- Ken Leon, Director of Equity Research at CFRA Research
- Jen Flitton, Head: US Government Affairs at Invesco
- David Kelly, Chief Global Strategist at JPMorgan Asset Management
- Aditya Bhave, Senior US Economist at Bank of America
Ken Leon with CFRA react to big bank earnings as earnings season kicks off. Jen Flitton of Invesco talks about why markets feel so uncertain about Trump administration policies. David Kelly with JPMorgan Asset Management and Aditya Bhave of Bank of America react to CPI.
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This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along with Lisa Bromwitz and Amerie Hordern join us each day for insight from the best in markets, economics, and geopolitics from our global headquarters in New York City. We are live on Bloomberg Television weekday mornings from six to nine am Eastern. Subscribe to the podcast on Apple, Spotify or anywhere else you listen, and as always on the Bloomberg Terminal and the Bloomberg Business app. We begin this hour with stocks rising ahead of CPI data and better than expected results from both JP Morgan and from Wales Farco. Joining us now to discuss is Ken Leon of cfra Ken. You've had about fifteen minutes to pour over those numbers. What do you make of them?
Well, it's great.
So we had outsize games for these stocks last year, and what the results speak to is the ability.
To earn into your evaluation.
I would expect the street is going to have upward earnings revisions for twenty twenty five. Take a look at twenty twenty six, as noted here, what's the delta for driving that earnings and that's about really for JP Morgan. First would really be net interest income, so it's not just rates as noted here, but it's also volume what speaks to the US economy growing about two and a half percent. Those two flywheels drives net interest income, which is significant for JP.
Morgan and other banks.
The other delta that we haven't spoken about is investment banking, and it might start slow, but the ability of a risk on environment for mergers and acquisitions and also equity underwriting means that we're going to be moving further up from the trough of the market or the cycle about eighteen months ago. Additionally, when you look at again net interest income, but JP Morgan is a diversified bank, so it's getting that from many different types of services.
The only negative.
Here in the print was really community banks a little bit slower in terms of their net revenue. But mostly this is a monolithic global bank, well placed trading at an expensive valuation. Our takeaway is stay the course and they're going to grow into their earnings and valuation.
Ken another figure, fourth quarter provisions for credit losses came in at two point six billion. The estimate was higher at just over three billion. Similar story for Wells, a lower number than expected to What does that say to you about credit quality? Are we in a period or at least getting very close to normalization?
Yeah?
For JP Murray, then the industry, so bank analysts are a nervous lot, and the concern is always on credit risk and major write offs. And so far the economy is resilient. We're nowhere near an amber or red alert in terms of significant need for build up of credit reserves.
Looks like we're going to have a pretty good year for the economy.
And when you look at the consumer, certainly, as you do see increases in allowance for bad debt, it's mostly because the volumes are much higher today.
Than they were two or three years ago.
Ultimately, and we didn't speak about this, which is whether it's on credit risk or on trading. Is that black Swan event? So Jamie Diamond mentions geopolitical arrests. The third I would ask, is some liquidity squeeze in a complex trading product that upsets the market and maybe the bank stocks. We haven't seen it here, you know, if you go back in twenty twenty three, that was credit.
Swiss Ken thirty minutes ago, I asked you what's your favorite what kind of business do you want to warn? And you were loving Goldman Sex. Do you love them a little bit more after those numbers?
We do, and I think there's a more dynamic story here for Goldman. They'll under promise and over deliver. I think through most of twenty twenty five, traditional businesses are going to get the benefits of positive trend M and A. Of course, with one trillion of private equity investments that have to be monetized in the next twenty four months, CEO confidences coming up, we're also seeing what higher equity marketing values great trading. But John, the story is, and if I was Goldman Management, I'd be talking about their really pivot to having durable, recurring fee revenue businesses across that would be an asset in wealth management.
They're large businesses.
And then also as we see the easing of regulation in Washington, you're going to see Goldman be more of a principal actor besides just an agent for transactions, and what that means is getting to be more of a participant in direct private equity and private credit. We saw that as part of their announcement earlier in the week of blending some of these businesses so that they can partner or compete with Apollo and others.
It is a different model can because for most of the big banks, the way that they've been approaching private credit is partnerships. Goldman with that announcement, to your point, shows that they can compete with some of the big names which are the model for the banking sector. Do you think we'll ultimately win out?
That's who you are, But I think Goldman can play often so they can certainly, as I said, be principal and compete, but also for asset back loans, they can also be there to also provide funding for the private equity firms. The traditional banks have a different game, particularly regionals or mid size you know, which is really loans or syndicate loans, competing against a corporate who wants to just get immediate attention with a direct borrowing from a private equity firm. And it's a sea change because it's moving up in size of the deals from small mid mid sized companies to much larger deals over a billion a year trend. I think Goldman again, you have to go back over ten years. Gold you know, Goldman couldn't be competing with Blackstone and KKR because of regulation, and we're going to see a little easing of regulation, but they're going to be smart because they want to have the right strategy and execute.
Ken, I want to go back to John's earlier point to Shanali, do you see any weakness in any of these earnings.
The weakness is, you know, really related to any sharp change or shock in the markets that affects volume but also affects in their books exposure. And I mentioned that at the hour before, which is really the black Swan event. You know, some complex derivative product that has a ripple effect whether it happens in Asia or Europe, but it impacts Goldman generally. The other one, which Jamie Diamond speaks to, is a geopolitical event that has usually been if there's any sell off of buyer opportunity. But what we're seeing so far is confirmation that twenty twenty five stayed the course, and we're going to see I think the consensus or street analysts raise their estimates as we go.
Through the year.
Ken, we spoke to you about thirty minutes ago. I'm going to say this for you. You gave Goldman Saxon a plus. What does City get this morning, Well, we'll give them a bee.
I haven't seen the details, but picking up from what Chinali said, the return on equity narrowing the range. You know, they took a one billion dollar restructuring charge in twenty four so the ability possibly to reduce costs or more than the street thinks might be able to help them on Roe. City is also an event driven stock. Of the large banks, they are finally this year, we hope moving to monetizing selling in Mexico Banamex, which was by far the largest consumer bank they had outside the US.
That significant. It's event driven.
They also have stable businesses with more transparency. That's called services. It's treasury and trade solutions, a dominant position in the corporate treasury market, and certainly they're more on the fixed income side versus equity across banking and trading.
So you know, I think City is going to be fine.
And they're still trading below net tangible book value, although the gap has narrowed a bit, so we need to see results improve through twenty twenty five. But I think myself and most analysts with buys think that they can execute.
Jane Fraser is still on course.
She's still on course. That gap maybe even narrowing more this morning with the rally still ongoing. Pre market, Ken another headline that came out is that they see their expenses for twenty twenty five slightly lower than fifty three point eight billion dollars. That is the high end of their range that they had already given to this market. Does it concern you that they aren't bringing in expenses quicker in the midst of this restructuring, Well, it ties.
In with my earlier point one billion dollar restructuring. But what they're doing is reducing management layers and also realigning businesses that weren't really responsive to the markets or customers.
So I think it's a.
Timing issue and one where you'll see accelerated improvement perhaps in the second half of the year, but you'll see improvement, but it just doesn't happen in one or two quarters.
I Ken, appreciate you time. Thanks for this morning, Ken Lee on that of CFI on City pH Seth appearing on course to win confirmation dismissing acusations of past misconduct in his Senate hearing. Secretary of State nominee Marco Rubio among those speaking on Capital Hill Lights alone this morning, then recent country nomination Scale Besson appearing on Thursday, joining us not to discuss Jennifer Flitzer of INVESTCA, Jennifer, welcome back any reason to believe that some of these nominations might be in trouble, any trouble at so well.
I think what we saw yesterday is that a lot depends on these hearings, and objectively, you know, Pete Hegseth did a pretty good job and it is now.
Taking him on the path to confirmation. I think he'll skate.
Through the committee approval and he'll be on the floor probably sometime next week. The other more controversial of folks like Tulci.
Gabbard or Robert F. Kennedy Junior.
I think these hearings are really going to matter, and if they have some of the same showing as Pete Heggseth did, then I think they're well.
On their way to confirmation, Jennifer.
If they're going up for the hearing, though, the Trump campaign must think that they have the votes for these individuals like Tulci Gabbard and our.
Well.
I think they have faith in their strength right.
And one thing that is sort of a through line with all of these nominees is their strong ability to communicate, their ability to message and stay on message.
And I think you're going to see that with Chelsea Gabbard and with Robert F.
Kennedy Junior, with patl for the FBI director. If they have strong showings that they're hearings and I think the faith there is with them from the transition.
Then I think they're well on their way to confirmation.
And what we're hearing behind the scenes with the meetings that are happening with the senators is that they're gaining a lot of support as they move along.
It's a good point you make, because that's what sources close to Trump tell me that being able to communicate his agenda is just as important as being able to do the job that he's putting some of these nominees in place. Can you give us a sense is what's so different from Trump one point zero and how they worked with nominees and some under secretaries. So what we're seeing now are they moving faster?
Now? They're definitely moving faster.
I mean I think the vetting was a little slow because of how they decided to do it, and when they brought in the FBI vetting, and when they started filing with the Senate. But I think they're well with on within their way, well on the path to getting folks in immediately as soon as the president is inaugurated on day one. I do see a much sort of stronger bench in the sense of the ability of Trump and the Trump transition team and really Susie Wiles at the top there as in the chief of Staff to get folks in who are really speaking the message of Trump and Trump two point zero. I think in one point oh, you saw sort of, you know, the mechanism in Washington.
Really working to influence Trump.
Now, Trump has a very strong position and has a whole team of folks who are there to push that position, to push that agenda.
Beyond just the ability to get these various cabinet members confirm Jennifer. Does it also speak to a cohesion within the Republican Party that will benefit Trump as he tries to do things like past one big beautiful bill in a very slim majority. Does it help that these are getting through? Does it speak to that ability?
Yeah?
Absolutely, And I think we've seen it just in this transition period.
Mar A Lago is a very.
Busy place right now, and not just with CEOs from the tech industry.
You see Washington basically flying down to mar A Lago.
He has been entertaining members of Congress, senators and Tiger caucuses and factions of the House representatives. I think going forward, especially within this first six months, you're going to see a very hands on White House working their agenda and working with the members within the House who might be the most difficult to get on board.
Jennifer, appreciate your time. Jennifer Flitten of Investco. David Kelly's with us around of TYPEO with David Kelly of JP markin Asset Management, David Mornick get to see you morning. You expected to see more of this softer inflation prints in a monthst ahead, Yes, I do.
I think the I think it's important to recognize that the year of year, which is kind of high right now at two point nine, that's going to look a lot better by April because the first four months of last year we saw pretty strong inflation, so that that makes it very easy to get down to a low twos by April. And overall, this is not an inflation prone economy. I mean, the economy left to itself is just chugging along, steady growth at over two percent growth, unemployment very steady, and inflation grad coming down.
So the economy itself looks pretty good right now.
It's got a lot coming up on the plate.
Here, but overall feel pretty good about.
We'll talk about what's coming up on a play, and I've seen you're talking about incoming policy changes. Potentially you've written about this sources of inflation, labor, energy, goods, and services. Where'd you have the most confidence?
Now?
I think the most important is the labor market, and I think what we've seen is American workers just won't ask for race. It's remarkable. I mean, we saw production on supervisory workers, wages up three point eight percent year over year.
We've got eight million job openings.
Everybody knows it's hard to find a good employee, but yet quits rates are below.
Where they were before the pandemic.
And either American business is great at saying why they're not going to give people a raise, or American workers are just won't be about asking for one.
But whatever way it works, we're just.
Not getting inflation coming out of the labor market, and without that you cannot get sustained inflation.
Just to that point on the labor market, as we're digesting CPI, you have had these individual announcements from companies, be it from Meta, Microsoft, Southwest City, when it comes to benefits about reducing hiring, not hiring, or even letting people go do some of that softness. Do you look at that and say these are idiosyncratic company events or does it suggest that something has indeed shifted in the labor market in terms of who has the power and overall represents some form of softness.
I think it's good messaging for these companies. There's nothing there's nothing like announcing perspective layoffs to quieten down the labor force. So I think it's a way of really suppressing wage gains. There's no evidence in GDP. I mean, you know, if you want to figure out where employment's going, look at where GDP has been. Because the last four quarters, the current quarter, in the previous three quarters are a very good.
Driver payroll employment.
So I know that the rate of growth of this economy is capable of generating on hundred and fifty one hundred and seventy five thousand jobs per month as an average through this year, and that forecast is good for at least the next three to six months anyway. So there really isn't any softness in terms of the overall economy. But business, you know, they focus on margins, they focus on efficiencies.
You know, how can we be more productive?
And yes, if that means announcing well, I'm going to have to lay off a few people, then that that.
Actually works in terms of maintaining cost control.
David John mentioned energy and that was a big part of this inflation story for this print forty percent. I believe IA Overnight was saying, actually they see a smaller glut next year. How concerned you that fighting energy prices, higher oil prices, higher grass lean price is going to be a concern for twenty twenty five?
Not too much.
I mean, if you look at the global composite PMI index, you've got a global economy that is kind of muddling forward. The US is doing very well in places like India and Italy are doing well, but a lot of Europe and particularly China are pretty soft here that's not going to generate a lot of demand. Meanwhile, I think with the change in administration, you could get two things. One, you may get a peace settlement in the Middle East, which could you know, DAP and down tensions a little bit and con turns. And then secondly you're going to have a very pro drilling policy which could increase US production, and some deregulation.
Which could help the energy sector.
So overall, I don't think energy prices for fossil fuels are likely to go up significantly over the next few years.
If you are just joining us, welcome to the program. Seven minutes ago, inflation data drops and came in a little bit better than expected on core CPI excluding food and energy month over month, coming in at zero point two percent the median estimate in our survey with zero point three on headline inline at zero point four percent the estimate with zero point four. Of course, we're trading off the back of that downside surprise on core CPI, and it's unlocking much lower bond yards across the curve. The ten year is now lower by ten basis points, the two year down by nine. That unlocks some dollar weakness and euro strength. Euro dollar at one oh three forty, and equities a really big lift of stocks on the s and p up by one point four percent. Likewise, on the Nasdaq and on the Russle, the small caps are absolutely flying this morning. On Russell, we are rallying pretty hard going into the up and about up by two point nine percent. David, you talked about the incoming administration. Danny talked about this earlier, the cost of not making your plans clear. You think it's high yields, it's that what's playing out in the bond market, not this morning, but leading up to this move.
Oh yeah, yes, absolutely, because we don't know how far we can push the global bond market. And on Friday we're going to get some new numbers from the Congression Budget Office looking at you know, if we don't do any tax cuts from here, if we don't even extend the tax cuts we've got still, I think they'll still show the debt to GDP ratio rising to about one hundred and twenty two hundred and twenty five percent of GDP by by twenty thirty five. It looks like that the budget deficit for this year could come in as over two trillion dollars, and half of that is interest, and these higher interest costs that we're seeing it's a negative feedback loop because it's actually pushing.
Up the deficit.
And the question is, well, how much can the government borrow from global capital markets at very cheap rates.
You said in your note the most dangerous three were and economics are quote wait and see. What do you do that in this environment where Trump wants to be unpredictable.
That's part of the policy. Yeah, and it doesn't it works.
You know, it works well in football, it works well in military maneuvers.
It does not work.
Work well in macroeconomic management.
You actually have to let people know.
I mean, that's why the fence spends so much time saying we're looking for two percent inflation and just tries to telegraph their punches all the time. And that's really what what you should do in macroeconomic management. So yes, I think there is an uncertainty tax, absolutely, because the problem is that if you don't know what the administration is going to do in terms of taxation or deficits, you don't know where interest rates are going to be. What's the easiest thing for business to say, well, let's wait and see. And you know, whenever decides to wait and see, what they eventually see is not good, So it actually drags in the economy, slows down economic growth. So I am not concerned about the economy accelerating a lot this.
Year at all.
I'd be more worried about it decelerating if we have some shock or make some mistake.
Sammary's point, though, this president, the incoming president, values a lack of predictability. Are you saying that's going to be a permanent feature of this bond market through this administration, a yield premium because we just won't have a clear plan.
It could be, but also because we're going into uncharted territory in terms of how much we're trying to borrow from the you know, the biggest borrow in the world is going to be borrowing more than they've ever borrowed before. And it's and you know, we're at a delicate point here because.
We really need to not only do we have to.
Have a sensible plan in terms of revenues and spending, but we need a certain amount of predictability. If you if we sort of push through a budget plan which suddenly pushes us to a four trillion dollar deficit and everybody said, well, it's okay, We're going to grow away out of it. We're not going to grow our way out of it. I mean, we have to do some sensible budgeting here. And yes, I do think that could push up long term interst rates. And as I say, it's a feedback loop because that pushes the deficit to GDP ratio up to you know, seven percent, eight percent. Those numbers make it very hard to finance this debt.
It's pretty a negative psycho David, it's going to say, as always, appreciated time joint to guess Nats continue the conversation. ADITYA Bve of Bank of America Global Research. Adita, you made a code in the last week off the back of pay rolls, no more rate cuts in twenty twenty five. Does this data point this morning change things on the margin at all for you in the team?
No, I don't think it changes our mind. Really, it's a good number. Zero point two percent on the core PC. We were below consensus at about twenty six basis points. This was even softer than that. But what's different this month relative to previous months is that we already have the PPI data, so we can very quickly go from reacting to CPI to then doing the read through to PCE, which is what really matters at the end of the day. And if you look over the last three four months, we're basically running it around two and a half percent, which is where the FED things will be at the end of this year for the core PC, So by the FED Zone admission, inflation is stuck around.
Two and a half percent.
And then also on top of that, the labor market seems to have stabilize and that was the primary reason they were cutting, so we don't see any reason for them to keep cutting now going forward.
Adachin that same call you made, you also say that should core PCE come in somewhere above three percent, then we'd start talking about hikes. With this data in hand, even if it doesn't change your call when it comes to no cuts, does it at least move us further away for having to talk about hikes.
I think that's fair.
We were pretty upfront about the fact that the bar for hikes is still quite high, so getting to three percent is not a trivial thing, right, even setting aside this latest data print, As your previous guest mentioned, we are going to go down on the year of a year eight over the next three months most likely, because the base effects are very favorable, so I won't be surprised if we're around two and a half percent once we have the data through March. So to go from there to three percent is going to be very challenging, and it'll probably take some sort of exogenous shock which could get hikes really into the equation. But equally, our point for now is getting from there to two percent looks quite challenging, which is why we don't see a rationale for continued cuts.
Is there some degree which we should look at these data points as a jumping off point point, that is to say that we are going to see inflation's true path coming forward once we pass the inauguration, once we hear different policy for Donald Trump. Is this only the beginning of something that again could be an inflationary path.
It's possible. We'll really have to see.
I mean, you talked a lot about policy uncertainty as well in the previous segment, and I think there is a lot of uncertainty, so we'll see how things play out. We have made it clear that we think the risks are skewed towards more inflationary policies, but nobody really knows what's actually going to happen, right, So we'll have to see how things play out. I think it is worth noting that last time around, there were a lot of expectations that tariffs would be super inflationary, but the dollar ended up absorbing a lot of the shock. There were a lot of exclusions and so on, so the tariffs didn't actually end up being that inflationary.
Well, then, going to.
David Kelly's point talking about this policy uncertainty and this wait and see, does this basically mean paralysis as you wait for this unpredictability because the income administration wants a lot of optionality when it comes to how are they going to enact some of these things like immigration policy and tariffs?
Right, Sorry I lost you for a bit. I'm not sure what the question was.
Well, are we going to have basically just economic paralysis this weight and see? And can that in itself hurt the economy?
Right?
So we're pretty optimistic on the trajectory of the economy. To be honest, economic paralysis isn't really our outlook. We think we're going in with significant momentum. We are above consensus on growth for this year, primarily because of structural growth, right, So we see productivity as a big driver of growth over the last couple of years. We think that can continue going forward. So we think we can grow at two point three percent this year with tariffs maybe putting some downside on growth, but then equally if we do get some fiscal stimulus, that could be the growth environment.
I did you appreciate your time, sir as always did you pother there Bank for America level research off the back of this inflation print at each This is the Bloomberg Surveillance podcast, bringing you the best in markets, economics, and geopolitics. You can watch the show live on Bloomberg TV weekday mornings from six am to nine am Eastern. Subscribe to the podcast on Apple, Spotify or anywhere else you listen, and as always, on the Bloomberg Terminal and the Bloomberg Business app.