This is Bloomberg day Break Weekend, our global look at the top stories in the coming week from our day Break anchors all around the world. Straight Ahead on the program, it's earning season with big banks reporting. We'll break down the numbers from JP Morgan City Group and Wells Fargo and look ahead to next week. I'm Tom Busby in New York.
I'm Stephen Carol and London for We're asking his upcoming inflation figures in Europe, we'll show signs of stagflation setting.
In I'm Doug Prisoner taking the pulse of the Chinese economy and the challenges that lie ahead.
That's all straight ahead on Bloomberg Daybreak Weekend, The business news you need to wrap up your week in just one fifteen minute podcast available on Apple, Spotify, The Bloomberg Business Appen everywhere you get your podcasts.
Good day to you. I'm Tom Busby and we begin today's program on Wall Street. We got earnings from three of the nation's biggest banks on Friday, and to help put the numbers into context, we're joined by Bloomberg Intelligence Bank analyst Alison Williams. Big last week three of the Biggies. We have a lot more to come, but let's look back at JP morgan chase record net income interest thanks
to higher interest rates. It boosted it's full year forecast, and also First Republic Bank the remnants of that bank helping JP Morgan chase. What can you tell us about the bank?
So JP Morgan really delivering very strong returns, leading returns. The net interest income continues to beat, and they also raised their guidance. They're also being helped by better than expected costs outlook, and really on the credit side was where we got another big surprise. Consensus forecasts were expecting sizeable reserve building and we actually got a modest reserve release.
So across the banks, what we're seeing is net interest income better than expected and a more positive view for the worth quarter. Of course, we caution that interest rate risks are rising, So while the run rate is good going into twenty twenty four, better than we had expected going into the earnings, there are still risks two twenty
twenty four and the outlook. But on the cost side of things, certainly the banks are managing to those risks, and as I said, JP Morgan also had a better than expected cost view at well as far ago they actually raised their expectations for costs. But I would note that in the third quarter they did have some severance charges. Now they have said that attrition is less than it's been in the past, and so that's some of the reason why you're seeing those severance charges. But again they
continue to make progress on the core costs. Obviously there's legal risks there and that could remain volatile for that bank. City Group joined these two banks and having better than interest income, but they kept their revenue guidance flat because fees are on the weaker side. And again so that's a continuation from that bank. But in general, net interest income better than expected, run rate better than expected. We
still do see those risks into twenty twenty four. On the credit side of things, again better than expected, we are seeing weakening and commercial real estate and office profit properties. At the margin, banks are taking reserves for card that's because they're building those card loans, and then on the operating expenses, you know, stable guidance at City A higher guide at Wells Fargo, lower guide to JP Morgan Netnet.
I would say they are focusing on those core costs and do continue to get some benefits.
Speaking of benefits. Let's talk about interest rates and how they benefited the bank, but their mortgage divisions, how have they reacted to these higher rates.
So the mortgage obviously has been under pressure, but given where we are, it's obviously a smaller part of revenue at this juncture, right, because we have seen a lot of weakness in the product, and obviously higher rates are not good for mortgage volumes. The other thing that we should probably speak about is the trading and fee revenue at these banks. Trading fixed income proving to be very resilient, equities trading a little bit weaker. That's similar to what
we've seen in the past few quarters. But on the feast side of things, things studying that and that's positive. So, as we said, mortgage is a smaller part of revenue, investment banking fee is also a smaller part of revenue because of the significant declines we've seen in both of those. But on the banking fee side, I think there is there are some reasons for optimism. M and A I
think was really the positive surprise equity markets. We did see some good IPOs, but those equity fees still coming in weaker than expected.
And we also a surprised mean that charge offs were down at least the JP Morgan chase. What does that tell us about consumers?
What it tells us is that credit continues to be very strong, and so yes, banks are taking reserves because they're looking ahead at some of the risks. But for the most part, consumers are healthy. Commercial loans are a little bit weaker, but in general credit there also remains very healthy. So we're seeing normalization. We're seeing a rise in charge offs from the lows, but as I said, better than expected. Office commercial real estate is something we're watching.
We did see reserving on those types of properties. Wells Fargo said about a month ago that things are the weakness is broadening out versus a year or eighteen months ago. We are seeing so weakening there, but on the consumer side, it's really the lower bucket where you're starting to sea some weakness. And that's not a tremendous exposure for these banks.
For these banks, and there are a lot more banks reporting next week, why don't we look ahead to what we're going to see.
So the expectations certainly are a bit better after the banks that we saw last week. Net interest income bodes well for bank of America. We'll see if they beaten reise. Similar to the other banks, will also be watching costs for them. Operating leverage is something that investors like to see.
It looks a little bit tougher for Bank of America or did about a week ago, but perhaps they can add to some of the positive net interest income story or the big banks in general, Goldmen, Sachs and Morgan Stanley. I would say net net again, the bar is higher because overall trading and investment banking fees better than expected, and that's really due to the fixed income trading line.
It's also due to better M and A fees, while equity fees are weaker, and debt fees there's definitely are there's some pockets of strength, especially with regard to the high yield business. So Goldman is a little bit more balanced in their business. Bank of America leans more towards fixed income, but they've been investing broadly, and Morgan Stanley leans more towards the equity side of things. But I would say that the other thing we're watching at Goldman
is some of the commercial real estate impairments. So we talked about sort of the provisions, but that's what we're watching for Goldman. Also specific to Goldman, a little bit of noise in the quarter because they are making progress on their strategic goals of sort of moving back away from consumer focusing on the core franchise. They announced the sale of Green Sky just last week. They have announced the sale of wealth assets related to United Capital, and
they're done with the selloff and the Marcus loans. So a little bit of noise still in this quarter, but we think that they are sharpening focus botes well.
Now after some of these biggest banks are done, we're going to see regional banks by the end of the week. And what a crisis we saw in the springtime. How have things changed or have they changed for some of those smaller regional banks.
Going into the quarter. I would say that there was probably a shared optimism around the potential for deposit costs to be stabilizing for the regional banks as well as the big banks. But again that rising rate risk is a negative. And for the regional banks, they don't have the card exposures most of them that I discussed for the big universe banks, and so the softer commercial demand is going to weigh a little bit more for those banks.
Let's talk about jobs in the banking sector, because we know that City Group Bank Frasiers is restructuring her bank, cutting management levels, which we know is going to lead to jobs. Is this just a normalization, is it just her bank, or is this something we're going to see throughout the industry?
Do you think for City Group in particular, Jane is making changes at that bank and honing its focus. And I think that the strategy or the restructuring of management is very much in line with a broader strategy, So I think that is specific to City Group. For the broad investment banking and trading business, we have definitely seen cuts there. We did see seven charges at several of the banks in the second quarter. We also saw some of those charges again being called out with the third quarter.
I think that banks are sizing their operations, in particular with regard to the investment banking. Fixed income trading has proven relatively resilient, equity trading has been a bit weaker, But both of those businesses are within a historically high range, So even though they're down a little bit, I would characterize them as healthy, strong, and relatively resilient. Investment banking on the other hand finally seeing some studying, so I
think that is a key positive. But the levels that investment banking is studying at are really closer to the pre pandemic norm.
Oh boy, a lot to look forward to, Alison, Thank you so much. That's Bloomberg Intelligence Bank analyst Alison Williams. And coming up on Bloomberg day Break weekend, we head to Europe to get a preview of this week's inflation figures. I'm Tom Busby, and this is Bloomberg. This is Bloomberg Daybreak weekend, our global look ahead at the top stories for investors in the coming week. I'm Tom Busby in
New York. Up later in our program, how China is juggling stimulating economic growth while being a leader on the geopolitical stage. But first, a host of inflation data from Europe will likely confirm the trend that price increases are slowing down, but with growth weakening, are signs of stagflation setting in? For more, Let's go to London and bring in Bloomberg Daybreak Europe anchor Stephen Carroll.
Tom here in the UK, inflation peaked in last October's reading at eleven point one percent and has been easing since falling to six point seven percent in August, but the downward trajectory has been uneven, so September's numbers will make for interesting reading across the euro Area. We're watching for the final reading of September CPI, which has also fallen sharply in recent months as energy prices have come down.
Of course, any sharp increase snoiler gas prices from tensions in the Middle East could upend that trend and raise the risk of stagflation. Weak growth coupled with high inflation. That's a big challenge for central banks, making every detail of every CPI print all the more important for the ECB and for the Bank of England. In the last few days, the International Monetary Fund raised its forecast for
where it sees inflation globally next year. In the UK, it expects the Bank of England to hike interest rates again by a quarter point and hold them at five and a half percent for most of next year. That's a more hawkish view than markets are currently pricing. I've been speaking to Daniel Lee, head of the World Economic Studies Division at the IMF about this, as well as his outlook for the rest of Europe.
Well.
For the UK, we have a forecast of subdued growth as higher interest rates bite, but infation is declining and so we think that by twenty twenty five inflation will be back to target. Cost for the UK has positive growth zero point five percent this year, point six percent next year.
And that situation then you see impact in the Bank of England holding rates higher for longer.
The rates are higher, not just in the UK but other economies, higher than we thought six months ago, three months ago because inflation has been stickier. So this is necessary around for managery policy to be steady to make sure that inflation expectations remain anchored that and inflation comes down to target.
Do your latest forecasts include the upgrades to UK GDP that we've had the Office for National Statistics do in the past a couple of months that has seen a significant revision to the trajectory for UK growth since the end of the pandemic.
Those National Office of National Statistics revisions were issued after we closed the forecast, but we did look and they do raise the level of GDP by twenty twenty two by about two percent, so less scarring than was originally thought.
From the pandemic, but at the same time, we don't see a significant impact of this on growth going forward, so our forecast of zero point six percent growth in twenty twenty four is not very changed, and it's slightly above the forecast of other institutions, including the Bank of England.
Okay, how does your outlook for the UK compare to the situation facing other major European economies.
Well, the challenge of bringing down stubborn inflation is shared. We did do some analysis of the drivers of inflation
in across economies. In the UK, a lot of this inflation is coming from passed through into other industries from energy prices having gone up so much, and the UK was exposed to the energy price shock due to external factors, so that's still working its way through in the Euro Area as well, though, this has played a very important role, more so in the UK and the Euro Area than in the US, where labor market tightness has been a more dominant driver of inflation.
Donald When we think about Europe geographically, including the UK and continental Europe as well, are we heading for a return to nineteen seventy style inflation.
No, we see that inflation has already significantly come down since its peak last year, and it's coming down further down to five point six percent on average this year, three point three percent next year on average, and back to target in twenty twenty five. And at the same time, we see growth bottoming out this year, coming up from zero point seven percent this year to one point two
percent next year. Unemployed has not gone up much. So this is a challenging situation, but we can see that with these steady policies it's going to resolve itself in the coming two years.
What are the key risk factors that we need to watch now when it comes to that trajectory for inflation, As you say your forecast do see it coming down over the next two years. What could upset that forecast?
Well, the main messages that risks are unfortunately still to the downside for growth and to the upside for inflation. Inflation could just be again surprising us as it has before, being stickier wages now are starting to rise to catch up with the fall and the cost of the in the purchasing power right of workers, sticky services inflation is there. If that happens, interest rates might have to be held higher for longer again, and that could potentially lead to
financial sector tensions. For insolvencies are going up, commercial real estate, non financial institutions, so this could create a larger than expected downturn in growth. These are downside risks. There's also the question of how to face with those risks. Fiscal policy can also play its role by having a medium term plan for reducing debt exposures.
What I mean, what is the key advice to fiscal policy makers to governments? Then on that basis, if we're going to be dealing with inflation for longer, many governments are still looking at, for example, public sector salaries and that they do have control over. Is the message restraint to those governments broadly?
Yes, we are as I said, there's a upside movement in growth for next year, but debt levels are still very high coming out of the pandemic and with higher interest rates, this is leading to using debt service costs, so safeguarding it sustainability, rebuilding the budget ry room, and really strengthening the disinflation process by moving in the same direction as manatory policy, that would be helpful.
Yes, you've outlined some of the risks that could be to the downside for growth to the upside for inflation. Let's take a more positive view. Are there surprises that could come that could be good? What are you factoring in or what are you watching for?
Yes?
And luckily, the overall perspective now is that risks are more balanced than they were six months ago when we were so worried about banking turmoil. Now we could have an upside risk from the labor market. There could be easing in labor market tightness by vacancies coming down instead of unemployment going up. That's been happening, especially in the US, by more than we expected, so more labor supply coming in that would ease inflation but also boost growth.
That was Daniel Lee, head of the World Economic Studies Division at the International Monetary Fund. I've been taking a look at Bloomberg Economics views on the inflation outlook too. They expect inflation in the Euro Area to average five point six percent this year and two point two percent next year. That's slightly higher than their last update in June.
They expect the ECB to shift their emphasis now from inflation risks to economic risks, and are warning that fiscal policy could become a more prominent issue next year, especially with the EU set to reimpose their deficit rules in twenty twenty four. Now, Jamie Russian colleagues at Bloomberg Economics don't see the ECB hiking again and holding rates in
fact until the middle of twenty twenty four. Right now they're penciling in a first rate cut at next June's meeting, although there are plenty more data prints for us to analyze between now and then. I'm Stephen Carroll in London. You can catch us every weekday morning here for Bloomberg Daybreak Europe, beginning at six am in London and one and am on Wallstrace Tom.
Thanks Steven, and coming up on Bloomberg day Break weekend, we head to Asia and look at how China is struggling to revive it's slowing economy. I'm Tom Busby and this is Bloomberg. I'm Tom Busby in New York with your global look ahead at the top stories for investors in the coming week. With China still struggling to revive its slowing economy, how will it juggle stimulating growth and maintaining its role as a geopolitical leader on the global stage?
And for help, we turned to Bloomberg Daybreak Asia's co host Doug Krisner for more.
Tom in the week ahead, we'll get the monthly economic activity data for China. This will include numbers on retail sales, industrial production, and the jobless rate. Now, as we know, there are many questions when it comes to the underlying strength of the Chinese economy, we want to take a closer look now with Bloomberg's John Lu, executive editor for China, and John is here in New York. It's great to see you. Thanks for being with us, Thanks for having me.
So much of the story I think on the overall economy in China centers on the strength of the consumer. Now, we've just moved through the Golden Week holidays. Some of the high frequency data that we have seen indicated a fair amount of resilience. Now, I know that the numbers that we're going to get on activity data for September will not reflect any of that Golden Week activity. But I'm wondering, is it safe to assume that the consumer in the month of September was in pretty fair shape.
I think the data that we got for the holiday period actually showed that there is a recovery after the end of COVID zero, but it's not been as good as people I hoped it would be. Even for that week long holiday period, we saw a recovery and travel and spending to pre pandemic levels, but still it came in shy of what the government had said it hoped it would get to. And so I think what that tells us about the economy is it's getting better, but
it's still weak. It's not doing as well as people had hoped, and there's still a lot of concern in beaging about how it's going to unfold.
So domestic demand is obviously a big issue. We'll talk in a moment about the notion of stimulus here. But on the export side, when I look at the numbers coming up on industrial production, what do we know about how well exports have been behaving.
So exports have been coming down, and so that has been the result of demand in the US and other parts of the world coming going more to places like Southeast Asia producers and other parts of the world. That's been the result of not only sort of the decoupling that's been happening between the West and China, but also just the fact that costs are so much more expensive
if you're making shoes or toys or electronics. It's so much more expensive to do that in China than it is in Southeast Asia now, and it's starting to be reflected in the idea.
Is deflation still a concern? Is it still a problem?
We should be getting inflation data and factory gain inflation pretty soon and that should show that factory prices are still falling. There is a lot of concern about consumer deflation. There was a stabilization last month, but I think that is still a big concern. There's a lot of overcapacity in the economy, be it in property, be it in just manufactured goods all across the economy, and that's going to take a while to work its way through.
One of the big stories that we had last week was on Beijing considering the possibility of raising the budget deficit and doing a little bit more. In terms of stimulus, everything that we've seen so far, whether it's been on the physical side or the monetary side, we know has been very targeted. What might a new stimulus package.
Look like, So it's actually going to look a lot like what the older stimulus packages look like, which is mostly infrastructure spending. I think what's interesting about this new package that's being discussed is who's going to raise the money. In the past, Beijing has asked local governments to sell that raise money and spend that money to build infrastructure. Now the central government, it looks like, is going to do that itself. And that's important because local governments are
really indebted. They are finding their finances in a lot of trouble and under a lot of strain. And so this is actually Beijing coming forward and saying the central government will do this instead of the local governments. It highlights how much concerned there is in Beijing that the situation might be worse than it has been in the past, and showing your willingness to try a new way to try to combat that.
There's been a fair amount of criticism already, just based on the early reporting, that the stimulus that is being discussed really doesn't do much for the consumer, it doesn't do much for the property market. Is it up for discussion maybe that those areas need to be addressed in a more forceful way.
What has been done so far has been a bit of a piecemeal effort, a little bit here, a little bit there. Like you said, cut in interest rates, cut in the reserve requirements, some policies to help the real estate sector. Everybody's been looking for a big bazooka sort of stimulus package. I don't think that's what we're about to get what's being discussed. It could be very effective in the sense that it shows a change in attitude, shows that Beijing is starting to evolve in terms of
how it's reacting to the slowdown. That could be more important in terms of the attitude or the confidence that it instills into the marketplace, more so than the actual amount of money, which as we understand is about a trillion unit. It's about one hundred and fifty billion US dollargy.
Also in the week ahead, as I'm sure you know, John, it's the third Belton Road Forum that Beijing will host. Where is the Belton Road? Where is this process right now? And can Beijing continue to make it a priority in the face of so much domestic weakness.
So the domestic weakness I think is important. It really reduces the amount of resources that Jijinping and his government have to spend on the Belton Road project, how much they can finance countries around the world when it comes to infrastructure. The other problem is we've had places like Pakistan, Sri Lanka that have run into trouble, have not been able to pay their debt. That's been a real drag on this initiative. The other thing is Russia, Ukraine and
Chinese support for Russia has resulted in European countries. I think Italy is probably the prime example of that. Pulling out of the Belton Road. Europe's really pulling away from this initiative, and so the whole thing is starting to evolve. It's become much more of a Global South sort of initiative. The Europeans are shying away. We're not expecting any big heads of state from Europe to attend the forum. Mister Putin will be there, of course, and that underlines that situation.
So that's a great point, and I'm wondering what his aim may be, looking to kind of fortify the relationship with China in both ways being able to export a little bit more in the way of commodities. I'm thinking crude oil in particular, and then looking maybe for some investment dollars coming from China into Russia.
From the Russian perspective, China is its most important supporter at the moment on the global stage, diplomatically, economically. As we understand it, there has been no evidence that China's providing weapons to Russia, but I'm sure if the Russians could get help in terms of supplies, equipment, technology, they would be they would look for that from China. It's
very important for mister Putin to maintain that relationship. He and President Chigping seemed to have a good personal bond, and I think this is this trip is an effort to fortify that against anything that might happen. Obviously, President Joe Biden would like to see China move away from Russia, and this would be an attempt from mister Putin to try and avoid that from happening.
We just had a group bipartisan group of US senators in Beijing, and one of the things that President Chi insisted in the meeting, from what I've read, he kind of downplayed this concern coming from Washington about China's intention essentially to challenge the US as a superpower. Is this something that is a major shift or is this basically just being reduced temporarily that she does intend to do that at some point, but now is not the time.
The Chinese position has always been that China does not want to replace the US as the pre eminent power in the world. I think this meeting with Senator Schumer and the Congressional delegation shows is there is a greater interest on the Chinese side to engage. This was the first time that President Jiji Pen has met a congressional delegation in eight years. I think that's especially important given that we have APEC coming in San Francisco in November.
We don't know if President Chigpin is going to attend, but given this meeting, given all of the talks that have been happening, given the cabinet level visits by American officials to Beijing, it does seem like that he will be attending APEK, and it does seem like that that is setting up a situation where President Biden and President She could have a face to face and you could
see some agreements reached there. Possibly probably not anything that's going to dramatically improve the relationship, but it could greatly stabilize things.
John lou Is Bloomberg, Executive editor for China. I'm Doug Prisner. You can join Brian Curtis and myself weekdays for Bloomberg day Break Asia, beginning at six am in Hong Kong, six pm on Wall Street.
Tom, Thanks Doug, and coming up here on Bloomberg day Break weekend in the States, another round of important economic data in the week ahead, and will preview US retail spending for the month of September. I'm Tom Busby in New York, and this is Bloomberg. This is Bloomberg day Break Weekend, our global look ahead at the top stories for investors in the coming week. I'm Tom Busby in New York and this coming Tuesday, Walls read gets US
retail sales data for September. It could show that stubbornly high prices and jitters about the economy are forcing many Americans to pull back a little bit on their spending. Well for what to expect, We're joined now by Anna Wong of Bloomberg Economics. Anna, thank you for.
Being here, Happy to be here.
So tell us what are you and other economists expecting to see.
Yeah, So, the general consensus is that consumers did slow down the pace of spending in September to about zero point one percent. Want to exclude autos and gasoline. So zero point one percent on a monthly basis once you adjusted for inflation, is actually slightly negative. But you know, this is on the heels of several months of retail's reports showing that effect consumers, we're spending and splurging over the summer. So that's what the general consensus is expecting,
but our team overall agrees. However, we do think there's substantial downside risks to this number. Our team's view is that consumers will likely retrench in the fall because of that overspending during the summer. We have already seen that generally that the sentiment of consumer has been dipping. So we just saw from the University of Michigan survey that was released on Friday that consumer's confidence about their present
economic situation has deteriorated significantly. And most of that is driven by the sense of you know, un well being due to higher prices, especially in grocery stores and gasoline. And I think that that is starting to really show up in terms of squeezing consumers household budgets, and we're seeing that in also, you know, their attitude toward buying durable goods such as cars, furnitures, and just large household items.
So on that, I do think that, you know, given that the consumer finances are deteriorating, that we should be seeing not just in next in the in the retail sales data for September, but also in October and November, the trend would be zero to negative spending growth.
Well, I want to ask you this. Also on Friday, City Group reported its earnings very solid, and one comment was that the US consumer remains quite resilient. That's a quote. But my question to you is is it all consumers? Is it just the middle and higher earners or is it everybody? And you know, I tend to think not everyone is the same when it comes to spending.
Yeah, you know, the the American consumer is always resilient as long as they can borrow. And you know, the typical American household is not known for their foresight. In fact, before the pandemic, the bottom forty percent of American household was pretty much living paycheck to paycheck, with the bottom twentieth percentile basically go like spending more than they earn
or save. So, you know, the resilience is not necessarily a good thing from that perspective, especially in an environment when credit card interest rate is like on the high twenties, you know, it just means that delinquency will be rising. And this so called resilience is spending will only last as long as people in the who are not earning as not as they spend that they could borrow for it.
And it's just not a sustainable thing. And so I just generally don't see it as resilience as necessarily telling you giving you any Ford signal of whether we will be in a downturn or not. So in the past recessions over the last forty or fifty years, generally consumption is resilient even in a recession because people just spend as long as they can borrow, well, as long as.
They can borrow, I guess they will. And Anna, I want to thank you. That's Anna Wong of Bloomberg Economics. And that does it for this edition of Bloomberg day Break Weekend. Join us again Monday morning, five am Wall Street Time for the latest on markets overseas and the news you need to start your day. I'm Tom Buzzby. Stay with us. Top stories and global business headlines are coming up right now.