We Expect 3 Rate Hikes, Zentner Says

JP morgan fourth quarter adjusted revenue came at twenty five point four five billion dollars the estimate five point five one. The fourth quarter adjusted EPs came in at a dollar and seventies six cents fixed income trading revenue, well below analyst estimates. These results, of course, include a two point four billion dollar a charge as a result of a tax bill. And to get some guidance on where JP Morgan sees the effective tax rate for eighteen, they see

it around nineteen percent. I'm very pleased to say I can bring in Bloomberg's day in Campbell now to get us up to speed on on what he sees in the numbers. We've been staying for a while day can we're expecting it to be a murky quarterly report from not just JPMorgan but across the street. Yes, that's that's for sure. This is no exception to get us started. One thing that I noticed in the result is expenses

are higher than analysts expected. That's never a good sign, especially at this point in the h in the business cycle for these banks. They've been slashing expenses for for years and UH and to be surprising on the up side in a quarter like this, I think maybe one reason why they shares her down. I'm not sure how much guidance we can take from the interday move pre market. Because they had such a monster year last year they can going forward. I'm still sitting here wondering where the

revenue comes from. Let's deal with the investment bank. First trading rem new has been rough for a while, Volatility is not in their client activity won't be what it otherwise would be. Are we going to see a change this year? That's the hope, certainly among Wall Street trading desks. UH, there is some reason for optimism. You you've got central

banks UH, and monetary policy diverging around the world. There is some thought that that's gonna help bring volatility back into the markets and give some opportunities for both clients and UH and traders. But we've been we've talked about that in twenty seventeen and it didn't really uh come to fruition. So I think that's still a question mark for So we've got JP Morgan and typically a Bloomberg.

We talk about the big investment bank, and we don't spend much time talking about Chase Chase of course, a massive retail arm. Can these guys continue to increase the NEN interest margin and continue to maintain such low deposit beta? And what I mean by cutting through the jargon, can they continue to ignore the rate rises that come from the Federal Reserve without passing them on to the deposit base.

That is the big question. Uh. You know this is interest rates have never been at zero percent before, and so coming off of a floor like that, a lot of analysts have had a hard time modeling what deposit betas or how much banks will have to pay depositors. Uh.

It's not like any other cycle. And so we have started seeing interest rates deposit rates tick tick up, and so there is some indication that maybe that will continue and make it a little bit harder for banks to expand their margin as much as they as they may like. But again we're coming off a very low base. Banks typically can move the and they position themselves. They can move the rate that they're getting on the loans uh more quickly than they than they typically do on the deposits.

So that should allow them to expand that margin. Taking Campbell with us is he's gonna get ready for his reporting on this and to advance the story further. We like to do that with Bradyn's legendary at Sanford Bernstein. His black book was it required historical and present tense read for years by hold selling the banks, and he now has a shingle out at the New York University Stern School of Business where he crushes people with quality

ces each and every quarter. Professor, it's wonderful day. Have you with us? I want to wax philosophical. Seeing a Bloomberg headline JP Morgan fixed income training revenue drops percent? Do we have an excess of banking in America? Are What we're really dealing with here is there's too much much iedness in banking. Um, well, that's a you could argue that on the retail side, which is if you if you think of the millennials, the millennials probably don't

visit bank branches a lot branches. I think there's absolutely certain you're but the your lead in which is fixed income, fixed income, has already cut back. I mean what you're what you're seeing with fixed income is a recognition on the part of all the banks that there will be a fixed income market. Someone at some point is going to have to pay for liquidity um. At some point the Vulcar rules will will will loosen up a little bit so that you can make money from market making.

But you know right now that is that is a hope. That's a hope. I love that. I hope you can say that. In academics they can hope. Professor Hin says that like three times in any given lecture that he just forget about the hope. Jamie Diamond, Brian moynihan, and arrest. They have to deal with this. Have they cut trading to the bone or is there more to come? I think there's a feeling out there that they have cut

trading to the bone. Uh. One one thing we we haven't talked about is how you sort of uh, convinced some traders to leave the bank when you don't want to cut them necessarily. How do you do that, Chief financial officer hands Um, that's called a buyout, right something like that? You uh, you you start seeing that they're not invited to the to the best meetings, their clients are taken away from them, and then next thing that sounds like Bloomberg taking taken This is the kickoff to

an earning season. Do you do you? Since you know within our team a similarity bank to bank in terms, I mean, John, what's it like in the United Kingdom? Is it trading? Trading that slow there as well? Training slow, training slow across the board. But I think client mix has been really important over the last couple of quarters,

depending on the client mix. If you're really exposed the institutional clients the hedge funds, for instance, then the vix tells the story of what the quarta is going to be like. But if you've got a real good corporate client mixed, like say Bank America, fixed income trading holds up because you've been exposed to that big boom in corporate debt issuance that we've had over the last couple of years. Is that going to be important this time around?

Day can as well that Yes, we think so. But JP Morgan is one of those banks that has that flow business, has a lot of corporate clients, and they turned in a disappointing fixed income quarter. So I sort of shudder to think of what people at Goldman are thinking on a daylight today. And we tite one set of earnings and we extrapolate it forward. We think about, what's JP Morgan gonna report now after Bank of America, say, and then next up Goldman Sex as well, what's the

read for Bank b of A and Goldman SAX next week? Yeah, the read for b of A and City I would add to the equation which also have big corporate businesses like uh, like JP Morrigan is you know, it could be down thirty percent, maybe a little bit less. All three of them coming into the quarter said, uh, trading overall was going to be down about fifteen percent, So

they were all in the in the range. Uh. For the Goldman Sacks and the Morgan Stanleys of the world, which have less of a corporate business, less flow trading, the story maybe even uglier this quarter. I mean, I think that's gonna be the read out of looking at JP Morgan. If they can't turn in a good quarter on fixed income trading, then then then how is Goldman going to do? Bread hands? I just got a first

statistic here. The earnings have come out really nuge two day and JP Morgan they used they're best in class in terms of putting out earnings and it's been a struggle to get the data. Bright and seven r o E. I'm sorry. Managers have to stand up and do something right. Yes, um recognize is viewed as good. I mean that's the cost of capital of these banks. So, I mean what has happened is we've become used to the idea of of you know, below cost of capital performance. Jamie's got

the best firm. Now this quarter, this quarter is going to be an unusual quarter, right because we've got all these tax rates to be a mess, Professor, isn't it That's an opportunity if you're the CFO, to throw everything you can into it because the analysts are going to are going to look at the quarter and say it's an aberration. I'm not going to worry about it, right, and so you throw X ray expenses, your rite things off,

you let people go. This is any time you have an event like this, it's a it's an opertunity to take the wheelbarrel out. And John the Tier one Capital's ubs like, I mean twelve point one twelve point four percent common equity Tier one capital, Dacon, they're on the edge of credit suite and ubs in terms of financial integrity. They're hold They're holding a lot of capital. Yes, they would certainly for all of Jamie talks about his Fortress

balance sheet, he would certainly like to hold last capital. Okay, this is making to Dick and Campbell. Get back to work at your real job. And Brad Hans, thank you so much for being with us today. Look for Dacon Campbell's work on Bloomberg News, further depth on JP Morgan and American banking. This is Bloomberg. We are more than close to a two percent two year yield. That means it's a good time to talk to Ellen Zentner Morgan Stanley.

She over the year has been wonderful at parsing y equals C plus I plus G plus n X and really had great acclaim eighteen months and two years ago. I'm saying this is a Fed that would be forced to wait and wait and wait. Is a two percent yield on the two year a signal that we're going

to have a significant set of rate increases this year? Well, I think that, Uh, you know, we expect three rate hikes, right, and if the tenure does not move much, or if it moves lower yields on the tenure, then you're going to have a very flat yield curve. And so the Fed is going to have a very difficult decision at

that time, say in the third quarter of this year. Uh, do they push it further because financial conditions may still be easy to tell them they should go further, or do they take a flat yield curve as as as a sign that if you go further, you're gonna risk converting the yield curve. But what's missing is inflation. You're one of the great parsers of inflation. Do you just hope inflations out there? If your chairman, Powell, do you wish for it as across my fingers, hope to die?

How do you do all this if there's no inflation? Well, so, hope is a big piece of it. Right. As a forecaster, you do your best forecasting where you think inflation will go, and developments in the economy and the way the data comes in will either give you more confidence about that assumption or less confidence about their assumption. And how confident you are in your inflation forecast that we will get to the two percent goal at some point over the

medium term horizon will dictate what they do today. UH. And so basically the mount Hornback, our global head of right Strategy, sees the tenure yield on the tenure moving lower this year UH basically a completely flat yield curve in the third quarter and slightly inverted in the fourth quarter. Part of what's driving that estimate of his is the fact that we have such a tepid forecast for inflation.

We're coming in lower than what the Fed expects, than what consensus expects in terms of the path we're looking for.

And in his estimation, if the Fed continues to hike rates with inflation not materializing, right, you're going to continue to get a market that bets every hike is a mistake, and that recessions around the corner, and it's just going to be very difficult to see how the yield kurse deepens in that environment and Ellen, I'm going to have the privilege of speaking to Matt Hornback a little bit later on on Blood Black TV, So I'm looking forward

to having this conversation with him. Was that a shameless plug before seventh for the company? We both and in my humble opinion, Matt Hornbuck is an excellent guest, so it ought to be a really good conversation. Thank you very much, Tom. Can you just let us have a conversation now? Thank you? Um CPI is going to come in a little bit later. It's not as if we

don't have any inflation. It's going to be north at two per year on year you back out food and energy, it's going to be around one seventy there the estimates the previous number quite similar as well. Is it a bit disingenuous to say there is no inflation in the United States of America because we do see some, right, we do see inflation. That's price growth, and prices are growing, but they're just not growing uh quick as quickly as the FED would like them too. And there's not enough evidence,

especially when you look at core PC. They're they're the measure they anchor their two percent goal around. There's just not enough evidence to him to them that there is a sustained pick up in inflation. But they believe that the recipe is there. Growth is coming in well above potential, the unemployment rate is low, much lower than where they think full employment is UH, and they're keeping financial conditions

very easy to encourage those inflationary pressures to build. And that's why they have confidence that they will get two percent some time over the medium term. Now, notice I keep stressing the medium term for the Fed. They don't need to see two percent now or tomorrow in order to raise rates. They just need to be convinced that the right UH environment is there for it to get there over time. But the market is much too impatient for that, and you'll not convinced that they can get

to that. No, we're not. We're not convinced. And I tell you what the We have been doing the traditional way of forecasting inflation for a long time. Inflation expectations lagged values of actual inflation, trade weighted dollar, all of the above. But we had not properly taken into account technological effects on inflation, and when we did, it just brings the path down that much lower. One minute, Morgan Stanley is a claim for parsing this strange thing. Productivity.

What are you observing in the next one quarter, two quarters, three quarters? On productivity? What are you looking for? We've got a cyclical rise in in capex that has already led to higher rates of productivity, and so we're looking between one and one and a half percent one to one and a half percent sustained in productivity. And the story there is that you just take that in a vacuum. It looks pretty tepid, right, but compared to about flat for the last five to six years, I think that's

as good as it gets. And that's a pretty good story. A cyclical pickup and productivity can stretch the cycle for longer. Ellen Saner, thank you so much. With Morgan Stanley on this important today. Lots of news, loan, some real shifts. Goland, okay, let's get focused. Bank of America two d and ten thousand employees, JP Morgan, Wells Fargo even more two d and sixty eight thousand in City Group. It's a tiny bank two hundred thousand as well. He's out of Kellogg

at Northwestern a real NBA program. Neil dar joins us with p WC on financial services. What I love about Northwestern and the legacy of it. The MIC's over there, Neil, You've got to get close to the mic. What what I love about Northwestern is a core curricula. If you were to teach financial services right now within the core curriculate Northwestaurant, what would be your number one message to the best and brightest. There's a lot of change out there. There's a lot of change, and we have to look

at things that are impacting the industry broadly. Uh coming at us in a lot of different directions. Technology is front center right. Did a panel of Davos three or four years ago? The Third world was way ahead of us and used to technology. What are the big countries America, United Kingdom, Germany, et cetera. What are they doing in the next twenty four months on technology? Well, technology, if

you if you think about it. Over the last several years, there's been a lot of fintech activity where fintech has been doing a number of things that now the bigger companies are absorbing, either through acquisitions or actually just embracing it. Fintech at times can struggle to scale um so every element of a company, at least in financial services. What we see across the banks, the insurers and the asset managers are looking at front office, mid office and back

office innervation. How technology can make things um more efficient firstly than secondly changing the customer experience. If I have a million employees at the top five or six banks total, how many of them are not going to be employed at those banks in twenty four months or far more importantly, five years. That's a great question. They've got a right size at some point. Well, it's a great question. I mean, what we're seeing right now is what the real impact

of digital labor is going to be. And what I mean by digital labor is things you hear about things like robotic and artificial intelligence, where it's making things more efficient. We're working through right now the life cycle of how that type of technology is going to impact the day to day business, and then that'll get to if I walk home to the man's okay, this is six bedrooms, five fireplaces, three dogs, I go by eighteen banks, they're

all empty. Forget about AI, forget about robots. The old model of banking that PwC advises them on every single day is a dinosaur. How many bodies will go out the door. Well, a percentage it is, it is changing dramatically. So your point around walking home and seeing the empty answers, we are seeing that customer experience dramatically change in relation

to UH. There was a survey that that we did that shows fifty two percent fifty two percent of folks are actually looking at digital banking in relation to the way they do things on a day in and day out basis, transferring money, um, paying bills UM. So so you're point a spot on in relation of what is that going to mean in relation to them? When do I start seeing press conferences that aren't a lot of happy talk about tax bills and use of cash and are I'm sorry the models over? I mean, I get it,

their control management is going to be doing gradually. I get that, But five years from now on a given million employees, it a huge part of American banking. I can't get a real answer on how many bodies on a percentage basis go out the door. Well, look, I think you're gonna have to see these business models evolve, and as these business models evolved, we will see natural

knock on in act. So on the people's side of things, what we're seeing at a number of our clients, uh is folks actually embracing digital labor in relation to doing things differently and then using their folks to actually do things differently in relation to and UM analytics and and actually doing a deeper dive into various things. Will that last over time? We'll see what does it mean for mergers? It it it the regional banks. I mean, you know

we're talking this morning. JP Morgan could barely move the needle. They're so big. I went over the scope and scale of trillion dollar numbers with JP Morgan. What does regionals do to compete with this new digital labor and new technology. Well, I think the regionals will continue to do consolidation. I think they'll continue to sort of grow in that aspect um. They're doing interesting things because of different size and scale.

I think the global banks just have a different footprint and profile, so they'll probably get bigger on on on the global stage in certain extent. Neil Dart with US with p WCS had a financial services as well. Are the global American banks competitive? The global American banks are competitive in RELATIONSHIPAUS That's a message I get in London. They are the US banks are really competitive. They are compared.

What is the distinction of a given American banker going into a median in Poland than somebody from the other platforms of France, Switzerland, United Kingdom. Well, it depends on in relation to what part of the bank you're talking about. Um but um but but yes, us banks are getting uh they are strong and they're getting stronger. Um. I think with a bit less regulation you'll see that these banks become even more competitive. Um so so so it's it's it's a good place to be right now. Now.

These banks also are going through their own evolution in relation to sort of doing things more efficiently. Uh so, things around cost, in relationship, constantly making things more better in improving the experience, but also looking at how to do um cost in a more cost effective way. What do the banks do that are so are lost in

the cracks. They're either big but they're not too big or there there there may be too big to be a regional they're these I don't want to mention names, but there's given banks worldwide where I can't figure out what the strategic mission is because they don't have scale. Well, certain banks playing in a very regional model UM and UM, they will have to figure out, UM, what is their next pass in relation to will they be able to invest the way the bigger banks will, Will they have

the innovative culture? Uh that that a smaller fintech will in relation to disruption? UM. So you hit a good point, Uh, that those banks are constantly gonna have to go through their own self assessment in relation to do we do something dramatic from a strategy. Is that happening in America and midsize and regional banks right now that that naval gazing into the spring of this year. Well, uh, I

mean we're talking about banks specific spankes specifically here. I think what we're seeing on the regional side of the banks is um on a smaller scale many of the other things we just talked about on a larger banks. So the impact of digital, the impact of technology, the impact of artificial intelligence. We saw black Rock today with

that thought baying up numbers fift dividend increase. Assets under management is obviously the Creek key phrase three years ago, everybody wanted to be an asset management Is that is that over or is that trend just continue? I think asset managers will continue to grow in relation to consolidate like Aberdeen did. I do think you will see consolidation in the industry in relationship, but also there's a lot of new product that's coming out within the asset management world.

UM in relation to more and more money is chasing yield um and I think the strong the strong will get stronger. Uh agreed, And I think you'll see that again through consolidation. But you've got to find a Greek letter to have as a vogue thing for two years. I mean, we've done Beta, We've done Alpha. Do we need a new Greek Do they teach Greek letters at Kel? We need a Greek letter to the Gamma fun? Him? Are you can invest in the Gamma Fund? I don't invest,

you invest? You need money to invest, Neil. One final question before we get you onto your Bitcoin day and p w C Bitcoin is that the new the new name for the company. Where does bitcoin fit into all of your financial services consulting. There's a lot of talk owination, cryptocrapnity, action or is it just Look, we have a lot of discussions across the industry and rational What does this

mean in relation to regulation? What does it mean in relation to cyber what does it mean in relation to uh, you know, the way things are going to be done in the future. So a lot of discussions. We'll see how this plays out over time the answers. Nobody really knows. I think people are figuring it out because I mean, we saw the I P O flutter or E T F flutter I can't remember which it was now this week and I guess SEC came in. Is it yeah? Maybe not well I think again, you'll we'll see regulation

around it, and I think it's developing there. Thank you so much. The p WC and Financial Service is good to catch up with him on a day of banking earnings. Really fascinating to see the huge capitalization of the American banks. Thanks for listening to the Bloomberg Surveillance podcast. Subscribe and listen to interviews on Apple Podcasts, SoundCloud, or whichever podcast platform you prefer. I'm on Twitter at Tom Keane before the podcast. You can always catch us worldwide. I'm Bloomberg Radio