'Bloomberg The Open' Full Show (01/13//2023)
Live from New York City this morning. Good morning. Good morning. Earnings season begins right now. Equity futures on the S&P 500 down nine tenths of one percent on the NASDAQ down a little more than 1 percent. We're 25 minutes away, 30 minutes away from the opening bell. Everything you need to get set for the
start of us trading. This is Bloomberg. The Open with Jonathan Ferro. Live from New York. We begin with a big issue. Earnings season begins, Wall Street banks preparing for tougher times.
Tesla cutting prices 20 percent to boost demand as the Fed lays the groundwork for smaller hikes in earnings. Q4 earnings season starting now. Expectations are that earnings will fall 2 percent minus 4 percent, minus 6 percent. When we look at tech and TMT, we think earnings are likely to come down another 15 percent. It's not news that this quarter is going to be bad. The floor is lower with estimates for 2023 are still too high. We think that margins are going to be under pressure.
Analysts still seem quite optimistic. That's going to be the major shift in the equity markets have to contend with. Tech companies have been a source of Dow Jones downward revisions. Thanks for going to Costco.
There's a lot of resilience in the banks arbiter of whether or not we're going into recession. We need to gauge what level of losses all going to be tolerated by the markets. We're actually hoping to use some of that weakness to actually buy it. Earnings is one of those key questions that we need to find an answer to.
Let's get straight to Glenn Beck. Sonali Basak Jason Kelly. John, you're looking at banks who are bracing for an uncertain macro environment, as well as uncertainties around both the top and the bottom line. You're looking at JP Morgan. Jamie Diamond now talking to analysts on a conference call, talking about the net interest income expectations that did fall short for the year when you compare them to analyst expectations.
Now, why is that? Because there's an expectation that with rates going up this fast, there will be more migration to savings products. But on the other hand, to a J.P. Morgan, Bank of America, Citigroup, you do have headcount rising. You have JP Morgan executives telling
analysts as well that there is still pressure on some costs, including labor inflation. So with all those bonus discussions that we've been talking about all year, you do sell the compensation costs. Overall, the bank rising over at Citigroup. It is worth noting fixed income traders, they blew through the roof here. Remember, macro environments being as volatile as they are.
Pretty good for these trading desks. Question is, does that continue? You know, Jane Fraser saying in a statement announcing that the bank is very much on track to meet targets, the medium term targets they've set out. Jamie Dimon also saying that they will meet their targets in the current quarter. Actually, they surpassed it meaningfully when it came to return on tangible equity.
But you do have longer lasting questions here on where the money comes from in a tough year. This all goes to the outlook, looking ahead for another tough year, another twelve months. Jamie Tommy, the CEO, said this. We still don't know the ultimate effect
of the headwinds coming from geopolitical tensions, including the war in Ukraine goes on to say, these honorable state of energy and food supplies, persistent inflation, this eroding purchasing power and perch and pushing rates higher and the unprecedented quantitative tightening as well. Just make sense of all of this for us. Jamie Tom Keene talked about hurricane headwinds are still to come. Where are we nationally? Some of the headwinds are good.
If you looked at the volatility and what it's done for trading over the last year, it's been a windfall. Of course, in the most recent quarter, you saw some pressure on them coming in below expectations on fixed income in particular. Where does that bode for some of the other banks and the money then that will be left to keep paying people at a higher rate as headcount grows. But as you're saying here, you're seeing it in part in the reserve builds. I think the reason this is interesting, John, is because you are seeing a lot of that reserve build in the card businesses which are growing. So you are seeing in a very competitive
environment, even in a tough environment, the banks at this point still leaning in on risk taking similarly in the value risks and JP Morgan's trading books rising a little bit. That shows you a more competitive environment in which the banks are willing to take on some risk and potentially some costs that come along with that. Morgan Stanley, Goldman Sachs, Tuesday, long weekend here stateside. When you look unfortunately, I'm look at trading. It's trading, trading in more trading.
But also, remember something interesting to look out at the site to supplement that trading is asset and wealth management. Goldman's restatement of their earnings show you that leaning on asset and wealth management platform solutions slash consumer businesses are giving you a one point two billion dollars worth of losses in the first nine months of last year. So where does that bring total losses for the full year for Goldman Sachs? And can they show that asset and wealth that is growing as a pivot, that business at JP Morgan? There was a significant decline. Thank you.
We catch you a little bit later around the opening bell. Those stocks, J.P. Morgan, twenty point six percent. Citigroup down by not even a tenth of 1 percent.
Thanks, America down by one point eight percent. Wells Fargo struggling, as you can see on the screen. With us now is cross marks, Bob Dole, nanny level at UBS. Now, you made a move on the financials recently.
Run me through why and whether these numbers this morning backs that up. Absolutely. I mean, we recently downgraded financials, the least preferred after strong outperformance offers the actual below. We decided to do that into a strength. I mean, we're not surprised by the pullback that you're seeing in the banks today. I mean, historically. Last year, plus, we've seen wheat trading around earnings after banks have run into and we think that there's just earnings ahead. I mean, I should, Ali, least pointed out the economic slowdown.
We think that net interest income is peaking and will decelerated as we hit those peak in rates. Deposit patterns are rising. They're picking up and that's going to pressure margins. Also, we think that the inverted yield curve will be problematic for spread long growth is slowing. We've seen that in the senior loan
officers service that tighten up lending standards and credit quality. While that remains pretty bright line right now, you're seeing the banks built reserve and we expect more reserve bills as the credit environment deteriorate. Those charge offs pick up. And so we just think it's going to be a harder environment for banks and they're not going to be able to pull those expense levers as they have been able to put in past slowdown, give ways, inflation, and also the need to continue to invest in technology to remain competitive. So that's why we also downgraded financials. I'll tell you on the same page, know,
largely speaking, I think that a lot of the verbiage that came out of these are earnings reports point to more difficulties going forward. Not he did a good job outlining his in the labor profit, the labor cost problems, the problems with the inverted yield curve. What does that does to net interest margins? Lower income consumers using those credit cards are going to be some loan losses there. So their environment is is tricky going forward. Now, he said that the stocks are pretty
cheap relative to most measures. And so I don't think there's huge downside, but there's some adjustment going on here, not just to go back to the motor running story. Where are you expecting the biggest tank writes this earnings season? Yeah, you know, I would say the earnest expectation for the fourth quarter has probably come down a no. You know, we've seen a massive downward revision revision since the third quarter. And so the consensus right now is called
in for the first negative earnings since there is a recovery. So 3 percent decline. But I think when you look across the board, we are concerned about the outlook.
We think that that's where there is some concern, particularly on the more cyclical sectors of the market. I mean, can you believe it that the consensus is calling for double digit earnings growth for financials, consumer, discretionary, industrial? That's just perplexing to us to see near record on record earnings for the sector. So we think that there's increased risk to those economically sensitive sectors as the economy slows down. We also even think that there's some risks even to tech. So I understand why you like Steinfels then. I understand why you like healthcare.
Why energy? Not. I'm sorry, but that was for Bob. Yes. You know, in terms of energy. You know, we just think that the drivers are still there for higher oil prices. They're still in place. We think that there's a weakness that you've seen year to date will fade.
I mean, when you look at Russian oil that still sell it below, well below the 60 dollar price cap that was put into place in December and half the global price. And it's becoming very difficult for Russia to sell us oil. We think it's going to become even more difficult when the embargo falls on refined products on February 5th. And then you have China reopen it. That's going to put upward demand on energy. India still remains strong, so that incremental demand is going to come from emerging Asia.
So we continue to believe that Brent oil is going to get to one hundred and ten dollars this year. So that's why we continue to like energy in this environment. 20 to repay on the counts for you and Nadia. Bob Dole, are you on the same page? Energy, staples, health care. When it's a 22, when is it?
Twenty three are largely speaking. I think the financials will have a better back half of the year. Health care is not all that cheap nor staples or that we like them.
But I want to underline the energy call based on, among other things, the discipline these companies have in how they're using the enormous cash flow they have in terms of how many holes they drill in the ground. So I think these companies are changed from what they were in a positive direction. Have these companies changed United American down to these airlines yet today have absolutely ripped.
I can go through some of the numbers for you. United Airlines up 36 percent over eight trading days now just down this morning off the back in numbers. But before that, doubts are up by more than 20 percent over the last eight trading days here today. American up by 32 percent. Even Southwest is up close to 10 percent year to date so far. Now, can you make sense of what's going
on here? The first eight trading days of the year and these massive gains we're seeing in the sector. You know, we think that this market is still in a downward trend. I mean, the massive move that you're seeing in some of these single stocks, in some of these interest is quite concerning to all of us, because we just don't think that we're out of the woods yet. I mean, even that means stocks are rally. And so we think that the rally that you're seeing remains quite fragile. And we think that you're going to see a stall out around this 200 day moving average, as we've seen in the past, bear market rallies.
We think that you're not going to really see an upward trend in the market until we get to a bottom of that economic dead and earnings. And so we would expect a pullback in some of these stocks that have massive rally in the last couple of weeks. We just don't think that there's enough downward from earnings revisions. Not yet. Well, let's talk about how long we have to wait for that downward revision to this economy. Bob Dole, let's talk about the right
hand right now. No DAX Renaissance macro amount, who we've quoted a lot on this program over the last couple of months is very constructive on where we are right here right now. He said this this morning, Europe is warming cap, likely avoiding a technical recession. China is reopening. The Fed is stepping down from an aggressive rate hike pace and fiscal policy is no longer a drag. He went on to say the Fed expects real GDP in 2003 to slow down to zero point five percent Q4 on Q4.
And he finished with this. Good luck with that one photo. What he said. Back to that. So a lot of good points there. I think what we don't know and perhaps what Neil's missing is what effect what the Fed has already done will have on the economy. Second fastest rise in Fed funds rate in history, and that operates on the economy with a long and unpredictable lag. The effects, I think still will be seen
and therefore the earnings risk and therefore hard to see a lot of upside the market. Why do you think it's taken so long? Or do you just need to be a little bit more patient? How long do you think this takes? Both just to say they didn't start to last March, as you remember, John, and a lot of it came in the middle of the year in the fall. Those legs are 612, sometimes 18 months. So I think we're yet to understand what effect that will have. Not to mention, you know, the balance sheet issue they have to deal with. We'll keep building on this story. Bob Dole, Nadia level sticking with US equities down by about 1 percent on S&P coming out.
Fed officials leaning towards smaller hikes now with forward looking real rates positive across the curve and therefore our feet unequivocally on the brakes. It just makes sense to steer more deliberately as we work to bring inflation down. More on that still ahead.
Now, with forward looking real rates positive across the curve and therefore our feet unequivocally on the brakes, it just makes sense to steer more deliberately as we worked to bring inflation down. The Richmond Fed President Tom Park, and take up a downshift potentially to smaller rate hikes. The Fed's Patrick Harker supporting that move. The days of us raising by 75 basis points have surely passed. In my view, hikes of 25 basis points will be appropriate going forward. Might NIKKEI putting it all together for
us? Hi, Mike. Hey, John. I don't think in all seriousness, that the debate is about the speed anymore. It's more about the destination. And there is a real disagreement between Wall Street and the Fed on the destination. Now, this week we've heard from Susan Collins, Patrick Harker, Tom Barkin and Jim Bullard. And while they disagree on the speed, they're all saying the same thing about the destination. Take a look at what Harker and Bullard
had to say yesterday. We need to get rates above 5 percent. How far above? We'll let the data dictate that. And the median dot said the policy rate would be somewhat above 5 percent at the end of 2023. That's what the Fed thinks. But take a look at what the market thinks. The market thinks the Fed isn't going to get to 5 percent.
The Fed's forecast is five point one, 2 percent if you want to use the median dot from December. The yellow line there is where the market thinks the median is going to be. And that is not the same number. Market is also pricing in rate cuts for next year.
The battle is going to be over the next couple of months. Is inflation going down fast enough or is the economy turning badly enough that we need to see rate cuts? Jeff, good luck. Double line said there's no way the Fed's going to 5 percent. The Fed is not in control. The bond market is in control.
To which Minneapolis Fed. Neel Kashkari this week in The New York Times had this rejoinder. They're going to lose the game of chicken. I can tell you that.
So there's going to be fun to follow as the year goes on. Well, we'll keep following it. Mike, I guess at this point, what's the disagreement really over inflation? The market seems to believe inflation's gone back towards Tom Keene quicker than some of these Fed officials. Well, there seem to be two camps. One agrees with that theory that inflation is coming down faster and the Fed will not have to react.
And the other is that the Fed is going to push us into recession and therefore they're going to have to cut rates. Now, the problem with the first argument is even if inflation comes down, if the rest of the economy is doing fine, the Fed would not have to cut rates immediately. And they don't really want to. They'd like to keep rates higher for longer because they got down to zero for so long and had few tools to fight recession. So if they can, somebody pretty yesterday normalize. I hadn't heard that term and awhile
normalized rates to the 3 to 4 percent range. They'd be very happy. I think we've forgotten what normal is. My thank you, sir. As always, my McKay that breaking it
down. Pace, speed and destination when we enter. This came from city Philadelphia. Fed President Harker argued for a few 25 basis point hikes and accepting a slow decline in inflation. But we did not think he speaks for the
committee. We continue to expect the Fed to reach a terminal rate of 525 to 550 as a city fee. But so what's a new thing for you? What's yours? We think we'll get to five and we'll be there at the end of the year and we might even have a mild recession. Look, the Fed waited too long to get
started. I think they're going to sit tight and let inflation fall once they get to where they're going to go. I disagree with the forehand or for the terminal rate. Nadia, you know, I think if it weren't for the job market, we would say that the Fed has enough inflation data, the downward trend, the pause, but we're just not there. So we're looking for 25 basis points in the next hike. We're looking for a terminal rate to get around 5 percent.
I think that the job market has been turned and that's very mixed signals. We saw wage growth, moderate loss last week in the jobs data, but we're looking for more. The ECI later this month and all also comments from operation in the Beige Book to get a better sense of the labor market. Get that data last week that we got was quite noisy. And so we do know that the labor market still remains really tight and we need that to come back into balance, not just about wage growth right now, it's also the labor markets come back and then the balance in terms of the demand versus the supply, what the Fed can feel comfortable and sort of pause it what we think ultimately you get to a terminal rate of 5 percent. Can we talk about that noise in the
labor market just a little bit? Not yet. What you say is unemployment at three point five percent. Wage growth softened a bit. I was where it came in just a little bit as well. Then I look at claims close to 200000. I look at job openings in the quits rate and everything looks pretty decent. Which one is it? We would say more where in terms of the claims, the unemployment rate and also the job openings.
We know that there is 147 for jobs for every person now unemployed. That is just too tight. So you throughout the earnings season, we're going to be listening to hearing from corporations.
What are what are they hear it in terms of how they see in the employment picture. We know that there are layoffs in CAC, but we also know that there is still tightness on the service side. So is that starting to ease? Because we think we need to see that before you can say that we are clearly in a downward trend in inflation or to that point, but never mind recession. Are you seeing evidence of any real softening in this labor market in America? Not at all. This is the Fed's biggest problem, as we've been stating that the unemployment rate in labor report last week went from 3 7 to 3 5 only compounds their problem. They're just not enough workers out
there. And therefore, getting slowdown in wage growth is going to be really difficult. Bob Dole alongside that, he'd love to do both. Thank you.
On this equity markets, we work through some of these themes. Equity market right now down about 1 percent on the S&P 500. Look at this bond market. The moment bond yields SAP as follows up about a basis point. So on a two year to 415, on a 10 year to
about 346, 46 elsewhere in foreign exchange. I need to talk about this a little bit more this morning. Some major, major moves developing. I think about where we've been, where we
were and where we are now. We've moved on the dollar by about 10 percent since late September on dollar yen, 128 on the screen. We were at 150 euro dollar ninety five. And the September now one away.
You can take your pick of the moment. Take a look at cable at the end of September 1, 350, and now it's through 120. Can that continue? Is that sustainable? And what does it mean for the path forward? We mentioned Caterpillar a little bit earlier this week. Caterpillar all time highs early this week. Take a look at the chart where Caterpillar bottomed, which was the end of September and when the dollar peaked at the same time.
And this enthusiasm for this reopening story in China, encouraging people to get back into GM, back into the minus, even in Europe. Just some relief that it's not as bad as we thought it would be, just leading to a massive rip that you've seen in somebody's European names. But some real pushback from the team over at Bank of America today on that theme out of Europe. And I can quickly bring up the note for you. It comes from the team over at BFA in the European desk. They said this The biggest upside risk
is China reopening. But we think the impact on European equities from a US recession will be dominant. We see nearly 20 percent, 20 percent downside on the stock, 600. They go on to say lower bond yields, widening risk premia, EPW downgrades and cyclical underperformance. And it seems the PFA pushing back pretty aggressively against what you're seeing develop over in Europe at the moment.
Its stock, 600 today, a percent of 1 percent at DAX, pretty stable and unchanged. The big story, the footsie, a full tenths of one percent again this morning. Guy Johnson to talk about that a little bit later. Coming up, the money coach and later, earning season getting under way. That's David George. Think a favorable up for the big banks
of the year ahead. Plus, Morgan Stanley's Jim KERIN joins us for the open in fat. All of that still ahead with futures down about 1 percent. This is falling DAX. Five minutes or so away from the opening bell.
Equity futures down here by one per cent on the S&P and the Nasdaq at the moment down by about 1 percent. Also, if you tee up the bond market to Stanton Service, look a little something like this, your 2 year old up 2 basis points to 417. The trend through much the year so far, though, year today. Yields coming in on a 10 year, 347. Back in October 433, you understand the trend yields rolling over dollar a little weaker equity market supported to start the year. At least some of the price action escapes the Monaco's three of them. Here's the first thanks. America upgrading Caterpillar by saying
higher prices and better earnings will provide some shelter from the economic slowdown that stocks been flying up another half of 1 percent. Next up, Guggenheim downgrading test. That's a sound warning that new incentives and recent price cuts will likely weigh on the automaker's margins. I'll get you some more Southside calls in just a moment on tests that that stock is down half by a little more than 5 percent at the moment to 116, 64. And your third and final call from RBC Capital downgrading the US. Homebuilders expecting numerous headwinds to drive significant downward revisions. K.B.
homes, difficult couple of days. That stock is down by one point five percent to thirty four forty three. The molecules coming up. Earnings season kicking off Wall Street's biggest banks gearing up for a challenging year ahead. That conversation up next with Morgan Stanley's Jim KERIN and. David George. Looking forward to that. You open about four minutes away. Equities down about nine tenths of one percent.
Twenty five seconds away from the opening bell this morning. Good morning as we wrap up the trading week three day winning streak, the S&P 500 after the close yesterday. That is the longest winning streak since November. Believe it or not, somebody speak like this right now, down about nine tenths of one percent looking to close out. And we may be on a softer note on the Nasdaq down by about 1 percent.
They show up in the past, which are the fourth, and get to the bull market yield shaping up as follows. Take a little time, buy a couple of basis points three forty five, ninety five on a 10 year. And the effects market, the dollar trying to show some strengths. Euro dollar 1 2 0 3, down about a half of 1 percent. Crude approaching eighty seventy nine dollars at about 10 cents one per cent on the day. That's 15 seconds into equities, down by
eight tenths of 1 percent on the S&P, on the NASDAQ down about eight tenths of 1 percent. Also one sector to watch at the open, the big banks. J.P. Morgan, thanks, America. City wells kicking off earnings season. Abby has the price action hangover. Hey, John.
Well, yeah, a bit of a disappointment here. We can see that all four of these big banks are trading to the downside on the unknown of the macro situation and what it could mean for revenue and profit going forward now relative to J.P. Morgan. That stock is down about 3 percent. They had a disappointing net interest
income guide of 73 billion versus seventy four point four billion. That was the estimate. Citigroup, interestingly, the stock had been almost higher earlier. Right now, down about 1 percent. Their fifth trading day actually smashed that number. The ISE banking and equities a little bit light.
However, Bank of America, those shares are down one point two percent. Relatively clean quarter beats net interest income. And then rounding it out. Wells Fargo doing the worst at this
point, down three point four percent. Surging expenses. They missed revenues slightly. They do expect the economy to worsen. Now take a look at net interest income. We are going to see here or excuse me, the provision for loan losses much larger than expected. Not a great sign for some of these banks.
J.P. Morgan leading the way there. And then finally, price action. John, you know, it's interesting that we have these banks trading off today, all four of these banks on the year over the last year, down about 20 percent or more. But take a look at this rally that we're seeing in JP Morgan and the banks overall. The banks overall out of that October
low, up about 20 percent for JP Morgan ahead of today had been up closer to 35 percent. So we're seeing this dip. It's going to be interesting to see if it continues that trend to the upside. Right now, it looks relatively strong. It's a massive rally since October or so. Abbi, thank you for that. Equities more broadly, about two minutes into the session, down about seven tenths of one percent. No real drama here. Hearing a lot from Jamie Diamond, warning some investors further economic uncertainty and saying this, we still don't know.
The ultimate thinks that the headwinds coming from geopolitical tensions, including the war in Ukraine, the vulnerable state of energy and food supplies, persistent inflation that's eroding purchasing power and pushing rates higher and the unprecedented duty as well. Now on top of the old ISE, Sonali John, not surprisingly here, as you're seeing, those economic uncertainties really start to bake in, you are starting to see some very interesting cracks in borrowers when you think about consumers as well as corporate customers. Let me draw those out for you really quickly here, because charge offs over at Citigroup, for example, rising. Remember, they are still coming off historical lows. These are not crisis era types of charge offs we're seeing, but they are indeed starting to rise. Remember, this is as credit cards
largely has risen, have risen very meaningfully, especially after the pandemic in more recent quarters for both Citigroup and J.P. Morgan. So when you see these reserve bill, that's really what you're talking about here.
It helps them in that net interest income that you like to see. So much for J.P. Morgan, though, however, they are going to likely come in short of expectations for the year. Part of that is because you're watching really deposits start to come back, especially in some of those higher yielding products like D. I will also say, interestingly, over at Citigroup, you are expecting a higher than expected revenue for the year in what Jane Fraser is saying is still the phase one of her turnaround story because it is indeed phase one. John, you are also likely to see higher expenses than expected overall in the conference call over for J.P. Morgan.
You are hearing Jamie Diamond and you're thinking, is he sitting there penny pinching here because he's getting questions about expenses as well. And he is drawing out his dollar in, dollar out analysis for four analysts here. Every branch we open and every banker they hire, they have to ask themselves what those dollars are coming in per those people. Sonali Basak, thank you. Just to the financials, Ken, off of CSR, right, saying financials can stay strong even as the economy kills. I think if you have an environment of
not too hot not to call, it's a great environment for a financial sector, particularly banks, where the expectations are not as high as perhaps other areas that have benefited with a strong gold case scenario. Banks actually are in a pretty good position for performance for 2020. As we see it, police say that David George is bad. Joins us now. David, we often do this every quarter. So thanks for being with us, sir. I know that you're neutral on JP Morgan. You were neutral on Bank of America. Does anything about today's numbers
change that? Hey, John, good to see you again. Happy New Year. No, not really. I think certainly a lot of your comments this morning. It's totally, totally ring true. But I think it's important.
I know the stocks are down today to have some perspective. J.P. Morgan came and we wrote in our note. The stock came in really hot. The quarter was fine. They made eleven billion dollars. You think about everything that you and
Jihye Lee were just discussing. They earned eleven billion in the three months. So fundamentally, despite all of the uncertainty, all of the macro fears that are out there, it's still a fantastic business model. From our perspective, it was just a
valuation issue going into earnings more than anything else rather than any meaningful fundamental issue. David, something you said coming into earnings season, reasonably good, the setup versus the broader market. Why is that? Yeah.
So coming into 2023, to give you some context, we did a fairly constructive view on financials. And one of your earlier guests just kind of mentioned the bars a little lower. If we think about a year or so ago when maybe we were having this conversation, John, that the stocks were 25 percent more expensive in the earnings outlook was is actually better today than it was a year ago. And that's a function of more aggressive Fed tightening and maybe we would have expected a year or so ago. So the revenue outlook is actually pretty good.
Now, it's really a function of what does the credit environment from here look like and how does that unfold? And were of the view that it doesn't have to be binary. It doesn't have to be a soft landing in one camp. And the great financial crisis in the other were of the view and what we're generally calling the 2023 three, the year of normalization in all things, and really kind of going back to 2019 as a core growth guide over it, since we've had so much unusual activity at between Fed stimulus and taking that away were of the view that things are going to normalize really throughout the economy and the banking system as well. David, when you say normalized, what is that? What would you make? What is normal mean these days? Well, we try and view cyclical stocks like banks, John, through a normalized lens. And what that means more than anything is what is normal from a credit perspective.
And credit costs in general. So JP Morgan, as an example, they only had 32 basis points of credit losses. What we would consider to be normal would probably be something in the order of 50 basis points. So it's while we're fully onboard with the notion that credit is going to deteriorate, it doesn't mean that we're going to have a GFC like scenario. Banks take risks and they're expected to have losses. That is actually part of the business. So I think I think sometimes we get too
caught up in the day to day delta, as it were, in terms of credit as opposed to just thinking through the cycle what's normal and taking more about kind of intermediate term view as it relates to that. I'm a fan to get caught up with what's happening on the screen right now. Well, stock down by a little more than 4 percent. That's a stock you like. David, what happened this morning? Yeah, it is. So a couple of things like the expenses
were higher than expected. They're taking some significant operating losses, which we think are to try and get in front of some of the regulatory issues that are certainly well publicized. And their net interest income outlook for 2023 was a little disappointing.
And with the magically one thing that we've seen so far is the net of just income outlooks for the full year are a little light relative to what it where I think consensus kind of came out. And that's a function, John, of deposit deposits and low cost deposits moving out of the system into higher cost alternatives. And that an eye impact, maybe a little more muted than that, maybe some market participants expected.
Is that another way, saying they might be competing for our deposits sometime soon? David, they can have to pay out for that. Well, I think that's a I guess that's your question. Yes, I think that that's going to be an industry wide phenomenon as we go through 2023. I think there's going to be more of a food fight for deposits and the days of paying one basis point for funding we think are generally over. And so that so that's going to be thematically something that we keep an eye on for sure. I think a lot of us are happy with that.
David, thank you. David Joyce, the Fed, thank you very much. It's what the equity market about nine minutes down nine tenths of one percent. Jim COWAN, a Morgan Stanley, joins us now. Jim, I just want to get straight to
earnings with you. If you look at the data NIKKEI astoundingly companies and I know you see a bit of a problem ahead. The profit margins. Why is that? Well, look, I mean, I think it all really stems from what's likely to happen with the broader economy in terms of GDP growth. If you get slower GDP growth, you get consumption comes down as well. Consumption brings out GDP growth. And when we see the labor market, which
we think is starting to soften up a little bit, that means consumers have less money. So what that what that then means is that core operations cannot pass on higher costs to the consumer. The consumer is just not going to be able to pay those costs. So there what would then that. To naturally is tighter profit margins. Once you start to get it laying off more workers and controlling labor costs.
And I think this is really the macro backdrop that we have to worry about in terms of thinking about this negative feedback loop that can start to work through the economy in 2023. And as I like to say, I don't like to say it, but 2023 could be worse for Main Street than actually for Wall Street, because this is the environment where I think the consumer actually starts to feel the pinch of the long and variable lags of Fed policy. So almost like the reverse of last year. Yeah, in many ways we can think about it as the reversal of last year. It's really a lot of these long and variable lags that are really starting to come home here.
So look, I mean, I think the Fed is in a very interesting position in terms of how we think about how we think we're going to grow in 2023. In some cases, I think maybe some people might consider the Fed is chickening out on their inflation mandate. Look, inflation is coming down. We had a month over month CPI print yesterday come out negative and we haven't seen that really since 20, 20. So that was just before the pandemic. So essentially what we're starting to see are price pressures starting to come down. And I think that's good. But it's coming down at the expense of slower growth and also potentially weaker weaker employment, weaker labor and also declining wages.
So all of this that feeds through to GDP growth, to earnings, to profit margins, and that's the cycle that's ahead of us. And John, I think the real question, though, is how much of this is in the price? How much of this do we think is actually already there? And will we do worse than what people are already thinking? As many people think the first half of the year is really where the adjustments going to take place. Such has my market question what makes less sense? The S&P 500 4000 to high yield spreads near 400. I would say high high yields. Well, OK. Well, well, this is good. Now, let me frame this. I'm actually I'm actually I'm actually more positive on high yield. And so I would say the S&P makes less
sense. I would argue that high yield spreads have more likelihood to do to do well, meaning tighten. High yield has more likelihood in higher quality risk adjusted returns context to actually perform better. And the reason is, is because if the Fed starts to pause around a 5 percent policy rate, maybe they go in February, maybe they go one more time in March and then they're done.
Then what that means is that the default risk cycle is going to be much, much more muted. So maybe you get that soft, bumpy landing. Look, I'm getting 8 percent yields, a little over 8 percent yields in high yield spreads are a little over 400 basis points or about 420 basis points. So I get that the spread may not come in a whole lot more, but I'm still collecting an 8 percent coupon. So maybe those yields actually start to come down and essentially, which would also mean Treasury yields come down a bit as well. But I'd rather collect that 8 percent coupon with more certainty of an easier default cycle than try to play the. I'm going to guess what equities may or
may not do so. So the way that we're structuring it in our in our balanced portfolios is we're trying to think about those two risks and trying to find which is the better quality risk. And I'm leaning towards thinking that high yield is that higher quality risk. I Jim, stick with us. Jim Carey and Morgan Stanley, they're
looking at high yield over equities right now. Their equity market, the moment of assets, a medicine down nine tenths of one percent on the S&P and on the NASDAQ say coming up, Tesla cutting prices to 20 percent. That's a great company. We just don't believe it's a great stock right now. It's unclear whether how long the price cuts are going to have to keep going in that conversation next.
If you have a stock was down 70 percent, I think that's the beginning of a train wreck as a great company. We just don't believe it's a great. Right now, it's unclear whether how long the price cuts are going to have to keep going. And why would you jump in now? Why would you just wait to let the dust clear? Because I don't think it's going to get away from you.
Tesla slashing prices by up to 20 percent across the U.S. and Europe in a bid to boost demand. Analysts on Wall Street starting to sound the alarm, Evercore writes in the following.
That will be a significant impact assessed as near-term gross margins. The math depends on how long these new prices last. Atlanta has more ahead. Good morning, Jonathan Tester down 6 percent, meaning it is now down 6 percent year to date.
This focus is largely with more significant discounts on model Y, 20 percent on the base model. Model Y here in the United States, as you said, will twenty one thousand dollars off the more expensive higher end performance model. There's more modest trims in price to the Model 3. What's so interesting is the emphasis Tesla is putting on that seventy five hundred dollar incentive, which will last through to March of 2023. I think what's so interesting about the sell side and this reaction is not that this will result in a hit to gross margin, but actually that they see a pretty significant miss on that margin when we get fourth quarter earnings in a few weeks time.
This is coming off the back, of course, of price cuts in China, multiple price cuts. I think the debate now around whether there is a demand issue is probably going out the window. But it depends how long these price cuts last. And indeed, it can be a lever that spares demand.
And so I think we want to know the duration of the price cut. And then what volumes will be going into 2023. There is some skepticism from some in the market that that target a 50 percent average annual growth on production and deliveries will be achievable for the coming year. Let's start with a bull case. Tesla 116, that's five point eight per cent and ISE of Wedbush outperforms still 175 said this. We believe altogether these price cuts could spur demand deliveries by 20 to 15 percent globally at twenty and shows Tester in Moscow going to be on the offensive to spur demand and a softening backdrop. That's the constructive. Let's put that to one side. The bigger issue for investors right now
is how to value the company. And you saw this from Wells Fargo. They asked the question at the moment for Tesla. There is a growing debate among institutional investors on how to value the company as auto. Or is it tech? Which one is it? Yeah, I mean, I go straight to 12 month forward earnings. I think we're around 25 to 30 when it comes to 12 month forward earnings. Right. There's an interesting way of looking at this, that if you applied a similar multiple to Tesla that that carries for Ford and GM as an example, then the market cap, the test occurrence hasn't come down very significantly.
You and I had this discussion many times over the last three years. Right. That a lot of the the the the valuation was put because a full self-driving, the future promise of robo taxi.
Now that the economy is change coming out of the pandemic, there is a realization that Tesla is starting to be valued simply as a company that makes cars and that demand for those vehicles is starting to pull back slightly. But there are many that are still bullish on the longer term about the software part of this business. It's been a difficult year for both autos and for tech as well, for that matter as well. Great work has always Tesla over the last year.
You can see it on the screen, down 66 percent over the last 12 months. We are about 20 minutes into this. The equity markets down about five or six tenths of one percent. One final thought now from Morgan Stanley's Jim Karen. Jim, I think you've been out front on this. You don't talk about defense. Talk about balance. Can you tell me the difference right now
as we look ahead? We're pretty uncertain, 2023. Yeah. So, look, I mean, you know, many people think about being defensive as ways to avoid risk or ways to participate in assets that just do not have a large movement in the markets, just tend to be lower or lower volatility. Now, what I think is very, very important is that we balance those risks, meaning that we are in a situation where we are fat tail risk, meaning that we could get a hard landing, you could get a soft landing and good things happen. And we have to balance those two things. So we can start by looking at cash, for
example. We can start by looking at short duration instruments and funds in that in that area and say that, you know, yields a pretty good three months to build, you know, yield about 4 percent. You know, that's you know, that's a good place.
Now, do you balance that by owning equity in high yield and other assets as well? Because if you're in an environment where you do get a risk on move in the markets. The one thing I think is a risk is risk. And I want to say that very, very clearly risk is a risk. And the reason I say risk on this risk is because people are under invested in the markets. If you look at what is in money market funds these days, it's almost five trillion dollars. So if you get a very positive move in
the market, you can't afford as an asset manager, as a money manager to move to you miss that move. So you want to be in in safer assets like, you know, short duration, high quality, fixed income assets. But you also want to balance that against owning things. Where, you know, if rates come down, if we stabilize, we get a soft landing, you know, asset classes like high yield credit and some high quality maybe value orientated equities could also do well to you want to be able to balance those two risks so that you manage you reduce the risks through diversification. So the difference between defensive and balance is that balance reduces risks through diversification and keeps it and keeps an eye on risk controls. In that sense, Jim, this was great. Jim, count on Morgan Stanley.
Jim, thanks for sticking with us, working through a lot about the equity market and its fixed income as well. And a little bit of portfolio construction at the end. Twenty two minutes. Twenty three minutes into the session, equity stand half of 1 percent with a sector price action is up. Well, Don, we are certainly coming off
the lows. The S&P 500 now down about half a percent. We have two sectors that are slightly higher health care and staples, defensive sectors to the bottom, not surprisingly, financials. But John, down just 1 percent. Some of those banks down less than 1 percent at this point. So it can be interesting to see how this day plays out. Tech right in the middle, down about eight tenths of one percent on the week, though, John. This is interesting.
So we're looking at a second up week in a row for the S&P 500, year to date. We have the discretionary space, very strong, up six point five percent. You can see Amazon is a big contributor to that Home Depot, too. But take a look at Tesla yesterday. I believe Tesla would've been about flat
to up on the air. But now on the 20 percent price cut that you all were just talking about, John, five point four percent, super interesting at its peak. Tesla, 20 percent of that sector now about 10 percent of a thank you. Some big moves there for you. The broader market, no real trauma, down a half of 1 percent next year. Training Doric. Twenty six minutes in equities and a half of 1 percent on the S&P and the Nasdaq down a half of 1 percent. Also just a little softer light negative
as we close out the week as the price action. Let's get the trading diary coming up. You march consumer sentiment survey at the top of the hour. More Fed speak. Kashkari Harker on deck looking ahead to next week.
U.S. markets closed on Monday. Bank earnings pick back up with Morgan Stanley and Goldman. Plus, we'll hear from Fed President John Williams from New York. That does it for me. For those here stateside, enjoy the long weekend. Thank you very much for choosing Bloomberg TV. Good luck for the rest of the trading
day. This is Bloomberg.