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Terminal and the Bloomberg Business app. Oppenheimers John Stoffers, writing, we expect investors to pay particular attention to the big banks this season for quarterly results in any guidance that could provide greater clarity into the health of the US economy, what lies ahead, and how it might affect stock prices. John joins us now for more. John, Good morning, Good mornings. Good to see us, sir, Good to kick off the
morning with you. How low is the bar for these banks after the guidance we got in conference seas in a few weeks back.
You know, I think the bar is relatively low for the banks. I think there's an understanding that is beginning to flow through the markets that this is a period of transition. I think the numbers that we saw in terms of the economy from the July jobs number and then the most recent jobs number, the disparity betwixt the two, the inputs that are put into the economy. It's never very clear when you're coming into a transition into a normalization or whether you're getting into trouble.
G and these bank stocks can perform well with the implied rate path from the Federal serve and the SEP.
I think I think they can, and I think that banks today are more efficient than they've ever been before. It doesn't mean that you can't get a disappointing quarter. And I think the markets always when they come in here, very often ahead of the reporting, the markets weakened somewhat. Then if we get some results that are better than expected, who knows what the.
Traders will do?
Well they say, oh, it's already done, what's going? But generally speaking, you know, the financials have done very well this year, and a lot of that is the implication that things are getting better, even as things remain quite uncertain.
To build on what John was getting at, there is a feeling that, yes, it potentially becomes more difficult to make the same kind of net interesting income as a FED cuts rates. That doesn't seem to concern the markets as much as the l financial issue, the potential of credit deterioration among consumers that might be beginning to feel the pinch of some sort of change in cycle. How much do you think that's really the concern that people have that could potentially shake some of the confidence.
I think that is one of the major concerns. But it's very quite normal that you'll feel that concern at a time when the I mean you consider the FED is what we had eleven rate hikes, nine pauses at the high level before the first cut, and then questions related to inflation being stickier than may have been anticipated before. But likely the hurricanes are likely to ameliorate that somewhat.
But overall, you know what really has amazed me is, you know, forty one years in this business I've gone through I remember when Walker was in his second term, is when I came on. Is that when you get to this kind of a point, what I've never seen the consumers so sophisticated relatives to relative to other periods, and a lot of that could be the dissemination of information, the digitalization process of shopping, and comparison shopping.
I recall.
A pro prior visit we were speaking about consumer discretionary stocks and how within the retailers you just have to pick the ones that navigate this current period better than other ones, whether it's whether they have greater buying power than the smaller discount stores or what have you. And the American consumer is remarkably resilient. The job's number is resilient. Earnings have been resilient. Let's see how this third quarter comes out.
You know, as you're talking, I'm thinking of someone who spoke to yesterday from Bank for America who is talking about the resilience of the consumer and how you see ongoing spending in certain discretionary areas. In the past, historically banks were leading indicator for the other sectors that might
be reporting earnings. Do you think this time around, if they're better than expected when it comes to consumer performance, they also will be sort of a leading indicator for the rest of consumer discretion I.
Think they should be.
It's just that there are so many more inputs today than we've had in the past, and a lot of that has to do again with that resilience of business. So when you take you look across the sectors and you see what's working with consumers, and you look at the businesses that come in and out of favor quarter to quarter, sometimes day to day with the traders. But
there's a general trend that's showing. There's an amelioration process, a digestion of the interest rates, and there really is a sense that people have more money slashing around in their savings accounts in different places than many people have anticipated.
Fifty seven eighty of the close yesterday, your price stocket still fifty nine hundred.
Well ins and P.
Yeah, John, it's still fifty nine hundred and will be until the S and P closes out or above it, because that's our just and that's our self on those disciplines.
So help me understand where you want to be in the equity market With that in mind, Yeah, with.
That, we wanted still cyclicals over defensives. It doesn't mean we don't own defensives, but we overweight the cyclicals. Continue to like technology, communications services, we like consumer discretionary industrials and financials within cyclicals.
Let's just work through that financials way. It fits into this.
I think the financials fit in because eventually we think that net interest margin is going to work for them once you get the there's some volatility in the yield curve that occurs the way things are going in a transitional period. But once we settle to a more normalized yield curve, I think the banks, once the consumer feels more confident. We'll have to see what later on today we get the uh uh, the we get the consumer sentiment number that comes out later on today, and it'll
be interesting to see. But the consumer can be very emotional on those readings. When when the university reviews, you know, it does its surveys, consumers can can be pretty fickle. Remember they warmed up for a while. The conference board was was negative for a while, and they got warmed up a little bit. University of Michigan is going back and forth. Yeah, I love this.
If they called me or you John, they definitely would get emotions. We would sort of express how we feel about flation.
Go further out. I just want to finish with this idea.
Of whether if rates stay where they are long term rates, We're not talking about short term rates. Do you think that it favors one sector over the other. Do you think that it favors the ongoing cyclical kind of rotation that we've been seeing.
I think it does favor the cyclical rotation. And I think there's a realization that's beginning to come through, but it's still flowing through, is that we're not going back to see the FED unless we have a crisis, an unexpected crisis, We're likely not to go back to that band of zero to zero point two five, but more likely in an environment that'll keep the ten year treasury
at least near term. With all the changes that are happening in terms of the reindustrialization in the United States and in different countries, the process of diversification of globalization, the expenses related to that, I bet you know, and our arguew we'd say that the tenure will probably be in a range in terms of price to yield somewhere between three point four of.
Five for quite a while.
Okay, somewhere around that right now, John, I appreciate it, Thank you. So that'scross cybers a Laara rang of FS investments. Lara, let's build on the conversation we were just having with Mike McKee and welcome to the program. CPI jobless claims out yesterday, PPI this morning. I think we're all having some difficulty understanding what to ignore and what to pay attention to help us out.
I think that's been made even worse by the fact that we got a higher than expected initial claims number, clearly because of the disruption of these natural disasters that are so devastating to small areas of the economy and can have a big impact on the data. I think, you know, it's really the payroll report, the CPI report within that we are seeing just this continued stubbornness in
the inflation picture. I think Mike's right, we're on tracks certainly for the Fed to continue to ease rates in November in December, but there's a stubbornness to the services side of this. I think it's one reason why today too, the PPI numbers maybe didn't make as big of a splash. Goods prices are back in deflation. We know that the inflation I think trouble is really still in the services piece. It's maybe troubles too strong. It's like a mild headache that still isn't going away.
Well, Laura, how big a gap is there between the way you see it and the way the Federal Reserve seems to see it? Because we heard from William's Skills we embark in and they seem to cement this idea that for the Federal Reserve, at least they're comfortable with this disinflationary trend still holding.
I think maybe I'm a little bit more concerned about inflation, and I'm concerned about it in this short term simply because I know we are going to have some data disruptions that are going to maybe you know, create the noise in the food data, create the noise in some of the you know, prices that we're seeing with cars.
But I'm also concerned about it in the medium term, looking ahead to some of the factors that I think in the middle of next year are going to give us stubbornly higher rent inflation.
You know, I don't know.
How far you want to look out, but when you put it all together, for the Fed, they're having to navigate their dual mandate in an active way that they haven't had to in decades. We were either only worried about growth, or we were only worried about inflation. Today, we're kind of worried about both the jobs pictures that inflation, and I think it's going to make us all really zero in on data and be more uncertain about the fence trajectory.
Laura. There was a signal in yesterday's trading action that I thought was really important, which is that the bond market was looking at the prospect of a FED cutting rates even with inflation rates that were messy, that did come in hotter than expected, with still some uncertainty about that path of disinflation.
Laura.
From that perspective, do you think basin FED comments, there are sort of a tacit understanding in the market and on the Fed, but they will tolerate a higher inflation rate going forward in order to keep any kind of weakness from getting a hold of this labor market.
You know, I think they have to because you know, inflation was so far below target for years leading into the pandemic. I think it's natural given their average inflation target over time, it gives them the latitude, and I think that's on purpose to you know, accommodate, make policy more accommodative, even if it's a little hot. You know, it's not a bad migraine, like nine percent inflation back in twenty twenty two. It's a chronic headache, but I
think it still gives them the room to maneuver. And if they go one hundred basis points in total this year, that still leaves rates in restrictive territory. I just think they pause at the beginning of next year and reassess where things are going, because I don't think inflation's going to follow the knee path like it did before the pandemic.
When you put this all.
Together, does it make the bond market look more or less accurate on the long end in terms of reflecting that there is more flexibility when it comes to inflation rates and the fees response mechanism.
I think it makes the bond market look way more correct. For the first time in a long time. The market has been trying to push in too much policy accommodation into the forward curve. They've been making that mistake for two years now, so this isn't new. I think what it changes is that, you know, thinking about FED rate cuts, we're kind of trained to think, oh, the whole interest
rate complex is going to continue to fall. In reality, the tenure falls a lot before the Fed cuts rates, but what it does after the Fed starts cutting rates really depends on the trajectory of the economy. If the economy doesn't go into recession, the tenure kind of floats back up again. I think that's what we're seeing, and it's a reflection of a solid economic base and only an incremental slowdown in growth.
Bon Yos was in the climb this morning.
We're up by three percent, three basis points just to account four point one percent just moments ago.
Range there of FS.
Investments got General Castley standing by over RBC, joined by start with JP Morgan.
What's your first take this morning?
The first tape, John, is that the revenues are better than expected, as you pointed out, which is positive.
The provision was a tad hire.
But what's fascinating about the numbers is that the capital levels for JP Morgan.
Are extraordinarily high.
They have over fifteen percent CET one ratio common equity to your one ratio, as you guys have been discussing, their return on tangible common equity very high. So overall, it looks like on the very first quick take, the numbers are slightly better than expected and again, it will be more on the Q and a period during the earnings call that we'll find out more about that twenty twenty five number.
Jorg, can you put this in a perspective in terms of what this bank JP Morgan has done in the past going into periods of potential turmoil or lack of clarity? In other words, is this a provision build something that is normal, something that is analogous to things that we've seen in previous years, or is this unusually large?
Actually it was slightly higher than our expectations. We were at two point nine. It came in to looked like at three point one. And so it is a very interesting point though that you're making, because what we anticipate
is credit costs are normalizing. We have to remember that following the pandemic for a couple of years for JP Morgan and his peers, the credit costs were extraordinarily low, and when you look at the level of credit costs today relative to other time periods, they're very manageable.
And the important.
Part is is what you expect for the economy in twenty twenty five, and so if you're anticipating a hard landing, then this could be the start of something. But we're in the soft landing camp that you saw the employment picture numbers a couple of over a week ago, very strong employment still, so we're in the you that the credit picture for a JP Morgan is quite healthy.
I do wonder if this is a luxury if being in the world's biggest bank, or if this is something that we're going to see repeated at other banks based on Wells Fargo is so actually provisions come in lighter than expected.
How much do you attribute this.
To their not being able to lend maybe on the risk of your side, or not being able to extend as much the way the JP Morgan does. And how much do you think this just highlights the JP Morgan is sort of doing its own thing and sort of preparing for something that maybe other banks aren't seeing.
It's interesting because Wells, as you point out, they've got the acid cap that's still in place, and it certainly does make it more difficult for them to grow their loan portfolio, and therefore you could argue that maybe their portfolios could be in better shape.
But I had to point out a couple of things.
First, commercial real estate, when you take a look at the deterioration we've seen has been very manageable for Wells Fargo.
And the other important point is that the banks have in d risks.
Remember they go through the stress test every year and the regulators are very tire.
So the industry today.
Versus two thousand and six or or nineteen eighty nine or two thousand, any of the periods where we went into hard landings, the industry today just doesn't have the risk that it had.
In those past periods.
Now, don't get me wrong, we'll see some credit problems, but they're going to be very manageable this cycle, we think, because we don't see the hard landing over the next twelve months. But all the banks, I think you're going to see these their We're going to have good credit numbers even though they're starting to normalize. But overall we don't see any mass deterioration in credit.
It's a big thing to watch this quarter. Jared, appreciate your time as always, Sir, Jared Cassidy. There of RBC alongside Bloombergs not only bast Section.
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Mm hmm