Podcast Summary
Stronger-than-expected net interest income from major banks: Major banks reported stronger-than-expected net interest income, managed costs effectively, and raised Q4 guidance. However, risks for 2024 include potential higher interest rates and weakening commercial real estate.
During the recent earnings season, three major banks - JPMorgan Chase, Citigroup, and Wells Fargo - reported stronger-than-expected net interest income and raised their guidance for the fourth quarter. The banks have been able to manage costs effectively, despite rising risks. JPMorgan, in particular, saw a surprise release of reserves on the credit side. However, there are still risks to the outlook for 2024, including the potential for higher interest rates and weakening commercial real estate and office profit properties. The banks' mortgage divisions have been under pressure due to higher interest rates. Overall, the banks are focusing on managing their core costs and continuing to make progress in that area.
Banking fees showing optimism despite lower contribution to revenue: Consumer credit remains strong, commercial loans and office real estate weaken, Goldman Sachs focuses on core franchise, and banking sector normalizes with rising charge-offs but better than expected results
While mortgage and investment banking fees contribute less to revenue for banks, banking fees, particularly from M&A, are showing signs of optimism. Consumers remain healthy, with strong credit and lower net charge-offs. However, commercial loans and office commercial real estate are showing some weakness. Expectations are higher for upcoming bank reports, with Bank of America and Goldman Sachs having different focuses and potential areas of strength. Goldman Sachs is making progress on its strategic goals of focusing on its core franchise by selling off consumer-related assets. Overall, the banking sector is experiencing normalization, with rising charge-offs but better than expected results.
Regional banks face unique challenges, Citigroup restructuring not industry-wide: Regional banks face softer demand, rising rate risks, while Citigroup restructures. Investment banking stabilizes, inflation remains a concern.
The regional banks are facing challenges different from those of the larger universal banks, with softer commercial demand and rising rate risks being more significant concerns for the former. The banking sector is undergoing restructuring, with Citigroup being a notable example, but this seems to be specific to that bank rather than an industry-wide trend. The investment banking and trading sectors have seen cuts, but fixed income trading has remained relatively resilient, while equity trading has been weaker but still within historically high ranges. Investment banking is showing signs of stabilization, but the levels it is operating at are closer to pre-pandemic norms. In Europe, inflation data is expected to show a downward trend, but the risk of stagflation, or weak growth coupled with high inflation, remains a concern due to potential oil or gas price increases. Central banks are closely watching every detail of every CPI print to navigate this challenge.
IMF forecasts high inflation in UK and Europe next year: The IMF anticipates the Bank of England will increase interest rates to curb inflation, forecasting subdued UK growth and a decline in inflation by 2025. European inflation is also expected to decrease, but risks to growth and inflation persist.
The International Monetary Fund (IMF) expects inflation to remain high in many countries, including the UK, next year. The IMF predicts that the Bank of England will increase interest rates again and keep them high to curb inflation and maintain expectations. The UK's growth is forecasted to be subdued due to higher interest rates, but inflation is expected to decline, allowing it to return to target by 2025. The IMF's forecasts do not significantly change with the recent upward revision to UK GDP growth by the Office for National Statistics. Although inflation is a challenge across Europe, the IMF does not foresee a return to 1970s-style inflation, as inflation has already significantly decreased since its peak last year and is expected to continue declining. However, risks to the downside for growth and to the upside for inflation remain, including the possibility of inflation being more persistent than anticipated and rising wages.
IMF and Bloomberg Economics issue warnings about global growth risks: Despite balanced risks, governments urged to focus on debt sustainability and economic growth, while labor market improvements could ease inflation and boost growth.
Both the International Monetary Fund (IMF) and Bloomberg Economics are warning about potential downside risks to global growth, including higher interest rates, financial sector tensions, and corporate insolvencies. However, there are also upside risks, such as easing labor market tightness and more labor supply coming in, which could ease inflation and boost growth. For governments, the advice is to focus on safeguarding debt sustainability, rebuilding budgetary room, and strengthening the disinflation process. Despite these risks, there is also optimism for growth in the coming year, but debt levels are still high and increasing debt service costs are a concern. The overall perspective now is that risks are more balanced than they were six months ago, but fiscal policy could become a more prominent issue next year. The European Central Bank (ECB) is expected to shift their emphasis from inflation risks to economic risks, and there could be an upside surprise from the labor market. However, there are still plenty of data prints to analyze before making any definitive predictions.
Chinese Economy: Recovery with Challenges: The Chinese economy is recovering but faces challenges in consumer spending and exports, with deflation also a concern. The government plans to raise the budget deficit and invest in infrastructure to boost growth.
The Chinese economy is showing signs of recovery but still faces weaknesses, particularly in the areas of domestic demand and exports. Consumer spending during the recent holiday period showed some improvement, but it did not reach pre-pandemic levels. Exports have been declining due to increased production costs and shifting demand to other countries. Deflation remains a concern, with factory prices continuing to fall. The Chinese government is considering raising the budget deficit and implementing a new stimulus package, which is expected to focus on infrastructure spending. However, this time, the central government will likely be the one raising and spending the funds.
China takes on more local debt, addresses economic concerns: China steps up to help local governments amid financial strains, showing concern and flexibility in economic policies, while dealing with challenges in financing Belt and Road initiative due to domestic issues and European withdrawal. Putin's visit aims to strengthen China-Russia ties, potentially boosting commodity exports and investments.
The Chinese government is taking new measures to address domestic financial strains by assuming more debt obligations from local governments. This shows Beijing's concern about the economic situation and a willingness to change its approach. The upcoming 3rd Belt and Road forum highlights the challenges China faces in financing this global initiative due to domestic weakness and European withdrawal. Putin's visit to China aims to strengthen their relationship, with potential benefits for both countries in terms of commodity exports and investments.
Chinese President Xi Jinping meets with US Congressional Delegation, Discusses Superpower Rivalry: Xi Jinping met with US Congressional Delegation, downplayed superpower rivalry, and discussed potential meeting with Biden at APEC summit. Economists anticipate retail sales decline, while tech industry braces for next phase of AI adoption with potential risks and uncertainties.
During a recent meeting with Senator Schumer and a congressional delegation, Chinese President Xi Jinping downplayed the idea of China trying to challenge the US as a superpower. This meeting marks the first time Xi has met a congressional delegation in eight years and could potentially lead to a face-to-face meeting between Xi and President Biden at the upcoming APEC summit. Economists expect US retail sales data for September to show a slight decrease in consumer spending due to high prices and economic concerns, but there is substantial downside risk to this number. Meanwhile, the tech industry is preparing for the next phase of AI adoption, with important questions about which companies will dominate and where risks and unintended consequences may lie.
Consumer financial situation strained, borrowing may not be sustainable solution: Consumer spending may decrease due to financial strain, borrowing may not provide long-term relief, and vulnerable populations could be disproportionately affected.
The consumer's financial situation is deteriorating, leading to a squeeze on household budgets and potentially negative spending growth. While some consumers, particularly those with higher earnings, may continue to spend due to borrowing capacity, this is not a sustainable solution and could lead to rising delinquencies. The resilience of consumer spending in past recessions was largely due to their ability to borrow, but this time around, the environment of high credit card interest rates may limit that ability. Overall, the trend in retail sales data for September, October, and November is expected to reflect this financial strain. It's important to note that not all consumers are equally resilient, and those living paycheck to paycheck may be particularly vulnerable. The recent solid earnings report from Citigroup, which cited the US consumer's resilience, may not be representative of the entire population.
