WEBVTT - Bloomberg Surveillance TV: October 11, 2024

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<v Speaker 1>Bloomberg Audio Studios, podcasts, radio news.

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

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<v Speaker 2>with Lisa Bromwitz and Amrie Hortern. Join us each day

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<v Speaker 2>for insight from the best in markets, economics, and geopolitics

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<v Speaker 2>from our global headquarters in New York City. We are

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<v Speaker 2>live on Bloomberg Television weekday mornings from six to nine

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<v Speaker 2>anywhere else you listen, and as always on the Bloomberg

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<v Speaker 2>Terminal and the Bloomberg Business app. Oppenheimers John Stoffers, writing,

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<v Speaker 2>we expect investors to pay particular attention to the big

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<v Speaker 2>banks this season for quarterly results in any guidance that

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<v Speaker 2>could provide greater clarity into the health of the US economy,

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<v Speaker 2>what lies ahead, and how it might affect stock prices.

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<v Speaker 2>John joins us now for more. John, Good morning, Good mornings.

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<v Speaker 2>Good to see us, sir, Good to kick off the

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<v Speaker 2>morning with you. How low is the bar for these

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<v Speaker 2>banks after the guidance we got in conference seas in

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<v Speaker 2>a few weeks back.

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<v Speaker 3>You know, I think the bar is relatively low for

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<v Speaker 3>the banks. I think there's an understanding that is beginning

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<v Speaker 3>to flow through the markets that this is a period

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<v Speaker 3>of transition. I think the numbers that we saw in

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<v Speaker 3>terms of the economy from the July jobs number and

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<v Speaker 3>then the most recent jobs number, the disparity betwixt the two,

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<v Speaker 3>the inputs that are put into the economy. It's never

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<v Speaker 3>very clear when you're coming into a transition into a

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<v Speaker 3>normalization or whether you're getting into trouble.

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<v Speaker 2>G and these bank stocks can perform well with the

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<v Speaker 2>implied rate path from the Federal serve and the SEP.

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<v Speaker 3>I think I think they can, and I think that

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<v Speaker 3>banks today are more efficient than they've ever been before.

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<v Speaker 3>It doesn't mean that you can't get a disappointing quarter.

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<v Speaker 3>And I think the markets always when they come in here,

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<v Speaker 3>very often ahead of the reporting, the markets weakened somewhat.

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<v Speaker 3>Then if we get some results that are better than expected,

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<v Speaker 3>who knows what the.

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<v Speaker 4>Traders will do?

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

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<v Speaker 3>generally speaking, you know, the financials have done very well

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<v Speaker 3>this year, and a lot of that is the implication

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<v Speaker 3>that things are getting better, even as things remain quite uncertain.

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<v Speaker 5>To build on what John was getting at, there is

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<v Speaker 5>a feeling that, yes, it potentially becomes more difficult to

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<v Speaker 5>make the same kind of net interesting income as a

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<v Speaker 5>FED cuts rates. That doesn't seem to concern the markets

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<v Speaker 5>as much as the l financial issue, the potential of

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<v Speaker 5>credit deterioration among consumers that might be beginning to feel

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<v Speaker 5>the pinch of some sort of change in cycle. How

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<v Speaker 5>much do you think that's really the concern that people

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<v Speaker 5>have that could potentially shake some of the confidence.

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<v Speaker 3>I think that is one of the major concerns. But

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<v Speaker 3>it's very quite normal that you'll feel that concern at

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<v Speaker 3>a time when the I mean you consider the FED

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<v Speaker 3>is what we had eleven rate hikes, nine pauses at

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<v Speaker 3>the high level before the first cut, and then questions

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<v Speaker 3>related to inflation being stickier than may have been anticipated before.

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<v Speaker 3>But likely the hurricanes are likely to ameliorate that somewhat.

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<v Speaker 3>But overall, you know what really has amazed me is,

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<v Speaker 3>you know, forty one years in this business I've gone

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<v Speaker 3>through I remember when Walker was in his second term,

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<v Speaker 3>is when I came on. Is that when you get

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<v Speaker 3>to this kind of a point, what I've never seen

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<v Speaker 3>the consumers so sophisticated relatives to relative to other periods,

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<v Speaker 3>and a lot of that could be the dissemination of information,

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<v Speaker 3>the digitalization process of shopping, and comparison shopping.

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<v Speaker 4>I recall.

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<v Speaker 3>A pro prior visit we were speaking about consumer discretionary

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<v Speaker 3>stocks and how within the retailers you just have to

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<v Speaker 3>pick the ones that navigate this current period better than

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<v Speaker 3>other ones, whether it's whether they have greater buying power

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<v Speaker 3>than the smaller discount stores or what have you. And

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<v Speaker 3>the American consumer is remarkably resilient. The job's number is resilient.

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<v Speaker 3>Earnings have been resilient. Let's see how this third quarter

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<v Speaker 3>comes out.

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

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<v Speaker 5>spoke to yesterday from Bank for America who is talking

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<v Speaker 5>about the resilience of the consumer and how you see

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<v Speaker 5>ongoing spending in certain discretionary areas. In the past, historically

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<v Speaker 5>banks were leading indicator for the other sectors that might

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<v Speaker 5>be reporting earnings. Do you think this time around, if

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<v Speaker 5>they're better than expected when it comes to consumer performance,

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<v Speaker 5>they also will be sort of a leading indicator for

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<v Speaker 5>the rest of consumer discretion I.

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<v Speaker 6>Think they should be.

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<v Speaker 3>It's just that there are so many more inputs today

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<v Speaker 3>than we've had in the past, and a lot of

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<v Speaker 3>that has to do again with that resilience of business.

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<v Speaker 3>So when you take you look across the sectors and

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<v Speaker 3>you see what's working with consumers, and you look at

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<v Speaker 3>the businesses that come in and out of favor quarter

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<v Speaker 3>to quarter, sometimes day to day with the traders. But

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

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<v Speaker 3>a digestion of the interest rates, and there really is

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<v Speaker 3>a sense that people have more money slashing around in

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<v Speaker 3>their savings accounts in different places than many people have anticipated.

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<v Speaker 2>Fifty seven eighty of the close yesterday, your price stocket

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<v Speaker 2>still fifty nine hundred.

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<v Speaker 4>Well ins and P.

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<v Speaker 3>Yeah, John, it's still fifty nine hundred and will be

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<v Speaker 3>until the S and P closes out or above it,

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<v Speaker 3>because that's our just and that's our self on those disciplines.

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<v Speaker 2>So help me understand where you want to be in

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<v Speaker 2>the equity market With that in mind, Yeah, with.

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

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<v Speaker 3>we don't own defensives, but we overweight the cyclicals. Continue

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<v Speaker 3>to like technology, communications services, we like consumer discretionary industrials

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<v Speaker 3>and financials within cyclicals.

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

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<v Speaker 3>I think the financials fit in because eventually we think

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<v Speaker 3>that net interest margin is going to work for them

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<v Speaker 3>once you get the there's some volatility in the yield

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<v Speaker 3>curve that occurs the way things are going in a

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<v Speaker 3>transitional period. But once we settle to a more normalized

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<v Speaker 3>yield curve, I think the banks, once the consumer feels

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<v Speaker 3>more confident. We'll have to see what later on today

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<v Speaker 3>we get the uh uh, the we get the consumer

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<v Speaker 3>sentiment number that comes out later on today, and it'll

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<v Speaker 3>be interesting to see. But the consumer can be very

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<v Speaker 3>emotional on those readings. When when the university reviews, you know,

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<v Speaker 3>it does its surveys, consumers can can be pretty fickle.

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<v Speaker 3>Remember they warmed up for a while. The conference board

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<v Speaker 3>was was negative for a while, and they got warmed

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<v Speaker 3>up a little bit. University of Michigan is going back

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<v Speaker 3>and forth. Yeah, I love this.

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<v Speaker 5>If they called me or you John, they definitely would

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<v Speaker 5>get emotions. We would sort of express how we feel

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<v Speaker 5>about flation.

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<v Speaker 6>Go further out. I just want to finish with this idea.

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<v Speaker 5>Of whether if rates stay where they are long term rates,

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<v Speaker 5>We're not talking about short term rates. Do you think

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<v Speaker 5>that it favors one sector over the other. Do you

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<v Speaker 5>think that it favors the ongoing cyclical kind of rotation

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<v Speaker 5>that we've been seeing.

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<v Speaker 3>I think it does favor the cyclical rotation. And I

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<v Speaker 3>think there's a realization that's beginning to come through, but

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

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<v Speaker 3>to see the FED unless we have a crisis, an

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<v Speaker 3>unexpected crisis, We're likely not to go back to that

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<v Speaker 3>band of zero to zero point two five, but more

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<v Speaker 3>likely in an environment that'll keep the ten year treasury

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<v Speaker 3>at least near term. With all the changes that are

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<v Speaker 3>happening in terms of the reindustrialization in the United States

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<v Speaker 3>and in different countries, the process of diversification of globalization,

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<v Speaker 3>the expenses related to that, I bet you know, and

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<v Speaker 3>our arguew we'd say that the tenure will probably be

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<v Speaker 3>in a range in terms of price to yield somewhere

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<v Speaker 3>between three point four of.

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<v Speaker 4>Five for quite a while.

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<v Speaker 2>Okay, somewhere around that right now, John, I appreciate it,

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

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<v Speaker 2>let's build on the conversation we were just having with Mike

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<v Speaker 2>McKee and welcome to the program. CPI jobless claims out yesterday,

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<v Speaker 2>PPI this morning. I think we're all having some difficulty

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<v Speaker 2>understanding what to ignore and what to pay attention to

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<v Speaker 2>help us out.

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<v Speaker 7>I think that's been made even worse by the fact

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<v Speaker 7>that we got a higher than expected initial claims number,

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<v Speaker 7>clearly because of the disruption of these natural disasters that

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<v Speaker 7>are so devastating to small areas of the economy and

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<v Speaker 7>can have a big impact on the data. I think,

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<v Speaker 7>you know, it's really the payroll report, the CPI report

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<v Speaker 7>within that we are seeing just this continued stubbornness in

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

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<v Speaker 7>certainly for the Fed to continue to ease rates in

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<v Speaker 7>November in December, but there's a stubbornness to the services

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

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

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<v Speaker 7>Goods prices are back in deflation. We know that the

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<v Speaker 7>inflation I think trouble is really still in the services piece.

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<v Speaker 7>It's maybe troubles too strong. It's like a mild headache

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<v Speaker 7>that still isn't going away.

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<v Speaker 2>Well, Laura, how big a gap is there between the

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<v Speaker 2>way you see it and the way the Federal Reserve

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<v Speaker 2>seems to see it? Because we heard from William's Skills

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<v Speaker 2>we embark in and they seem to cement this idea

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<v Speaker 2>that for the Federal Reserve, at least they're comfortable with

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<v Speaker 2>this disinflationary trend still holding.

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<v Speaker 7>I think maybe I'm a little bit more concerned about inflation,

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<v Speaker 7>and I'm concerned about it in this short term simply

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<v Speaker 7>because I know we are going to have some data

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<v Speaker 7>disruptions that are going to maybe you know, create the

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<v Speaker 7>noise in the food data, create the noise in some

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

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<v Speaker 7>But I'm also concerned about it in the medium term,

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<v Speaker 7>looking ahead to some of the factors that I think

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<v Speaker 7>in the middle of next year are going to give

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<v Speaker 7>us stubbornly higher rent inflation.

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<v Speaker 6>You know, I don't know.

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<v Speaker 7>How far you want to look out, but when you

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<v Speaker 7>put it all together, for the Fed, they're having to

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<v Speaker 7>navigate their dual mandate in an active way that they

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<v Speaker 7>haven't had to in decades. We were either only worried

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<v Speaker 7>about growth, or we were only worried about inflation. Today,

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

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<v Speaker 7>and I think it's going to make us all really

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<v Speaker 7>zero in on data and be more uncertain about the

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<v Speaker 7>fence trajectory.

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<v Speaker 5>Laura. There was a signal in yesterday's trading action that

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<v Speaker 5>I thought was really important, which is that the bond

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<v Speaker 5>market was looking at the prospect of a FED cutting

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<v Speaker 5>rates even with inflation rates that were messy, that did

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<v Speaker 5>come in hotter than expected, with still some uncertainty about

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<v Speaker 5>that path of disinflation.

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<v Speaker 6>Laura.

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<v Speaker 5>From that perspective, do you think basin FED comments, there

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<v Speaker 5>are sort of a tacit understanding in the market and

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<v Speaker 5>on the Fed, but they will tolerate a higher inflation

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<v Speaker 5>rate going forward in order to keep any kind of

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<v Speaker 5>weakness from getting a hold of this labor market.

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<v Speaker 7>You know, I think they have to because you know,

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<v Speaker 7>inflation was so far below target for years leading into

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<v Speaker 7>the pandemic. I think it's natural given their average inflation

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<v Speaker 7>target over time, it gives them the latitude, and I

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<v Speaker 7>think that's on purpose to you know, accommodate, make policy

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

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<v Speaker 7>it's not a bad migraine, like nine percent inflation back

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<v Speaker 7>in twenty twenty two. It's a chronic headache, but I

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<v Speaker 7>think it still gives them the room to maneuver. And

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<v Speaker 7>if they go one hundred basis points in total this year,

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<v Speaker 7>that still leaves rates in restrictive territory. I just think

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<v Speaker 7>they pause at the beginning of next year and reassess

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<v Speaker 7>where things are going, because I don't think inflation's going

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<v Speaker 7>to follow the knee path like it did before the pandemic.

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<v Speaker 6>When you put this all.

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<v Speaker 5>Together, does it make the bond market look more or

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<v Speaker 5>less accurate on the long end in terms of reflecting

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<v Speaker 5>that there is more flexibility when it comes to inflation

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<v Speaker 5>rates and the fees response mechanism.

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<v Speaker 7>I think it makes the bond market look way more correct.

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<v Speaker 7>For the first time in a long time. The market

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<v Speaker 7>has been trying to push in too much policy accommodation

0:12:09.679 --> 0:12:12.320
<v Speaker 7>into the forward curve. They've been making that mistake for

0:12:12.400 --> 0:12:16.040
<v Speaker 7>two years now, so this isn't new. I think what

0:12:16.160 --> 0:12:19.560
<v Speaker 7>it changes is that, you know, thinking about FED rate cuts,

0:12:19.960 --> 0:12:22.360
<v Speaker 7>we're kind of trained to think, oh, the whole interest

0:12:22.440 --> 0:12:25.439
<v Speaker 7>rate complex is going to continue to fall. In reality,

0:12:25.720 --> 0:12:28.240
<v Speaker 7>the tenure falls a lot before the Fed cuts rates,

0:12:28.520 --> 0:12:30.960
<v Speaker 7>but what it does after the Fed starts cutting rates

0:12:31.040 --> 0:12:33.440
<v Speaker 7>really depends on the trajectory of the economy. If the

0:12:33.480 --> 0:12:37.520
<v Speaker 7>economy doesn't go into recession, the tenure kind of floats

0:12:37.559 --> 0:12:39.600
<v Speaker 7>back up again. I think that's what we're seeing, and

0:12:39.679 --> 0:12:43.760
<v Speaker 7>it's a reflection of a solid economic base and only

0:12:43.800 --> 0:12:45.720
<v Speaker 7>an incremental slowdown in growth.

0:12:45.800 --> 0:12:47.400
<v Speaker 6>Bon Yos was in the climb this morning.

0:12:47.440 --> 0:12:49.760
<v Speaker 2>We're up by three percent, three basis points just to

0:12:49.760 --> 0:12:51.959
<v Speaker 2>account four point one percent just moments ago.

0:12:52.679 --> 0:12:53.800
<v Speaker 6>Range there of FS.

0:12:53.600 --> 0:13:07.320
<v Speaker 2>Investments got General Castley standing by over RBC, joined by

0:13:07.360 --> 0:13:08.240
<v Speaker 2>start with JP Morgan.

0:13:08.240 --> 0:13:09.440
<v Speaker 6>What's your first take this morning?

0:13:10.440 --> 0:13:13.880
<v Speaker 1>The first tape, John, is that the revenues are better

0:13:13.920 --> 0:13:17.400
<v Speaker 1>than expected, as you pointed out, which is positive.

0:13:17.679 --> 0:13:19.800
<v Speaker 4>The provision was a tad hire.

0:13:20.080 --> 0:13:24.760
<v Speaker 1>But what's fascinating about the numbers is that the capital

0:13:24.880 --> 0:13:26.679
<v Speaker 1>levels for JP Morgan.

0:13:26.559 --> 0:13:27.840
<v Speaker 4>Are extraordinarily high.

0:13:27.840 --> 0:13:32.199
<v Speaker 1>They have over fifteen percent CET one ratio common equity

0:13:32.240 --> 0:13:34.840
<v Speaker 1>to your one ratio, as you guys have been discussing,

0:13:34.880 --> 0:13:38.680
<v Speaker 1>their return on tangible common equity very high. So overall,

0:13:38.880 --> 0:13:40.880
<v Speaker 1>it looks like on the very first quick take, the

0:13:41.000 --> 0:13:44.520
<v Speaker 1>numbers are slightly better than expected and again, it will

0:13:44.600 --> 0:13:47.040
<v Speaker 1>be more on the Q and a period during the

0:13:47.120 --> 0:13:50.000
<v Speaker 1>earnings call that we'll find out more about that twenty

0:13:50.040 --> 0:13:50.880
<v Speaker 1>twenty five number.

0:13:51.160 --> 0:13:53.600
<v Speaker 5>Jorg, can you put this in a perspective in terms

0:13:53.679 --> 0:13:56.840
<v Speaker 5>of what this bank JP Morgan has done in the

0:13:56.880 --> 0:14:00.400
<v Speaker 5>past going into periods of potential turmoil or lack of clarity?

0:14:00.559 --> 0:14:03.400
<v Speaker 5>In other words, is this a provision build something that

0:14:03.559 --> 0:14:06.360
<v Speaker 5>is normal, something that is analogous to things that we've

0:14:06.400 --> 0:14:09.080
<v Speaker 5>seen in previous years, or is this unusually large?

0:14:10.520 --> 0:14:13.640
<v Speaker 1>Actually it was slightly higher than our expectations. We were

0:14:13.679 --> 0:14:16.000
<v Speaker 1>at two point nine. It came in to looked like

0:14:16.040 --> 0:14:19.880
<v Speaker 1>at three point one. And so it is a very

0:14:19.880 --> 0:14:23.520
<v Speaker 1>interesting point though that you're making, because what we anticipate

0:14:23.640 --> 0:14:27.480
<v Speaker 1>is credit costs are normalizing. We have to remember that

0:14:27.680 --> 0:14:30.720
<v Speaker 1>following the pandemic for a couple of years for JP

0:14:30.840 --> 0:14:34.680
<v Speaker 1>Morgan and his peers, the credit costs were extraordinarily low,

0:14:34.920 --> 0:14:37.120
<v Speaker 1>and when you look at the level of credit costs

0:14:37.120 --> 0:14:41.560
<v Speaker 1>today relative to other time periods, they're very manageable.

0:14:41.800 --> 0:14:43.320
<v Speaker 4>And the important.

0:14:42.880 --> 0:14:45.680
<v Speaker 1>Part is is what you expect for the economy in

0:14:45.760 --> 0:14:49.720
<v Speaker 1>twenty twenty five, and so if you're anticipating a hard landing,

0:14:50.000 --> 0:14:52.000
<v Speaker 1>then this could be the start of something. But we're

0:14:52.040 --> 0:14:54.720
<v Speaker 1>in the soft landing camp that you saw the employment

0:14:54.760 --> 0:14:57.960
<v Speaker 1>picture numbers a couple of over a week ago, very

0:14:57.960 --> 0:15:00.520
<v Speaker 1>strong employment still, so we're in the you that the

0:15:00.560 --> 0:15:04.440
<v Speaker 1>credit picture for a JP Morgan is quite healthy.

0:15:04.840 --> 0:15:06.480
<v Speaker 5>I do wonder if this is a luxury if being

0:15:06.480 --> 0:15:08.280
<v Speaker 5>in the world's biggest bank, or if this is something

0:15:08.280 --> 0:15:10.800
<v Speaker 5>that we're going to see repeated at other banks based

0:15:10.800 --> 0:15:13.120
<v Speaker 5>on Wells Fargo is so actually provisions come in lighter

0:15:13.160 --> 0:15:13.880
<v Speaker 5>than expected.

0:15:14.160 --> 0:15:15.360
<v Speaker 6>How much do you attribute this.

0:15:15.280 --> 0:15:17.840
<v Speaker 5>To their not being able to lend maybe on the

0:15:17.880 --> 0:15:20.200
<v Speaker 5>risk of your side, or not being able to extend

0:15:20.240 --> 0:15:22.360
<v Speaker 5>as much the way the JP Morgan does. And how

0:15:22.440 --> 0:15:25.320
<v Speaker 5>much do you think this just highlights the JP Morgan

0:15:25.400 --> 0:15:27.480
<v Speaker 5>is sort of doing its own thing and sort of

0:15:27.480 --> 0:15:30.880
<v Speaker 5>preparing for something that maybe other banks aren't seeing.

0:15:32.360 --> 0:15:35.680
<v Speaker 1>It's interesting because Wells, as you point out, they've got

0:15:35.720 --> 0:15:39.160
<v Speaker 1>the acid cap that's still in place, and it certainly

0:15:39.200 --> 0:15:42.280
<v Speaker 1>does make it more difficult for them to grow their

0:15:42.720 --> 0:15:45.960
<v Speaker 1>loan portfolio, and therefore you could argue that maybe their

0:15:45.960 --> 0:15:47.920
<v Speaker 1>portfolios could be in better shape.

0:15:48.000 --> 0:15:49.880
<v Speaker 4>But I had to point out a couple of things.

0:15:49.880 --> 0:15:52.760
<v Speaker 1>First, commercial real estate, when you take a look at

0:15:53.080 --> 0:15:56.720
<v Speaker 1>the deterioration we've seen has been very manageable for Wells Fargo.

0:15:57.040 --> 0:15:59.920
<v Speaker 4>And the other important point is that the banks have

0:16:00.080 --> 0:16:00.760
<v Speaker 4>in d risks.

0:16:00.920 --> 0:16:03.920
<v Speaker 1>Remember they go through the stress test every year and

0:16:04.120 --> 0:16:05.600
<v Speaker 1>the regulators are very tire.

0:16:06.040 --> 0:16:07.960
<v Speaker 4>So the industry today.

0:16:07.680 --> 0:16:11.280
<v Speaker 1>Versus two thousand and six or or nineteen eighty nine

0:16:11.400 --> 0:16:13.880
<v Speaker 1>or two thousand, any of the periods where we went

0:16:13.920 --> 0:16:16.920
<v Speaker 1>into hard landings, the industry today just doesn't have the

0:16:17.040 --> 0:16:18.240
<v Speaker 1>risk that it had.

0:16:18.040 --> 0:16:19.040
<v Speaker 4>In those past periods.

0:16:19.040 --> 0:16:21.440
<v Speaker 1>Now, don't get me wrong, we'll see some credit problems,

0:16:21.480 --> 0:16:24.000
<v Speaker 1>but they're going to be very manageable this cycle, we think,

0:16:24.200 --> 0:16:26.440
<v Speaker 1>because we don't see the hard landing over the next

0:16:26.480 --> 0:16:28.600
<v Speaker 1>twelve months. But all the banks, I think you're going

0:16:28.600 --> 0:16:30.560
<v Speaker 1>to see these their We're going to have good credit

0:16:30.680 --> 0:16:33.520
<v Speaker 1>numbers even though they're starting to normalize. But overall we

0:16:33.560 --> 0:16:36.360
<v Speaker 1>don't see any mass deterioration in credit.

0:16:36.600 --> 0:16:38.920
<v Speaker 2>It's a big thing to watch this quarter. Jared, appreciate

0:16:38.960 --> 0:16:41.320
<v Speaker 2>your time as always, Sir, Jared Cassidy. There of RBC

0:16:41.400 --> 0:16:43.000
<v Speaker 2>alongside Bloombergs not only bast Section.

0:16:43.560 --> 0:16:44.200
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0:17:00.800 --> 0:17:02.120
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0:17:06.160 --> 0:17:06.600
<v Speaker 6>Mm hmm