Speaker 1: Welcome to the Bloomberg Markets Podcast. I'm Paul Sweeney alongside
Speaker 1: my co host Matt Miller. Every business day we bring
Speaker 1: you interviews from CEOs, market pros, and Bloomberg experts, along
Speaker 1: with essential market moving news. Find the Bloomberg Markets podcast
Speaker 1: called Apple Podcasts or wherever you listen to podcasts, and
Speaker 1: at Bloomberg dot com slash podcast. Shallie Bastick joins in
Speaker 1: your studio, Shanalie. We were just talking about how you
Speaker 1: cook me food sometimes and we use lots of tupperware.
Speaker 1: I have so much of Shanelie's tupperware in my cover
Speaker 1: that I've never returned or like takeout containers, but I
Speaker 1: mean whatever. She doesn't even know the difference. Yeah. Alison
Speaker 1: Williams walking in studio as well of Bloomberg Intelligence also
Speaker 1: at shock at our lack of tupperware use. Anyways, you
Speaker 1: guys don't want to hear about tupper Where you want
Speaker 1: to hear about bankstocks. And that's where I want to
Speaker 1: go next. JP Morgan shares hire by get this six
Speaker 1: point nine percent in the pre markets. Shall Let's start
Speaker 1: off with you here. What's the highlight with JP Morgan?
Speaker 1: They just dumped a lot of information on us. I'm
Speaker 1: writing my newsletter right now, and I'm like the cherry
Speaker 1: on top of the cherry, on top of the cherry,
Speaker 1: on top of the cherry. I mean, JP Morgan with
Speaker 1: twenty three percent returns on tangible common equity, blowing that
Speaker 1: out of the water. Also increasing their expectations from that
Speaker 1: interest income this year. We have not seen that yet
Speaker 1: among the other banks. They're expecting or at least warning
Speaker 1: that rates could be higher for longer. They said, it
Speaker 1: doesn't necessarily need to be the case, but in for
Speaker 1: bank like JP Morgan, they would benefit more from something
Speaker 1: like that. We have seen what higher interest rates have
Speaker 1: meant for the rest of the banking system, So this
Speaker 1: could be a messy year ahead. That's Aliston william Senior
Speaker 1: Global Banks and Asset Manager analyst with Bloomberg Intelligence, And
Speaker 1: I wanted to get your perspective, since you cover this
Speaker 1: so closely more broadly, what's your kind of big takeaway
Speaker 1: now that we've heard from some of these big banks
Speaker 1: this morning. So the net interest income is really the
Speaker 1: positive story and most positive at JP Morgan, as Shinale
Speaker 1: pointed out, I mean, those returns are really impressive and
Speaker 1: you know, the net interest income. We looked like it
Speaker 1: was peaking in the fourth quarter, but it got even
Speaker 1: better this quarter, and that was across the banks. The
Speaker 1: delta at JP Morgan is so much stronger, and really
Speaker 1: what we're seeing is it's the asset yields, so that
Speaker 1: actually the cost of deposits, which is something we've been
Speaker 1: talking about, especially accelerating in the in the you know,
Speaker 1: with the bank turmoil. Those costs actually did come in
Speaker 1: higher than expected, but the yields are even better. I
Speaker 1: think for both JP Morgan and City they're benefiting actually
Speaker 1: from card that's really the area of loan growth, that
Speaker 1: is the class of loans with the highest yield. But
Speaker 1: they're also all of these banks executing on costs as well.
Speaker 1: That was a positive story in the quarter, helping profitability. Lastly,
Speaker 1: I'll just point out reserves. Reserves are coming in higher
Speaker 1: than expected, charge offs still better, so it's still good
Speaker 1: credit quality, but that's the negative in terms of the
Speaker 1: look ahead. Speaking of the look ahead, you know you
Speaker 1: mentioned that credit cards that's where the highest yield for
Speaker 1: the banks. That means for the consumer, it's the highest
Speaker 1: price you're paying for debt. There's a sense that consumers
Speaker 1: are not too stretched right now according to JP Morgan,
Speaker 1: but they've also said the consumers will hit a cliff
Speaker 1: at the end of the year. Realistically, can banks keep
Speaker 1: on making more and more money from credit card loans?
Speaker 1: I think this cycle is so different, right, so we
Speaker 1: know it's so different. It's the pandemic was something unprecedented.
Speaker 1: And keep in mind that what we saw right for
Speaker 1: JP Morgan and City Group, one of the big disappointments
Speaker 1: in twenty twenty and twenty twenty one was that those
Speaker 1: card balances were paying down, the consumer was getting healthy,
Speaker 1: and so the consumer came into this or recession, which
Speaker 1: I get is still coming, but we're already I think
Speaker 1: thinking about it as if it's here, but came in
Speaker 1: in such better shape. So I think at the margin
Speaker 1: that that's a little bit different this time. But to
Speaker 1: your point, it is something to watch in terms of
Speaker 1: the consumer getting some better yield, finally getting more than
Speaker 1: zero on those deposits, but those who are borrowing are
Speaker 1: going to be paying a higher price. Whenever the c
Speaker 1: suite executives, especially for the banks, come out, I always
Speaker 1: think of like last summer, right when we got the
Speaker 1: sort of weather forecasting. Always think of the hurricane comments
Speaker 1: from JP Oregan, but I was curious if what specifically
Speaker 1: stood out on some of these earnings calls to you
Speaker 1: as far as the rhetoric moving forward. When it comes
Speaker 1: to these chief executives and what they're expecting for the
Speaker 1: trajectory of the economy moving forward, they're still talking a
Speaker 1: lot about uncertainty. And that's why, you know, if you
Speaker 1: looked at the numbers, you know, JP Morgan did increase
Speaker 1: their guidance, but it still looks like it could be
Speaker 1: conservative City Group and Whiles far Ago despite better numbers,
Speaker 1: not changing their guidance, and I think because they are
Speaker 1: being conservative because we really don't know. And part of
Speaker 1: the upside this quarter was, you know, rates, the rates
Speaker 1: coming in higher that expected, at least on the short
Speaker 1: end of things. As we know longer term yields are
Speaker 1: coming down, and there still is a lot of uncertainty.
Speaker 1: That brings me to another business, fixed income trading surprising
Speaker 1: in the quarter. We think that people aren't going to
Speaker 1: extrapolate that to the rest of the year, but we
Speaker 1: really think that that can continue to surprise to the
Speaker 1: upside because of the uncertainty, because of this unprecedented environment,
Speaker 1: which brings me to Shanali exactly what you actually point
Speaker 1: out to me this morning, which comes to what Jamie
Speaker 1: Diamond said about rates. It is blowing my mind that
Speaker 1: he can actually say six percent potentially on the front
Speaker 1: end of the curve, when we're barely sustaining above four percent.
Speaker 1: I mean, except for the earnings from today, we weren't
Speaker 1: even crossing four percent for I want to say at
Speaker 1: least a couple weeks time, and really since the banking crisis.
Speaker 1: Now we're looking at four a weight on the two
Speaker 1: year yield. To me, also, then you have to kind
Speaker 1: of square that with the deposit flows, because even though
Speaker 1: you saw that major intake, I think you pointed out
Speaker 1: that he's still saying that by the end of the
Speaker 1: year this is all going to reverse. He's even saying
Speaker 1: that the deposits that they took in in the wake
Speaker 1: of kind of this quote unquote banking crisis. Now everyone
Speaker 1: is disputing the term again. Right three weeks ago, it
Speaker 1: was a full blown crisis. Now I'm over yeah, whatever,
Speaker 1: But anyways, what he is saying is even those deposits
Speaker 1: for JP Morgan are flighty and so yeah, I mean
Speaker 1: but that's just on the deposit story. I think on
Speaker 1: the loans story, it's very important also because he's saying,
Speaker 1: don't call this a credit crunch, and they're not aggressively
Speaker 1: tightening standards. You know, I look at that super closely.
Speaker 1: I want to say, their loans or total loans are
Speaker 1: slightly down, But on the other hand, I look at
Speaker 1: their institutional checking book and how much risk they're taking
Speaker 1: on their value at risk is also down, and so
Speaker 1: I you know, again, these are not huge things, but
Speaker 1: they are the biggest ship at sea here, and so
Speaker 1: if there's any signs of contraction here from JP Morgan,
Speaker 1: you have to expect that to be multiplied by many
Speaker 1: margins at all the other firms. And also we're specifically
Speaker 1: are you watching because William about a minute left, but
Speaker 1: we're potentially other cracks could begin to emerge as far
Speaker 1: as particular indicators you're watching when it comes to these banks.
Speaker 1: So I think that, you know, commercial real estate, I
Speaker 1: think is the longer thing that we're watching, and it
Speaker 1: is good. We're getting some added disclosures today, but we're
Speaker 1: very very early in that cycle. But I think that's
Speaker 1: what we're gonna continue to be watching for the year.
Speaker 1: I do think, you know, after you know, we're gonna
Speaker 1: want to hear from the banks next week, But we're
Speaker 1: hearing from the big banks, right so I want to
Speaker 1: hear next week what's happening at these smaller banks. JP
Speaker 1: Morgan did gain in deposits? Is how much of that
Speaker 1: was at the expense of smaller institutions? And will those
Speaker 1: smaller institutions be pulling back? Yeah, and that's the of course,
Speaker 1: going to factor into what we hear. I believe able
Speaker 1: twentieth is the day that you see a lot of
Speaker 1: the smaller banks report, key Corps, etc. A lot to
Speaker 1: watch right there. JP Morgan shares still climbing. Folks higher
Speaker 1: by seven and a half percent right now in about
Speaker 1: less than an hour of regular trading. Alson Williams of
Speaker 1: Bloomberg's chief equity strategist covering all those banks. We thank
Speaker 1: you as always, along Susion Alibastic, our chief Wall Street correspondent.
Speaker 1: You're listening to the team ken'shur Live program Bloomberg Markets
Speaker 1: weekdays at ten, Amy's Daring on Bloomberg dot Com, the
Speaker 1: I Heard Radio app, and the Bloomberg Business app. We're
Speaker 1: listening on demand wherever you get your podcast. Marie Sure,
Speaker 1: she joins us talk about the retail story. Senior equity
Speaker 1: analysts over at Columbia thread Needle Investments. Marie, do you
Speaker 1: share the same view as Justice sources this is something
Speaker 1: to kind of rush off. I think it is something
Speaker 1: to brush off. The results today from March retail sales.
Speaker 1: We're really not surprising. We know that the March period
Speaker 1: was impacted by lower tax refunds, lower snap benefits, and
Speaker 1: also unfavorable weather. But as we look forward and we
Speaker 1: see the weather turn and fewer headwinds from some of
Speaker 1: those trims a factors that I just cited, I think
Speaker 1: that there is reason to believe retail sales get a
Speaker 1: little bit better. On the other hand, I would say
Speaker 1: we continue to see the mix shift towards services away
Speaker 1: from goods, and within goods towards needs over wants, and
Speaker 1: I think that that trend will continue breakdown. More specifically,
Speaker 1: where we began to see a bit more of the
Speaker 1: weakness within retail sales, whereas we still continued to see
Speaker 1: strength there. Because obviously, like you were just mentioning the
Speaker 1: whole when we're debating about goods versus services, still clearly
Speaker 1: we're seeing that theme among whether it's these retail sales
Speaker 1: reports and also these inflation reports too. Yes, absolutely, and
Speaker 1: you're absolutely right. We saw it in the CPI data
Speaker 1: earlier this week, sawed in the retail sales print today.
Speaker 1: The greatest weakness that we're seeing is in the bigger
Speaker 1: ticket durable goods categories like consumer electronics and appliances, and
Speaker 1: of course those were some of the categories that we're
Speaker 1: strongest during the pandemic. We're also seeing a slowdown in
Speaker 1: categories like apparel in home, although not as weak as
Speaker 1: what we're seeing in some of those bigger ticket durable
Speaker 1: goods categories, and still seeing relative strength in food and
Speaker 1: the consumer continues to absorb the inflation that the companies
Speaker 1: continue to pass through in the food category. Marie, how
Speaker 1: do you then square that with margins? Because we had
Speaker 1: a Steeplesberry Banister, the chief equity strategist there joined Bloomberg
Speaker 1: Television last week and he said, look, profit margins have
Speaker 1: peaked for the entire decade, and yet this is a
Speaker 1: stock market that is trading on those margins. What happens
Speaker 1: then if you do continue to see this deceleration in
Speaker 1: the retail consumer. How much real upside is there if
Speaker 1: you follow that train of thought, I think you will
Speaker 1: continue to see pressure in margin. As I look across
Speaker 1: my coverage group, a lot of companies have comparisons relative
Speaker 1: to twenty twenty two, but over a three year period
Speaker 1: when you think, when you think about the strength that
Speaker 1: they saw margins during the pandemic when demand far exceeded supply,
Speaker 1: the multi year comparisons remain very difficult. And we know
Speaker 1: that they will recapture some of the benefits from freight,
Speaker 1: but I think they will continue to face pressure from
Speaker 1: higher promotions, higher markdowns, especially if demand continues to weaken.
Speaker 1: And for these companies, it's really all about the supply
Speaker 1: demand balance of inventory. And again during the pandemic, they
Speaker 1: were in a very good place where demand far exceeded supply.
Speaker 1: But stepping back looking at these companies historically, they've always
Speaker 1: struggled to find the right balance between demand and supply,
Speaker 1: and so that should result in I believe, continued margin
Speaker 1: pressure for years to come. And we have a little
Speaker 1: less in a minute left. But was there anything surprising
Speaker 1: to you into this report that a trend you haven't
Speaker 1: seen emerged, that it was a little bit different than
Speaker 1: maybe what we would have seen the past couple of months. No,
Speaker 1: I think everything was relatively in line with expectations. I
Speaker 1: would say the noticeable strength that we saw was in
Speaker 1: the non store retail category, and of course that was
Speaker 1: a category that suffered last We are just from very
Speaker 1: difficult comparisons, but it seems like for most companies, and
Speaker 1: of course Amazon in particular, they've really started to see
Speaker 1: the e commerce part of their business stabilize, and I
Speaker 1: think from here it's poised to grow at a more
Speaker 1: normal rate in the high single digit to low double
Speaker 1: digit range. Yeah, certainly something we're going to be keeping
Speaker 1: an eye on. Murray Shore, Senior equity analyst over at
Speaker 1: Columbia Threadneedle Investments, we thank you as always for the
Speaker 1: insight on it decelerating retail sales report. You're listening to
Speaker 1: the Take Cans Are Live program Bloomberg Markets is at
Speaker 1: ten am Eastern on Bloomberg Radio, the tuning app, Bloomberg
Speaker 1: dot Com, and the Bloomberg Business App. You can also
Speaker 1: listen live on Amazon Alexa from our flagship New York station,
Speaker 1: Jose Say Alexa play Bloomberg eleven thirty. I just find
Speaker 1: it crazy that we're talking about of a vix at
Speaker 1: seventeen as a low volatility gauge, which is weird because
Speaker 1: a vix at seventeen is not supposed to be low volatility.
Speaker 1: It's actually still very high volatility relative to historic norms.
Speaker 1: And then you have to factor in the bond volatility
Speaker 1: with factors into the currency volatility. And it's the dollar
Speaker 1: here that I think you pointed out to me. Yes,
Speaker 1: I was looking at the d x Y in the terminals,
Speaker 1: So the Dollar Spot index, when you're looking at that
Speaker 1: hovering around a one year low, CREATY a one year low,
Speaker 1: it's wild. I've actually been looking at the dollar the
Speaker 1: last few days and the biggest contributors outside of the
Speaker 1: Easter holiday with which the biggest contributor to that drop
Speaker 1: was the Mexican PACEA, which told you was very low volume.
Speaker 1: But since then it's really just been the euro strength
Speaker 1: in the euro, which I think is interesting. We're looking
Speaker 1: a one ten handle and I want to say, like
Speaker 1: two or three months ago we time about parently on
Speaker 1: your own dollars. So that's kind of a wild story.
Speaker 1: Who better to talk about the fax space than Jane Folly,
Speaker 1: A true expert at All Thinks Facts. She's managing director
Speaker 1: and head f FX strategy over at Rabobank. Jane, A
Speaker 1: pleasure to have you on the show. Thank you for
Speaker 1: joining our All Gals cast. We appreciate that as always
Speaker 1: your take on the bearcase for the dollar, well, thank
Speaker 1: you for having me. And actually, as we've been looking
Speaker 1: at these screens in the last couple of hours, we
Speaker 1: see the pulling back a little bit of ground. So yes,
Speaker 1: it has been on the back foot in the last
Speaker 1: few days and certainly I think it's a market over
Speaker 1: the last couple of weeks has put distance between itself
Speaker 1: and the banking jitters of last month. We saw this
Speaker 1: movement back into the risk appetite. We've seen stocks doing
Speaker 1: well and the dollar performing poorly. But of course this
Speaker 1: afternoon we've had these new questions. It's about, oh, actually
Speaker 1: is going to be touching interest rates before the end
Speaker 1: of the year. The comments coming from Wallace for instance,
Speaker 1: and that something his view is certainly something that rhymes
Speaker 1: with our of you, that sticky inflation is going to
Speaker 1: be persistent due to the end of the year, to
Speaker 1: seg may not be able to cut into foots. And
Speaker 1: if that's the case, and actually the toller may get
Speaker 1: back some ground, and I think we've seen a little
Speaker 1: bit of position adjustment this afternoon as the market feeds
Speaker 1: back into the Oh, actually maybe the FED is going
Speaker 1: to be a little bit more hawkish for longer, and
Speaker 1: that is something which I think the markets reacting to
Speaker 1: this afternoon. What do you think the risks are to
Speaker 1: your call? Is it just the obvious of what you
Speaker 1: were just talking about where it comes to the Fed
Speaker 1: and the big question mark of whether or not that
Speaker 1: pause could potentially be coming in early May. Well, you know,
Speaker 1: I think there are various risks to this view, and
Speaker 1: the biggest one is the one which the IMF alluded
Speaker 1: to early on this week, and actually there is different
Speaker 1: analysts and commentators have alluded to. And this is really
Speaker 1: ever we've scene last month with it with the banking jitters,
Speaker 1: as we perhaps saw in the GILST markets in the
Speaker 1: UK LUB but after the mini budget, the markets having
Speaker 1: cheeping problems. It's getting used to this environment of a
Speaker 1: much higher interest rates of environment where you do not
Speaker 1: have quantity vision, where you do not have very very
Speaker 1: cheap money, and the items talked about a plausible alternative
Speaker 1: view and that is one where growthest dragged lower by
Speaker 1: weeks adia economies and one way the markets are looking
Speaker 1: for the next weakest link. Where is that going to be?
Speaker 1: Is it going to be an autoloader, It's going to
Speaker 1: be somewhere else. And if that is based you can
Speaker 1: visit your scenario. Well, yeah, the US, the FED may
Speaker 1: be cutting interest rates, that wouldn't be for very good reasons.
Speaker 1: And if the US off the feed were cut in
Speaker 1: interest rates because there was some sort of stress in
Speaker 1: the market, that is not an environment whereby the dollar
Speaker 1: would necessarily be weakening. That is environment where you can
Speaker 1: see money coming in from whisky assets such as emerging
Speaker 1: markets back into the dollar. And so from that point
Speaker 1: of view, that is a risk to our central view
Speaker 1: certainly with respective said policy, but not necessarily a risk
Speaker 1: to the view that the dollar could pick up further
Speaker 1: ground later on this year. Yeah, when the world's in
Speaker 1: crisis by America and seems to be the mantra that's
Speaker 1: been in play for decades on decades Jane walk us through.
Speaker 1: Then the other side of the equation. I think when
Speaker 1: I look at something like European currencies, for example, the
Speaker 1: euro of the Norwegian crona, the pound. Even it feels
Speaker 1: like we've seen iterations of this recessionary call, where in
Speaker 1: a recessionary downturn it starts off obviously in the United States,
Speaker 1: but kind of lingers in Europe a little bit. This time,
Speaker 1: I want to say, could be different in that the
Speaker 1: recovery in Europe could be a bigger kind of jump
Speaker 1: than we've seen in past post recessionary period simply because
Speaker 1: of the carnage we've seen from the war Ukraine and
Speaker 1: the recovery in commodity prices and arguably the sustainable alady
Speaker 1: of the consumer there. Since, what does that then mean
Speaker 1: for a currency like the euro or like the pound.
Speaker 1: Is one ten a ceiling or a floor for the euro?
Speaker 1: You know, I think the market consensuses you a dollar
Speaker 1: going up maybe twee twelve. I think that could be tough,
Speaker 1: largely because of our dollar story, but also in terms
Speaker 1: of the Euro, you have a little paramount of optimism.
Speaker 1: They're particularly of course, with respective ability of the Central Bank,
Speaker 1: or maybe the necessity of the Center about the U
Speaker 1: to B to hike intrust rates. It has been very hawkish.
Speaker 1: We have seen a lot of those hawkish views been reiterated,
Speaker 1: and certainly the UTB you'd like to be able to
Speaker 1: hike intrust rates further in order to push that inflationary pressure.
Speaker 1: But there is still a number of unknown with respect
Speaker 1: to Europe. Yes, energy prices, wholesale gas prices are much lower,
Speaker 1: thank goodness, than they were at the start of the
Speaker 1: war in Ukraine, but there's still a fair amount of
Speaker 1: uncertainty going through next winter with respect to that, so
Speaker 1: that certainly is not free from uncertainty. You know. With
Speaker 1: respect to Sterling, and it was the best performing Kepen
Speaker 1: currency in March. That however, was a reaction I think
Speaker 1: to a slower better than expect to data, so the
Speaker 1: markets repriced for that. The UK for instance, may be
Speaker 1: able to avoid technical recession this year, but even though
Speaker 1: the markets were priced to a better outlook, the outlook
Speaker 1: is still not good. So it's less bad, but not good.
Speaker 1: And I think Sterling, or that that position adjustment in Sterling,
Speaker 1: it's probably more or less done now. I think Sterling
Speaker 1: could struggle and probably will underperform the Euro we think
Speaker 1: in the coming months. That's interesting, Creety, because with the
Speaker 1: dynamic that could be risks to equities. The two things
Speaker 1: that have come up is different extremes when it comes
Speaker 1: to the dollar or also if there could obviously the
Speaker 1: extremes of oil as well. So those are two key
Speaker 1: factors that could affect up. Yeah, something we're keeping an
Speaker 1: eye on. Jane Foley, Managing director and head of FX
Speaker 1: Strategy at Rabble Bank. We thank you as always, folks,
Speaker 1: keep an eye on the Do all are stronger today?
Speaker 1: Will it stay there? You're listening to the Team Cancer
Speaker 1: Line program, Bloomberg Markets weekdays at ten am, easting on
Speaker 1: Bloomberg dot com, the I Heard radio app and the
Speaker 1: Bloomberg Business app. We're listening on demand wherever you get
Speaker 1: your podcast, folks. We're looking at markets here that are
Speaker 1: a little bit risk off sort of. I mean the
Speaker 1: SMP five hundred is lower by three tenths of one percent.
Speaker 1: I wouldn't call about a major sell off, no, And
Speaker 1: I wanted to point out if we're looking at regional banks,
Speaker 1: so the k r X index for regional banking that's
Speaker 1: down close to two percent, but obviously more regional focus.
Speaker 1: But if you're looking at the KBW Bank Index, which
Speaker 1: includes regionals but as well as these bigger banks like
Speaker 1: GP Morgan that's up more than one percent, so you're
Speaker 1: seeing a little bit of a divergence there on the
Speaker 1: financials creating. Yeah, I love that you brought that up,
Speaker 1: because the only sector that's in the green right now
Speaker 1: on the SMP five hundred is the financial exactly, and
Speaker 1: there's really thanks to just a handful of banks. But
Speaker 1: the question here is what is the ripple effect to
Speaker 1: the regionals, because at the end of the day, I
Speaker 1: first Republic was supposed to be the first bank to
Speaker 1: report it then pushed their earnings back to I want
Speaker 1: to see the twenty fourth if I'm right, and now
Speaker 1: it looks like the big banks are benefiting. The question
Speaker 1: is for how long? Who better to ask than our
Speaker 1: regional banks. Expert Herman Chan, senior analysts for US regional
Speaker 1: banks and fintech over at Bloomberg Intelligence, joins us here. Herman,
Speaker 1: your take on this as one of the kind of
Speaker 1: pieces of the earnings report out of JP Morgan city
Speaker 1: Will Spargo that really caught my eye was JP Morgan saying, look,
Speaker 1: we're sitting on a lot of deposits. We knew that
Speaker 1: this was coming, but by the end of the year
Speaker 1: this is going to reverse. Is it going to reverse
Speaker 1: into regional banks. It's gonna reverse from two aspects. So
Speaker 1: we're seeing continue deposit inflow into money market funds, so
Speaker 1: that that will absorb some of the deposits that JP
Speaker 1: Morgan's probably seeing, and also some of those deposits can
Speaker 1: revert back once we're already starting to see the industry stabilize.
Speaker 1: The emergency lending measures from the Federal Reserve of those
Speaker 1: actually declined again, and the liquidity the new liquidity measure
Speaker 1: that the Fed unveiled after SBB that actually declined for
Speaker 1: the first time since the inception of the bank term
Speaker 1: funding program in early March. So all those things point
Speaker 1: to some stability, and the hope is that for the
Speaker 1: regionals that some of those the deposits that they that
Speaker 1: left in the first quarter does come back. And I
Speaker 1: just double checks so first Republic there was a results,
Speaker 1: so they did get pushed back. It'll be Monday, April
Speaker 1: twenty fourth is what they're going to So we still
Speaker 1: have a little over a week obviously till we get them.
Speaker 1: But when you're thinking about these regional banks from in
Speaker 1: what are you expecting that we're going to get with
Speaker 1: these results, which these are rolling in so we're going
Speaker 1: to expect some a lot of commentary on deposits and
Speaker 1: the stickiness of the deposits. P and C. The first
Speaker 1: regional reported today and showed some stability in their deposits,
Speaker 1: which was a great sign. And also more importantly probably
Speaker 1: is the funding costs and how much do they have
Speaker 1: to pay up for a deposit. So there's two issues there.
Speaker 1: The deposits that there that some of these banks are
Speaker 1: gaining are the form of higher cost CDs, so you
Speaker 1: have to pay up more for ely CD balances. And
Speaker 1: also um the zero cost deposits, those operating accounts, the
Speaker 1: non interest sparing accounts, those continue to decline, so there's
Speaker 1: been a mixshift happening. And also how much are banks
Speaker 1: paying up for to retain these deposits. So that's one
Speaker 1: of the factors that drove some negative guidance for a
Speaker 1: p and C for for the four year coming ahead,
Speaker 1: Well flu coming ahead. I got to ask about kind
Speaker 1: of buybacks for a lot of these regional banks here.
Speaker 1: I mean, look, if I was sitting on a healthy
Speaker 1: flow of deposits, which a lot of these regional banks
Speaker 1: are still saying, look everything is fine, We're okay um,
Speaker 1: and yet the shares are selling off as much as
Speaker 1: they are on sympathy, I would dive into the market
Speaker 1: and buy back those shares. Is that something that we're
Speaker 1: going to see from these visual banks. It'll be interesting
Speaker 1: because there's still a lot of uncertainty. PNC actually just
Speaker 1: came out and said they're going to dial back some
Speaker 1: buybacks given the market incertaincy for at least the second quarter,
Speaker 1: and they took celebrity to say that they might change
Speaker 1: their stance going forward depending on how market conditions change.
Speaker 1: But there are some banks that still are sitting on
Speaker 1: really strong capital ratio, strong credit quality performance. So it's
Speaker 1: going to be a bit of a choppiness going forward,
Speaker 1: and we could see some aggressive buybacks, but overall, it's
Speaker 1: going to be maybe some conservatism from some of the
Speaker 1: larger ones until this uncertainty recedes. And we're specifically when
Speaker 1: it comes to these regionals, are you keeping a close
Speaker 1: eye to monitor where other cracks could potentially be emerging
Speaker 1: for them in other quarters? Right? So the big focus
Speaker 1: from a credit quality standpoint has been in office commercial
Speaker 1: real estates. That's something that that PNC had talked about
Speaker 1: and gave some new disclosures in a new extra emphasis
Speaker 1: in their slide deck in the first quarter. We'd expect
Speaker 1: more of that, just focusing. The market's been focused on it,
Speaker 1: so we'd expect the banks to talk more about it
Speaker 1: and what they expect from performance going forward, how much
Speaker 1: is going to be needed to be refinance over the
Speaker 1: next couple of years. Those sort of statistics will will
Speaker 1: help alleviate or at least inform the market in terms
Speaker 1: of what the exposure is. Herman, you mentioned the P
Speaker 1: and C earning specifically. Can you put those into a
Speaker 1: little bit of context? For US P ANDC in my
Speaker 1: view at least is a little bit more well known,
Speaker 1: a little bit more kind of protected than say your
Speaker 1: first republics, etc. That's right. What is the broader read
Speaker 1: through from the PANC earning? Sure, the stock is down today,
Speaker 1: so it just seems like that there's a lot of
Speaker 1: negativity towards the regionals despite a beat in the first
Speaker 1: quarter numbers better performance from deposits, I would say, but
Speaker 1: the guidance was a bit was a bit negative. I
Speaker 1: would say that if we do see HEPNC, like the others,
Speaker 1: show some deposits stability, that would be great but the
Speaker 1: markets focused on what's ahead and in terms of how
Speaker 1: much do you have to pay up for a deposits,
Speaker 1: So it could spell some negative revisions going forward and
Speaker 1: some net interest margin contraction for further regionals. Yeah, and
Speaker 1: if you're looking at PNC stock this morning, that's ticker
Speaker 1: symble pn seeds down more than two percent on piece boards,
Speaker 1: worsty since March twenty second. But what about when it
Speaker 1: comes to some of these other smaller banks, when you
Speaker 1: were thinking of like Western Alliance, how much concern is
Speaker 1: there still potentially lingering with these other banks and what
Speaker 1: potential problems could be around the corner? Right, I would
Speaker 1: say that overall the regional banks are are probably out
Speaker 1: of the woods from a liquidity and funding risk standpoints.
Speaker 1: There's a hand banks that we continue to monitor in
Speaker 1: terms of how how are they going to protect their
Speaker 1: at a positive base. Western Alliance comes to mind, Pack
Speaker 1: West comes to mind, and also First Republic. The banks
Speaker 1: that sort of operate on the West Coast and maybe
Speaker 1: have some exposure to tech or start up deposit taking.
Speaker 1: Those are the ones that seem to be more in
Speaker 1: the crosshairs and still have some question marks about how
Speaker 1: they're going to manage their balance sheet going forward and
Speaker 1: how drastically their margins are going to suffer. So PNC
Speaker 1: is already seeing a bit of margin pressure, but some
Speaker 1: of these banks that are in the cross there's probably
Speaker 1: have more, and there's some unanswered questions as to how
Speaker 1: much and what they're going to do in terms of
Speaker 1: shoring up their balance sheet. Well, herman, now let's talk
Speaker 1: about kind of what some of these regional banks are
Speaker 1: exposed to. Signature Bank, for example, very famously supposed to crypto,
Speaker 1: and Barney Frank, the creator of the Frank Dodd Act
Speaker 1: or one sponsors of it, at least very vocal on
Speaker 1: the board Seaure Banging, very vocal saying, look, we were
Speaker 1: targeted by regulators because of that crypto exposure. To what
Speaker 1: extent is that true? Yeah? The New York State regulators
Speaker 1: said that wasn't a factor and closing that bang down
Speaker 1: over that weekend after Signatures SBBs failure. We've written about it.
Speaker 1: We would say the crypto issues didn't help their cause, right,
Speaker 1: because there was already some compliance matters that they had
Speaker 1: to shore up in terms of knowing your customer and
Speaker 1: what sort of folks were operating within the framework of
Speaker 1: signatures balance sheet and the real time crypto payments network
Speaker 1: that they operated. So I would say that it didn't
Speaker 1: help matters at all. But really the crux of the
Speaker 1: issue for Signature was that they were facing a lot
Speaker 1: of deposit outflow given the concern related to what happened
Speaker 1: with SVB and some of these larger, chunkier deposits, they
Speaker 1: had the same thing and that ultimately is what created
Speaker 1: the fallout and the closure from the regulators. Something that's
Speaker 1: come up in a lot of my conversations is trying
Speaker 1: to monitor specific data points like say the Senior Loan
Speaker 1: Officer Survey, which actually won't come because this is quarterly, right,
Speaker 1: won't come until May seventh, so that is after the
Speaker 1: fed's two day meeting, which is on May second, me third.
Speaker 1: But obviously that's going to gauge bank lending in credit conditions.
Speaker 1: What do you think as far as if we're not
Speaker 1: going to get that until after the next FED meeting,
Speaker 1: what else are you watching to kind of monitor where
Speaker 1: credit conditions stand. Yeah, it's going to be it's going
Speaker 1: to be listening to the guidance from these banks that
Speaker 1: are going to report starting today and next week, next
Speaker 1: week is the bulk of the large cap regionals that report,
Speaker 1: so Wednesday Thursday are the big days you should get
Speaker 1: some really good takeaways from in terms of their appetite
Speaker 1: for lending and whiles. Fargo actually said today that they
Speaker 1: were starting to be a bit more conservative with their
Speaker 1: underwriting credit underwriting criteria. JP Morgan said on their call
Speaker 1: this morning, said it's not a credit crunch per se,
Speaker 1: but it's more of a putting the thumb on the
Speaker 1: scale and being maybe a bit more cautious, but not
Speaker 1: overly cautious. So I think those types of antidotes anecdotes
Speaker 1: will be something that will be monitoring, certainly something we're
Speaker 1: keeping an eye on. I'm just going to be a
Speaker 1: very intense next week for Herman Chan is what hits
Speaker 1: super Bowl, I think, so we are very grateful to
Speaker 1: have him around. Herman Chan senior analysts US regional banks
Speaker 1: and fintech over at Bloomberg Intelligence, walking us through exactly
Speaker 1: the ripple effects of this banking crisis turned turmoil turned hangover. Jess,
Speaker 1: you're listening to the tape cancer our live program, Bloomberg
Speaker 1: Markets weekdays at ten am Eastern on Bloomberg Radio. The
Speaker 1: tuning app, Bloomberg dot Com, and the Bloomberg Business App.
Speaker 1: You can also listen live on Amazon Alexa from our
Speaker 1: flagship New York station, Jose Say Alexa play Bloomberg eleven thirty. So,
Speaker 1: you know, it's an interesting markets day, but it feels
Speaker 1: like all the action was in the morning. But then
Speaker 1: you look at some of the other stock movers. Here,
Speaker 1: just Boeing catching our eye. It is looking at that.
Speaker 1: Take your simple BA down now about five point four
Speaker 1: percent on pay sports worst Staceince October twenty six, that
Speaker 1: data had dropped close to nine percent. So seeing a
Speaker 1: bit of pressure still there on Boeing. Yeah, certainly something
Speaker 1: to keep in mind. And look, Boeing has had its troubles,
Speaker 1: it's also had the successes, and none of that has
Speaker 1: to do with why it's moving today. To explain the story,
Speaker 1: we bring in Bloomberg's Simone Foxman, she is all over it.
Speaker 1: I've rather been covering the airline's head to toe for
Speaker 1: us on Bloomberg Television and Radio all week. Simone, let
Speaker 1: me have you walk us through what's going on with Boeing. Yeah,
Speaker 1: I seem to be an aviation reporter this week, but
Speaker 1: this is a really Boeing specific story. So there's a
Speaker 1: production issue on the rear end of its aircraft, has
Speaker 1: to do with non conforming brackets tied to the fuselage.
Speaker 1: They're non conform arming. But this doesn't seem to be
Speaker 1: a major safety issue, or else the FA would be
Speaker 1: grounding these planes. So the concern here is how long
Speaker 1: it takes to bring aircraft in from the field to
Speaker 1: kind of address these nonconformity concerns. And there's really a
Speaker 1: wide window of what it could be because earlier this year,
Speaker 1: late February, we saw a nonconformity issue with the seven
Speaker 1: eighty seven that was solved in fifteen days, but previous
Speaker 1: issues took a year to resolve. Jeffreys, for one, believes
Speaker 1: that Bowing will cut about twenty percent of its deliveries
Speaker 1: this year, and then that ties into how much airlines
Speaker 1: are affected. Southwest and United specifically have a lot of
Speaker 1: Bowing orders they're expecting to receive overall. You know, if
Speaker 1: that twenty percent cut is what we see, then we
Speaker 1: see eighty planes not delivered out of the four hundred
Speaker 1: and twenty that Boeing is expected to deliver this year.
Speaker 1: Anytime we see moves in these types of names, especially
Speaker 1: when you have Bowing, I obviously will think of its
Speaker 1: rival Airbus, and it comes to these aircraft manufacturers, I mean,
Speaker 1: there's only so many of them, right, It's right. You
Speaker 1: see a pullback like this a lot of times. When
Speaker 1: it's longer term investors that I'm speaking with, they'll use
Speaker 1: that as a buying opportunity. Do you think there's a
Speaker 1: situation here? I mean, just looking at where if you
Speaker 1: use the comp function in the terminal for the stock
Speaker 1: year to date, looking at Boeing ticker SMaL BA, it's
Speaker 1: up about six percent. But looking at its rival, when
Speaker 1: you're looking at what's happening with Airbus, this is the
Speaker 1: US ad R. It's EA d s Y it's about
Speaker 1: seventeen percents. Move well. I mean Airbus has just won
Speaker 1: the reputational game. Yeah, and it resolved some of its
Speaker 1: issues with its own buyers. You think clutter airways for one.
Speaker 1: But frankly, this is going to add to concerns that
Speaker 1: Bowing doesn't have its supply chain under control. You know
Speaker 1: that said you believe in the air travel rebound that
Speaker 1: we're seeing post pandemic, especially with China coming back online.
Speaker 1: If you think that Bowing can kind of engineer a turnaround,
Speaker 1: then perhaps this is a buying opportunity. Sure, so what
Speaker 1: are more of the nearer terms here when it comes
Speaker 1: to investors as far as kind of what is happening next? Well,
Speaker 1: I think a lot of the attention well, look Bowing Airbus,
Speaker 1: these are sort of long term plays where you want
Speaker 1: to know about the future of the market. Will they,
Speaker 1: you know, will airlines you know, continue buying the sort
Speaker 1: of narrow body that are more flexible to fly around
Speaker 1: the world. I think near term when you think about aviation, though,
Speaker 1: it's all about what happens this summer. Cret and I
Speaker 1: in particular have been talking about American Airlines Delta a
Speaker 1: lot on TV this week, and really what happens with
Speaker 1: the consumer near term? Do they see themselves as being
Speaker 1: confident and having enough money to continue flying as much
Speaker 1: as you know, Delta in fact is hanging its hat
Speaker 1: on you know, that's the near term concern when you're
Speaker 1: thinking about the trading in the next couple of days, weeks, months. Well,
Speaker 1: when we talk about just some of the broader moves
Speaker 1: in the space, aerospace and defense specifically, I'm obsessed with
Speaker 1: airlines I think they're very cool. But we're talking about Bowing.
Speaker 1: But another stock with moving off these spirit aerosystems, that
Speaker 1: makes that faulty part spr I believe down far far more.
Speaker 1: Someone talk to us a little bit about that stock. Yeah.
Speaker 1: I mean, I think if you get find yourself in
Speaker 1: a situation where you have made a faulty part and
Speaker 1: that's very that you're very reliant on that you're that
Speaker 1: that kind of complicates the relationship with you know, the buyer. UM.
Speaker 1: But you know, I think for all these stocks, and
Speaker 1: that's one that you know, this part specifically very important
Speaker 1: UM for that company. But UM, you know, obviously that's
Speaker 1: a reputational damage as well. I think the idea from
Speaker 1: from a Boeing perspective is certainly that you can move
Speaker 1: past this a little bit easier, they can find another supplier,
Speaker 1: they can potentially um that it's not as much of
Speaker 1: a hit to their business model. UM. But certainly if
Speaker 1: this is a part that someone's relying on you for
Speaker 1: you on you on UM, then that's more problematic. I
Speaker 1: think you were talking about obviously the airliners. So we
Speaker 1: did hear from Delta early this week and obviously they
Speaker 1: still saw strong demand for the second quarter, so you
Speaker 1: would think that obviously could be a key gauge for
Speaker 1: the consumer. But then on the other side of that,
Speaker 1: we did hear from American Airlines and unfortunately it profits
Speaker 1: forecast was disappointing. Where do you see things kind of
Speaker 1: headed when we're thinking more geared toward these airliners as
Speaker 1: far as obviously as things continue to reopen from the
Speaker 1: pandemic and people are traveling, but inflation is still a
Speaker 1: big key issue right when it comes to those prices, right,
Speaker 1: I mean, the airline play at this moment is all
Speaker 1: about deleveraging, pulling down the amount of debt you have
Speaker 1: so that in the long term you can pay lower
Speaker 1: interest rates. Particularly we're an interest rate rising environment that's
Speaker 1: going to last for a little while. But you see
Speaker 1: things on their bound that they're going to have to
Speaker 1: work against, like higher labor costs. That was something that
Speaker 1: was flagged both in higher non oil costs, was flagged
Speaker 1: in Delta yesterday American Airlines. We were looking at higher
Speaker 1: non oil costs, United saying, and it's higher labor costs
Speaker 1: last month are specifically going to lead to the reason
Speaker 1: that it may report a loss though that's a problem
Speaker 1: for the airlines, and then you know, play that against
Speaker 1: the consumer that I was mentioning earlier. Is the consumer
Speaker 1: enough to offset some of the weakness if prices continue
Speaker 1: to rise? Yeah, Simone Foxman covering everything from the consumer
Speaker 1: to airlines, to Boeing to engineering. I think somewhere thrown
Speaker 1: in there. We thank you. You're listening to the Team
Speaker 1: cancer Line program Bloomberg Markets weekdays at ten am Eastering
Speaker 1: on Bloomberg dot com, the I Heard Radio app and
Speaker 1: the Bloomberg Business App. We're listening on demand wherever you
Speaker 1: get your podcast. Jess, We're going to kind of go
Speaker 1: full circle here because we started off this program talking
Speaker 1: about banking stocks. We started talking about what the read
Speaker 1: through is into the economy. And look, we're looking at
Speaker 1: SB five hundreds down about six tenths of one percent
Speaker 1: in the green. Though, is those financials and obviously the
Speaker 1: key question is still being deposit flights, paying up for funding,
Speaker 1: looking at tightening financial conditions. But so far, when we're
Speaker 1: looking at especially these bigger banks, it looks like things
Speaker 1: have been holding up a lot better than what people
Speaker 1: were expecting. Obviously for the first quarter. Yeah, and remember
Speaker 1: one of the big concerns here is to what extent
Speaker 1: do we see that credit crunch? Jamie Diamond came out
Speaker 1: and said, look, we might not be seeing that credit.
Speaker 1: It would be a credit crunch necessarily tightening lending standards.
Speaker 1: Sure does that even read through into the consumer? We
Speaker 1: still don't know. So a lot of the panic perhaps
Speaker 1: a little overdone there. Let's get some true expertise here.
Speaker 1: Hugh van Stinas joins us from Oliver our Wyman. He's
Speaker 1: a vice chair and partner, but he's also spent tons
Speaker 1: and tons of time really digging into the banks. He
Speaker 1: was a senior advisor from Mark Carney over at the
Speaker 1: Bank of England. He's worked over at UBS as well. Hugh,
Speaker 1: A pleasure to have you on the show as always.
Speaker 1: Yesterday you came on to Blomber Television and talked about
Speaker 1: just kind of what the equivalent rate hike would be
Speaker 1: to accumulate all of the bank stress. I think you
Speaker 1: said anywhere from one to one hundred and fifty basis
Speaker 1: excuse me, a one hundred to one hundred fifty basis
Speaker 1: points excuse me, worth of a raid heights. That's how
Speaker 1: much the financial stress is showing. What is your takeaway
Speaker 1: from the bank earnings we got this morning, we'll look
Speaker 1: pretty Thanks for having me back on a a terrific
Speaker 1: panel with Tom earlier. Look, I think it's one of
Speaker 1: the early signals. So I mean, first, as Gesture said,
Speaker 1: I think that they're the super legal banks is pulling away.
Speaker 1: They seem at least my hypothesis is that they're benefiting
Speaker 1: from not only not having to pay up as much
Speaker 1: for deposits. I mean, the deposit beaters came through a
Speaker 1: little bit better today, but also the deposits they're benefiting
Speaker 1: from sort of shifted deposits from some of the MidCap banks.
Speaker 1: And obviously the key question has just said it like
Speaker 1: how long this continues. I still fear that there will
Speaker 1: continue to be a bleed from the MidCat banks because
Speaker 1: the opportunities switched from a couple of basis points to
Speaker 1: four point eight percent, and the money market fund, as
Speaker 1: you heard with Black Proper to day, is just so appealing.
Speaker 1: But I think that that means that for the larger banks,
Speaker 1: I think that they're in a much more stable position.
Speaker 1: But obviously, just looking around the corner, all eyes on credit,
Speaker 1: all eyes on the stickiness of that funding structure, you,
Speaker 1: I know you were also tuning in to this great
Speaker 1: panel that Tom Keene was hosting. What was your sort
Speaker 1: of big takeaway from what you had heard so far
Speaker 1: on that? Well, look, it's such a rich panel. I
Speaker 1: don't want to There are a lot of good points,
Speaker 1: but I mean, first, you know, I think there's two
Speaker 1: things here. One is, you know, what does this mean
Speaker 1: for the FED call to these tightly the financial conditions
Speaker 1: really lean against them? Or have we seen the final
Speaker 1: rate hike? Or is there is there any one more
Speaker 1: to come? Or they carry on batting for more? And
Speaker 1: I think that's that that is the big tough call.
Speaker 1: And you know, yesterday Christie and I were chatting about,
Speaker 1: you know, the parallel with Volca where after he had
Speaker 1: the largest bank failure in history at at that time,
Speaker 1: at eighty four, you know they did, they paused, They
Speaker 1: then put up rates a bit more. Within six months
Speaker 1: they were cutting rates. And I think that that rate
Speaker 1: that call, I think is really important. I think the
Speaker 1: second thing came out as Muhammad was saying, was what
Speaker 1: this means for the kind of reshaping of the financial infrastructure.
Speaker 1: You know, how will the system deal with less liquidity
Speaker 1: with higher rates, with quite frankly, a very uncomfortable shape
Speaker 1: of the yieldker for a bank to enjoy earnings. And
Speaker 1: I think that reshaping is something which we've only just
Speaker 1: started seeing today in the numbers. But I think is
Speaker 1: that's the real tension that as I engage with banks,
Speaker 1: it's that focus about how sticky is this liquidity and
Speaker 1: how they're going to adjust. And then the third thing,
Speaker 1: which the thing which didn't come out of the panel
Speaker 1: at least so far, and obviously it was such a
Speaker 1: rich panel. I don't want to pick on them for
Speaker 1: not mentioning it, but is what does this mean for
Speaker 1: the kind of liquidity schemes the central banks offer? You know,
Speaker 1: Christie and I were chatting about how the feds overnight
Speaker 1: repo facility is de facto subsidizing money market funds. I mean,
Speaker 1: forty percent of all money market funds are now being
Speaker 1: parked at the FED overnight, giving them a huge advantage
Speaker 1: over the banks. And I think that's one area where
Speaker 1: I think it would be prudent for the maybe less
Speaker 1: the monetary policy guys, but the financial plumbers at the
Speaker 1: FED to really reassess. I love that you brought up
Speaker 1: the repo and yes, folks, I do chat and nerd
Speaker 1: out with Hugh and see us on the repo facility
Speaker 1: over at the Fellow Reserve. That's what we do in
Speaker 1: our spare time. Hugh talk to us a little bit
Speaker 1: about kind of the comments that Jamie Diamond made this morning. Again,
Speaker 1: I'm going to kind of harp on what he says,
Speaker 1: because so much of the market hangs on his every word.
Speaker 1: He specifically said that when you're looking at deposits, we
Speaker 1: of course saw this major inflow into the deposits when
Speaker 1: you look at the larger banks. But he said, look,
Speaker 1: this is not going to last. This is going to
Speaker 1: kind of you're going to end up seeing deposit outflows
Speaker 1: by the end of the year. Where does that money go?
Speaker 1: Does it go back into the regional banks, does that
Speaker 1: you start to see some sort of re emergence of
Speaker 1: confidence in that sector of the economy. Or does it
Speaker 1: go into the money markets and then straight into the
Speaker 1: repo facility like you just mentioned. Where does that money go?
Speaker 1: Oh well, I think it's a great question. I think
Speaker 1: I look up with humility. I don't think there's an
Speaker 1: easy answer this. So look, I think first the continued
Speaker 1: bleed from deposits into money market funds. I think it's
Speaker 1: highly lightly and obviously heard Larry pick Up, think pick
Speaker 1: up on that today as well. If you take it
Speaker 1: the banks have lost nine hundred billion from the peak
Speaker 1: and the deposit roughly half of that loss was in March,
Speaker 1: and that the money market funds took in two thirds
Speaker 1: of what they lost, so that that probably is still
Speaker 1: the dominant trend. And the difference between two basis points
Speaker 1: and four point eight is so get big. It will
Speaker 1: tempt some companies more for yield pick up because they're
Speaker 1: panicking about what's in the system. And I think that's
Speaker 1: consistent with what you know Jamie was saying on his
Speaker 1: call today. I think in terms of the MidCap banks,
Speaker 1: I think it's a tough call because I think it
Speaker 1: comes down to, you know, how they respond. Will there
Speaker 1: be you know, mergers, will there be the stress test
Speaker 1: that the Dinant administrations proposing help, How will the FED
Speaker 1: facilities ease? And I think there's a complex run there,
Speaker 1: but I think it's going to you know, whenever you
Speaker 1: have a shock like this, it typically takes quite some
Speaker 1: time to work through. So I think the banks, treasurers
Speaker 1: and CFOs are going to be planning that this is
Speaker 1: easy come, easygo, and therefore they will be more cautious
Speaker 1: about giving it granting loans. And that's why, at a minimum,
Speaker 1: I think as we go into the full we have
Speaker 1: a credit squeeze. And the key call is it is
Speaker 1: that is it a really big squeeze or is it
Speaker 1: a crunch? Yeah, Hugh Off the retail sales data this morning,
Speaker 1: we were looking at a two year yield that has
Speaker 1: crossed significantly above four percent. We're looking at four about
Speaker 1: four eleven, we'll call it on the two year ye old,
Speaker 1: thet front end of the curve. One of the arguments
Speaker 1: you made in your peace in the Economists, and I
Speaker 1: want to say in the Financial Times as well, was
Speaker 1: simply that there needs to be more stress tests that
Speaker 1: take interest rate shock into account, and even that might
Speaker 1: not be enough. Jimmie Diamond, again we're going to quote him,
Speaker 1: said there might be a scenario where the two year
Speaker 1: old could reach his high six percent, that higher rates
Speaker 1: for longer could keep yields along treasury curve significantly higher
Speaker 1: than what we're seeing right now. Are the banks ready
Speaker 1: for that kind of move to the upside? I think so.
Speaker 1: I think so first, I think it depends which banks,
Speaker 1: and I think what you're seeing here is that the
Speaker 1: larger of super league banks have you know, might be
Speaker 1: bleeding some deposits because uh, you know, corporate treasurers, you know,
Speaker 1: individuals are trying to just get chasing a bit of
Speaker 1: yield quite you know, quite rightly. And I think what
Speaker 1: was interesting to me is that that yield chasing really
Speaker 1: accelerated when FED funds had about four percent lost ball.
Speaker 1: And so if we do head towards six critie, then
Speaker 1: I'm sure that would accelerate in you know, people looking
Speaker 1: for a better alternative. But of course, you know, now
Speaker 1: that the banks have had this big shock to the system,
Speaker 1: they will be redoing their models. They will be think
Speaker 1: even before any regulator comes to their door, they're going
Speaker 1: to be rethinking their own internal stresses, and quite frankly,
Speaker 1: many of them have been doing that in the last
Speaker 1: two to three weeks. So I think already that's why
Speaker 1: there's going to be less lending. I think the really
Speaker 1: interesting question, which you should you know, which I'm sure
Speaker 1: you're you you've picked up already, but with other guests
Speaker 1: will be you know, will the private credit market in
Speaker 1: fill some of the gaps where the mid market banks
Speaker 1: aren't going to be lending, and I think at particularly
Speaker 1: around commercial real estate, there's gonna be some really interesting opportunities,
Speaker 1: you know, from this dislocation. I think some of the
Speaker 1: private market players will also be able to pick up opportunities.
Speaker 1: But I do think for the banks that they will
Speaker 1: be plenty more cautious going and obviously we'll need to
Speaker 1: stress themselves for a range of painful scenarios. Hugh. And
Speaker 1: as you were just talking about mentioning commercial real estate,
Speaker 1: that comes up in so many of my conversations as oh,
Speaker 1: this could potentially be the next shoe to drop. What
Speaker 1: are you watching regards to that? And also even beyond
Speaker 1: that and other corners of the system that you feel
Speaker 1: like are showing some signs of potential weakness at this point. Look, Jess,
Speaker 1: it's a it's a great question, and like you, a
Speaker 1: lot of my conversations around trying to segment this market.
Speaker 1: It's a huge asset class and it will be foolish
Speaker 1: for us to say it's all going to be impacted
Speaker 1: if you slice and dice it. I mean, I'm coming
Speaker 1: across asset managers and private credit managers and privacty firms
Speaker 1: who are really interested in refinancing or taking advantage of
Speaker 1: some dislocate. But you know, there are two buts. I mean,
Speaker 1: one is the cost of capital has significantly increased and
Speaker 1: the terms of leverage may have deteriorated, so that actual,
Speaker 1: you know, the clearing value can be impacted. But secondly,
Speaker 1: I think what we're all trying to I mean, effectively
Speaker 1: from sly beyond ward, we're all trying to sift for
Speaker 1: is where are the some carry trades which have gone wrong?
Speaker 1: Or where are there some carried trades with weak hands?
Speaker 1: And I think particularly some of the office parts of
Speaker 1: CRI are an area which I'm sure U jess and
Speaker 1: we are having conversations about where are the weaknesses? Has
Speaker 1: that vary by city by location, but it's but that's
Speaker 1: that's one of the hot potatoes, and obviously snarias around
Speaker 1: some of them. There are more recently some of the
Speaker 1: vintages of private equity deals as well where they need
Speaker 1: to be some refinancing. But as ever, you need to
Speaker 1: sift for the week hands and the weak trades rather
Speaker 1: than think about the whole market. So the conversation about
Speaker 1: commercial real estate specifically. You know, it's one that several
Speaker 1: people have brought up. We had the deputy chief econists
Speaker 1: over at Kushment or way Field, a massive real estate
Speaker 1: firm here in New York and of who has of
Speaker 1: course a presence across the country as well. And look,
Speaker 1: she said, yes, the commercial real estate piece of the
Speaker 1: equation could come under pressure, but it already kind of
Speaker 1: has for the last nine months. And a lot of
Speaker 1: that has to do with the extreme tightening you're seeing
Speaker 1: from the Federal Reserve. A point that Muhammad al Arian
Speaker 1: made in that panel at the IMF with our very
Speaker 1: own time team as well, that because the Federal Reserve
Speaker 1: started so late, the moves were far more dramatic. To
Speaker 1: the upside something that has already been kind of caught
Speaker 1: in the commercial real estate space. How much more pain
Speaker 1: is there really due in that part of the economy.
Speaker 1: What we'll look So I don't want to profess to
Speaker 1: be your commercial estate experts. I mean I'm thinking about
Speaker 1: it from the point view of the banks and how
Speaker 1: they think about the lending. Certainly as I engage with
Speaker 1: the larger banks's and also talk about it, some of
Speaker 1: the given the very high inflation in the area there
Speaker 1: are there's good coverage, there's you know, strong covenance. But
Speaker 1: you know the cost of capital has gone up plenty
Speaker 1: some as Mohammad said, it's the fastest increase in rates
Speaker 1: in history, and so that took a few people offside.
Speaker 1: So I think it's more looking for the weak hands
Speaker 1: and the weak properties rather than the whole market. But
Speaker 1: you know, given the shifting cost of capital, it would
Speaker 1: be amazing if there aren't going to be some areas
Speaker 1: of weakness. And you saw that as well, with some
Speaker 1: of the banks today taking slightly higher charges, not yet
Speaker 1: seeing major source of pain, but anticipating that there will be. Hugh,
Speaker 1: we've talked about commercial real estate in the cracks that
Speaker 1: are there. We were talking about this potential more deposit flight.
Speaker 1: So the big question how does this end up affecting
Speaker 1: FED policy? Look, I think this is so we've we've
Speaker 1: already seen a very sharp move down as as you saw,
Speaker 1: and obviously a little bit of retracing as Krittie just
Speaker 1: mentioned in a two year you know that that weekend
Speaker 1: around SDB where we moved you know, we moved over
Speaker 1: a point three sessions. So think there's as a huge
Speaker 1: move Um, I think this is one of these things
Speaker 1: where you know, there's no good historical parallel, but if
Speaker 1: it rhymes with anything, it rhymes mostly with the nineteen
Speaker 1: eighties where we've got a very big increasing interest rates,
Speaker 1: where the banks were the wrong way round. You know,
Speaker 1: their funding costs were very you know, super complicated with
Speaker 1: where there the eels and the assets were. And again
Speaker 1: many of the banks were squeezed in the same way
Speaker 1: and you saw runs. So look, you know, if I
Speaker 1: go back to that parallel, I'm not suggesting history repeats,
Speaker 1: but there, you know, within six months of the shock
Speaker 1: to the bank failure, which that was sort of the
Speaker 1: bank rescue. I'm sorry, you know, rates were coming down,
Speaker 1: credit was tighter. But you know, the other thing I
Speaker 1: think we learned from there is that once the really
Speaker 1: big bank had been saved, even though there was another
Speaker 1: nine hundred thirty odd regional banks who sadly did fail,
Speaker 1: over the following seven years, you still had the Roaring eighties.
Speaker 1: So I think, you know, we shouldn't be completely dooming gloom.
Speaker 1: I personally think there will be significant tightness and credit standards,
Speaker 1: there will be a credit squeeze. I think of the
Speaker 1: fall it will be quite highly to be much much tougher.
Speaker 1: But but the larger banks navigating this means we just
Speaker 1: need to make sure who's who's filling the gap that
Speaker 1: the MidCap banks are providing. I think the really interesting
Speaker 1: question here for me is is that going to be
Speaker 1: some of the private credit players or some of the
Speaker 1: other banks, or would they just be a lack of
Speaker 1: a vtibility of credit? Huvan Stina's everybody making a reference
Speaker 1: to the eighties, which if Paulsweenia Matt Miller here would
Speaker 1: make some obsture comment about like warmers or something like that.
Speaker 1: But I gotta say I love that he's talking about
Speaker 1: the eighties here, because Jess, if you remember, well, you
Speaker 1: weren't around in the year I was born, but it
Speaker 1: was around perhaps not monitoring the banks in the federal
Speaker 1: reserve at the time. It's certainly a really important piece
Speaker 1: of the equation has been that in the eighties, even
Speaker 1: though you had this extreme tightness from the federal reserves,
Speaker 1: as you just pointed out, you also had extreme spending
Speaker 1: from the fiscal side as well, think Reagan and the
Speaker 1: defense budget. Yeah, so there's there's a lot of things
Speaker 1: to consider their human Stina as the Vice churm partner
Speaker 1: over at Oliver Wyman, of course, the former senior advisor
Speaker 1: the CEO EUBS, as well as the Governor of the
Speaker 1: Bank of England, Mark Carney. We think you as always.
Speaker 1: You can check out his work over at The Economist
Speaker 1: at the Financial Times, and he's a very active Twitter
Speaker 1: feed as well, which I find it very interesting, so
Speaker 1: definitely check that out. Just as we talk about again
Speaker 1: the eighties, I wonder how much of the parallel really
Speaker 1: is there, because look, it is a completely different economy
Speaker 1: it is. It also makes me think of whenever Join
Speaker 1: tried to compare last year with everything going on with
Speaker 1: inflation to the seventies. Right, it's not Apple's apples. Yeah, yeah,
Speaker 1: a little bit of a hangover. Thanks for listening to
Speaker 1: the Bloomberg Markets podcast. You can subscribe and listen to
Speaker 1: interviews at Apple Podcasts or whatever podcast platform you prefer.
Speaker 1: I'm Matt Miller. I'm on Twitter at Matt Miller nineteen
Speaker 1: seventy three and on false Sweeney I'm on Twitter at
Speaker 1: pt Sweeney. Before the podcast, you can always catch us
Speaker 1: worldwide at Bloomberg Radio