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I want to bring in now Kay Her, she is US CIO of Global Fixed Income, Currency and Commodities at JP Morgan Asset Management. And Kate, do you think that we got anything new from this latest FED minutes? I mean, we knew that Steven Myron was an outlier, and these minutes certainly showed that. But what do we learn in terms of the debate going on inside the Federal Reserve?
So Scarlett, first off, I'm glad to be here. Thank you for having me, Nora too. Second off, I think the short answer to your question is we didn't learn anything new. And I think one of the best ways to think about whether we've learned anything new is what the market's reaction is. And the market's really not giving
us much of a reaction. Maybe at the margin the minutes are showing us that there was some discussion about maybe we didn't need to do anything, but it was pretty clear that we only had one dissent when that was released September seventeenth, and not a lot of new information in the minutes today.
Okay, not a lot of new information. And of course, as we're looking at the trade still green across the screen right now, all across the board here when we're looking at equities in particular. But what do you think the FED should be focused on right now?
It's such a great question in Aura. As everybody knows, we've got a government shut down and we are in an absence of data. So the FED or the the Bureau of Labor Services did not release the employment data on Friday. It's unlikely unless the government reopens, it's unlikely that we're going to get CPI next week. So what are we looking at? What's the FED looking at? The next major piece of data that we think is two things.
I would say The first is corporate earnings start on October fourteenth, and I think that can be a great indication of what we're seeing from a bottom up perspective on the economy. The second one on a macro perspective that I'm sure the fedal look at is the Beige Book. So we've got the Beige Book coming out on October fifteenth.
Yeah, and I feel like the Beige Book has taken on greater importance in this period of uncertainty where we're not sure if companies are passing along higher costs to their customers or how they're dealing with it. We're kind of in an uncharted territory and every company is doing things differently based on the experience of their executives when it comes to corporate earnings. K as someone who is in the fixed income market, what do you watch for?
What do you look for?
Is it the banks that will really tell you the most about what kind of credit quality we have in this economy.
Sure, that's a great thing to think about. I think, first off, you know, we're not entirely in unprecedented territory. We have had government shutdowns before, and when we take a step back and think about the overall impact to gross domestic product, it tends not to be that material in the grand scheme of life. So from an earnings perspective, I think we're going to be looking for a couple of things. Number One, from the banks, what's the credit quality?
Look at what's the indication of the consumer. As we've seen in the macro data, we've seen some softening in employment, so is that going to flow through into reserves, into credit quality and banks? And then from the broader companies and the industrials, what are we seeing in revenue growth versus EBITDAH obviously or earnings before interest, taxes, depreciation cash flow as it were. So what are we seeing in
cash flow? I think for the most part, companies have very high margins and are they going to protect those margins or are they going to pass through costs onto consumers? And then what's that going to do to demand? I think that's what we'll be look looking at.
So as we head into earnings, using just around the corner here, what sectors in particular are giving you the most concern? Just based off of what you were saying.
I'm a bond portfolio manager, I'm paid to worry and loose sleeve, so very thing gives me concern. You never know where you might see a pocket of distress, and it's the unexpected that are the real concerns.
Well, we've seen pockets of stress in the auto sector. When you look at first brands, when you look at tricolor, what does that tell you about the state of the consumer, especially at the lower end. You know, these were two credit blow ups that took people by surprise, and a
lot of people will say, Okay, there's it syncratic. There's some maybe fraud issues that are particular to those companies, and that may be the case, but these are also sectors that are very much affected by tariffs, and they are not the only ones affected by tariffs either.
So I think there's a couple of things going on here. Scarlett and yes, on a certain level, tree color and apparently that's how it's pronounced.
Oh, thank you.
I know that's your pro tip.
I've been saying try credit.
Thanks there.
Well, I think there's a couple of things going on treac a Lore in particular, and I'm not going to talk about specific credits, but I think we should take a step back and think about what's going on in the broader economy and broader financial markets. And the reality is there's a lot of cash slashing around. And when there's so much money slashing around, that tends to be
the point late cycle where excesses happen. So that tends to be the point if you went back to the two thousands you send to see it's not uncommon to see corporate malfeasance, and it may be in these types of instances where are seeing corporate malfeasance. To answer your question with regard to the consumer, you know, we had been talking for a while about what we referred to as a CA shaped economy, and that was high income consumers with a lot of exposure to stock markets, and
we're doing very well. Lower income consumers had been hit with inflation. It actually that that seems lower income consumers he seem to have stabilized some. We're more focused and concerned about maybe more prime consumers that are going to start repaying student loans or interesting defaults and type of behaviors that we're going to see there.
So let's dig a bit deeper into the lack of data that you pointed out, just the bit to go here. So we have traders that are really bracing for a range of fed outcomes here, some of them even hedging flows, plate flavoring outlier dubbish scenarios, and others focusing more on the possibility that the Fed four goes a move at one meeting. How are you thinking about all this right now as it relates to the bond market.
Yeah, a couple of things. I think if you look at what the market is pricing in now, a twenty five basis rate to twenty five basis point rate cut is almost fully priced into the market for the October meeting, I think is it October twenty fifth, So that's almost fully priced in October twenty ninth, twenty ninth.
Sorry, I mean, how can you not know? Easy? How could anyone not? That's kidding.
So the market's pricing almost an entire rate hike in October, and then on the December tenth meeting, the market's pricing another let's call it twenty basis points something like that. But I think the other interesting aspect is that volatility in the rates market has been very low, So you get this base case that the Fed continues to ease.
And if we go back to the Fed minutes and what the Fed said on the last meeting on September seventeenth, is that they are saying that they intend to do two more cuts this year, And that's the base case. I think in periods of economic uncertainty, and the government shut down is perpetuating that uncertainty because we're not getting
regular economic data updates. Then I think that logically follows that people worry about tail risk outcomes and they look at unusual patterns in behaviors or in particular markets and worry about what they could glean from those.
So we don't have any data right now.
What we do have are the government auctions of US treasuries because we need to raise money. So that continues. Is the risk of a tail event tapering off a little bit here. For a while, people were monitoring every single auction with baited breath, and it feels like we're excelling a little bit here.
We still monitor them with baited breath, and I think, off the top of my head, today's auction at one o'clock was something like ninety one percent end users and something like a tale of zero point four or five basis points. So you're right, that's a strong auction, and I think that has settled down. I think concerns about the US government US treasury as a safe haven have abated as people have gotten more comfortable with the macro environment and the geopolitical environment.
So safe haven here, maybe abating, But what do you think is the next story here?
Next story? Gosh, I don't know. I'm not the reporter on this. We're just we're just I want to leave that to you in the market. In the market, I think it's probably earnings. I think it's going to be you've got earnings kicking off on. Look, as you all said, in the absence of any macroeconomic data being released by the federal government, I think people are going to obsess about every single earnings release and anything that they can
glean from that. Specifically in as you all know, there's been an extraordinary amount of investment in AI and looking maybe starting to look for returns on that, look at that investment cycle. So I think that's going to be important. I think to Scarlett's earlier question, always credit quality, return of capital to shareholders, increases, and dividends, looking at flows. I think that's that's that's the next story.
But yeah, where do you want to be on the yield curve?
Yeah, we still like the belly of the curve.
Everyone loves the belly of the curve.
Everyone loves the belly.
Is just fun to say that the belly of the curve, right income Geese. But yeah, I think we think that the we think that the rates are going to continue to be pretty range bound here between three seventy five and four and a quarter, and we continue to like high quality intermediate duration credit. You know, as my dear colleague Ian Steely says, spreads are tight, but yields are right. And that's that's really what the what the driver is
for investors. You know, they're not investors who are thinking about investing for pension funds, endownment funds, individual investors. They care more about what the yield is, not what the spreads are.
So, of course, as we mentioned, the belly is what everyone's talking about. But is there any sort of opportunity on the other end.
I mean, there are always opportunities, but where we would are most comfortable in the yield curve is really in the belly.
What about gold, I'm curious what you think about the relationship of gold to fixed income These days, gold continues to zoom higher, now sixty one dollars an ounce and just pierce four thousand.
Dollars this morning.
Insane.
Yeah, so, and there seems to be very little that people can identify that's going to stop this momentum. It's driven by inflows into gold ets and also central bank buying.
How does that playoff.
Of what's happening in treasuries or doesn't.
So you've just hit on a key aspect of it, Scarlett. So there are obviously two components of any market, supply and demand, and you just hit the two main components of demand and that central bank buying, and that's the ETF buying. I think the ETF wrapper is providing people with an easily accessible way to buy gold instead of buying bullion and storing at someplace. So you've got an
increase in demand for gold. On the other side, if you look at the supply of gold, it's really been pretty constant, So you've got this mismatch between supply and demand. I think in terms of the relationship that we've seen historically, gold has been correlated with real yields. So when you see real yields come down, gold prices go back up. So why is that the opportunity cost is lower? If you can't get a high rate in treasuries or in
risk free assets, then maybe gold becomes more attractive. Well, what we've seen really post pandemic. That relationship has broken has broken down, and I think it's really a function of the supply and demand. But I think the point would be that that's broken down really over the last five years. So I don't read anything different in gold pricing about you know, US exceptionalism or the dollar flight to currency or anything like that. I think it's old fashioned supply and demand fundamentals.
You don't see it as part of the debasement trade that everyone keeps talking about.
Not really now, you don't buy into that.
I guess someone who's the global head of fixed income, you know, probably doesn't see.
Much value in that, but had to ask it.
I mean, do you think we have more room to run here on gold?
You know? My only strong view on that is I like it as jewelry, as you can see from my necklace.
I don't.
I'm not enough in the leeds on supply and demand to gold to have a strong view on that. I think I've got a good handle on what's going on the fundamentals and why we've seen prices going, but I'm not a technical analyst on gold and whether we've got more room to run?
All right, Kay, Always appreciate your joining us.
Thank you so much for coming into studio.
Okay, her is us CIO Global Fixed Income, Currencies and Commodities at JP Morgan Asset Management.
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All right, let's head over back to Europe because we now have some more details coming out of France, and I want to bring in Stephen Carroll. He is, of course the host of Bloomberg Daybreak Europe, and Stephen is an expert on authings France. He's certainly my expert on all things Frans. We go to him constantly for the latest and there's been a lot to stay on top
of here. Stephen Sebastian Lancorneu, who is the outgoing Prime Minister of France, says that Emmanuel Macron, the President of France, can name a new prime minister in the next forty eight hours. He can do that, he may not do that. Where does leave us what does this mean for his government, Scott.
Things are a little bit clearer now than they were earlier today, but not much. What we know is that the theory that fresh elections could be called for the National Assembly looks less likely than it did this morning.
For example, what Sebaston mccorney was just said on French television is that he believes there is now a political situation that allows Emmanuel Macron to name a new prime minister and take the next spin on this wheel that we've been on since June of last year of trying to build a minority coalition in Parliament that's able to
pass a French budget. Now, he did this after the forty eight hours of intense consultations with political leaders from across the political spectrum, not all parties, but most, and what he was trying to do was see if among those groups he could find enough support for central ideas that he believes that could lead to a budget. Essentially, he wants somebody else to take the reins from here,
That's what he's told to the President Emmanuel Macron. He came to this interview this evening on French television straight from the Elise Palace where he spent an hour and forty minutes with the President briefing him on what he'd learned over the past two days. He now expects the President to name somebody else to take on the job to lead those discussions. He was asked repeatedly, should it be a candidate from the Left Party, He said, it's
up to the President to decide. Should it be a technocratic prime minister, It's up to the President to decide. He has made it clear, though, is that nobody's going to be in this government should have presidential ambitions for the twenty twenty seven presidential election.
It looks like.
He's pointing towards a sort of technocratic arrangement, but very much involving the politicians who are in the National Assembly now, who are on the political scene to be able to put that compromise together, because they have some pretty big issues they have to decide, and the calendar on this
budget is already running very very tight. So the rush is to try and get something done in time that can be passed through Parliament and actually keep the public finances running over into next year, avoiding the sort of emergency measures that we saw at the end of last year, which as we know, didn't go down very well on the bond markets.
Can investors force the hand of the centrist parties who must decide whether to play ball with Lacornell or for that matter, Macrum.
Look, that's a really good question, because what we've seen so far is a little bit of tension in markets, but not something that our own economists or any of the market analysts that we've been speaking to would describe as a fiscal or financial crisis in France. This is still a political crisis. We have seen the spread of bond deals between France and Germany widen, although it did actually tighten a little bit today when the corn New signaled this morning that he had been making some progress
in these talks. Realistically, looking at it for markets right now, nothing's really changed in the past week, or really since the middle of the summer when the last prime minister from Sobereru proposed his budget. They're still in this phase of negotiation. There are still signals that a compromise could be found. When markets will run out of patience with
France is very much an open question. You don't have the cliff edge of a government shut down in France in the way that you do in the United States, because the way it works as the system runs into sort of keeping the lights on measures where taxes are collected and public services operated. That's not a situation any politicians want to be happening. It's not a situation the public wants to happen either. But the cliff edge moment looks that little bit further away, at least for now.
The situation that markets were most worried about is what fresh elections could could produce national assembly elections or in an extreme case, a fresh presidential election. Both of those look off the cards this evening, but things are moving very quickly, and who am Manual Macron could pick in forty eight hours time is going to be a very interesting question.
So very quickly.
If you know, legislative elections would be unsettling to investors. I'm guessing that presidential elections, Macron actually resigning, as some in the opposition parties want him to do, is not something investors would welcome.
No indeed, I mean that would be a much more dramatic shift in France's both fiscal approach and some of those big heavy issues like the pension reforms, which is the central thing politicians here are fighting over at the moment. If that were to be disrupted, that would change the fiscal perceptions of France. We've also got some ratings agency decisions to look out for, too. A presidential election would
be very dramatic. A National Assembly election would be less dramatic, and getting a new prime minister, while that could produce another shrug from markets.
All right, thank you so much, Stephen Carroll. Fantastic context here. Stephen Carroll is host of Bloomberg Daybreak Europe, but he is at least my go to authority on all things in France, certainly the political crisis that has been brewing for over a year now.
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Now, so many aideals and so many questions. So to answer those questions, let's bring in Mandy Saying, who is the global head of technology research for Bloomberg Intelligence. Who can tell us all about whether we are in fact in an AI bubble. So Mendy, thank you so much for joining us today.
Okay, let's talk about.
This concept of circular funding to start with why has it created such a fus amongst market observers.
And what is it?
Well, I guess the easiest way to frame it is a company like OpenAI doesn't have the balance sheet of Meta or Microsoft or Google in terms of the huge AI infrastructure build out that they want to go ahead with. And so far they relied on Microsoft to consume all the data center capacity they needed for chat, GPT and the enterprise business they have. And now they feel that numbers and the demand is getting so big that they
are planning ahead. They are looking two three years ahead where they would need probably two or three times more capacity than they are consuming right now. And for that, first they did a deal with Oracle three hundred billion dollar deal that spends almost five years. Then they did this deal with Nvidia actually to build ten gigawatt of
data center capacity. Now, the interesting part to answer your question on circular funding is Nvidia is spending you know, ten billion dollars and giving it to open Ai for them to add up to ten gigawatts of capacity, and that investment could go up two hundred billions, So every gigawat involves almost forty billion dollars of spend. That's a rough calculation, so you can imagine for ten giga whats
we're talking four hundred billion dollars in spend. Out of that, Nvidia is going to put one hundred billion dollars, So one fourth of that is coming from Nvidia. The rest open EI still has to raise it through a private
vehicle or some other type of instrument. But that's the challenge open ai has to grapple with and figure out the rest of the funding, and they feel they can do that in conjunction with I mean, I'm not even talking about the AMD partnership, but that's essentially what they're trying to do is to build out data centers on their own as opposed to relying on hyperscale.
And so we're going to get to the whole idea of an AI bubble here shortly. But do these companies have all the money to back it up? Do they have the financing to support these efforts. We're throwing around a lot of big numbers here, and it feels like with the tech space. It doesn't matter what number you throw out. You could find some company that's saying that that's what they're going to spend. When we think about CAPEX.
So you're right, the traditional business used to be asset light. You needed kapex spend of maybe thirty to thirty five billion dollars if you're Google or a meta and that would suffice for the whole year and it would stay you know, around five to ten percent, give or take. But now it's already you know, two times larger than that thirty five billion dollar and next year it's going
to cost one hundred billion dollars. It's going to be three times larger for existing companies that run data center assets. And the reason for that is the compute has gotten so expensive. Plus you need more compute for generative AI. So think of traditional search. It needed compute that equated to maybe point zero two cents per query. Now with generative AI, that chat pot query is almost ten times more expensive then your traditional search query. So that's where
the compute demand is coming from. And these companies have no choice but to invest in infrastructure because users are spending more time. I mean, Google's token usage has grown fifty x, so people are consuming a lot of these products, and if the pace continues at this level, then you have no choice but to add more capacity. And that's why the numbers are so big here.
Well, you know you're talking about it seems like it really is just an insatiable appetite for investment into the space, right and now we're talking about not just kind of the chips and the service, but also the physical space. But when you compare that with the flow of money and investment into the stock, whether it's from investors on the street or companies looking to get in on it, it seems like there are a lot of willing players
still in the market. Do you think there really is such a mismatch between the flow of money coming out and also the demand for funding to create and further fuel this AI infrastructure situation.
Yeah, everyone, I think now realizes that this is a very long runway in terms of both the bill out of the infrastructure and how it will eventually monetize. I mean, look, there's a lot of upfront investment, and that's where you know, the Hyperscaler Capex guys, they were willing to invest money with their operating cash flow. They have the balance sheet, the Google Meta Microsoft, they have the balance sheet to put their operating cash flow in the form of capex.
But now the numbers are getting even bigger. And so if Google generates one hundred billion dollars in operating cash flow, now they're talking about spending more than that hundred billion. And that's where the private guys come in. Everyone feels it's an attractive asset because you can rent it, you can generate a return over three or four years, and that's where I do think there will be a lot
more of these deals. I mean, the whole neo cloud space has come about literally because of this demand and you know, willingness to rent compute from someone else.
Right lots of activity happening in the AIS can't stop, won't stop. A lot of bubble allegations too, anything that you can point to that would dispute that.
Well, right now, we are still in that phase where the demand far outstriped supply. And to me, the biggest indicator of that is what Nvidia tells us on their earnings call in terms of their margins they're pricing. I mean, right now they're in Blackpool architecture, their Harper chip prices have started to go up because the demand is far
outstripping supply. So when you see a trend like that, just there will be probably some misallocation of capital that will find out in retrospect that this capital was misallocated in some way. But right now, it's very hard to question the pace of this build out because there's still that big gap between demand and supply, and until that narrows, it's hard to question why capital is going in this domain because I mean it should.
Well, thank you for mentioning the earning season, because that's exactly what we want to be asking you about.
Obviously.
Yeah, Kapex was such a big theme last season, especially for Nvideo, but really just in general, right the magnificence having companies and anyone involved in the space. I think that's still the big question for investors is is what companies are spending on AI Does that justify the returns that they're getting now and in the future. What would you say to those investors kind of weighing that balance as we head into the next season's earnings.
I mean, look at the ear to date performance of mag seven. The stocks that have outperformed are the ones that have spent their capex that have increased their spending on AI, not the ones that have been conservative. Your Apple and Amazon haven't.
Outperformed, right, and Vidya the best performer.
I mean, Nvidia is not the one who is putting capex dollars. But look at you know, Google, they I think, so that's where I do think the market is still rewarding companies that are spending on AI. And if you have been conservative and just focused on margins, you're multiple has shrunk. And that's the sort of mood we are in. So my feeling is you will see this earning season also reward companies that show higher AI revenue growth, even
if they have large businesses. If that AI component is accelerating, you will see multiples expanding, and that's where there is scope to be positively surprised.
Our valuation is too high though.
I mean you could argue that, you know, in certain pockets for maybe the index as a whole, but when you look at individual companies, I go back to mag seven. These are wonderful businesses that are investing in AI, which everyone deems, you know, will have high usage. The question is how will they monetize and if they can answer that question in terms of, you know, how it monetizes over time, not in the next twelve to twenty four months, but over time, I think investors will be happy.
Now, of course, part of the jitters around this weather AI is in a bubble and all that is really this idea of concentration risk, right, And the fact that more and more gains and the S Top five hundred and the US equity market in general are being driven by such a small number of companies. Is that something that investors really need to be worrying so much about when, as you say, at the moment, demand for these companies products and services is still far outstripping the supply.
Yeah.
So I mean again the pigs and shovels trade has carried on. Now we are in that phase where the LLM frontier models are you know, clear which ones are those and which ones have the lead. And now it's about, you know, how the other software companies adapt in terms of using these models as a distribution and making sure they can thrive in the world where llms are also part of the tech stack. So we'll start to see
that pan out over time. Not every company will be as dominant as they used to be But then the businesses that end up using LLM as an intelligence layer and continue to show positive surprises, I think you will see a rerating in their multiple Well.
Thank you so much, Mandeep, as always for providing us with your excellent insights into this space. Now, for more insights from Mandeep and the Bloomberg Intelligence team, make sure to check out their Tech Disruptors podcast that features conversations with thought leaders and management teams on disruptive trends in the tech world, covering everything from AI, to EVS, to VR and beyond. Find it at Apple, Spotify, or wherever you get your podcasts.
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We need to move over into the land of banks. I mean, earning season is just around the corner. You blink, and here we are again. Let's talk about banks, Christine, I think that would be such an interesting discussion here for our viewers. We're joined, of course, by Herman Chan. He's a senior analyst for US regional banks at Bloomberg Intelligence, and he is here with us happily in the Interactive Brokers studio.
Bridge down.
This deal that's going on right We've got Third, This is an eleven eleven billion dollar deal, sparking hopes for a bank merger wave. Is there a wave?
There's a bit of a crust right now.
I would say that this deal with Fifth Third and Commergan comes on the heels of a few other large regional bank deals. P and C's buying First Bank, which is mostly in Colorado and Arizona, and then Huntington's also buying a smaller competitor to Camericas in Texas as well in Veritech. So you're seeing some percolating activity. A lot of that is really driven by deregulation efforts under the
Trump administration. That's encouraging more banking M and A. And also the secondary factor is bank stock prices have improved, so they've got the currency to do deals.
I talk to us.
About this wave right of just mergers in particularly in the regional banking sector. It wasn't too long ago that you know, we were having issues in this particular space talking about a couple of years ago. Now fast forward to this sort of environment where there are a lot of active deals. Do you think that this kind of helps mitigate some of the concerns that we got from that regional banking crisis from a few years right.
So, one of the key lessons from the SBB failures that also toppled First Republic and Signature was that deposits are the lifeblood of banks and you really need to protect those deposits during events of uncertainty because the positive flight is real. That's really what took down SBB, and this deal with Comerica and Fifth Third is a direct
reflection of that. Well, come America really didn't have the same deposit flight as SVB, they did have some, and it really showed the need to have a more diversified deposit base, i e. More retail deposits that fall under the FDIC insurance so there's no reason to take your money out of the bank.
And that's really one.
Of Fifth Third's key expertises is their consumer banking in branch banking expertise, and that's that's driving some of that merger activity that we're seeing today.
So taking a look at your report that you recently wrote, you see that Camerica's management missteps and structural weaknesses in its funding profile have hindered the top line trajectory and profitability. Here are these risks that Fifth Third can afford to be a exposed to.
Yeah, that's that's a good question.
What's what's great is that, through the magic of bank merger accounting, when when these deals happen, you get to
reset on day one. So so the issues that affected co America are are effectively less of an issue for for Fifth Third, And so they start off with the clean slates and they can manage their rate sensitivity and asset management liability without some of the legacy issues that that co America had, both on the funding side as I mentioned earlier, but also on the swap side, where where they added some ill time swaps that really hindered them when rates were staying high.
Yeah, and what do you make of the equity reaction or I guess like the investor reaction to this. Is this a deal that you know, as you mentioned, you know there's some synergies here or some benefits, particularly for coo America, But what are we kind of gleaning from the immediate reaction industry to this.
Yeah, I think that the immediate reaction is is there going to be more ahead? I think the analyst community and the investor community understood the reason why COO America was sold, and particularly why they chose fifty third as a partner, so it makes sense that that would happen. Really,
is there going to be more consolidation ahead? There are a number of regional banks around the same size as the Third and PNC and Huntington banks, like Regions and M and T and Citizens, and that's going to be a big topic on the three Q earning skalls over the next couple of weeks.
Is there more room for consolidation? I mean personally when I think, I feel like we have so many regional banks here in the US, and you can inlighten me as to how that compares globally, But we have so many regional banks here. Is there more room for mergers some consolidation trinking here?
There is? There's about forty five hundred banks in the United States, and so is.
There really a need for that many?
I would say no, And so there's going to inevitably.
Be con consolidation. These smaller banks.
They not only have to compete with these regionals that I'm talking about, but also the largest banks in the United States like Chase and b of A that are expanding organically and opening up branches in areas like Alabama and Mississippi and Pittsburgh and Washington.
D C.
And And the fintech challenge is real. You've seen FinTechs come in and really take share banks. FinTechs like Chime and so far are really gaining a lot of new customers and to the to the detriment of banks big and small, So it's harder to compete. And then you have the technology and compliance issues that all banks have to deal with because of the regulations that they have to adhere to. So it makes for a really tough
operating environment. And so that's something that that is pushing a lot of banks.
To Yeah, well, we're of course kicking off earnings season and next week with the biggest Wall Street banks reporting. What are you in particular looking out for when that starts.
Yes, so the largest Wall Street banks kickoff next week. I think a lot of it will be what's happening in capital markets driving trading activity, fixed con ecruity trading activity IPOs have been really picking up over the past several months, so that's something that bodes well for the capital markets activity. And also on the lending side, commercial lending has been pretty strong, particularly lending to non bank financial institutions, and so it seems like there's some positives.
And also the interest rate high cut that happened in September should help on the deposit funding side as well.
And I mean, you mentioned the rate cut that we just had. What about this October? I mean, are you if there is one right leading this October? Does that change your thinking at all?
Yeah, So it's interesting banks typically will be able to reduce their funding costs that they cut their deposit rates
for their depositors, so that's an immediate benefits. On the other hand, there there's still some uh some juice left with a lot of the fixed rate assets that the banks added onto their balance sheet when rates for zero, So those are actually repricing still higher today and so there there's some really positive sort of dynamics going on for for banks netter just income, so that'll continue to flow.
Through over the next several quarters.
Yeah. Well, I mean, yeah, given that what we've seen from the Federal Reserve though in their potential for the rate US this year. I mean, just generally, is the rate conversation still relevant for banks or has that been overtaken by just the deal BLENANDSA that we've seen over the last quarter.
Yeah, that's that's a good question.
Rain banks are are naturally reflecting the rate environment and how their positioned for rate changes. A lot of the banks have really hedged their exposure, so there's less of variability going forward for a lot of the banks that I cover, so that that's helpful. They've already taken some of the hits on their negatives incombine by adding these swaps and insurance on their on their balance sheets.
And then I think the real, the real.
Positive aspect of my coverage right now is just there's more M and A activity that really gets the juices flowing from analyst investors. And it's really good to see after the Biden administration, because it seemed like the prior administration really did not have a positive view on bank m and A and it's been a real one eighty from from the current administration and that's why you're seeing more activity today.
I'm looking at the BKX index. Actually quickly KBW regional Banks down one point two at the closing bell, Christine, Wow.
Yeah, Well, I mean a lot to look out for them when it comes to M and A deals. But thank you so much once again to Herman Chand, who is our senior analyst for e US regional Banks from Bloomberg Intelligence.
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