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, and straight ahead on the program, here comes US Bank Earnings. I'm Tom Busby in New York.
I'm Kallie Lines in Washington, where we're looking toward Lithuania as President Biden heads to the meat of Summing.
I'm Brian Curtis in Hong Kong. We weigh up monetary versus fiscal stimulus in China and weather Beijing is actually prepared to loosen the purse strings.
I'm Klin Hedge in London, where we're looking to the Chancellor's mansion house speech and weather he delivers on a UK growth songs.
That's all straight ahead on Bloomberg Daybreak Weekend on Bloomberg E Love the three own New York, Bloomberg ninety nine to one, Washington, DC, Bloomberg one O six one, Boston, Bloomberg nine sixty, San Francisco, DAB Digital Radio, London, Sirius XM one nineteen and around the world on Bloomberg Radio dot com and via the Bloomberg Business App.
Good day to you. I'm Tom Buzzby and We begin today's program with second quarter earning season beginning this week, and that means big bank earnings. To kick things off, and for what to expect and why, we turned to Alison Williams, senior analyst with Bloomberg Intelligence. Well, the major Wall Street banks turned in pretty solid results for the first quarter of this year. Things may be a little
softer this quarter, and there are several reasons why. One, higher interest rates just this past week approaching seven percent for long term mortgage loans, putting the squeeze on loan originations, weighing on commercial real estate, that's one. What are your thoughts on how that may impact things.
Higher rates have provided a big boost to banks, much of which we saw in twenty twenty two, But now we're starting to see the downside of higher rates, which is that the bank's cost of funding is going up. And there's two key reasons, one of which is deposit it. The price of those deposits is rising. And then secondly, deposits are flowing out of sources such as free checking or low rate savings accounts and flowing into things like
money funds. So there's a there's a shift happening, you know, within the mix going to money funds, going to CDs, and then across all deposits, that cost of deposits is going up.
Now also continued caution after this spring's banking crisis and failures of a signature bank. We had Silicon Valley Bank, first Republic Bank now part of JP Morgan Chase, now some say still unresolved this crisis. How has that impacted the major lenders?
So part of it really I think has been a wake up call to consumers that maybe haven't looked for haven't looked at their deposits in a while, and so part of it is that sort of accelerating that that shift into higher yielding deposits, which is good for consumers, but not as good for the banks that have to pay those rates. If we look at the broad landscape, we had heard from most of the banks in April that things had sort of stabilized, and so I think
that stability continues. So the concern was really very significant to positve flight at a few banks, so things were extreme in those cases, but the but the broad trend for the for the banking industry continues. The second part of that is bank investment portfolios. You know, This was another issue that led to some of the problems at the banks during the pandemic. As those balance deposit balances swelled,
they were invested in securities. As rates have risen, those securities are worth less than they were and so as rates move up, will continue to see some pressure on those portfolios.
A dearth of deals this past quarter of the IPO market nearly non existent, mergers few and far between. I mean, is this a real concern for lenders as well?
So for the banks broadly, it's really the big six universal banks if you will, that are most impacted by trends in the global investment banking landscape, so that's fees as well as trading, and of the big six, it tends to be a smaller part of the business for Wellsbargo, though they did have some very good results last quarter, so on the investment banking fee front. As you know, we had a really solid year in twenty twenty one, record levels in businesses like M and A and IPOs.
Last year things softened and I think the banks were still hopeful that things would pick up coming into this year. There were some very optimistic expectations built into estimates, but as things have progressed. It's looking like those fees are going to be studying at much lower levels now. We did see some signs of life in the IPO market in the quarter. High yield is also an area where we've seen some very good issuance in the quarter. But M and A, which really sort of held things up
last year, has really now turned into a headwind. So on the feed front, we do expect things to be weaker. The question is how are the banks making adjustments to their headcount because all of last year the banks really did hold out hope and keep that headcount steady. They had to really scramble to add bankers when things were going really well, and they were hesitant to sort of
let those people go. But I think now we are seeing some adjustment by the banks in terms of the expectations going forward that things could be soft.
Well, let's talk about how the banks, big ones, small ones, twenty three in all navigated the Federal Reserve's latest stress test. What was different this time?
So for the big banks, really it was generally pretty positive. All five of the six banks are going to see their capital requirements come down as a result of the stress test. So City group is that the outlier, their stressed capital in the tests actually looked a little worse, and so their requirement is going to be going up. I think one thing that is highlighted by the results both this year and last year is just the volatility that we're getting in terms of capital requirements for these
big banks. So last year, JP Morgan, Bank of American City Group all saw very big increases in their capital requirements. They had to very rapidly shrink their balance sheets to make sure that they were going to comply with the newer requirements. This year, for the most part, it's the opposite. Again, the City was a little bit of different story, but
also there's these big changes that we're seeing. But then also for the banks, are trying to understand some of the numbers that we get from the FED are so different than the tests that they run themselves, and so in particular Bank of America, which had a very significantly better result, it's not going to fully translate into a
lower ratio because there is a minimum there. So a lot of that had to do with changes in their other comprehensive income and they are talking to the FED to try to understand why their number is so much different than the FED.
And at the fed's meeting just now the following week after Earning Start, we're expected to see some new proposals on bank capital requirements.
Is that right?
That is that is correct? We're waiting for the big banks are waiting to see what we're calling the Basil three endgame. So the finalization of some rules which Powell to confirm, could lead to the banks having to hold more capital. And so that's another reason why that the stress tests were sort of, you know, one piece of information that we have for the for the near term. But the banks are conservative, we think on buybacks, despite the good results from the test for most banks, because
they don't know what's coming from these endgame rules. I would say that these rules will obviously be phased in over time. The banks have a significant amount of capital that they're generating every quarter and every year to meet these higher requirements. But it is a question that the banks are looking to be resolved.
Wow.
Well, let's talk then about these some of the individual banks that are reporting later this week, JP, Morgan, Chase, Wells, Fargo City Group, those three giants. Alison, what are you expecting to see and will they be different? Those three are we going to see sort of a similar pattern.
So I think we'll see sort of a similar pattern as we saw last quarter. That interest income growth still is very strong. So the issue is really not that it's weak, it's just that the strength is slowing, if you will. And so Bank of America, JP, Morgan, and Wells Fargo, we think are all still going to be able to are going to be the bigger beneficiaries there in terms of seeing revenue growth and operating leverage for
a city group. On the cost side of things that you know, they're they're still working through some regulatory issues what they call the transformational costs, and so that will eat into their ability to post operating leverage. And then Goldman Sachs and Morgan Stanley because these banks are much
more capital markets focused, we're seeing trading normalizing. We discuss the weaker fees, and so these banks may also have severance costs as they adjust their workforce, and so less positive for those banks.
Oh, Allison, a lot to look forward to. Thank you so much for joining us. Coming up on Bloomberg Day Break weekend, President Biden and US relations with NATO. I'm Tom Busby, 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. Up later in our program and look at China's struggling economy and what to watch for this coming
week on that front. But first, President Biden has been working on rebuilding closer relations with some NATO countries after the Trump administration's emphasis elsewhere. Now for more on why we'll be watching this in the coming days, let's head to our Bloomberg ninety nine one news from in Washington and Bloomberg Sound On host Kaylee Liones.
Yeah, Tom all eyes will be not on Washington this coming week, but Lithuania, where the NATO Alliance is set to meet with a focus on Russia's war in Ukraine. US President Joe Biden will meet with his counterparts about future security assistance and economic deterrence and the future of the alliance, as well as Finland officially enters the group
and Sweden faces stubborn opposition from Turkey on acceptance. President Joe Biden actually in advance of the summit welcomed Sweden's Prime minister to the White House this past week and praised the prospect of his country joining NATO.
The United States fully, fully, fully support Sweden membership in NATO, and the bottom line is simple, Sweden that is going to make per alliance stronger and has the same value set that we have in NATO and really looking actiously looking forward.
For your membership now. Sweden's Foreign minister also spoke to Bloomberg TV after meeting with his counterparts from Turkey and Finland at NATO headquarters this past Thursday about his hopes for completing a session we.
Are now closing in towards the summit in Vilnius next week. It is Minam the Swedish government's hope that we will now see a clear response from the Turkish side so that the ratification process can start in the Turkish parliament and Sweden can become NATO member.
All right, so let's talk more about what is to come from this NATO summit. Joining me here in Washington is Justin Sinc who covers the White House for US here at Bloomberg, So Justin at least for President Biden, what is his primary objective at NATO this coming week? Is it Sweden?
I think Sweden's a huge part of it, because for President Biden, the ascension of Sweden and finn into NATO is representative of a new sort of block against Russia. For a long time, those Nordic states had stayed neutral, not wanted to depict sides. I actually really celebrated the fact that between Russia and the United States or Russia
in the West, they were a neutral party. The Russia's invasion of Ukraine has sort of jambled politics in those countries that are now looking at what happened in Ukraine and worried about their own defense, and so getting them into the NATO alliance is a big symbolic move for President Biden, who has really sort of stressed that NATO has gotten larger and stronger since the invasion, contrary to what he believes Russian President of Vladimir Putin thought going in,
which is that NATO would splinter under an attack and that there wouldn't be sustained support for Ukraine.
So of what President Biden wants is to get Sweden into this alliance, it's a question of what he's willing to give up to make that happened right. The issue of f sixteens and Turkey. Do we have a full understanding of where exactly the administration comes down on this.
It's a little tricky. I do think that there's broadly support within the Administration for giving Turkey F sixteens, despite some of the problems that they've had with Turkey adopting Russian technology into their military platforms that have caused sort of problems with the NATO alliance through the years. That you know, even with those concerns, there is support from
the White House for these F sixteens. But there are Democrats on Capitol Hill, including Senator Menendez of who chairs the Foreign Relations Committee, who is opposed to the sale.
And it will take some real legislative strong arming from the White House to get a possible deal through, particularly if everybody is upset with Turkey because they're holding up Sweden's membership, and so Turkey doesn't want to move first and potentially lose out on these F sixteen because they have already sort of publicly said that they'd accept Sweden.
But in the US, you know, both Democrats and Republicans are skeptical about authorizing this defense deal unless they have that sort of in hand.
So Obviously it's a tricky situation and frankly we might not even be talking about Sweden trying to join NATO or the US, you know, trying to put forward that effort if not for the war in Ukraine, as you were alluding to. So Ukraine has to feature highly on the agenda as well expansion of NATO aside, what else are we expecting to come from this summit Regarding Ukraine specifically.
I think there's two things that we'll really be looking for. One is what the new stepped up defense packages that the US and other allies are shipping to Ukraine. Shortly before the SUMMITO was announced that the US would start providing cluster bombs, which have been controversial because of how they are not as sort of precision guided as other
weapon systems and that can lead to collateral damage. But it's something that Ukraine has said could be really helpful to them, especially in areas where Russia has sort of dug in on the battlefield. So that was a big concession.
Ukraine is always pushing for more supplies, new types of supplies, bigger supplies, and so that will be an area to look and it'll especially be interesting within the prism of the sort of two percent of GDP goal that NATO countries have long set but long for the most part failed to sort of reach up to, and so less tangible but almost as significant thing will be if there's new language about that two percent goal, and whether it becomes rather than an aspiration or a ceiling of a
floor for defense mending for NATO countries.
Is there a real conversation to be had or currently being had about Ukraine becoming a part of NATO, because obviously, given the articles of the Alliance, an attack against one is an attack against all, and this is a country that is at war, which makes that a highly complicated proposition.
Yeah, it's it's a huge question, especially because Ukraine is very eager to enter the Alliance because it would offer them new protections and sort of trigger a more aggressive potential response from the West. But at the same time, you know, the United States and many of its allies are very wary of escalating the current the current conflict beyond what is already obviously a sort of tragic and
sweeping situation. So I think what we'll see is language that you know, post war may make it much easier for Ukraine to enter the Alliance. This is even before the invasion, been an aspiration of Theirs and a long and winding path to get there. So there's no doubt that President Selenski and some of the countries that are really close to Ukraine, like Poland, are going to be pushing hard on this front. But it's unclear how exactly it's all going to shake out.
Yeah, and it's very unclear when post war or even will be. We have no real endgame that's in sight at this point, and as the war is ongoing, just talking about the composition of the Alliance and who really is at the helm, Jen Stoltenberg's going to be sticking around for a while longer.
There's a real you once you get in a Yeah, he is sticking around because the Alliance could not come to a consensus around a replacement candidate. The UK had put forward a candidate, there were other candidates within Europe, and there had not really been somebody that everybody co ust around, And part of the reason is that we
didn't see the US sort of pick aside. There have been reports, though the White House is flatly declined to comment on them, that we were upset over the UK sort of pressuring US and other countries into going forward with the F sixteen program for Ukraine, which there was a genuine concern that it could escalate the conflict, and so as a as a result, it may have resulted in it may have resulted in the US not backing
the UK bid to lead NATO. But a big conversation among leaders is going to be who can bring the alliance forward. Stolenberg's not going to be there forever and they need to find a consensus.
Canada, all right, So it's a busy week ahead for President Biden and for those who cover him like are very own Justin Sink, who covers the White House for us here at Bloomberg. Thank you so much. Tom. We'll send it back to you.
Thank you, Kaylee. That was Bloomberg Sound don co host Kaylee Lines, reporting from our Bloomberg ninety nine to one newsroom in Washington, and you can hear sound on weekdays one to three pm on Bloomberg Radio and coming up on Bloomberg Day Break weekend, What's next for China's economy. I'm Tom Busby and this is.
Bloomberg broadcasting live from the Bloomberg It a active brokers studio in New York. Bloomberg eleven three to zero to Washington d C, Bloomberg ninety nine one to Boston, Bloomberg one oh six one to San Francisco, Bloomberg nine sixteen to the country Syrius XM channel one to nineteen to London DAB Digital Radio, and around the globe the Bloomberg Business app in Bloomberg Radio dot Com. This is Bloomberg Daybreak Weekend.
I'm Tom Busby in New York with your global look ahead at the top stories for investors in the coming week. Next, we look at China's faltering recovery. Can policymakers crack the code and unleash the animal spirits? Let's get to Brian Curtis, co host of Bloomberg Daybreak Asia.
Tom, investors are dropping their expectations for gains in Chinese assets this year. Now, there's a wealth of disappointment in the measures being taken to try to re vitalize the Chinese economy. Despite calls from more aggressive stimulus, policymakers, at least at the moment, appear to be sticking with targeted measures. What might change that. We've got a lot to discuss I've asked ten Chen, the team leader for FX and rates in Asia, to join us here on the program. Tenchen,
thanks very much for being with us well. The PBOC has extended its support for the yuan with some of these stronger fixes that we've seen of late. But this is really more about arresting the decline in the currency. It's not really about stimulus. But let's talk a little bit about why the PBOC wants to address that decline.
Yes, of course that's a good question. So basically PBOC is in a very difficult dilemma right now. So PBOC knows that if the yuan is weak, when the economic fundamentals are weak, a weaker currency is going to help the economy is because it's a big support for the
exports sector. But at the same time, a very weak yuan means that we're going to see financial stability because a very fast decline in the yuan, that means that it's gonna spill over to the stocks market, it's gonna spill over to the to the bunk market, and that's going to prevent foreign investors from buying Chinese assets. So so in the stylema BBOC has to strike a balance of you know, keeping the yuana weak, but not so weak that's going to trigger any sort of panic. That's
why you are seeing this. We're in this situation where the PBOC is supporting the yuan with stronger than expected fixings, but the bias, I mean, that's the actual fixing versus the Bloombird estimate. The bias is not very big. It's about three hundred pips every single day, and that's far away from the levels that we saw last year where
it went to as high as eight hundred pips. So the PBOC is only taking very moderate measures to support the yuan, and it has a ton of tools they can use to be more aggressive when it sees the yuan being two week But right now the PBOs is really keeping it spowder dry, just using the fixing with a little bit of verbal intervention.
It's something else you didn't mention, which has been an issue at times in the past is capital flight. But they have made a number of moves on this front to keep capital from flowing out of China, but still must be in the back of everyone's minds.
Yeah, there's still pent up demand to take capital out of China. Remember that onshore investors, onshore residents. They can only convert fifty k of US dollars into the of US dollars. They can only buy fifty k of US dollars, So that's not a lot of money. Like if you want to buy apartment in Hong Kong that it can only buy you like one square feet or something. So it does it is the curbs are very high. I mean, once the curbs got dropped, we're going to see a
lot of all flows happening. Right now, we haven't seen very recent measures of the PBOC titan macro prudential measures on the on the corporate side. But when if it wants to it can you really can't do that.
Now people ask me sometimes you know, how uncomfortable is the PBOC with you on weakness, and I think you've outlined that, well, there's a balance there. A slightly weaker currency is actually good in some ways for China, stimulating exports and such. But they do have these other concerns.
But where does it get uncomfortable for them in terms of like at the moment, we're around seven to twenty five and change against the greenback for the offshore Chinese currency where would it have to be for all of a sudden more aggressive measures to come into play.
I think it's going to be seven point three, because that would be very close to the low in twenty twenty three, twenty twenty two, last year in November. So if we reach that level, that's gonna the UN's gonna get a lot of interest from shorting overseas. And another thing that we have to watch out for is the R and B C Fast Index. That's uan's value against not just the dollar, but a bunch of other effects. So if that basket keeps falling, that means the yuan
is falling against a lot of things. So that's really gonna hurt trade. So that's another thing the PBOs is looking at, and of course hard behavior.
Now in terms of the other area of what can the PBOC do to actually help stimulate the Chinese economy, interest rates is one thing, and also the triple RS is another. How much do we expect more aggressive behavior here coming soon?
It is pretty hard, and the PBOC has done a lot already and it's not doing more because there's nothing else it can do. I mean the triple R cut, of course it can it can cut rids further. But that's just for a sentiment, like for to restore market sentiment. But is it going to be useful. It's not going to be useful because the problem is that the demand is very weak no matter how much raised the PBOs cut.
If an investor, like if a Chinese individual doesn't want to buy a new home or doesn't want to buy a new car, she's not going to buy a new car. So what needs to be done right now is fiscal policy, Like that's not under PBOs, that's under the Ministry of Finance. So if that's if we see more physical stimulus, local governments start to sell bounds and to build infrastructure, that's
going to stimulate the economy. But that's going to carry risks Like in twenty eight during the financial crisis, the massive stimulus package resulted in a lot of local government dead and other issues. And obviously the government is aware of that.
Yeah, we heard a lot from Richard Ku from Nomura Research Institute about how fiscal stimulus should be done in China And basically, even if they wanted to do that, what are the constraints for strong fiscal stimulus that the government feels.
Yeah, there is a side effect for fiscal policy if you'll let local governments to sell a lot of bonds to that to build infrastructure like highways and then subways, when in the end they have to repay the debt in like ten years time. And China is already having a massive local government debt problem, and we have avs facing issues, we have credit risks with corporates. So that's
that is well. It can resolve the problem maybe stimularly economy today, but years from now it can be a bigger problem for the government.
In terms of institutional strength in China. I wanted to ask you about Pangong Chung, who has been named the new party Secretary for the PBOC and we think will become the next governor of the PBOC. Now, he was not on the list of the Central Committee, the two hundred highest ranking party officials. In any way, does that weaken the institution of the PBOC. We already know the PBOC has been put under the State Council, right, so from that standpoint, it would seem to have a little
bit less independence than it did before. How do you see it?
That's definitely right, that's the interpretation A lot of people are getting from this change, not just from Pangonshan. It's been going on for a while. So before Pangonshan, in the Egon age, they have Gaciuting as the party's secretary, and Egon's level as PBOs governor is being seen as less important than Gotiuting's role as a part of governor.
And it still remains a mystery. We don't know whether Punkonshan is going to be the governor, but that's the party secretary is definitely a bigger boss than a governor job. And the role of the PBOC is is becoming less
and less independent for sure. Now it's under the State Council, and starting from years ago before the PBSC country pollar, you can always get some sort of a spoiler from the state state consols saying that, oh, we think the PBOs should culture pillar soon, and two days later the PBOCA does that.
I wonder how much it matters in that power really flows from the very top anyway in China, doesn't it.
Yeah, yeah, yeah, so's it is. All the government agencies are to some extent losing a bit of a power, and it is quite concerning if this is happening to the PBOC.
Tinggent thanks so much for joining us Tangent team leader for FX and Rates in Asia. I'm Brian Curtis along with Doug Krisner. You can catch us every weekday here for Bloomberg day Break Asia, beginning at six am in Hong Kong and six pm on Wall Street.
Tom, thank you, Brian, and coming up here. On Bloomberg day Break weekend, we turned to the UK economy and one controversial idea to get things going again. I'm Tom Busby 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. The UK needs to boost economic growth and one strategy being pressed amid a dearth of London IPOs is tapping
the cash in pension funds. It's thought that a plan may be announced by the UK Chancellor next week at a major City of London event. And for more, let's head to London and bring in Bloomberg Daybreak Europe Banker Caroline Hepgar Tom.
The Chancellor Jeremy Hunt's Mansion House speech is a set piece event of the financial calendar in London this year, though maybe particularly important for the pensions industry, with big pension funds potentially agreeing to invest up to five percent of their assets into unlisted UK companies to provide better returns and grow the British economy well. For more on the story, I'm joined by Bloomberg City Editor Katherine Griffiths. Welcome to Radio Katherine, great to have you with us.
Lots of focus then on the Lord Mayor of London's initiative, his idea fifty billion pounds a future growth fund. Who do you think is actually going to be in favor? Will it get rolled out in this speech?
It probably will get rolled out in this speech, and it's kind of all to play for in the run up. There's lots of different conflicting groups. Some are quite in favor,
some are not even within the same industry. Among the insurers, which is other group that are really affected by this, Some are quite keen on the idea of signing up and allowing about five percent of their defined contribution pension funds to go into growth assets, but some are really kind of holding out and saying that it could be quite problematic. So it's going to the wire ahead of the speech as to what the details will actually be Yeah.
Absolutely, How do you think it's going to work though? It's it going to be mandatory? Is it going to be a nudge a deal?
So I think it's not going to be mandatory. So Nick Lyons, who is interestingly of the industry, he is the chairman of Phoenix, which is the UK's biggest pensions provider. He was suggesting that the contributions could be mandatory. That's not his preferred option, but they could be mandatory. He's
not a fool. The reason why he raised that quite contentious idea is because if insurers and other asset managers are not forced to hand over these funds or to direct them in a certain way, they may not do it. A decade ago, the Cameron Osborne government tried to do something really quite similar. The whole project just didn't go anywhere because the insurers and the asset managers and the pension funds just couldn't really agree on the terms and who to invest in and how so that's where this
mandatory idea came from. But it's been killed certainly in the run up to the Mansion House speech.
But as you say, it's also quite fraught with difficulty I mean, to my mind, I think back to one of London's star investors, Neil Woodford, who only a few years ago ran it's a huge difficulty with much less liquid investments in UK assets, and it's sort of did for him in some ways. So I guess maybe you could think of that being a kind of a risk.
Sure, And actually yes, I think the industry says, look, it's all very well to want to invest in these startups and liquid assets, but you have to face the fact that the rate of failure is higher in those areas. They are inherently riskier. And the counter argument there as well. You know, you invest in a wide range and overtime things come good, but when you're talking about people's pensions money, there is clearly a problem.
The pressure there is on the government to deliver better growth. We've seen, you know, months of anemic growth. Bloomberg Economics now expects a recession in the fourth quarter of this year. So the pressure is on this Chancellor and the Prime Minister.
The pressure is massively on and I suppose they would say the hope, and some in the city would say too, that the hope is to kind of create a virtuous circle where you do invest more in the UK and they hark back to say twenty thirty years ago when pension funds did invest in UK companies, And so of course if you've got that kind of bank of money being invested into UK companies, the chances are those companies may do better, their valuations will rise. That in turn,
of course is good for their owners. So the hope is to create that virtuous circle. Kathin, thank you so much for being with us. Bloomberg City Editor Kathy Griffith, and I've Caroline Hepkee here in London. You can catch us every weekday morning for Bloomberg Daybreak. Youre at the beginning at six am in London. That's one am on Wall Street.
Tom, Thank you Caroline, and that does it for this edition of Bloomberg day Break Weekend. Join us again Monday morning at five am Wall Street time for the latest don 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.