This is the Bloomberg Surveillance Podcast. I'm Tom Keene, along with Jonathan Farrell and Lisa Abramowitz. Join us each day for insight from the best and economics, geopolitics, finance and investment. Subscribe to Bloomberg Surveillance on demand on Apple, Spotify and anywhere you get your podcasts, and always on Bloomberg dot Com, the Bloomberg Terminal and the Bloomberg Business app.
Look on I'm this morning, but our lead story JP Morgan in the pre market up by two point eight percent. Ken Leon, the director of equity research at CFI right, joins us now for more. Can should I be focused on the beat, the race or the provisions for credit losses?
I think you can.
Focus on the economy and the strength of the resulting and performance. And what this means is, you know, that's her kind of Coquillier. You build reserves mostly for loan losses and also looking ahead to perhaps a weaker per performance. Sometimes you have long loss reversals. We had that a
year ago. So what's likely now is if we have a soft landing, not a recession second half of this year, the likelihood as these provisions begin to slow down and possibly the reserves may be too high in twenty twenty four when you have an ability to beat much better comparisons to twenty three.
This was a good quarter.
We thought this would be the trough of the investment backing cycle and we are seeing green shoots. But the strength of the consumer and commercial loan activity is very promising. And size matters here, and that's been your discussion in the last half.
Hours, Ken Leon.
It's where every wanted to go in size it matter. I'm going to give you two buried in a PowerPoint, Ken Leon, and I know you know this and probably knew it already. Thirty five percent pre tax margin on JP Morgan Asset and Wealth management thirty five percent on the dollar, folks. That's that's almost like just not in the books, is how I'd put that. And what's so important to me, Ken, The return on equity with the Marinero's system leaps from a twenty five blend system up
to thirty four percent. Roe, have you ever seen a big profit machine like that?
And asset and wealth management.
You know what's amazing, Thomas JP Morgan has done this, you know, with less fanfare than others such as James Gorman and Morgan Stanley. I took it from twelve to twenty five percent and probably thirty.
These are phenomenal numbers and it speaks to making the right strategic decision to expand an asset and wealth management.
That's what Goldman Sachs unfortunately will have to talk about next week, where they made the wrong turn and they're trying to play catch up in these amazing areas.
Lisa, that's exactly where I wanted to go. This is not about I've.
Never seen this before from JP Morgan and what the improvement was at Gorman coming ages ago.
This is about the one that.
Aren't doing it, and we're going to look to that next week. In particular, Ken, I'm curious your take on the net interest income coming in so strong, upgrading that for the full year at a time when a lot of people are critical of the big banks for not passing along those extra profits to depositors more quickly, akin to what we're seeing over in the regionals.
Yeah, that's right, and we have a beautiful chart somewhere, but basically it's two points. You have one lever, which is rates, and rates might have peaked, but if you have increased loan activity that will spur net interest margins and maybe keep the earnings asset yields at decent spreads, even though we have this disintermediation where depositors are looking for five percent or so. This is really promising for the larger banks. It's about fifty to fifty five percent
a total net revenue. As to your point, Lisa, you get a little bit more downstream, it's sixty five percent or more.
So that might help the smaller banks. And we're going to be watching that at CFRO.
What are we seeing ken with respect depositors getting sick of earning nothing on what they are parking at these banks and moving and actually shifting into CDs into income producing instruments. Is this causing any kind of pressure or have we seen a surprising stickiness of these deposits that will allow this type of net interest income to continue.
Yeah, so that continues.
That's far the biggest macro trend is this pivot to getting higher yield. And additionally there's course non interestparing deposits and deposits that are there because you're a small business doing business like with Bank of America and you have relationships, so you know, I think that will continue. But if we reach next week where we've reached the FED finishing its rate rise regime and pause and then perhaps cut next year, this will be less of a factor.
Ken.
Can we just finish on regulatory over hank bit a pushback? I think then in the statement this morning, JP Morgan, I just wonder how much of an overhang that's going to be on the whole group of stocks in a bank and sector one hundred.
Percent, And that's where I would have started this conversation with Michael Barr's holistic capital approach that we studied rigorously, that talks about the interplay of liquidity and capital risk and taking two dollars for every one hundred dollars for risk weighted assets.
But you know capital will increase.
If I'm an investor, I'm looking at total return. This might put some kind of ceiling on buybacks that none of the banks did. Those in the dot Crank stress tests were allowed to do, but they had dived. An increase capital and return of capital is what Jamie Diamond's most worried about, because a sophisticated investor may say, I may go.
Elsewhere, Ken, Thank you, sir, Ken, Leon F. CFO eight.
Megan Swiber joins US right now, director of US Rates Strategy at Bank of America.
This is a brutal job. Does moynehint call you up to get briefing?
Pharaoh's big on this like Brian's like wicked, wicked informed from his research staff. He harasses Ethan Harris at home on a weekend. Does he call you up to say, what's a terminal rate?
You know?
Occasionally here and there, but you know, I would say that that's just been really the focus of markets more broadly, right is Ultimately what it's going to come down to is what is the FED going to do at the next meeting? Where does neutral sit? And that's been very important for the bond market. But of course, as we were just talking about the equity market and okay, but Mark.
You did your fobosi and there's got to be a mathematics that you go out to a place. We're back to a normal environment for fossils like me that we haven't seen in sixteen years. What's the new you know, in terms of terminal uncertainty, what's the new terminal rate you're working with?
So, Tom, what it comes down to right now is
the inflation picture. And part of the reason why we've been able to see rates rally so much this week is at the end of the day, we got a pretty promising CPI report, and when you're looking at inflation being able to moderate, you know, when we dive into the details terminal rate, what it does to the terminal rate is it reduces how much more we think the Fed will have to go if we listen to the more of the hawks and the Committee needing them suggesting
that there's still more room for the Fed to hike. What it comes down to is whether or not inflation is persistent or not. This core services x housing component that Powell's really anchored the market on printed at zero percent month over a month in the most recent reading. So it takes a little bit of the wind out of out of the sales of the more hawkish camp.
Here.
One thing I can get hooks and Stuffs to agree on right now is this soft summer patch for inflation.
Yes, exactly.
Then there's this divide that starts to merch lights this year as you know about the potential to reaccelerate, where we evening the team on that.
So we are of the view that in the long run, inflation will be able to settle back to two percent, and I think that that's right. There is really this divergence between are we going to settle now closer to three percent by the end of the year, or is that going to be closer to two and a half percent. What I'll say right now is that we're a little bit more so in the stickier inflation near term camp
when I look at what the market's pricing. Though you look at one year inflation swaps sitting below two point two percent this morning, even with our house view for a mild recession starting in the first half of next year, that's still about forty basis points or so below where we're expecting. So I will say the market seems to be very overly optimistic around where inflation's going to settle,
even over the near term. And I think what it will come down to about this question of how quickly they're going to be able to see inflation moderate down to the target. It's going to be a matter of how strong the US economy will will continue to be, and a lot of that economic resilience to skew the risks I think near term towards towards more persistent prints.
Then do you think that it's too early to get both on longer term bonds at a time when perhaps the market is overpricing the idea of this soft landing that yields low inflation, robust growth, and everything can chug along.
So I think, Lisa, what this presents for us right now is the is when we look at what the market's pricing across the curve, I think it's too early to get bullish on the front end of the curve. And as as was just highlighted, right we've seen really that very notable rally in the two year rate. I think what makes more sense right now from the investor perspective is going along further out the curve, actually closer
to the tenure point. And that's because when we look at prior hiking cycles, right when you look at how the market performs twelve months after the Fed delivers that final hike, you usually see tens rally on average about one hundred basis points over that twelve month period. The ability for the front end to really calm down is going to be a question more so about when does the Fed deliver deliver.
These cuts You talk about basically a real deepening in the yield curve inversion, and this would be a resteeping or reinversion down to near record loads or at least post nine to eighty one. What does that mean in terms of some of the dynamics that we're talking about this morning with banks and whether that increases the risk of this shallow recession becoming something a little bit more Yeah.
So deeper inversion we'll put more pressure on banks, for sure. But what I think the curve inversion is really telling us right now, it's not so much so reflecting recession concerns as some of these recession probability models will tell us. What it's reflecting is expectations for the FED to cut, and the FED cutting alongside inflation that's able to moderate
back down to its target makes sense. The FED thinks about setting interest rates through the real rate, So a five percent FED funds rate is different when inflation's running at four percent than it is when inflation's running at three percent. So what we see the market pricing, and part of the real reason behind that yield curve inversion is this strong confidence in the market that the Fed's going to be able to get this back down to two persons.
It's amazing, it's always.
It's beautifully spoken, because John, that's the absolute underlying belief structure that.
We have hasn't been shattered, hasn't been shattered.
You look at five year, five year break evens, they've been pretty consistently priced at the Fed's target throughout this whole inflationary episode.
That's the credibility test for chem and pound. In fact, he's basically so, oh yeah, a few times. Can we finish on the global backdrop? We haven't discussed that much. Does it matter to your call that China is experiencing what some people might refer to as deflation disinflation? The UK has got problems with inflation, Europe inflation, it's all this tension abroad and some major trading partners. How important is that?
So?
I think it's definitely important, John, And when we think about the China story right with that will probably weigh more so. And when we're thinking about what our inflation forecasts are to the commodity story right and we've been able to see and that's a major reason why year over year inflation has been able to fall so much because commodity prices have fallen from where we were sitting
this time last year. So the fact that we're seeing more of this weaker China story really does, I think, endorse the fact that the market's been able to price inflation down so much. When you're talking about how the market price is inflation, it's very, very highly correlated to the commodity story. So that in and of itself really does help support lower inflation compensation priced across the curve.
Megan, thank you, big fan of your work together with Marcavana, just pretty in thank you, Thank you very much.
Thank you.
Megan Swambite of Bank for America on race strategy and this inflation backdrop.
We're trying to get perspective here, and we've heard a lot from bears vacillating, readjusting up. Anastasia m Rosso, chief investment strategist at I Capital, she doesn't have to vamp it up it all. She nailed it the market up. Let's go back in history. What did you see in October? What did you see that was enthusiasm for the market.
Back in October? What we saw were valuations that we're discounting a lot. I mean, if you looked across the equity markets. You've had the SMP that was trading I think at the time in the fortieth percentile. Over the last fifteen years, if you look at investment grade and high yield bonds that were trading, you know, in the nines or tenth percentile of their respective ranges. So we were discounting a lot and then positioning. I mean, Tom, could you get anybody to invest in any risk asset
in October of last year? The answer is no. And then ultimately the catalyst. You always need a catalyst. What we saw was that by the middle of this year there was likely to be this gap that was going to open up between what the level of FED funds rate is and where inflation was going to be, and that gap was going to be positive, meaning FET funds rate is above the rate of core inflation. And that's sort of what we are today. And I think that's
what's been happening in the last six months. We've incrementally been getting closer and closer to that pivot point. But as you know, markets priced in advance.
So what next, I guess the question. You know, you've wrote this equity market ballmark, if you want to call it that, Yet today. What are you doing now?
I mean, you stick with it, You stick with.
It, and you know, for now, I think we are on track for a soft landing. And I know, you know, the bearish camp would say, well, you look at positioning and it's getting very exuberant, you know, by some metrics you look at, you know, whether it's touch funds, whether it's CTAs, all of those investors have you know, very quickly, very bullishly positioned. So you know that leaves you susceptible to a negative catalyst. But can you name a negative
catalyst right now? You know, we've got if we've got inflation that is easy, We've got the FED that is pausing. And you know, Lisa, you talk about this all the time. If you've got the consumer that is strong and is not going anywhere, you know, then where's the secuity market going to go?
You know?
So for now, I think when I score the valuations, which is supported around these levels, and when I score that with twenty twenty four earnings, which by the way, have been derisked a lot, that we have zoo close to forty eight hundred on the SMP.
And just to let you know, I could give you a numerous catastrophic situations that could potentially happen to Curtaila, but that doesn't look likely. And that is the underscored point here that we are seeing less headwinds to this rally continuing, which raises a question of leadership. How much do you shift away from what's done best so far to some of the small cap areas the financials after seeing the results that we've seen just this morning.
Yeah, well, I think you stick with tech because tech, of course is where the growth is and is going to continue to be. And I am a big fan of artificial intelligence. I think that's a huge trend that is adding to earnings of companies starting today. So you stick with tech. But at the same time, Lisa, I'm really coming around on financials, and you know, if you look at the earnings results this morning, there's not much
to be disappointed about. You know, yes, we know deposit betas are going to rise, but guess what that's priced in. You know, yes, we know lending is going to be slower, but that's also baked into the cake. And what I'm actually encouraged about for financials two things that I don't
think are yet priced in. The First one is the possibility of a steeper Yel curve if we are, in fact, in a soft landing scenario that at some point the FED is going to pause and maybe even ease if inflation really comes down, and if the economy is still on track, then the back part of the curve should actually hold up.
The only thing that someone could say if they're a bearish and Tom would grunt and he would say, oh, come on, I can't stand this. The concept of regulatory overhang.
It.
Yeah, if perhaps these banks do too well and suddenly the supervisors and congress members decry that and try to put more constraints on them, is that something you're watching.
Yeah, it does need to be baked into the models for sure, But I would say it's a one time risk. That's a one time adjustment that would be that would have to be made. And guess what. It's also being talked about in the research for pots. But the other thing, again that I don't think is yet baked in possibility of step a Yel curve, but also the possibility of
deal activity picking up. I know that in some of the results that we're seeing today, you know, there's not much to write home about when to IPO volumes.
Or m and A.
But I think conditions are starting to be in place for capital markets to really open up in the back half of the year. So that means more IPO volumes, more announced m ANDA deals, which by the way, picked up this quarter, more of them getting done, and that's positive for banks, it's positive for alternative asset managers, for all the PE companies, private equity companies that will have the exit opportunities they haven't had.
Let's get concise. Do you see a second leg of the of a bullmarket to a fossil like me, that's early nineteen seventy six, and what's an SPX called. Don't give me this ninety day garbage that you do give me like a one year, two year, three year view. I'm scared stiff, I've missed this. I need to participate. Do I have a luxury of a second leg of a bullmarket?
I'll give you a six month view of that.
That's just really reaching out sixtears.
You know, it's somewhere between the ninety day and the one year, But the six month view, I think we do push higher towards forty eight hundred on the S and P and a little bit more cautious going to twenty twenty four, because you know, if we are at a point where the real rates do become restrictive, you know, at some point we may actually have a downturn in the economy. So I don't want to pretrade that. So
that's why I'm sticking with it. But at some point in twenty twenty four we might have to have a different conversation.
It's been a great coach I found this year. Congratulations and a stays around myrsite if on capital.
What we need now is a reset on the American economy. She's expert with this, with the acuity out of London School of Economics Poosia shir I'm joins just now a US economist at Barclays. You got to write a weekend note, my deepest sympathies. What's going to be the theme of the weekend note? Across the algebra of real GDP, consumer investment, government in this oddity of trade.
Yeah, that's that's a that's a good point. So you know, we've we've been seeing very strong consumption spending since the beginning of this year.
Lake.
You know, Lisa pointed out there's there are signs that perhaps the momentum is slowing, but we're still you know, fairly high. So just to give you a sense of the numbers, you know, we're tracking GDP in the second quarter, it's still one point five percent, comes to one point
five percent, and that's that's a resilient economy. I think where we are seeing some signs of weakness is perhaps in business fixed investment and that's you know, supplemented by the data we're getting in terms of manufacturing pmis, and that that's really where the weakness seems to be building up. And then we're expecting you know, some drag from from trade. But overall, if I want to look at GDP, you know, we're still on a fairly strong foot.
It's been off message today for us as we focus on the banks, and it really hasn't come up in the powerpoints that I've seen. But what is Barclay's, with all of your heritage of studying us in London say about commercial real estate? I understand it's not going to move the needle on real GDP, but fold a commercial real estate analysis into your American economics.
Yeah. Fair. So we did write about this a while back, Tom and we've course focused on office cre and I think that's where at the time there was a lot of discussion about stresses. But you know, some of the takeaways from the note was look off of CIRE is just about one third of all of the CIRE in the markets. And I think the second is it really
depends on, you know, how the stresses play out. Typically you find that loan maturities are staggered, Lee's rollovers are staggered, and the lot of exposure for CRES is with the smaller banks. So for it to become a macro scenario, we would really need a solid meltdown, and that's something we don't see happening at the moment.
PUSHA.
We're talking about the economic backdrop in a week that has been pivotal. It has given us both the dissipflation narrative that has gotten given us roid or shot, and everyone seems to be buying it. It's everything is rallying, kind of weak. We also have earnings from a number of companies, not just the banks, that highlight the strength of the consumer. Is this an economy that has any chance of a recession this year?
Well, at the look of it, yes, it seems hard to see how the slow down materializes. But our baseline, Lisa, is that it's likely that momentum will slow towards the end of this year, and a lot of that is contingent on the FEDS hawk is rhetoric and further rate tightening. And you know, it's hard for us sitting here to now think of how the economy slows, but we think higher rates will slowly start to bite. Towards the third
quarter of this year. We're seeing some nascent signs of slowing perhaps in the economy, and we think that with further rate tightening, we should get to a point where we see a mild and shallow recession towards the end of the year.
We're seeing that a lot of the banks are increasing their loans to consumers right now. They see the money signs because they're getting good interest rates on these loans, even as delinquency rates pick up, and they're putting aside more cash for loan losses. How do you watch this, the releveraging of the American consumer ahead of what a lot of people are expecting to be a slowdown.
Yeah, that's that's a that's a good point. So we are seeing some signs of stresses in terms of delinquencies like you pointed out, and we think, you know, eventually the US consumer is likely to slow. But you know, just to sort of tie all of this back, it really depends on what happens to the labor markets. You know. We we see strong consumption spending that's primarily a reinforcing cycle of strong labor demand feeding into income, feeding into consumption.
So in order for this to slow, what we really need is for labor market conditions to ease. Yeah. I think that's that's the key point that we we want to see, and I think that's where we're looking at in terms of where consumption spending is headed.
What I see in the earnings.
We'll talk to Shanoli Bassk about this in a bit, folks, and then Gina Martina Adams on this equity surge is and I want to fold this into economics because everybody's telling me the hour after hour after hour, and there's guys now that the stock markets delinked from the economy, which I'm not sure I buy. What I see here in the PowerPoint from JP Morgan is the iconic bank is the rich people are basically throwing money at a financial system profiting from it, and the haves in.
America are really doing well. What's the polarity?
And I think you're really qualified to do this with your workout of Indian out of the United Kingdom, you're distant from this, which is great.
What's the polarity you perceive.
In the two Americas or the three Americas.
That are out there.
Yeah, I think that's a good point. I think that the people in the upper income group are clearly very well positioned in this economy, very strong balance sheets, you know, very strong savings. And I think it's the perhaps the income personiles which are in the lower end of the spectrum, which is where the stresses are likely to be quelt.
You know.
Of course we look at aggregate data, Tom, and what that tells us is across the board, people seem to be comfortable to not save even in this economy, I think, and that they're benefiting from this this huge pile of savings and they're taking comfort from it, and so across the spectrum it seems like, you know, we yet to see any cautious sentiments set in.
That's the expense of summer camps in plural which is where you see the saving dynamic on a macro basis.
Slip away, rollover, rollover.
I'm hoping July rolls over into August where we can save ourselves.
Push your surround. Thank you so much with Barkley so they really nice. Update.
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