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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 2: with Lisa Bromwitz and Amrie Hortern. Join us each day

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Speaker 2: for insight from the best in markets, economics, and geopolitics

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Speaker 2: from our global headquarters in New York City. We are

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Speaker 2: live on Bloomberg Television weekday mornings from six to nine

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Speaker 2: am Eastern. Subscribe to the podcast on Apple, Spotify or

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Speaker 2: anywhere else you listen, and as always on the Bloomberg

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Speaker 2: Terminal and the Bloomberg Business app. Oppenheimers John Stoffers, writing,

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Speaker 2: we expect investors to pay particular attention to the big

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Speaker 2: banks this season for quarterly results in any guidance that

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Speaker 2: could provide greater clarity into the health of the US economy,

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Speaker 2: what lies ahead, and how it might affect stock prices.

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Speaker 2: John joins us now for more. John, Good morning, Good mornings.

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Speaker 2: Good to see us, sir, Good to kick off the

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Speaker 2: morning with you. How low is the bar for these

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Speaker 2: banks after the guidance we got in conference seas in

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Speaker 2: a few weeks back.

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Speaker 3: You know, I think the bar is relatively low for

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Speaker 3: the banks. I think there's an understanding that is beginning

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Speaker 3: to flow through the markets that this is a period

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Speaker 3: of transition. I think the numbers that we saw in

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Speaker 3: terms of the economy from the July jobs number and

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Speaker 3: then the most recent jobs number, the disparity betwixt the two,

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Speaker 3: the inputs that are put into the economy. It's never

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Speaker 3: very clear when you're coming into a transition into a

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Speaker 3: normalization or whether you're getting into trouble.

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Speaker 2: G and these bank stocks can perform well with the

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Speaker 2: implied rate path from the Federal serve and the SEP.

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Speaker 3: I think I think they can, and I think that

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Speaker 3: banks today are more efficient than they've ever been before.

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Speaker 3: It doesn't mean that you can't get a disappointing quarter.

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Speaker 3: And I think the markets always when they come in here,

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Speaker 3: very often ahead of the reporting, the markets weakened somewhat.

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Speaker 3: Then if we get some results that are better than expected,

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Speaker 3: who knows what the.

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Speaker 4: Traders will do?

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Speaker 3: Well they say, oh, it's already done, what's going? But

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Speaker 3: generally speaking, you know, the financials have done very well

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Speaker 3: this year, and a lot of that is the implication

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Speaker 3: that things are getting better, even as things remain quite uncertain.

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Speaker 5: To build on what John was getting at, there is

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Speaker 5: a feeling that, yes, it potentially becomes more difficult to

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Speaker 5: make the same kind of net interesting income as a

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Speaker 5: FED cuts rates. That doesn't seem to concern the markets

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Speaker 5: as much as the l financial issue, the potential of

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Speaker 5: credit deterioration among consumers that might be beginning to feel

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Speaker 5: the pinch of some sort of change in cycle. How

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Speaker 5: much do you think that's really the concern that people

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Speaker 5: have that could potentially shake some of the confidence.

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Speaker 3: I think that is one of the major concerns. But

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Speaker 3: it's very quite normal that you'll feel that concern at

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Speaker 3: a time when the I mean you consider the FED

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Speaker 3: is what we had eleven rate hikes, nine pauses at

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Speaker 3: the high level before the first cut, and then questions

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Speaker 3: related to inflation being stickier than may have been anticipated before.

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Speaker 3: But likely the hurricanes are likely to ameliorate that somewhat.

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Speaker 3: But overall, you know what really has amazed me is,

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Speaker 3: you know, forty one years in this business I've gone

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Speaker 3: through I remember when Walker was in his second term,

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Speaker 3: is when I came on. Is that when you get

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Speaker 3: to this kind of a point, what I've never seen

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Speaker 3: the consumers so sophisticated relatives to relative to other periods,

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Speaker 3: and a lot of that could be the dissemination of information,

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Speaker 3: the digitalization process of shopping, and comparison shopping.

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Speaker 4: I recall.

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Speaker 3: A pro prior visit we were speaking about consumer discretionary

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Speaker 3: stocks and how within the retailers you just have to

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Speaker 3: pick the ones that navigate this current period better than

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Speaker 3: other ones, whether it's whether they have greater buying power

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Speaker 3: than the smaller discount stores or what have you. And

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Speaker 3: the American consumer is remarkably resilient. The job's number is resilient.

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Speaker 3: Earnings have been resilient. Let's see how this third quarter

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Speaker 3: comes out.

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Speaker 5: You know, as you're talking, I'm thinking of someone who

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Speaker 5: spoke to yesterday from Bank for America who is talking

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Speaker 5: about the resilience of the consumer and how you see

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Speaker 5: ongoing spending in certain discretionary areas. In the past, historically

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Speaker 5: banks were leading indicator for the other sectors that might

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Speaker 5: be reporting earnings. Do you think this time around, if

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Speaker 5: they're better than expected when it comes to consumer performance,

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Speaker 5: they also will be sort of a leading indicator for

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Speaker 5: the rest of consumer discretion I.

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Speaker 6: Think they should be.

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Speaker 3: It's just that there are so many more inputs today

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Speaker 3: than we've had in the past, and a lot of

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Speaker 3: that has to do again with that resilience of business.

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Speaker 3: So when you take you look across the sectors and

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Speaker 3: you see what's working with consumers, and you look at

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Speaker 3: the businesses that come in and out of favor quarter

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Speaker 3: to quarter, sometimes day to day with the traders. But

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Speaker 3: there's a general trend that's showing. There's an amelioration process,

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Speaker 3: a digestion of the interest rates, and there really is

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Speaker 3: a sense that people have more money slashing around in

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Speaker 3: their savings accounts in different places than many people have anticipated.

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Speaker 2: Fifty seven eighty of the close yesterday, your price stocket

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Speaker 2: still fifty nine hundred.

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Speaker 4: Well ins and P.

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Speaker 3: Yeah, John, it's still fifty nine hundred and will be

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Speaker 3: until the S and P closes out or above it,

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Speaker 3: because that's our just and that's our self on those disciplines.

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Speaker 2: So help me understand where you want to be in

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Speaker 2: the equity market With that in mind, Yeah, with.

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Speaker 3: That, we wanted still cyclicals over defensives. It doesn't mean

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Speaker 3: we don't own defensives, but we overweight the cyclicals. Continue

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Speaker 3: to like technology, communications services, we like consumer discretionary industrials

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Speaker 3: and financials within cyclicals.

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Speaker 6: Let's just work through that financials way. It fits into this.

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Speaker 3: I think the financials fit in because eventually we think

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Speaker 3: that net interest margin is going to work for them

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Speaker 3: once you get the there's some volatility in the yield

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Speaker 3: curve that occurs the way things are going in a

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Speaker 3: transitional period. But once we settle to a more normalized

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Speaker 3: yield curve, I think the banks, once the consumer feels

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Speaker 3: more confident. We'll have to see what later on today

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Speaker 3: we get the uh uh, the we get the consumer

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Speaker 3: sentiment number that comes out later on today, and it'll

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Speaker 3: be interesting to see. But the consumer can be very

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Speaker 3: emotional on those readings. When when the university reviews, you know,

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Speaker 3: it does its surveys, consumers can can be pretty fickle.

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Speaker 3: Remember they warmed up for a while. The conference board

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Speaker 3: was was negative for a while, and they got warmed

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Speaker 3: up a little bit. University of Michigan is going back

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Speaker 3: and forth. Yeah, I love this.

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Speaker 5: If they called me or you John, they definitely would

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Speaker 5: get emotions. We would sort of express how we feel

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Speaker 5: about flation.

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Speaker 6: Go further out. I just want to finish with this idea.

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Speaker 5: Of whether if rates stay where they are long term rates,

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Speaker 5: We're not talking about short term rates. Do you think

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Speaker 5: that it favors one sector over the other. Do you

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Speaker 5: think that it favors the ongoing cyclical kind of rotation

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Speaker 5: that we've been seeing.

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Speaker 3: I think it does favor the cyclical rotation. And I

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Speaker 3: think there's a realization that's beginning to come through, but

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Speaker 3: it's still flowing through, is that we're not going back

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Speaker 3: to see the FED unless we have a crisis, an

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Speaker 3: unexpected crisis, We're likely not to go back to that

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Speaker 3: band of zero to zero point two five, but more

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Speaker 3: likely in an environment that'll keep the ten year treasury

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Speaker 3: at least near term. With all the changes that are

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Speaker 3: happening in terms of the reindustrialization in the United States

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Speaker 3: and in different countries, the process of diversification of globalization,

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Speaker 3: the expenses related to that, I bet you know, and

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Speaker 3: our arguew we'd say that the tenure will probably be

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Speaker 3: in a range in terms of price to yield somewhere

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Speaker 3: between three point four of.

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Speaker 4: Five for quite a while.

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Speaker 2: Okay, somewhere around that right now, John, I appreciate it,

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Speaker 2: Thank you. So that'scross cybers a Laara rang of FS investments. Lara,

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Speaker 2: let's build on the conversation we were just having with Mike

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Speaker 2: McKee and welcome to the program. CPI jobless claims out yesterday,

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Speaker 2: PPI this morning. I think we're all having some difficulty

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Speaker 2: understanding what to ignore and what to pay attention to

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Speaker 2: help us out.

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Speaker 7: I think that's been made even worse by the fact

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Speaker 7: that we got a higher than expected initial claims number,

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Speaker 7: clearly because of the disruption of these natural disasters that

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Speaker 7: are so devastating to small areas of the economy and

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Speaker 7: can have a big impact on the data. I think,

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Speaker 7: you know, it's really the payroll report, the CPI report

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Speaker 7: within that we are seeing just this continued stubbornness in

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Speaker 7: the inflation picture. I think Mike's right, we're on tracks

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Speaker 7: certainly for the Fed to continue to ease rates in

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Speaker 7: November in December, but there's a stubbornness to the services

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Speaker 7: side of this. I think it's one reason why today too,

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Speaker 7: the PPI numbers maybe didn't make as big of a splash.

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Speaker 7: Goods prices are back in deflation. We know that the

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Speaker 7: inflation I think trouble is really still in the services piece.

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Speaker 7: It's maybe troubles too strong. It's like a mild headache

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Speaker 7: that still isn't going away.

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Speaker 2: Well, Laura, how big a gap is there between the

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Speaker 2: way you see it and the way the Federal Reserve

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Speaker 2: seems to see it? Because we heard from William's Skills

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Speaker 2: we embark in and they seem to cement this idea

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Speaker 2: that for the Federal Reserve, at least they're comfortable with

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Speaker 2: this disinflationary trend still holding.

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Speaker 7: I think maybe I'm a little bit more concerned about inflation,

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Speaker 7: and I'm concerned about it in this short term simply

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Speaker 7: because I know we are going to have some data

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Speaker 7: disruptions that are going to maybe you know, create the

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Speaker 7: noise in the food data, create the noise in some

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Speaker 7: of the you know, prices that we're seeing with cars.

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Speaker 7: But I'm also concerned about it in the medium term,

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Speaker 7: looking ahead to some of the factors that I think

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Speaker 7: in the middle of next year are going to give

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Speaker 7: us stubbornly higher rent inflation.

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Speaker 6: You know, I don't know.

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Speaker 7: How far you want to look out, but when you

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Speaker 7: put it all together, for the Fed, they're having to

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Speaker 7: navigate their dual mandate in an active way that they

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Speaker 7: haven't had to in decades. We were either only worried

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Speaker 7: about growth, or we were only worried about inflation. Today,

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Speaker 7: we're kind of worried about both the jobs pictures that inflation,

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Speaker 7: and I think it's going to make us all really

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Speaker 7: zero in on data and be more uncertain about the

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Speaker 7: fence trajectory.

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Speaker 5: Laura. There was a signal in yesterday's trading action that

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Speaker 5: I thought was really important, which is that the bond

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Speaker 5: market was looking at the prospect of a FED cutting

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Speaker 5: rates even with inflation rates that were messy, that did

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Speaker 5: come in hotter than expected, with still some uncertainty about

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Speaker 5: that path of disinflation.

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Speaker 6: Laura.

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Speaker 5: From that perspective, do you think basin FED comments, there

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Speaker 5: are sort of a tacit understanding in the market and

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Speaker 5: on the Fed, but they will tolerate a higher inflation

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Speaker 5: rate going forward in order to keep any kind of

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Speaker 5: weakness from getting a hold of this labor market.

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Speaker 7: You know, I think they have to because you know,

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Speaker 7: inflation was so far below target for years leading into

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Speaker 7: the pandemic. I think it's natural given their average inflation

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Speaker 7: target over time, it gives them the latitude, and I

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Speaker 7: think that's on purpose to you know, accommodate, make policy

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Speaker 7: more accommodative, even if it's a little hot. You know,

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Speaker 7: it's not a bad migraine, like nine percent inflation back

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Speaker 7: in twenty twenty two. It's a chronic headache, but I

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Speaker 7: think it still gives them the room to maneuver. And

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Speaker 7: if they go one hundred basis points in total this year,

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Speaker 7: that still leaves rates in restrictive territory. I just think

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Speaker 7: they pause at the beginning of next year and reassess

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Speaker 7: where things are going, because I don't think inflation's going

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Speaker 7: to follow the knee path like it did before the pandemic.

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Speaker 6: When you put this all.

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Speaker 5: Together, does it make the bond market look more or

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Speaker 5: less accurate on the long end in terms of reflecting

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Speaker 5: that there is more flexibility when it comes to inflation

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Speaker 5: rates and the fees response mechanism.

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Speaker 7: I think it makes the bond market look way more correct.

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Speaker 7: For the first time in a long time. The market

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Speaker 7: has been trying to push in too much policy accommodation

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Speaker 7: into the forward curve. They've been making that mistake for

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Speaker 7: two years now, so this isn't new. I think what

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Speaker 7: it changes is that, you know, thinking about FED rate cuts,

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Speaker 7: we're kind of trained to think, oh, the whole interest

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Speaker 7: rate complex is going to continue to fall. In reality,

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Speaker 7: the tenure falls a lot before the Fed cuts rates,

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Speaker 7: but what it does after the Fed starts cutting rates

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Speaker 7: really depends on the trajectory of the economy. If the

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Speaker 7: economy doesn't go into recession, the tenure kind of floats

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Speaker 7: back up again. I think that's what we're seeing, and

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Speaker 7: it's a reflection of a solid economic base and only

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Speaker 7: an incremental slowdown in growth.

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Speaker 6: Bon Yos was in the climb this morning.

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Speaker 2: We're up by three percent, three basis points just to

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Speaker 2: account four point one percent just moments ago.

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Speaker 6: Range there of FS.

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Speaker 2: Investments got General Castley standing by over RBC, joined by

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Speaker 2: start with JP Morgan.

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Speaker 6: What's your first take this morning?

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Speaker 1: The first tape, John, is that the revenues are better

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Speaker 1: than expected, as you pointed out, which is positive.

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Speaker 4: The provision was a tad hire.

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Speaker 1: But what's fascinating about the numbers is that the capital

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Speaker 1: levels for JP Morgan.

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Speaker 4: Are extraordinarily high.

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Speaker 1: They have over fifteen percent CET one ratio common equity

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Speaker 1: to your one ratio, as you guys have been discussing,

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Speaker 1: their return on tangible common equity very high. So overall,

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Speaker 1: it looks like on the very first quick take, the

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Speaker 1: numbers are slightly better than expected and again, it will

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Speaker 1: be more on the Q and a period during the

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Speaker 1: earnings call that we'll find out more about that twenty

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Speaker 1: twenty five number.

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Speaker 5: Jorg, can you put this in a perspective in terms

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Speaker 5: of what this bank JP Morgan has done in the

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Speaker 5: past going into periods of potential turmoil or lack of clarity?

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Speaker 5: In other words, is this a provision build something that

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Speaker 5: is normal, something that is analogous to things that we've

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Speaker 5: seen in previous years, or is this unusually large?

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Speaker 1: Actually it was slightly higher than our expectations. We were

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Speaker 1: at two point nine. It came in to looked like

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Speaker 1: at three point one. And so it is a very

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Speaker 1: interesting point though that you're making, because what we anticipate

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Speaker 1: is credit costs are normalizing. We have to remember that

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Speaker 1: following the pandemic for a couple of years for JP

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Speaker 1: Morgan and his peers, the credit costs were extraordinarily low,

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Speaker 1: and when you look at the level of credit costs

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Speaker 1: today relative to other time periods, they're very manageable.

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Speaker 4: And the important.

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Speaker 1: Part is is what you expect for the economy in

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Speaker 1: twenty twenty five, and so if you're anticipating a hard landing,

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Speaker 1: then this could be the start of something. But we're

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Speaker 1: in the soft landing camp that you saw the employment

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Speaker 1: picture numbers a couple of over a week ago, very

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Speaker 1: strong employment still, so we're in the you that the

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Speaker 1: credit picture for a JP Morgan is quite healthy.

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Speaker 5: I do wonder if this is a luxury if being

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Speaker 5: in the world's biggest bank, or if this is something

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Speaker 5: that we're going to see repeated at other banks based

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Speaker 5: on Wells Fargo is so actually provisions come in lighter

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Speaker 5: than expected.

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Speaker 6: How much do you attribute this.

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Speaker 5: To their not being able to lend maybe on the

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Speaker 5: risk of your side, or not being able to extend

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Speaker 5: as much the way the JP Morgan does. And how

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Speaker 5: much do you think this just highlights the JP Morgan

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Speaker 5: is sort of doing its own thing and sort of

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Speaker 5: preparing for something that maybe other banks aren't seeing.

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Speaker 1: It's interesting because Wells, as you point out, they've got

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Speaker 1: the acid cap that's still in place, and it certainly

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Speaker 1: does make it more difficult for them to grow their

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Speaker 1: loan portfolio, and therefore you could argue that maybe their

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Speaker 1: portfolios could be in better shape.

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Speaker 4: But I had to point out a couple of things.

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Speaker 1: First, commercial real estate, when you take a look at

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Speaker 1: the deterioration we've seen has been very manageable for Wells Fargo.

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Speaker 4: And the other important point is that the banks have

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Speaker 4: in d risks.

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Speaker 1: Remember they go through the stress test every year and

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Speaker 1: the regulators are very tire.

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Speaker 4: So the industry today.

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Speaker 1: Versus two thousand and six or or nineteen eighty nine

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Speaker 1: or two thousand, any of the periods where we went

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Speaker 1: into hard landings, the industry today just doesn't have the

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Speaker 1: risk that it had.

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Speaker 4: In those past periods.

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Speaker 1: Now, don't get me wrong, we'll see some credit problems,

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Speaker 1: but they're going to be very manageable this cycle, we think,

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Speaker 1: because we don't see the hard landing over the next

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Speaker 1: twelve months. But all the banks, I think you're going

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Speaker 1: to see these their We're going to have good credit

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Speaker 1: numbers even though they're starting to normalize. But overall we

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Speaker 1: don't see any mass deterioration in credit.

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Speaker 2: It's a big thing to watch this quarter. Jared, appreciate

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Speaker 2: your time as always, Sir, Jared Cassidy. There of RBC

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Speaker 2: alongside Bloombergs not only bast Section.

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Speaker 6: Mm hmm