Interest Rate & Yield Curve Impact - Potential Fed rate cuts as early as September could steepen the yield curve, benefiting banks' net interest income [2] - Rate cuts of 25 to 50 basis points between now and year-end, and potentially further next year, are anticipated [5] Loan Growth - Consumer loan growth, particularly in credit cards, has been robust over the last two years [3] - Corporate lending has been modest, but commercial and industrial lending has shown a pickup in the last 6 to 8 weeks [4] - The industry could see loan growth exceeding 4% on an annualized basis in the current (third) quarter [4] Regional vs Money Center Banks - Regional banks benefit more from a steeper yield curve because they generate 65% to 70% of revenues from net interest income (spreads) [6] - Money center banks like JP Morgan and Bank of America generate closer to 55% of revenues from spreads [6]

♪ DANI: IT’S 5:00 A. M. IN NEW YORK CITY.GOOD MORNING, I’M DANI BURGER WITH YOUR "BLOOMBERG BRIEF." MORE TALKS. PRESIDENT TRUMP CALLS FOR A MEETING BETWEEN PRESIDENT PUTIN AND ZELENSKIY AND A TRILATERAL WITH HIMSELF. THE BIG INTEL BET.THE TRUMP ADMINISTRATION WEIGHS A 10% STAKE. SOFTBANK BUYS A SURPRISE $2 BILLION WORTH OF SHARES. PLAYING FOR TIME, STOCKS GO NOWHERE FAST AHEAD OF ALL TIME HIGHS AND RETAIL EARNINGS AND JACKSON HOLE.WE’RE STILL GOING NOWHERE THIS MORNING. THE S&P ENTERED DOWN 0.01%. WE’RE SO ...

Bond Market Overview - Investors should always consider bonds for income, capital preservation, and diversification, regardless of the interest rate environment [5][6][7] - The yield curve, typically referring to Treasury bonds, reflects inflation and growth expectations, and its shape signals future economic conditions [8][9] - An inverted yield curve, where long-term rates are lower than short-term rates, often anticipates Federal Reserve rate cuts due to declining inflation or a weakening labor market [13][14] Investment Strategies & Considerations - Reinvestment risk arises when short-term investments mature and proceeds must be reinvested at lower rates, potentially decreasing income [15][16][17] - Mortgage rates are based on expectations for the next 10-30 years, not solely on current Federal Reserve actions [20] - Investment-grade corporate bonds (rated BBB or above) offer low to moderate risk with average yields around 45%-5%, making them attractive compared to 2010-2022 levels [25][26][28] - High-yield or junk bonds (rated BB or below) are riskier due to higher debt and volatile cash flows, and the current compensation for this risk is relatively low [26][27] Federal Reserve & Monetary Policy - The 1951 Fed Treasury Accord established Federal Reserve independence, separating monetary policy from government spending [2][3][38][39][40] - Fed independence is crucial to avoid using monetary policy for short-term political gains, which could lead to higher inflation, long-term interest rates, and a weaker dollar [41][43] - Quantitative easing (QE), where the Fed buys long-term securities, and yield curve control, where the Fed targets longer-term rates, could undermine Fed independence if used to lower government interest expenses rather than address emergencies [47][48][49][50] Mortgage Rate Strategies - Adjustable-rate mortgages (ARMs) may be favored in a Fed rate-cutting environment, as they are more closely tied to short-term interest rates [55][57] - Potential homebuyers should temper expectations, as mortgage rates may not fall as much as the Fed funds rate, and a return to 3%-4% mortgage rates is unlikely [59][60][61]

Interest Rates and Housing Affordability - Lowering interest rates by the Federal Reserve (Fed) does not inherently make housing more affordable; in some cases, it can make it less affordable [2][3] - Mortgage rates are more dependent on the long end of the yield curve (e.g., 10-year and 30-year yields) and typically trade 1.5% to 2% higher due to associated risks [6] - The Fed is projected to lower interest rates in September, but this may change based on labor market reports and inflation readings [7] - If the Fed cuts rates preemptively to avoid a recession, it can reignite "animal spirits," causing markets to rise and the bond market to reprice inflation risk, potentially increasing mortgage rates [12][13][14] - Cutting rates prematurely may worsen the real estate market [34] Asset Prices and Housing Market Improvement - Lower asset prices are needed to achieve a durable improvement in housing affordability [22][23][25] - Lower asset prices lead to a lower long end of the yield curve, which in turn leads to lower mortgage rates [39] - The market may take 6 to 12 months to accept the reality that lower asset prices are necessary to improve the real estate market [23] Market Dynamics and Future Outlook - The housing market is currently seeing a drop in new privately-owned housing units under construction due to unaffordability [20][21] - The author anticipates that after a second round of rate cuts, potentially starting in September, the long end of the yield curve will likely increase, leading to higher mortgage rates [29][30] - It may take a couple of years for the market to accept that lower asset prices are needed to improve the real estate market [33]

Summary of Key Points from the Conference Call Industry Overview - The focus is on the banking sector, particularly in Europe and Japan, with a long-standing overweight position on banks globally [2][15]. Core Insights and Arguments 1. **Macro Environment**: - Rising populism is leading to fiscal imprudence, necessitating a fiscal tightening of approximately 3% of GDP in the US to stabilize government debt [3][18]. - Banks benefit from rising bond yields and a steepening yield curve, performing well when currencies like the Euro and Yen appreciate [3][31]. - Private sector loan growth is increasing, particularly in Europe, with corporate lending in France and Italy showing signs of recovery [3][42]. 2. **Valuation**: - Banks in Europe and the US are trading at about a 10% P/E discount to their historical norms, with European banks' cost of equity at 11.6% compared to 8.8% in the US [4][65]. - A significant EPS downgrade of 10-14% is being discounted, which would require a sharp slowdown in growth [4][71]. 3. **Structural Improvements**: - Banks are more resilient to recessions due to lower-risk lending practices and improved regulatory frameworks [5][86]. - Non-macro headwinds have diminished, with reduced litigation risks and improved risk controls [5][88]. - Increased consolidation in the banking sector is expected to benefit incumbents [5][92]. 4. **Tactical Considerations**: - The banking sector is not overly crowded, ranking 8th out of 29 sectors globally [6][103]. - Strong earnings revisions are noted, with banks ranking 2nd in Europe and 5th globally in terms of earnings growth [6][105]. 5. **Preferred Banks**: - Specific banks highlighted for investment include BAWAG, ING, Standard Chartered, Barclays, and others [9][11]. Additional Important Insights - The report emphasizes that banks are becoming akin to consumer staples, offering attractive yields and earnings growth amidst market disruptions [5][95]. - The potential for a weaker dollar is seen as beneficial for European and Japanese banks, while it poses challenges for US banks [38][39]. - The macro model used for banks indicates that further rises in the Euro and PMIs should lead to outperformance of European banks [115][116]. This summary encapsulates the key points discussed in the conference call, providing a comprehensive overview of the banking sector's current landscape and future outlook.

Market Trends & Yield Curve Analysis - The yield curve is flattening, with 10-year Treasury yields decreasing while 2-year Treasury yields increasing on the week [1] - The shift in the yield curve's steepening trend occurred around July 15th and 16th, following the release of CPI (Consumer Price Index) and PPI (Producer Price Index) data [2][3] Currency Market Dynamics - Euro is outperforming, reaching a one-year high against the Yen (euroyen) [3][4] - The dollar is underperforming against the Yen (dollar yen) [4] - Euro is hovering near a four-year high against the dollar [5] Factors Influencing Euro Strength - Concerns about fiscal prudence and austerity measures in Europe, even after the election, are contributing to the Euro's strength against the Yen [4][5]

Interest Rate and Inflation Expectations - The market is pricing in both potential rate cuts and higher inflation, creating conflicting signals for the Federal Reserve [3] - The analyst believes inflation has bottomed for the year, referencing break-even spreads as an indicator [2] - The analyst anticipates no rate cut in the immediate term, but acknowledges the possibility of a 50 basis points cut if labor market conditions deteriorate [4] Treasury Market Strategy - The firm is currently positioned for no rate cuts, with a "Steve Burner trade" involving being long on the two-year Treasury and short on the ten-year Treasury [5][6] - The firm has been largely ignoring the 30-year part of the Treasury market, anticipating further upward pressure on rates in that segment [9] - A steeper yield curve is expected if monetary policy is loosened amidst existing inflation and tariff pressures [8] Portfolio Construction and Risk Management - The portfolio includes short-duration credit, which is expected to rally if rates decline, providing dual exposure [13] - The firm is prioritizing stability and managing volatility, avoiding stretching for valuation or taking on significant risk due to unpredictable rate cuts [17] - The portfolio incorporates floating rate debt to benefit if there are no rate cuts [18] - The firm is considering non-dollar trades for the portfolio at some point this year [18] Fiscal Policy and Global Sovereign Debt - The analyst expresses concern about increased government spending, noting the debt limit was raised by $5 trillion [14] - There is pressure in sovereign debt globally, influenced by factors like the Japanese market and elections [15]

Federal Reserve & Interest Rates - The market is closely watching President Trump's pressure on Fed Chair Powell and potential impacts on Fed independence [1][2][10] - Uncertainty surrounding tariffs makes it difficult for the Federal Reserve to predict economic conditions and future rate cuts [3] - There are differing opinions on the timing of rate cuts, with some suggesting July or September, while others believe cuts are not urgent based on current data [10][15][18] - The futures market implies a slow, steady easing bias, and the Fed is ready to respond to downward trends in growth and the labor market [16][17] - Some Fed officials are increasingly voicing support for rate cuts sooner rather than later to get ahead of potential economic lags [7][8][9] Bond Market & Yields - Concerns exist that losing Fed independence could undermine the Treasury market's status as the safest asset [2] - The yield curve could steepen if there is not a credible Fed nominee, potentially leading to higher long-term rates and a bond market "conniption fit" [12] - The long end of the yield curve is reacting to political and economic risks, including questions about Fed independence [23] - Developed market economies are engaging in deficit-driven fiscal spending, requiring bond market absorption, potentially pushing the 30-year yield between 5% and 55% [25][26] - A steeper yield curve is likely to continue, supported by long-end demand and technicals [28] Credit Market & Risk - There's a surge of reverse Samurai bonds, with Japanese companies borrowing overseas, and the U S leveraged loan market is experiencing its busiest week since the start of the year, with volume near $50 billion [30][31] - The market is seeing a rush into riskier debt, but corporations are navigating the backdrop with resilience, though dispersion exists within sectors [32][33][34] - Valuations on a spread basis are approaching all-time high single-digit percentiles, emphasizing the importance of avoiding downside risk [36] - Selectively moving down on credit risk is favored over duration risk, with opportunities in triple B-rated bonds or the high end of high-yield bonds [38][39] - While default rates are historically low, they are creeping higher, and bankruptcies are rising, partly attributed to tariffs and aggressive capital structures [44][45][46][47]

We do have that breaking news right now. Let's get straight to Rick Santelli for more on that. Rick, take it away.Yes, this is our June read on CPI, the consumer price uh inflationary guide, and it is a little warmer than expected on year-over-year, but headline looks good. Up 3/10 as expected. That does follow up one10enth.Up 3/10 will be the second warmest of the year. January was the warmest at up half 1%. This is as expected but two ten hotter than the rearview mirror.If we strip out food and energy com ...

Tariffs and Market Risk - The market is largely discounting the risk of higher tariffs, viewing President's threats as saber rattling [2][3] - There is a risk that tariffs, with an effective rate of 13-14%, will start to impact second quarter earnings, as they began to kick in during May [4] - Mega cap tech companies are relatively invulnerable to tariffs [12] Interest Rates and Fed Policy - The Fed is split on interest rate policy, with approximately 50% favoring rate cuts due to concerns about unemployment and 50% worried about the inflationary effects of tariffs [6] - Chicago Fed chairman Goulsby is considered dovish and signals potential rate cuts [5] Yield Curve and Banking Sector - A steepening yield curve is generally considered positive for the overall economy and is beneficial for banks, as they borrow short and lend long [8] - The banking sector is fundamentally benefiting from the current yield curve [9] - Mega cap banks like JP Morgan are trading at high valuations (250% of book value), but regional banks may still offer attractive opportunities [10] Tech Sector - Tech names are showing strong positive indications pre-earnings, with approximately 60% of positive pre-announcements coming from the tech sector, compared to about 14% for industrials [13] - Mega cap tech companies still have room to grow, driven by long-term growth pathways, despite recent pullbacks for profit taking [12]