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This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along with Lisa Bromwitz and Amrie Hordern. Join us each day for insight from the best in markets, economics, and geopolitics from our global headquarters in New York City. We are live on Bloomberg Television weekday mornings from six to nine am Eastern. Subscribe to the podcast on Apple, Spotify or anywhere else you listen, and as always on the Bloomberg Terminal and the Bloomberg Business app.
Kenleyon, director of Equity Research at CFA, joins us. Now, Ken, what's your big takeaway from the earnings reports we've gotten so far? Hi, You know, I.
Think the first supporter sets the base for growth for the rest of this year, and I think the narrative is to be conservative. We certainly have a different economic backdropers for growth. We saw a very healthy loan activity that will accelerate for the rest of the year, not only consumer but really business. And to your point about are the banks going to compete with the Apollos of the world.
We saw healthy fixed income underwriting.
We also saw off the shelf dusting bank loan syndicates and giving very aggressive pricing, so the direct lending from the apollos and areas is really bought off. So I think the opportunity here is really net interest income is based on rate, but also on volume. Volume is business activity expanding the balance sheet. And that's why I think JP Morgan is guiding conservatively and they're going to exceed expectations if we have a very healthy US economy this year, which we believe.
Good morning, Ken. I'm looking at both Wellsfanga and JP Morgan on the provision for credit losses and just before the break as we went to the breaker said one point eight to eight billion at JP Morgan, lesson billion over at Wells Fargo. Still both of these materially lower than the market had expected, and that talks to the uniqueness and the strength of the US economy.
It does, and the narratives different than January where there was more concern of recession and also areas that where we could see higher credit risks. So as to my point, as you see the volumes of a healthy US economy, you will see some increases in loan provisions, but it's going to be proportional I will stay.
In the normalized area.
So I don't think credit risk is a problem, but both bank managements and analysts, you know, we'd like to look at it and talk.
About it well.
Obviously dividend and buybacks are part of the narrative with banks. We'll hear a little bit more, hopefully later on today from Jamie Diamond on that front. As you look at the banks, we've had this pivot to breadth in financials generally, But where the lead, where's the leadership in the end story? Kem for you.
It's a great question.
And now we're speaking about investors in terms of when we look at the financial sector, sixty five percent or twelve stocks, six of the largest banks are in there.
And also return of capital comes up.
With the mid year the June banks stress tests, and you know, we think the banks are very well capitalized. They're also building building up their capital because we don't know what's going to happen.
What's called Basel.
Three end game, which is getting a lot of pushback from Congress that it's too onerous and has negative impact.
For the US economy.
So I think what we have here and cf A went to an overweight on the financial sector and the large banks are part of that story. Is because we're going to see very healthy return of capital and probably.
We're going to get a glimpse of that at the end of June.
Ken You know, sometimes people take a look at bank earnings and they say it kicks off the rest of earning season. Mix it gives it to of what the economic outlook looks like. I'm not clear on whether there is a clear read on the economy going forward in these earnings.
Did you get one?
I think there is because we did see credit service income still very healthy year over year and sequential, so the consumer is healthy and spending. We'll take a closer look at volumes or transaction activity. We did see in the commercial loan activity midteam growth year over year for
JP Morgan. That suggests that we're seeing CEOs more confident for capital raising, whether it be through loan activity or going to the capital markets, which we think in the second half of this year there is a tsunami of capital that has to exit the private equity firms, which is going to benefit IPOs or m and A.
Meanwhile, you're looking at in terms of net interest compression that is compelling to me and Menace was talking about this earlier, this idea they've got to pay more for deposits and that deposits are leaving. This really raises a question is is basically you're going to get a more direct read through of that five percent benchmark rate if
you just get into a savings account. And this might be somewhat personal, but you know, there's this question of are they going to have to pay up akin to what the regional banks and having had to do for a longer period of time.
Totally different businesses. It's an easy narrative.
So I mean, if you're a city or JP Morgan, you have treasury services to studio institution, and then of course you have.
Small business and individuals.
So their relationships are far greater than giving five percent versus you know of a small bank versus four point six percent on a CD. Their relationships are dynamic. And when you look across where deposits are for these large banks, and there is a high percentage to my description that are non interest bearing.
That it's a little bit different.
So Moini hand, the CEO of Bank in America, always has that's a great explanation for this is we have diversified businesses and in terms of our deposit base, and so also based on the underpinnings of other things that we do in those relationships.
Well, JP Morgan certainly has that breadth. Give me your view on this.
I reflect back to the start.
Of the year, HSBC Wholesale sacked twenty seven percent of the commercial real estate exposure. They were nervous, The world was nervous. We're less nervous now.
It takes my mind back.
To just before the GFC, who was left holding the baby when it came to know cds's who is holding the baby in terms of C or E exposure that we should be concerned about, or is that a media obsession and not an analyst obsession with C or E.
We look very closely at that. And I also cover part of real estate and there isn't a black spawn event here for the large expects.
But when you go down and look at the total portfolio of commercial real estate, it's mostly in multifamily.
And then when we go down.
To office for JP Morgan, it's investment grade borrowers, it's Class.
A tower buildings.
It might be idiosyncratic, but to Gerard's point, Gerard cassidy earlier. You know, it's under five percent, three percent of the total loans. When you get down to the regional banks are smaller, it becomes more problematic.
But because these are not massive consumer.
Loans, they'll just kind of extend these loans for two or three years.
And work out any problem real estate.
But for the largest banks, we all watch it very closely and we look at all the metrics and think that this will be more idiosyncratic, not systemic.
Ken Lee and a CFI.
You were going to be back.
With us in eight am following the City group earnings. Thank you so much for being with us today, right, friend Max Neil Datta joins us now with an answer to that question, is this a pivot point this week or is this something that just is more noise, more bumpiness to the same road to easing policy.
Well, I think the latter.
I think it's a bumpiness on the path to still a couple of cuts this year. You know, you kind of had to take the data as it comes to you, and certainly what we learned in the last week definitely throws a bit of cold water on the idea that residual seasonality was a big driver for why you know, we sort of missed the boat on inflation the first couple of months of the year because March was still somewhat firmer. You know, the PPI data certainly took some of the edge off in terms of what it means
for PC. But at the end of the day, you're talking about core inflation PC inflation likely to be running above three percent over the first three months of the year. So the way I'm thinking about it is, you know, July at the earliest we had, we had three months of poor inflation data, and you're gonna need at least that many months to undo the damage.
So lots of things have.
To go right, But I think July at the earliest is probably the way I would think about it. If you get another bad inflation number, you just push it out.
I mean, Lisa, I do think it's worth reminding people that, you know, the late I mean, you have to kind of go back to first principles in these sort of situations, right, I Mean, we know the labor markets are cooling, we know that inflation expectations haven't really moved if you look at surveys of consumers and households, so at some level that would that suggests to me that consumers are somewhat resistant now to taking on higher prices, and so if
this continues, I'd be frankly more worried about corporate profit margins than anything else.
Well, now, let's really raise us a question about whether this sort of challenge is a bullish thesis and equity is more significantly than people are realizing. If you do see slowing under the surface, if you do see people pushing back on prices, the inability for companies to pass along things like oil prices and other commodities that are coming up, how much does that really make you less optimistic about what we get in the equity market.
Well, I mean, right now, the markets are kind of trading right. At any given point in time, I think you could basically say, you know, the economy is you know, one of four things. Right, we could talk about soft landing sort of you know, solid growth, benign inflation. We could talk about inflationary boom, or you could talk staflation or a recession right deflationary bust. And right now I think the markets are kind of thinking inflationary boom like dynamics.
I mean, that's an environment where you know, stocks can work, bonds can. But you know, if you kind of move towards the situation where inflation stays sticky, that begins to erode household incomes, it keeps the FED off on the sidelines, then you're talking about a situation where equity markets will come under more pressure. You know, I don't think we're there yet, but you know, certainly if we can, because
I think inflation will cool. But if it doesn't, then you have to be cognizant of that risk.
And that's maybe where the bond markets and New Good morning. The bond markets have been trying to price. They did thirty odd basis points in the space of two weeks. We've got a little bit back this morning. We've had a couple of auctions this week which it took more to encourage people to buy the tens and buy the thirties than it has for a long time.
Now.
That's because of market dislocation. But I'm looking at my inbox from Torsion Slock and he says, we are seeing the first science of US financial stress appear. Trailing treasury auctions, rating agencies issuing opinions about deteriorating fiscal situation and term premium trending higher. What do you make of that? The dislocation of the auctions this week, ad you syncraphic or something more malevolent?
I mean, I think.
It's I mean, I think financial conditions have tightened. If you look across a different indicators, right the dollars going up, corporate credit spreads of Titan. You know, I wouldn't say that it's a significant dislocation yet. I mean, I still think that, you know, financial market conditions, you know, have largely repriced because inflation has been higher, so you know that's going so in other words, inflation's higher, it's going to take a little bit weaker growth to get inflation
back to where the Fed wants it. And so you're seeing financial conditions titan. I don't think it's anything beyond that.
Just yet, Neil.
We have some more news. We've been reporting all week that this attack potentially from Iran on Israel was going to be imminent, and we have reporting that it's going to be within the next forty eight hours. We've see a few signals from that, whether or not it's the US directing embassy personnel in Israel where they should and should not go friends telling putting certain countries on no travel lists.
Last time we spoke, you pretty much shrugged off geopolitics at this point. How can you not say that this is not concerning at all to what is going on when you look at the global marketplace.
Well, you don't shrug it off. You just I mean, you take it as it comes to you, right, I mean, in my experience, like changing a fundamental forecast based on what's going on geopolitically is usually you know, by the time you start doing that, usually the crisis is over.
That's that's in my experience.
Now, what I will say to me, the most interesting thing is just the relationship between what's going on in the energy.
Markets and the dollar.
You know, historically everyone's thought, you know, dollar down, oil up. But given the US position as a major commodity exporter, and you know, we run a net surplus in petroleum, you're seeing you know, stronger oil prices boost the terms of trade of the US and that strengthens the dollar. Right, So the causality is actually from oil to the exchange
rate in the US. I think it matters more frankly for emerging markets or you know, sort of oil importers globally, because not only are they dealing with higher oil prices, they're also now dealing with weaker currencies, and that's going to limit the ability of those central banks to cut interest rates, which has been a reason for some of the enthusiasm and.
Global risk appetite.
Right, So, I think it introduces a little bit more tighter financial conditions, particularly in the rest of the world, I think more so than the US.
Yeah, before we let you go, it sounds like you're a little less bullish than you have been of late. Is that true?
Well, yeah, the data hasn't gone my way. How do you expect me to set you know, I mean, you know, you have to be honest with yourself, right, So, but I will just say, I mean, I do think we're Ultimately, when the dust settles on twenty twenty four, we will still be talking about a situation where the US economy is growing and the FED will be cutting That is, you know, I think, still the fundamental story.
And honestly, Neil data hasn't gone to anyone's way because no one's been able to gain this out. Remax, Neil Data.
Thank you so much for being with US.
Bank of America stel Caerry Hall, writing quote, we think the uncertainty overhang may challenge relative performance of the Russell two thousand for now. Given higher for longer rate risks, small is likely to lag large until later this year if and when we get more confidence in cuts. Jill carry Hall joining us now and Jill, this has been always a fascinating discussion. If we're getting this sort of cyclical boom, why are we not seeing it as small caps?
You're saying it's completely hinged on rate cuts and if we don't get them, we're not going to get that rebound this year.
Yeah, and thanks for having me. I mean, we talked to a lot of investors and I think there has been this year more optimism on small caps. We've seen that in the inflows that we track. But I think in all of the conversations that we have, investors have sort of been looking to the FED as the next catalyst for why the Russell two thousand could could move higher from here. You know, corporates in general, especially when you look at the S and P five hundred, they've.
Locked in dated low rate debt.
But for smaller companies within the rustle, about forty percent of their debt is either short term or floating rates. So you know, we estimate this could be a pretty significant hit to earnings over the next five years of rates sort to stay high relative to you know, if we see cuts, then this becomes a less detrimental headwind.
Jill, forgive me for sort of the hypothetical here, but what does it take to get some sort of fuel to this particular sector. Is it just one rate cut, is it just taking the prospect for even higher rates off the table, or do we need to sort of see the beginning of a protracted rate cutting cycle that could bring some of these expenses interest expenses back into something similar to.
The past, right, I mean, I think you know what one cut isn't necessarily just going to solve the problem. I think, you know, given how elevated rates are are, our economists are now expecting that we'll see a cut in December. They had pushed that back from June, and
four cuts next year. So I think if we get greater confidence that we're on a path to lower interest rates so that when these companies do have a lot of debt coming due over you know, twenty twenty five, twenty twenty six, and beyond that, that refinancing won't be as big of an impact to earnings as it could be now a great state. At these levels, I think a lot of the macro positives for small caps still stand,
the profits recovery. But you know, another risk there is that the profits recovery this year is very back end loaded. Earnings are still going to be negative year over year this earning season. The consensus is looking for small cap earnings to recover to about thirty percent year every year by the time we get to the fourth quarter. So we'll be paying a lot of attention to guidance this
earning season. So that could you know, potentially if things do come through, set us up for a better year end rally for small caps if we have confirmation that the back end loaded earnings recovery is coming through, and if we have confirmation that okay, inflation is cooling and the FED is going to cut, which as mentioned is our economists forecast now for December.
Still good morning. Looking at the breath trade and the Russell Twoth size and energies at the top there are up over ten percent, and tech and when you look at the commodity complex, we're talking about oil around this desk this morning. Geopolitics is samory the warnings that are there. We're looking at oil, we're looking at copper, We're looking at a some kind of a new cycle within the breadth narrative, within the Russell twoth size and how do you play commodity strength and will it endure?
Well?
I think you know, the good news around the commodity oriented sectors like energy and materials and industrials is that they are some of the sectors that have lower refinancing risk relative to sectors like real estate that can see
a much bigger earning set. So I think within small caps, if you're an investor right now, you want to be selective, and some of these commodity oriented sectors are one way to do that because they will benefit from from higher commodity prices, you know, manufacturing GDP improving, but they're less
sensitive to refinancing risks. So that's one area that we see as relatively better positioned within SMID and we'd stick with higher quality stocks and stocks that don't have a lot of leverage or short term or floating ratedit.
And then I pivoted one Ida and I look at the lags in the Russell two thousand and it is in the financials. We're getting information through and from JPM, from Wells Fargo, from City and it is about the net interest income and that story incrementally under a bit of pressure. But is that more pressure to come in financials in the regional banks.
So within within banks we'd favor large over smid banks for now. Obviously the regionals have been challenged. And you know, overall, this is a sector within the rustle that's sensitive to to credit conditions and to you know, the FED. So you know that's an area that even though it's ranked relatively well in our plot work, we're relatively cautious or more selective within Right now, we'll see what all of the banks continue to say this earning season, watching guidance
pretty closely. US corporates over all had guided relatively weekly in the last three months. Guidance usually is weaker at the start of the year, so we'll see if we see any improvement there. But in addition to financials, real estate it is another one that you know, we're more cautious on in small caps and does have you know, more and more risk for refinancing.
Jill Kerry Hall, thank of America, Thank you so much. As always, we try to parse through the different cost currents and the whack a mole of narratives.
This is the Bloomberg Surveillance Podcast, bringing you the best in markets, economics, angiot politics. You can watch the show live on Bloomberg TV weekday mornings from six am to nine am Eastern. Subscribe to the podcast on Apple, Spotify, or anywhere else you listen, and as always, on the Bloomberg Terminal and the Bloomberg Business app