Bloomberg Daybreak Weekend: Banks, CPI, SCOTUS, Spain

The Q2 reporting season for banks is underway, and so far, the results have been stronger than expected. JPMorgan's record-breaking quarter, with a return on tangible equity of 25%, was driven by better-than-expected net interest income and stable costs. The industry as a whole is seeing a migration of deposits into higher yielding alternatives, but not at a pace that had been feared, which is aiding the net interest income line for banks. Trading and investment banking revenues have also come in ahead of analysts' expectations, despite a decrease from the previous year. Industry dynamics have stabilized, and the absorption of regional bank failures, such as First Republic by JPMorgan, is proving to be beneficial.

While trading volumes and fees are both experiencing a decrease, it's important to note that this is a tale of two different areas within the financial industry. Trading, specifically fixed income and credit, is normalizing at historically high levels, with growth in high yield issuance and credit trading improving. On the other hand, investment banking fees are normalizing at weaker levels, similar to pre-pandemic times. The decrease in fees has led banks to right-size their staffing, which can be interpreted as letting people go. However, this trend is expected to continue as trading remains strong, and the optimism for a rebound in M&A activity in 2023 has not materialized yet. Bank of America, as a bellwether institution, is a key player to watch, and commercial and industrial lending may show some weakness as utilization rates of commercial lines had been improving but are now stabilizing.

Several major banks, including Bank of America, Morgan Stanley, and Goldman Sachs, are expected to face challenges in different areas in their upcoming earnings reports. For Bank of America, while they will benefit from credit card business, they will be offset by weak commercial and industrial loans. The wealth business, which is significant for them, could also be affected by rising deposit costs. Morgan Stanley and Goldman Sachs, on the other hand, are likely to feel the headwind from weak fees, particularly in mergers and acquisitions, and potential impairments on real estate. Investors will be watching closely for these trends and any potential mitigating factors when these banks report their earnings in the coming week. Additionally, attention is turning to Japan, where investors are watching for key inflation data as the Bank of Japan grapples with persistent deflation that has lasted for decades.

The Bank of Japan (BOJ) is expected to change its monetary policy later this month due to rising inflation rates, which have been above 2% since April 2022. This is a significant shift for Japan, which has experienced deflation for decades. Economists anticipate that the BOJ will raise its inflation forecast for this year, as it currently predicts an average of only 1.8%. However, the BOJ may need to see inflation staying above 2% for several years before making major policy changes. Additionally, the recent strengthening of the yen against the dollar could impact the BOJ's thinking. Ueda, the new BOJ governor, has been cautious about raising interest rates due to Japan's history of premature rate hikes leading to deflation. The BOJ could consider implementing stopgap measures to make its stimulus more sustainable in the meantime. Overall, the signs point to a significant change in BOJ policy coming soon.

The Japanese economy and the Bank of Japan (BOJ) face unique challenges, including structural issues related to demographics and an aging population, which make inflation and growth more difficult to achieve. The recent strengthening of the yen and cooling U.S. inflation have brought uneasiness to markets about the BOJ's upcoming meeting and potential intervention. The wage component, which has been a long-standing issue in Japan, is still a point of suspicion regarding its sustainability. The political environment, specifically the delayed Japanese election, reduces the pressure on the BOJ to avoid market disruptions. As a result, investors should be cautious and watch for potential stopgap measures at the upcoming BOJ meeting.

The United States Senate is pushing for a new law to establish a code of conduct for Supreme Court justices following a series of ethically questionable incidents. The Senate Judiciary Committee, led by Democratic Chairman Dick Durbin, will vote on the bill on Thursday. The need for this legislation arises due to the lack of an enforceable ethics code for Supreme Court justices. Recent controversies include Justice Clarence Thomas accepting luxury travel from a Republican mega donor, Harlan Crowe, and Justice Sam Alito taking a trip funded by Republican donors. Justice Sonia Sotomayor's use of staff members to encourage venues to purchase her books for signings is another example. The Supreme Court justices are not currently bound by any code of conduct, and there is no independent entity to enforce ethics rules. The proposed legislation aims to address this issue by requiring the court to establish clearer disclosure rules, conflicts of interest guidelines, and an enforcement mechanism involving lower court judges.

The ongoing ethics debates surrounding the Supreme Court are more about preventing future conflicts than addressing past ones. The legislation aimed at imposing ethical requirements on the court faces significant hurdles, including Republican opposition and the court's reluctance to acknowledge Congress' constitutional right to impose such requirements. The court's standing with the American public is at an all-time low due to controversial decisions and a lack of transparency, making it crucial for the court to address these issues to restore public trust. The refusal of key figures like Harlan Crowe to cooperate with investigations and the court's reluctance to engage in dialogue further exacerbates the situation. The court's unwillingness to accept external ethical guidelines could lead to a potential standoff, making it essential for the court to find a way to address these issues internally to maintain its legitimacy.

The Supreme Court's rulings and decisions on nominations have led to a loss of confidence among Democrats, and the political process surrounding the court is increasingly seen as a zero-sum game. The court's rulings on issues such as abortion and affirmative action have been met with approval from Republicans, while Democrats have expressed dissatisfaction with the way nominations have been handled, including the controversial confirmation of Amy Cony Barrett before the last presidential election. This is leading to calls for reforms to the court, such as expanding it or imposing term limits, or even more serious conversations about the future of the court. However, these proposals face significant political hurdles and are unlikely to happen anytime soon. Meanwhile, the Spanish general election is approaching, with Pedro Sanchez seeking reelection for his socialist party against strong opposition from the conservative People's Party. The election was called to stop the momentum of the conservative party, and the outcome will have significant implications for Spanish politics.

Spanish Prime Minister Pedro Sanchez called for snap elections in an attempt to refocus his government and his junior partners, while also putting pressure on the main opposition, the People's Party, led by Alberto Nunez Feijo. The economy, which had been a major point of pride for Sanchez due to Spain's impressive recovery from the COVID crisis, has not helped him in the elections. Instead, regional nationalisms and local cultural wars have dominated the campaign. Sanchez's proximity to Catalan and Basque secessionists has been a major point of attack for the right. Feijo, the main challenger, is known for his centrist leanings but can also appeal to the extreme right. He ruled his region, Galicia, for 12 years and effectively quelled the local nationalist movement. The election, taking place on July 23, is expected to be closely watched as it could shift the political landscape in Spain.

Convergence of technology giants, academic researchers, and industry leaders in driving innovation and shaping the future. The event, as mentioned, features the presence of Snap's Evan Spiegel, Xbox President Sarah Bond, Open AI's Brad Lightcap, and top researcher Doctor Faye Feili of Stanford, among others. Their participation underscores the importance of collaboration between various sectors in advancing technology. For instance, Evan Spiegel's presence highlights the significance of social media platforms in shaping our digital world. Sarah Bond's inclusion in the lineup speaks to the growing influence of gaming and its potential applications beyond entertainment. Brad Lightcap's role underscores the importance of artificial intelligence in driving technological progress. Doctor Faye Feili's participation, as a leading researcher, emphasizes the role of academia in pushing the boundaries of knowledge. The fact that there are just a few tickets left for this event at Bloomberg.com/techsf underscores the high level of interest and excitement surrounding this convergence of minds. It's a testament to the power of collaboration and the potential impact of these discussions on the future of technology.