'Bloomberg Surveillance Simulcast' Full Show10/14/2022
Fiscal and monetary policy appeared to be meeting in completely opposite directions. The Bank of England is having to try and manage the chaos. The government has been creating in both markets the bond market vigilantes are back.
What we had in UK really is symptomatic of what is happening elsewhere. For the Fed, they're strapping themselves in for this. They're sort of expecting some increase in volatility because the world is uncertain. This is Bloomberg Surveillance with Tom Keene, Jonathan Ferro and Lisa Abramowicz. Grandma is going to explain what happened yesterday.
I've got no idea. Live from New York City this morning. Good morning. Good morning for our audience worldwide. This is Bloomberg Surveillance on TV and radio later this hour.
J.P. Morgan kicking off bank earnings here on Wall Street. Rameau, shall we start with yesterday? Yes. Would you like to explain yesterday for the audience worldwide, please? People say it was technicals because they have no other explanation for it. That basically some people saying that it hit the point of a 50 percent retracement since the gains of the post pandemic show. And that was suddenly a by trigger for the algorithms say what you want to do. It's a massive market, whereas the
compass for what's actually meaningful in a market that makes no sense. Jordan Rochester of Nomura with a quote at the top of his note this morning. It reads as follows. If it doesn't smell right, it probably isn't. Yes, a lot of us have a lot of people felt the close yesterday. The two year, three, 450 in yesterday's session. Now, typically, if you tell me where the
bond market is, I can guess where the equity market finished. That wasn't the case yesterday. Yields responded in the way we expected them to respond to that CPI print. The equity market did not. The equity market was one of the only markets that did not respond in the way that you would expect it to respond. I think that's notable. You saw the dollar key. You're seeing the dollar continue to
gain today anyway. You saw, although it briefly did see some stability in terms of the dollar globally, which perhaps some people said also could be the trigger. I'm not going to speculate, but still you are seeing in March the terminal Fed funds rate four point nine percent is what's currently priced into the market. To give you a sense of how aggressive
people are pricing in this Federal Reserve. I'm not sure where the optimism is that we saw this massive U-turn in markets. You turn the attention shift this morning. Go away from CPI for a moment. We'll go through the bank earnings.
Retail sounds a little bit later. Got to talk about the U.K. as well. Chancellor quite is no longer in DC on his way back to the U.K. I understand he might have landed in the last few minutes or so. The UK's prime minister, Liz Truss,
according to our reporting, is set to reverse some of the economic plans later today. Never mind in a couple of weeks time this could happen later today. Dani Burger. My favorite articles about this are an explanation of one reporter, Sir Andrew Bailey, in the hallway and said, what's going to happen today? And he just smiled, you know. I mean, he kind of knew. And how much did he win, right? I mean, who is going to be who is going to blink? He didn't blink. And not only that, but in some manner, he is actually forcing forcing fiscal discipline on a government that did not want to behave or adhere to what the market was saying. We'll head down to Washington in just a moment to catch up with Tom Keene down in D.C.
to get the latest on a lot of this. Right now, futures are negative by only two tenths of 1 per cent. Setting the tone early on this morning will be J.P. Morgan. Then we'll run through all the earnings in just a moment.
Then you've got retail sales a little bit later. Look at the bond market yields come in today. I can tell you on the week for an 11th consecutive week, the 10 year yield is climbing higher. On the session, we're down about 4 basis
points or so. Lisa, 390 55. Yeah, the CPI data was not a comforting for anyone, particularly with respect to Quora, where it coming in at the hottest level in 40 years. As you said today, bank earnings very much in focus. Not just for the banks, but as a kickoff to the overall earnings season. How well are consumers hanging in there? And is a good thing or a bad thing? Year to date, you've seen no real varied performance across the board in terms of which banks have outperformed U.S. J.P.
Morgan down more than 30 percent yesterday. I just want to point out yesterday you saw a massive gain in all of these shares. Again, why? I'm not sure. Again, try to make a narrative out of this. Good luck to you. I'm not going to do it. But down the line, you see Wells Fargo
down only 12 percent, perhaps because it didn't have as far to go. Markets only down 20 percent year to date. And Citigroup down nearly 38 percent. Also today, September retail sales at
830 AM are consumers continuing to spend? It's going to be massive because of what happened with the hurricane down in Florida and University of Michigan. October sentiment index at 10 AM. It's mattering again. I expect this to actually be significant. And I can see your face, John. I'm just smiling. I'm just happy it's Friday because I don't want a 30 year old. Everybody here at the University of Michigan survey. Again, I wasn't curious to see whether
you start to see it roll over a little bit, just based on what we're seeing with respect to gasoline prices starting to tick up again. And today, we do have a bunch of fits. My care about Fed speak today. OK, first reaction to CPI, Governor Warner and Coke. Yep. Kansas City Fed President Esther George. Fed Governor Lisa Kirk. And Fed Governor Chris Waller.
Really your interest in what you want to see? I want to see what Governor Wallace got to say about that print. He's been pretty hawkish on the board. I think he's been a bit of an outlier in some sense, but a lot of people had to catch up with his view down in D.C. and I wonder if he pushes it even further.
For me, yesterday wasn't about the November decision. It was about the news conference with Chairman Powell. Could he lay the groundwork for a downshift in hikes from 75 to 50 to 25? Going to be really difficult now. How do they set the stage for December? These guys wanted a string of decelerating inflation prints to give them some kind of convincing guided. Maybe we're heading back towards two.
They're not getting get well. And right now, that's the reason we're getting a nearly five percent terminal rate being priced in to Fed funds futures. How much is that going to go above that as you'd start to see some of these? Pelosi see the sticky component of the CPI that that increased at the most going back to the 1980s. So it's not just sort of the temporary aspects, the sticky aspects that are going to present as you see the administration. They now want you to include gas prices went through the summer and last year they wanted to strip out the bits. And they emphasized the headline rather
than core. And earlier in the year, they emphasized horror over headline Haidi Lun. Politicians just drive me nuts. No one knows that. A headline out of the UK are reporting
less trust. The prime minister held a press conference on the UK economy later on today down in Washington, D.C. at the International Monetary Fund is our good friend Tom Keene.
T.K., the chancellor is no longer there. I know you had eyes on a governor a couple of minutes ago. Set the scene for us down in Washington as we look ahead to the UK and what's about to happen in London a little bit later. Without question, the most interesting
meeting since 2008, John, absolute extraordinary. John, let me paint quickly here because of time is short. The picture yesterday, I've got the Bloomberg on my iPhone and I'm showing the managing director of the IMF. The eleven basis point move in the 10 year real yield to one point six nine. She and her entourage were silent. This is before our discussion. As we did this, John, behind us was the chancellor setting up for his interview with the BBC, which again moved the markets there before he exited. Across the Atlantic Ocean.
That's the movement here. It's very fluid. We'll speak with Rod Rajan of Booth School. And, of course, his extreme expertise on emerging markets and his India and get a grip on earth will join us as well. You know, the first questions on inflation and looking forward to it some. Just a final question for you before we catch up with you again later on in the show. Mohamed El-Erian started the conversation this week and he said we've got a global problem that requires a global solution. You get the sense that we're heading in
that direction down in Washington this week. This is the heart of the debate. I was having a beverage of my choice yesterday, John. And this was the key thing. The word a chord from John Lipski. John Lipski does not see the elements of
a chord that are necessary to get that global solution. It's a Bremmer meeting, John. It's every nation for itself. A time. Some great work this week, sir. As always, good to catch our buddy Tom Keene Dan in Washington. We'll catch up with T.K. a little bit later.
We're not getting a global solution to a global problem anytime soon. I'm really sorry. We knew that, though. I mean, nobody was going to say that we were going to get that until the pain really starts to feed into the U.S. And right now, if anything, it's helping, at least when it comes to overall inflationary pressures. I'm curious about retail sales a little bit later. Does that just confirm that story of underlying strength that this Fed just needs to do a whole lot more? My concern is this is somewhat new ISE.
I'm not gonna get into it right now, is it? You are seeing the upper income individuals and households continuing to spend and spend even more. Lower income, much more constrained. You're getting very different stories depending on which bracket you look at. Joining us right now is market. It's our senior portfolio manager at
Offspring Global Investments. Marcie, first question, unfortunately, it's the the awful one I start the show with. What on earth happened yesterday? Oh, I think it was a typical short term traders rally, even though the numbers were bad. You could look at and say, well, here and there, their numbers would suggest inflation is rolling over. So maybe the federal backpedal will not be so aggressive. I don't think that's what they're worth the Fed is going to do. But I think that's what the market
thought. And the market is really all about short term trading swings. Nothing about fundamentals. It's only about what is the Fed going to do and handicapping that market. How has your view changed over the past couple of months as you do start to get more of these short term trading swings? You start to get read after read, highlighting the persistence of this inflation.
Well, I think the market has been dominated by this very short trading swings from companies, from sectors back and forth reacting. Again, it all comes back to the Fed, people trying to handicap what the Fed is going to do. So it hasn't changed very much. I think that the Fed is guarding light is basically looking at the unemployment rate, which looks terrific. So they feel they can continue to aggressively tighten, aggressively sell securities.
And things are all right because the unemployment rate is low. And so I think that's why the market will once again overreach, because it's looking really at that unemployment still looks good. And that's what they're going to focus on. And so no change. I think the Fed is going to continue to be on this path for quite a few months. Does this mean that you're hiding out in
cash? I know I think that basically equities still look very attractive because maybe one day the feds will say, well, let's we've done enough here. Let's stand back, compromise with inflation. And then in the interests of growing the economy and also the very strong dollar that says to me more than anything that tells you the strongest economy in the world is manifested in the strength of the dollar. So I think the U.S. has store good place to be. If you're invested, you'll be there on
the bottom and which will come one day a market. Great to catch up, as always, Maggie. But now that have all spring global investments, trying to make sense of the last 24 hours. And I think a lot of people struggling to explain what happened yesterday.
The first five minutes made sense. Right. That's the thing about this market. If you don't like the price action, wait 60 seconds sensing. Right change for you. Yeah, the explanations were kind of fun. I read through some of the commentary and it basically was like, you know, this is technical.
The algorithms, you know, they don't know anything. This doesn't make sense. Ignore it. Perhaps this is persistence. It shows that there's still money in the market. I mean, all the explanations were basically don't listen to it. But how do you position around that?
Right. How do you have a long term view if short term trading signals are not giving you information that is reliable? What is the ballast? What is the compass? I really spent a lot of time thinking about that last night. Does it all come back to the dollar? Is that really the tail that wags the dog? Sure. I think for a lot of people, it is. The other question I've been asking at the moment, short term versus long term, is whether we've seen some kind of secular shift away from the old regime to a I use the word permanent loosely.
But, you know, I'm going with this to a more permanent state where you have higher rates and higher inflation levels. And there's still a lot of people pushing back against that, although you are seeing and not to get, you know, super philosophical, the sort of NIKKEI deep place, the deep globalization night. And this question of re shoring is going to have a more persistent inflationary tilt that has not necessarily been factored into the secular kind of low growth, low inflation environment. And that, I think is the key.
And that was super philosophical. Hang Seng. Tom Keene. We'll get philosophical about the UK in just a moment. Your 30 year gilt yield is down 26 basis points. We'll catch up with a former chancellor
who left the mess of the early 1990s. That conversation. Up next. Keeping you up to date with news from around the world with the first word. I'm Lisa Matteo. Germany's defense minister says NATO
allies must take Russian threats to use nuclear weapons in its war on Ukraine seriously, but should not let them disrupt international efforts to support the government in Kiev. Russian President Vladimir Putin has warned that any nation that interfered in his invasion of Ukraine would suffer, quote, consequences that you have never experienced in your history. His comments widely seen as threatening a nuclear strike. UK Chancellor of the Exchequer quasi quartering left IMF meetings in D.C. early to rush back to the U.K.. Prime Minister Luiz Truss's administration is preparing to abandon a central part of its tax cutting agenda.
Trucks has come under pressure for her own party to restore Britain's economic credibility after the fallout from their fiscal proposals. And U.S. House Speaker Nancy Pelosi said in a video shot during the January 6 insurrection that she wanted to punch President Trump if he showed up at the Capitol. A video released by CNN shows Pelosi in her office says the Capitol is about to come under assault in the footage. Pelosi says, quote, I hope he comes out. I'm going to punch him out and I'm going to jail and I'm going to be happy.
Lawmakers want to question Trump about the 20 21 riot and are demanding documents and testimony about his role. The move comes just weeks ahead of midterm elections that will determine control of Congress. Global news, 24 hours a day on air and on Bloomberg Quicktake, powered by more than twenty seven hundred journalists and analysts in more than 120 countries. I'm Lisa Mateo. This is Bloomberg.
Our position hasn't changed. I will come up with the medium term fiscal plan on the thirty first of October. As I said earlier in the week and there'll be more detail than what I'm totally focused on is on delivering on the mini budget, making sure that we get growth back into our economy. I'm not going anywhere. I guess if you've done a 180 on the previous planning, you do a 180 again, but your position hasn't changed. Right. Because you just go back to the old plan doesn't really work like that.
Politics just of throw that out there. I think that there is some reputational damage along the way. I think that's what he. Nobody's trying to say. That was the chancellor in the last 24
hours that chancellors landed back in the UK because the UK has had some problems over the last couple of weeks. Right now, the 30 year yield in the gilt market is down by 25 basis points. The Telegraph in the UK reporting the following that the prime minister, Liz Truss, will hold a news conference at 2:00 p.m. today. And this is the line I think that's going to get a lot of interest. The corporation tax will rise to 25 per cent from 19 per cent. Lucy Burdon, outside of the Bank of England and outside of Number 10 Downing Street force in the last couple of weeks.
Right now, outside number 10. Lizzie, let's start with number 10. And what's about to happen a little bit later? Well, it's a complete U-turn here. There they are going back to Boris Johnson's plan to raise corporate corporation tax from 19 percent to 25 percent, giving up one of the main planks of first nomics, which was intended to boost growth. And it became inevitable yesterday when the markets priced in. Of course, cross having rushed back from Washington in the early hours. It's been compared to when the Greek finance minister left the G. 20 in 2011, although his allies have
shown that comparison. And really, in the game of chicken between the chancellor and the be a weak governor, Andrew Bailey, it seems to be quieting who's blinked first. Bailey looks like he can uphold his promise to end the Billy Bond buying program today. But we are expecting this press conference from less trust later on and hope they will hope that it will calm the markets when sources comment was. People are petrified of the markets. I was reading this yesterday in the
Financial Times. Lizzie, how much is this entirely a market driven response where they are trying to calm a market? When Andrew Bailey is backing away and gave the government three days? Yes. He was also giving perhaps pension fund managers three days. But really, it was the trust administration. Exactly. And Mark CARNEY, the former GOP governor at the IMF, said that bad policy would be punished by the markets and yet again, quasi quarantine unless trusts are having to learn that lesson. This may just be the second of many more
U turns because of course, the government needs to plug a 60 billion pound hole in the public finances. That's according to the Institute for Fiscal Studies estimates. She's already said this week that she's not prepared to cut public spending, although there are hints, efficiency, savings, and we all know what that euphemism means.
But even if they reverse this cooperation tax freeze, it's still not going to plug the 60 billion pound gap. It'll save about 13 billion a year. So there's much further to go. And then you have to ask, what's the point of having Liz Truss if she can't get the central planks of trust and mix through? She's a prime minister who's in office, but not in power. And today, The Times is reporting that the Tories could change their rules so that she could be replaced with Rishi soon. I can Patti Morton, who, of course, run
against her to be the leader. But whoever took over from her would have a seriously diluted mandate, and there'd be therefore pressured to call a general election. And by the looks of the polls at the moment, it looks like Labor would win this week. Thank you. This one's a struggle to keep up where
there's an air. Lizzie Bird, an outside number 10 for us. I thought this morning we'd be talking about the Bank of England, the expiry of the gilt market operation, Lisa. But the attention firmly on the other side of London Dani Burger. Yes, because basically Andrew barely won. And there are going to give some creeds to this.
How much then do you see yields continue to come down? And will this be enough? We'll see. Let's catch up with a man who left a mess of the early 1990s. The former UK chancellor, Lord Norman Lamont. Lord Lamont, fantastic. Catch up with you, sir.
Want to borrow the words of Lizzie Burton and my colleague there. We have a prime minister in office, but not in power. I beg your pardon, I didn't hear that. Do we have a prime minister in office but not in power? Well, that is a quotation from myself.
That phrase in office, but not in file. Which was the phrase I used to describe the position of the major government. I think probably we do have a situation like that because it is deeply humiliating what has happened. It is a real mess. I hope that what is about to be announced will calm the markets, but I'm rather skeptical about it because it is only a part of the package that needs to be reversed. I think you either have to have public expenditure cuts or all the tax cuts will have to be reversed. It is really a very, very awkward
situation and a very humiliating situation. Lord Lamont, given that you think that perhaps a full reversal could but may not really give some more credence to this administration. Do you think that there needs to be a new administration, new leadership to this particular parliament? Well, I think that's up to members of parliament. We definitely need instability. I think employees need to be conscious not just of whether the Conservative Party can recover in time for the general election, but we need to remember that this is being watched by the world and this is not a very good advertisement for the country. How concerned are you about the pound,
given the structural damage with respect to the U turn? Can we even call them your turns, maybe switchbacks from this administration? I'm sorry. I'm wondering about sorry. Let's leave it there. I appreciate your time. Lord Lamont, it seems like our connection has gotten lost.
Lord Norman Lamont. Thank you so much, John. Really, this highlights the concern at a moment where it's very difficult to really understand how they can restore credibility with the pound, with markets that are incredibly skeptical of their of their of their plan. Unfortunately, we lost the former chancellor there because this is a man who left it in the early 1990s when Sterling dropped down off the MRM. The question that we've been asking is whether there will be scars left on sterling denominated assets where you'll have to bake in some kind of risk premium, not permanently, but perhaps for a period of time, because this is playing out now and maybe they have a U-turn.
But have they completely lost credibility to your point, whereby that even if they unwrap and walk back all of this stuff to the bank, having been still needs to do more than it otherwise would have had to do when it meets now in November. But is it the Bank of England or is it on this fiscal administration? Right. I ask this because the Bank of England, some people would say it comes out looking better than anyone in this environment. They didn't go that big. Right.
They did this emergency program to kind of plug the gap, but they haven't. You turned on the quantitative tightening. They're continuing to go at the rate hikes.
On the flip side, how much has to be done with respect to policy that might not have had to be done, to your point, more fiscal discipline than they even would necessarily have had to do in order to restore credibility of the pound? This has been a mass. The U.K. has been a focal point for the last month or so. But we not we have a global problem here. This has been a global story where the dollar has been immensely powerful and strong. Yields have been climbing all over the place.
And when I asked the question earlier this week, of course, I had my own answer to it. What surprises you more, what's been announced or how the market responded to it? For me, it's how the market responded to it to see this market, this fragile in response to 45 billion pounds worth of tax cuts. It's pretty amazing. And if you flip it on its head, how much is what just happened? A symbol of the fact that monetary policy makers are going to be able to inflict discipline on the fiscal authorities. We've seen that this week, last year in a big way. We're going to catch up with you and CASSIDY, the head of U.S. Bank Equity Strategy, RBC Capital
Markets, a little bit later this morning. J.P. Morgan numbers just around the corner. There's some news for you from Stephen Sweeten effort of the Times. The political editor in the U.K., I'm told the quasi quieting is being sacked as chancellor as less trust prepares to reverse the mini budget.
Not clear who will be replacing Kim. Events moving very, very quickly this morning. No.10 not commenting. British politics is absolutely brutal and severe and you're about to see some of that play out today, possibly especially with the finger pointing of who takes the blame for this Camilla's trust, preserve her reign by basically throwing quasi quoting under the bus a couple of weeks on the job.
This comes from the political editor of The Times in the United Kingdom out of London, exclusive. I'm told the quasi quiet tank is being sacked as chancellor as Alice Truss prepares to reverse the mini budget. Outside Number 10 Downing Street, Alessi BURDEN Lazy.
The headlines keep rolling in. I don't know if you just caught the look on my face, John. This is a huge moment for less trust because quasi cross hiring is one of her close friends. Her neighbor in southeast London in Greenwich and her political soul mate. Over the course of the past 12 years, they've been joined at the hip.
They wrote together, Britannia Unchained, this manifesto calling for tax cuts and deregulation. That was the blueprint for this budget that today we find out. Trust is going to announce she is going to reverse huge swathes of. And it leaves her an extremely lame duck
in office, but not in power. And you have to ask how much longer she can cling on to power. The Times has also reported today that the Tories are going to change their rules so that she can be replaced with Penny more and rarely see Eunuch. But if either of them took over, they'd still have a severely deleted mandate and they'd have to. They'd be massive pressure for an election.
Lizzie, I'd love your thoughts on what we understand so far. We started this reporting yesterday that we get some form of U-turn from the budget announced just a couple of weeks ago with the fiscal announcement. Can you tell me how much of that is actually going to get walked back? Is it just the corporate tax component of it or is it everything? Well, the Financial Times is reporting that it's going to be even more of it, and it makes sense because trust has said in Prime Minister's questions that she's not going to make spending curbs, which of course would be difficult in the first instance because George Osborne as chancellor picked most of the low hanging fruit under austerity, but also politically ugly in a cost of living crisis. There was also speculation that she would try to raise benefits only in line with earnings instead of inflation to try to incentivise people back into work. But again, ugly because on the main form of welfare, universal credit, 38 percent of recipients are in work. And again, we're in a cost of living crisis. So if you put the spending cuts aside,
it leaves you turns on the tax cuts. We've already had the massive U-turn on the top rate. Then corporation tax seems to be the next. And then you've got the rest to come today. But really, as I say, what's the point
of having Liz Truss in number 10 if trust nomics can't get done? But wasn't it always inevitable given that she was? Yes. The party memberships choice for leader, but not employees choice because they actually wanted rescue sooner. But what's pushed her to this point is the markets. As Mark CARNEY said, the markets will punish bad policy.
And finally, she's learning that guiltless trust, blame, quasi courting entirely for this. No, because as I say, they have been joined at the hip throughout. These are her ideas. She you can see the roots of these ideas in her writings over the past few years. There's no surprise that this is what Liz Truss wanted to do. She told us day in, day out throughout the leadership campaign that from day one, what she was going to do were tax curves. And they have gone down so badly with markets.
I mean, the other problem of why this hasn't been able to have market credibility is because they have outcast Thomas Scholar, the top civil servant at the Treasury. They have sidelined the Office for Budget Responsibility, the fiscal watchdog, and throughout quasi crossings time as chancellor, he has been almost flippant about the markets. Remember, he said that they all react as they well.
Other ministers, him included, have said that what is going on in the markets is due to the international context, the war in Ukraine, fed hike dollar strength. But anyone with a Bloomberg terminal can see that there has been a particular quarter tank effect on top. But as I say, it's not just a quarter of a fact. It's very much also a trust, the fact. And that leaves the problems even if she
cuts out quoting from the picture. Hey, Lizzie, great work, great reporting, Lizzie Burton. Our site, number 10. James Carville, say I'd come back as the bond market. Yeah, exactly. This bond markets back in a big, big way. We've heard it from a few guests,
including Mohamed El-Erian this week on this program. And in a Bloomberg opinion column, the vigilantes are back and the vigilantes have claimed a couple of names already, Joel Weber. And basically who's next. Right. And at what point will you see this start to impose some sort of restriction in terms of how much debt a number of different nations sell? I also want to raise, though, that this comes at a time when you have a lot of nations that want to plug fiscal gaps by selling debt. I'm thinking of Germany in particular. So this is a real tension, especially when some of these spend expenditures are considered necessary.
So we've had the reports. We want the news now, don't we? We've had the reports that we'll get this news conference a little bit later at 2:00 p.m. in the U.K. We've had the reports from The Times this morning that the chancellor is going to get sacked. Now we need the news. I said to Leslie, I want to understand how much of that budget actually gets walked back. Is it just one component of it, the corporation tax or is it everything or 45 billion sterling worth? Right. So, in other words, if they don't walk back everything and then the bond market revolts, do they then have to walk back more and fear losing even more credibility in the process? I suspect that's not the situation they want to be.
Exactly. In a week or so, yields right now down about 25 basis points on a 30 year to for 29 a little bit later this morning. We'll be focusing on one thing, bank earnings.
J.P. Morgan is just around the corner. Gerald CASSIDY joins us right now, the head of U.S. Bank Equity Strategy in large cap bank analyst at RBC Capital Markets. Gerard, let's go there. First of all, to J.P.
What are you looking for from Jamie Dimon? Big bank. John, I think what we have to look for is obviously how are they doing in their investment banking and capital markets, businesses. But more importantly, since those numbers are being guided to by many of the big banks and the investment banking business, revenues could be down as much as 50 percent year over year, trading revenues could be flat to down. But it's the net interest margin, as you know, you've been talking about it all morning about interest rates. The rise in the Fed funds rate has been very favorable to JP Morgan and his peers as the margins have expanded. The other thing we've got to watch very carefully, though, with JP Morgan is their capital levels.
Those rising long term interest rates have hit their bond portfolio as a large GSE bank. This company has to take that unrealized loss not only for their gap capital, but their regulatory capital. That will be another point that we're going to focus in on.
And lastly, of course, the loan loss reserve build up under Cecil current expected credit loss accounting. They're going to have to build up that almost reserve this quarter. Jared, I'm curious to understand exactly the context of Jamie Diamond was speaking in yesterday when he said, I don't know if it could be a soft landing talking about the U.S. economy. I don't think so, but it might. He said in a tough recession, you could expect the market to go down in the 20 to 30 percent chart. What's the signal from these sort of dire proclamations from the CEO of JP Morgan? I think what we're seeing is obviously based on history, this type of action by the Fed would lead to a slow down flash recession, as he pointed it out.
And we have some history, of course, back in the 80s when inflation was like this and none of us, none of us have been in that market, you know, trading and looking at stocks in such a high inflationary period. So it's really unusual. The other unusual period here is what they did during the pandemic. I'd like to say that they threw the economy out of kilter with all of that stimulus and we're still off kilter. So there are many crosscurrents going on
right now. And we see that with the economic numbers that we look at on a daily basis. Gerard, looking forward to breaking down these numbers with you. Joe CASSIDY there of RBC Capital is going to be with us in just a moment on the J.P. Morgan numbers. I think you asked the brilliant question and you'll write what Jamie Diamond says about the macro situation in the U.S. economy. Is that a man who sees the same situation in his bank right now, or is that just an independent thought about where we go in? But that's really what's key in terms of interpreting this particular proclamation, a 20 to 30 percent additional decline in U.S.
equities. You can imagine freezing up in the credit markets, in the in the IPO markets. You're already seeing that to some degree.
What does that mean for their revenues? How can he January enthusiasm to go out there and do banking at a time when he's experiencing or expecting to experiencing something quite negative? I had spent in this week and it's spending if you just look at the U.K. as well right now. Guy Johnson is just run over to a camera for us in the city of London. Guy, great to catch up with you, buddy. Let's just start with what you're expecting to hear at 2:00 p.m. local time, a little bit later.
It's gonna be a big U-turn. I don't think we'll get the details. Maybe we won't get the details today of exactly what the U-turn does look like in terms of the ultimate tax policy. Here we have a pound there is responding to a tweet from the Times suggesting the quality quoting is likely to no longer be in post. It looks like his his decision to rush
back may have been to to find himself with a with a an announcement that he is going to be leaving. He clearly made a tactical error, maybe going to to Washington at this moment in time, John. But I don't think do we have a well-thought-out economic policy that is going to be announced this afternoon. This was the governments that came in promising massive supply side reform. It has not been able to deliver that
growth agenda. Now what? It doesn't have a mandate for anything. And we are unlikely to see a clearly well-thought-out plan this afternoon. They will not dare, John, to do anything
that is going to expose them to the danger of the Obama are saying that this is problematic. They are not going to go anywhere near that. But I'm not expecting a kind of clearly sort of coherent, well thought out plan this afternoon. Interesting, though, he's going to be the new chancellor of the exchequer. There we be to get one. I'm not sure who wants to be the
chancellor in this government right now. Guy, this party is doing terribly in the polls and the knives out for the leadership right now. How quickly can this Conservative Party move to change leadership? So so changing leadership in the form of the chancellor, relatively straightforward, changing leadership in terms of Theresa May, I would thought extremely hard. The British public will not tolerate it
is unlikely that the British public will tolerate another change at the top of the Conservative Party. That basically means that you are left with less trust. In post as prime minister, but with no authority. John, and we could be in for two years,
therefore, of chaos. This will make Theresa May's term look well organized and well run. A guy you and I are going to catch up next time around, the time that this trust is going to speak. The prime minister a little bit later at 2:00 p.m.
local time, 9:00 a.m. Eastern, about 30 minutes away from the opening. You gonna hear from the prime minister? JP Morgan numbers. Minutes away from New York.
This is Bloomberg. Keeping you up today with news from around the world with the first word. I'm Lisa Mateo. Elon Musk warns Space X cannot help
carry the costs of high speed broadband Internet for Ukraine indefinitely. This comes after an earlier dispute over his public comments suggesting the government in Kiev seized territory in exchange for peace with Russia, but says the starling terminals deployed in Ukraine are using data as much as 100 times the amount of typical households. A week ago, he tweeted that Starlink in Ukraine had cost base X eighty million dollars, and Twitter's lawyers tried again to learn what Moscow had told federal authorities who were investigating his attempt to take the social media company private. According to a letter unsealed in court. Attorneys for Twitter sought documents last week related to the mosque investigation. By that point, Musk will reverse himself on walking away from the 44 billion dollar takeover. But he and Twitter were still
adversaries in court. Global news 24 hours a day on air and on Bloomberg Quicktake, powered by more than twenty seven hundred journalists and analysts in more than 120 countries. I'm Lisa Matteo. This is Bloomberg. Wall Street earnings begin right now with JP Morgan and its a B on investment banking with the numbers for 3Q. Let's get to Sonali Basak Jason Kelly. John, you're looking at fixed income trading revenues that blew through Wall Street's estimates. That's very good news for Jamie Diamond and his traders that just got promoted over at that bank.
Equities, however, is light. Remember, we do have Morgan Stanley coming up soon as well. The question is, is this J.P. Morgan's one quarter being lighter than analysts estimates? Or are we going to see this follow through in Morgan Stanley and Jeep and Goldman Sachs next week? Can you reconcile these numbers with the commentary that's come out of the C suite over this bank? I can because this is at the end of the third quarter. Things have gotten worse since then. So I think the forward looking
commentary is going to be very important here on whether these numbers can be maintained in fixed income trading in particular. Now, again, we're going to want to take a look at what those provisions for credit losses look like. So far, headlines crossing the wires there there at one point five billion dollars worth of provisions. That means they're a little bit higher than what Wall Street had initially estimated. What analysts were expecting.
Here's the thing. Provisions this quarter can tick higher in future quarters if they think that the economy will get worse. So all that commentary that Jamie Diamond may have and Jeremy Barnum may have about whether this is kind of it's based on their calculations of where the next year is headed or whether those provisions can get worse. Is this partly also giving lip service to the fact that they haven't passed on that much in terms of higher interest to their savings accounts, to their deposits, and they've capped a much bigger proportion of the net interest income given how much yields have risen? It's such a tough spot to be in because lawmakers were asking them this just a couple of weeks ago, why aren't consumers seeing higher savings rates? Credit card loans have been rising throughout the year. So they are lending still, yet they are also accumulating money. So they're in a rock and a hard place
with that because lawmakers are asking for it, but they are still hoarding cash. Lisa, what you make of this headline, they hope to resume buybacks early next year. So that's a big deal, right? Because remember, there was a lot of concern about the buybacks with JP Morgan, especially given all of that concern that Jamie Diamond has laid out about where they are in terms of capital positioning in the face of higher capital requirements that he calls really arbitrary based on rules that are kind of made out of thin air.
I mean, that's the best way to describe that. Jamie Diamond is describing these regulations, and it's why you see equal and equal parts. The bankers talking to investors this week and also down in Washington all week, talking to lawmakers on the side of stocks, up about one point eight percent of the free market, 90. Stay DAX and look at Wells Fargo numbers for us as well. Joe CASSIDY alongside us today from RTS. Judge, about a couple of minutes to look
at these numbers. Your thoughts place? Sure. And John, what's really interesting and we saw this with a few others that already reported the net interest revenue numbers are really strong for this company as well as its peers. It goes back to the net interest margin. When you and I were just talking about
the spreads are doing very well. And that's what's really supporting the higher level of provisions. They came in slightly above expectations, but that's his loan loss reserve build up. Based on this new accounting the banks are doing this quarter.
But what this shows you is the banks can handle the build up or reserves because the margins are coming in better than they expected due to the rising short term interest rates. David Westin lunch. Do you sort of understand their fears of the future, as we've heard from J.P. Morgan reiterating his concern about the next couple of quarters? How well can these banks withstand it and continue with some of the profits and perhaps show that the valuations are a little bit under where they ought to be? It's really interesting because they fear going into next year, of course, is that there could be a real steep downturn in credit costs, could come in much higher than people are expecting. However, what this quarter is showing us is that the banks can handle the higher credit costs because of these spreads. So as we go into the fourth quarter and
next year, even if the economy really does slow down, as Jamie Diamond is indicating, we think that based upon the core businesses of commercial banking, these banks are going to be able to handle these higher credit costs because of these wider spreads. We're looking right now shares are continuing to climb up now more than 2 percent as people digest these earnings charade. How much you looking at the banking side of things and the weakness that we've seen in equities? The strength for the time being, an investment banking with respect to JP Morgan's results. But still, this feeling that deals are slowing and are going to continue to slow. That is the real critical part today with the banks, the traditional banking businesses of taking in cheap core deposits, not having to pay up for those deposits and making loans is the business that is working today.
The investment banking and trading businesses, as you pointed out, have been weak all year with the uncertainties in the marketplace. We cannot count on them really being very strong in the fourth quarter or going into the early part of next year. So the banks that have more traditional businesses of taking deposits and making loans are going to do quite well. The regional banks that don't have exposure to the. Markets are the ones that will probably be the leadership in the bank stocks over the next quarter to join Hang Seng. Sit tight.
Now see what you make of that headline. The quarter included in that investment securities losses of nine hundred and fifty nine million dollars. That's a serious number. And you know what? It's not going to be the only one you see. The thing about it, again, we've been talking about it.
That's the end of the third quarter. Things have gotten worse since then. I think not only J.P. Morgan, but especially Morgan Stanley, which is so exposed to Twitter, are going to have to answer questions about how much worse things have gotten since the end of the third quarter and what they'll really have to take in losses. These are mark to market losses.
So what exactly is going to be on their books and how are they going to be transparent about that? You talked about Twitter. Do you expect to have some real sense of what the commitment there is about what hung bridge loans are on their books about just in terms of what they're planning to sell and what they're going to hang on to in hopes for a better day? It's a great question, because, Lisa, to your point here, they can't sit there and often name single name clients here, but these are massive deals that everyone in the market already knows about. So how they're going to handle the discussion around this is very interesting. And, you know, frankly, what's also
interesting about this is the way that the buy side has stepped up and say, hey, let us take your let us take your loans off your books, for you should love some of that interest. Third, what for what price? John CASSIDY of RBC Capital Markets. Gerard, just one final word from you. Say you've gone over the numbers you're looking through to the rest of the banks today and into next week. What's your take away? The takeaway, John, is when we were expecting, which was the strength and net interest revenue growth due to the margin expansion is going to be able to cover up higher costs in other parts of the bank. You guys just talked about the write down of the bridge loans. That number, almost a billion dollars was was included in the total revenue numbers and they still beat on revenue. So the strength of this net interest
revenue would jump we haven't seen in 15 years. This is really the story for the third quarter. It can handle the higher cost of building a loan loss reserves, possibly weakness in investment banking. And I think that's why the stock is up in premarket trading out you on the best.
Thanks for being with us, sir. Gerard CASSIDY of RBC Capital Markets. Sonali. Just a final word on wells, if you can take away. Yeah.
There's also been on a lot of metrics, including net interest income. So those higher rates helping Wells Fargo, but they missed on efficiency. Will investors allow that to happen over and over as a question or as net interest income? Enough Lisa Abramowicz where the storm clouds? Well, Wells Fargo, third quarter provision for credit losses that came in above expectations, 784 million versus the estimated six hundred ten point eight million. It's the credit losses. It's the investment losses. What happens if we get to a scenario that people think is the silver lining of the Fed slowing down? Some of those rate hikes are perhaps even dropping them in the face of weakness.
What does it do then to some of these banks that are getting higher incomes on their net interest margins, but are struggling with what is expected to be higher loan losses and investment losses as is there a hurricane brewing? Let me start. The irony is that Jamie Diamond is saying that there is and everybody is cheering his results and saying you've just made so much money. Hey, so, you know, try to try to square that one. I think we can try square that one for
the next couple of hours in the next couple of aswell. So talk about us. Retail sales will go to the U.K. We'll hear from less trust the British prime minister. And in just a moment, we'll catch up a batch fish for itself. Jan from New York, this is Bloomberg. Fiscal and monetary policy appeared to be meeting in completely opposite directions. The Bank of England is having to try and
manage the chaos. The government has been creating in the bond markets the bond market vigilantes attacked what we had in UK, really symptomatic of what is happening elsewhere. For the Fed, they're strapping themselves in for this.
They're sort of expecting some increase in volatility because the world is uncertain. This is Bloomberg Surveillance with Tom Keene, Jonathan Ferro and Lisa Abramowicz life from New York City for our audience worldwide. Good morning. Good morning. This is Bloomberg Surveillance on TV and radio right here in New York City alongside Lisa Abramowicz. Some Jonathan Ferro Sonali Basak standing by for earnings on Wall Street. We'll get into JP Morgan in just a moment.
Brahma retail sales coming up a little bit later. And we still got to process the price action of yesterday, especially given the strength that we're seeing in certain components of the population amid the weakness that you're seeing in others. Just because of inflation, a messy, messy, seasonal were to the weak. I mean, it's the word of the year. I was looking through some of the CPI components. You know, the biggest one was shelter. Nope. I mean, your shelter is the biggest one.
But outside of shelter, it was child care costs and those rose the most going back to 1980 to talk about specific corners of pain as people try to figure out how to live an inflationary regime in services versus good ones fading. And the other one is getting really sticky and it doesn't seem to be slowing down the sticky aspects of this inflation. Persistent, which raises a question. Okay, well, how do we think came out? What happens next year? And we heard from the banks that it's going to get really ugly and they're doing just fine right now. And squaring that message is going to be increasingly difficult at a time when they're making incredible profits and they are not passing along those interest cost to the savers. Can I do where do the week and what are the year and apply it to the UK, please. What a mess.
So you're going to hear from the prime minister a little bit later this afternoon, 2:00 p.m. local time. So 9:00 a.m. here in New York City, there are rumors, reports, the Times suggesting the chancellor is about to get sacked. We've been reporting for the last twelve hours we're going to get some form of U-turn. I'm trying to work out what kind of U-turn we're going to get. The Bank of England governor baby was the villain a couple of days ago. He said, you've got three days and now
he's some kind of hero. You've still got this all to play out. You still got a bank having the right decision at the start of November. And you've got Kutty set to kick in at the end of this month. You're the expert in UK politics and I know that, but I am very much not. But as I hear all of this. Can they do anything other than to announce today a full rollback of everything proposed and say we are going to spend more time to unleash something that is cohesive, well thought out, comprehensive? Until then, we're not going to make major changes. Can they do anything except for that
without having to walk it back yet again? A week later? Joel Weber the drama sets a plan and the UK will bring us some of that drama a little bit later. Right now, no drama in this equity market. Futures up four tenths of 1 per cent on a S&P 500 tons of drama in the bond market in the last 24 hours. At the moment, yields in the UK aggressively lower, down by 25 basis points.
Yesterday in the U.S. aggressively higher. The two year briefly through 350 on a two year, 450, rather, right now on a 10 year, about three eighty nine, twelve on a 10 year low to lower by about 5 basis points. Brammer. JP Morgan behind us, more banks. Still to come, Emma Chandra and JP Morgan shares flying up now nearly two and a half percent in premarket trading after reporting better than expected earnings on those interest margins that really compensate for a lot of the losses. And other play says they did also beaten fixed income. We also heard from Wells Fargo that shares up more than 2 percent premarket trading. Morgan Stanley up in about a half an
hour. And then in about an hour's time, Citigroup. How did they pass out the fear of what's to come with what is going on right now, which is profits? And that is going to be a political discussion as well as one that perhaps can give some guidance as to where we are in this economic cycle.
At eight thirty a.m., we get retail sales. Interesting to see how that breaks down, considering some of the weakness that we've seen in certain areas. The resilience in the CPI. People are still willing to spend at the University of Michigan October Sentiment Index at 10 AM. I can feel John saying like I hate looking at this thing, but I am curious if we start to see, you know, you're absolutely out of the building at 959 a.m.
but I am curious about whether we do get some sort of deterioration here simply because gasoline prices are starting to rise again in addition to all of the gloom and doom that you hear from everyone. And I know I could be part of the problem there. Also, we get a slew of Fed speak today. And John, I hear that you're actually interested in it today, which is, I guess, new one, considering how much said Jihye Lee commentary Emma Chandra. So we get Kansas City Fed President Esther George Fed, Governor Lisa Cook and Fed Governor Chris Waller.
How do they spend this at a time when people are ratcheting up their expectations for what the Fed has to do with rate hikes, given that the terminal rate now priced into the market is four point nine percent of March of next year, getting closer to 5 percent? We were told a hurricane was coming. It's not even raining on JP Morgan this morning. The stock is up by 2.5 per cent. We're gonna catch up with tonight
through the ambition on. Let's cross over to just briefly the takeaway from these numbers from JP Morgan, what's the number one talking point for you in the team right now? He just raised his net interest income expectations by three point five billion dollars, whereas the regulatory concern there is what I want to know. Deposits have slowed to only 3 percent. And so is there more wiggle room here to than lending at a greater rate? In the face of a worse economic environment and the buybacks are set to come back, potentially set to resume early next year. Well, The Factor finale later on. What's left this hour? How many more bank earnings have we got? Well, I mean, it depends if you include 8:00 a.m.. But we've got two.
Two. Yes, two more still to come. Goldman next week. Yes. OK, so Matt Miller joins us now. Can't wait. How do U.S. rate strategy has such chance the better? I want to start with the race story. And can we start with that to you. Yesterday through 450, briefly, really
powerful move to banter if you rethought just where this Fed funds is going to peak next year. The market saying that it's going to peak at 5 percent, but it's really hard to know for sure because it's an extraordinarily volatile I'd say anywhere between four and a half to five percent makes sense, which is what they told us in the summary of economic projections. But it really depends on the trajectory for inflation going forward. If we do continue to see persistent inflation and also persistent underlying strength in the economy, especially job, the job market is extraordinarily resilient. We're going to get retail sales today. I think we're going to you know, the
consumer is also pretty resilient. So under the circumstances, the Fed's going to keep continue to raise rates aggressively, too. They see the need to to slow down. I don't think that this year Kamala Harris a lot of people earlier this year, we're getting bullish on longer term rates. There seems to be a bit of a rethink of that of late, not only because of where inflation has come in, but internationally, the contagion effects of the entire world unraveling zero rate policy is for that have been in place for more than a decade. Has that been true for you as well? Are you changing how high you expect yields to be able to ultimately go in the long end because of what we saw in the U.K. about the potential of selling from
international investors? I think the U.S. is in a very different spot than the UK, right? You have a situation, the UK, where I'd call it a crisis of confidence. You're seeing this massive rise in long and yields and then all this. The issues with U.K. pensions and margin calls. The US is positioned very differently from from that perspective. Broadly speaking, the tenure or the long end of the US curve tends to be see very good demand from pension funds in the U.S.
as well as globally. Do Japanese lifers and the like. And also it tends to be a safe haven asset with the front end paying to set expectations. You're going to see a decent amount o
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