

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Speaker 8: with higher quality stocks and stocks that don't have a

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Speaker 8: lot of leverage or short term or floating ratedit.

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Speaker 5: And then I pivoted one Ida and I look at

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Speaker 5: the lags in the Russell two thousand and it is

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Speaker 5: in the financials. We're getting information through and from JPM,

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Speaker 5: from Wells Fargo, from City and it is about the

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Speaker 5: net interest income and that story incrementally under a bit

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Speaker 5: of pressure. But is that more pressure to come in

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Speaker 5: financials in the regional banks.

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Speaker 8: So within within banks we'd favor large over smid banks

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Speaker 8: for now. Obviously the regionals have been challenged. And you know, overall,

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Speaker 8: this is a sector within the rustle that's sensitive to

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Speaker 8: to credit conditions and to you know, the FED. So

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Speaker 8: you know that's an area that even though it's ranked

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Speaker 8: relatively well in our plot work, we're relatively cautious or

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Speaker 8: more selective within Right now, we'll see what all of

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Speaker 8: the banks continue to say this earning season, watching guidance

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Speaker 8: pretty closely. US corporates over all had guided relatively weekly

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Speaker 8: in the last three months. Guidance usually is weaker at

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Speaker 8: the start of the year, so we'll see if we

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Speaker 8: see any improvement there. But in addition to financials, real

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Speaker 8: estate it is another one that you know, we're more

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Speaker 8: cautious on in small caps and does have you know,

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Speaker 8: more and more risk for refinancing.

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Speaker 1: Jill Kerry Hall, thank of America, Thank you so much.

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Speaker 1: As always, we try to parse through the different cost

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Speaker 1: currents and the whack a mole of narratives.

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