Closing Bell - Closing Bell: Wild Trading Week, Wells Fargo CFO & Shopping For A Deal 10/14/22

Episode Date: October 14, 2022

Another day, another market reversal. Stocks giving up early gains to close sharply lower as the wild trading week wraps up. The big banks reporting earnings and Wells Fargo was one of the winners after beating Wall Street's expectations thanks to rising interest rates. Wells Fargo CFO Mike Santomassimo breaks down the results and the outlook for consumer loans in this uncertain environment. Kroger CEO Rodney McMullen discusses his company's $24.6B deal to acquire rival grocery company Albertson's and whether he thinks the acquisition will be approved by regulators. A lot of market volatility in the U.S. has been from the political drama in the U.K. Former JPMorgan Chase International Chairman Jacob Frenkel weighs in on how that could impact the Fed.

Yep, another big intraday reversal, this time to the downside. Stocks are pulling back as we wrap up this wild week on Wall Street. We are sitting at session lows right now. This is the make or break hour for your money. Welcome, everyone, to Closing Bell. I'm Sarah Eisen. Take a look at where we stand right now. Down 350 or so on the Dow. Started the day higher, as you can see. It's been dropping ever since. The S&P 500 is now down 2%, which means we are weaker overall for the week. Just giving you the week to date right now. We're down 1.17%. NASDAQ's down 2.5% right now, also weaker overall for the week.

The small caps down 2.25% as well. Check out the bank stocks. Some mixed action today after reports from J.P. Morgan, Citigroup, Morgan Stanley and Wells Fargo. Morgan Stanley is the loser today, down 5 percent. Wells Fargo, one of the winners, up 3 percent. We're going to talk to the CFO of that bank in a first on CNBC interview in just a moment from now. Also ahead this hour, the man at the center of the big deal news. Kroger CEO Rodney McMullin joins us exclusively to talk about his twenty four point six billion dollar agreement to buy rival Albertsons.

Let's break down today's reversal here, though, in the markets with our senior markets commentator, Mike Santoli, and his dashboard. Not as not as we're not giving back all the gains from yesterday, but still, it's an ugly turn. It's a it's a high compression, high emotion market, I would argue. And when you have these moves that really do shuttle from low to high in a hurry, like we saw yesterday, it shows you it's kind of a quick money, easy come, and then kind of quick to disgorge them. I'm not saying it's all mechanical and technical, but that was a certain element of it. Here's where it takes us. Yesterday's low in the S&P 500 was just under 3,500. So we're about 100 S&P points above where we were. And we were a total of more

than 200 S&P points from yesterday morning's low to this morning's high. And now we've given back, you know, let's call it a third of what was gained. So it's not comfortable. But right now, you're still kind of hovering right in the vicinity of those September 30 lows. Really not that far either from the June 16th lows. So essentially, over the past four months, you haven't made any net progress. But if you bought at the lows, you also are not quite yet a loser. Now, Treasury yields remain a big part of the story. The equity rally yesterday, in part, was about yields backing off to a degree and not reacting in a very sharp

way to the CPI number. Well, here is the real 10-year yield. So this is the yield on 10-year Treasury inflation protected securities. The nominal yield is over 4%, 4.02. That's pretty much a new high for this cycle. What you see here is it's flattened out on the real yield side. So what this means is you get this yield over 10 years plus whatever the CPI is. That's the adjustment that gets made for the return here. Real yields are what does restrict economic activity. It makes, you know, yielding instruments more profitable for the people who own them and for lenders. But for borrowers, it means there's a bit more of a hurdle rate. That's what acts as restrictive kind of a force on economic activity. That's what the Fed wants.

And the stock market valuation is pretty sensitive to this number, Sarah. So is the key now you just have to watch yields? And if yields are higher on the day, then the stock market is lower? It's a big chunk of it, yes. Although I would argue that it's sort of like a give and take process because the stock market can ultimately make its peace with higher yield levels at some point. Keep in mind, June 16th, we did have somewhat lower yields and the S&P is at the same level, right? So it seems as if you can have a little bit of a loosening of that relationship over time. I think the market just

needs clarity on where the Fed's headed, the destination level. Right now, it seemed to be just under 5% in terms of short-term yields. And we need to know approximately when we're going to get there. Once you have stability there, bond market volatility can calm down. That, to me, is a prerequisite for any real sustainable advance in the equity market. And we've also been sort of obsessed with what's happening in the U.K. and whether that market dysfunction could really start to spill over, could make the Fed pause. I think the determination today is no, that it's not going to get in the way of the Fed policy. But I do wonder if some of the political developments have quieted that situation or because the gilts, their equivalent, still higher yields.

I think investors and the market itself doesn't know when it's on its own, when the Bank of England's not in there and they're not in there right now, if it's going to get messier. And what that means is if yields are going to get really disorderly to the upside and you're going to have a lot more losses taken on the fixed income side of portfolios, and that's been a drag on stocks all along. So I don't think anyone's looking at one particular thing that says, uh-oh, that's going to be the danger point. It's just this general unknown of we don't know exactly how it's going to settle out. It's going to have enough demand for all the supply.

We've got every sector lower right now, energy and consumer discretionary, worst performers. Healthcare is holding up the best, but it's down half a percent. Mike, thank you. We'll see you later for Market Zone. Mike Santoli. Take a look at Wells Fargo. It is popping today after reporting third quarter earnings, which did top analyst estimates. But the company's performance was hurt by operating losses of $2 billion related to litigation, customer remediation and regulatory matters. Joining us here first on CNBC is Wells Fargo CFO Mike Santamasimo. Mike, welcome back. Nice to see you. Hey Sarah, thanks for having me. So clear, the market's taking it well and and it looks like aside from some of those those

litigation costs it was a beat on the top and bottom line. How would you characterize the environment right now that you're operating in? Consumer, credit, all of it. Yeah, look, it's a challenging environment overall, but I think what you saw is some solid performance when you look through into the underlying fundamentals of the business. We had strong net interest income growth driven by the higher rates and loan growth that we've seen. We had really good credit performance that's continued for the last number of quarters across both the consumers and our commercial portfolios. We've got really good strong capital ratios that continue there. And we've been continuing to execute on the things that we can control the most, you know, our risk and control infrastructure build out, our efficiency program, and the products and people we need to continue to, you know,

grow across each of the businesses. So good, solid performance in a really challenging, you know, macro environment. The self-help story, as one analyst told me today, is very much intact here. You mentioned net interest income. Clearly, that's a bright spot as interest rates rise. It was up 36 percent. The margins were a beat as well. How sustainable do you view these kind of gains? Do you think we're at peak net interest income? Well, I think it's hard to tell, right? You know, the Fed's on a path to continue to increase rates. At least that's what it appears to be doing. And the market's pricing in a number of incremental rates from here. So that will certainly help. We'll continue to have to pass some of that along to customers through deposit pricing. And we'll see how loan growth

progresses for the rest of the year. But we're in an environment now where we're benefiting from higher rates as we thought we would coming into this, given our positioning that we've done over the last couple of years. You mentioned deposit pricing, and I wanted to hit that too, because I know that investors are really paying attention to the outflows right now happening in deposits. Your costs were less than some of your competitors that reported today. First, I'm wondering why is that and just how competitive you think that's going to get, the pressure to raise those prices?

Well, we certainly have different mixes of businesses. So that's probably part of some of the differences you see across the peer set. But for us, as we've said for a while now, as rates continue to rise, you're going to see deposit prices go up. And as they rise from here, those prices will go up a bit faster than you've seen so far. You know, it'll happen most in our corporate investment bank where those are the most price sensitive deposits. We're also seeing that pressure in our wealth and investment management business and a lesser degree on the core consumer side. But from here, as rates go up, you're going to see pricing definitely go up. And you mentioned loans also growing, and we saw that across banks,

although your loan growth was a little bit below consensus and quarter to quarter was flat. Why is that, and is that the end of loan growth? Well, we thought coming into this quarter that the growth rates were going to moderate quite a bit. What we saw in the first half of the year was that really strong growth coming out of the first quarter and into the second quarter. We knew that just wasn't going to sustain itself across the book. But underneath that, you're seeing our credit card portfolio continue to grow. You're seeing the home lending, first lien mortgages continue to grow.

A little bit offset by our auto portfolio and then you're seeing some you know good stable loan balances across the other businesses. Our commercial bank continues to grow and it's offset a little bit by what's happening in the corporate investment bank. But overall we're about where we expected based on what we were seeing earlier in the quarter coming out of the second quarter. And then from here I think it's going to be you know dependent upon what happens in the overall economy. And I think, you know, we're not past, you know, the utilization rates in our commercial businesses aren't past where

they were in the, you know, pre-COVID. So I think there's still some opportunity to grow here, but I think a lot of it will be dependent upon what happens in the environment. Are you guys expecting a recession anytime soon? Well, you know, I leave the projections of like whether we're going to hit a recession or not like to others. But I think from what we're seeing so far, like you're going to see some slowing growth as rates rise. But so far, you know, consumers are doing really well. They're out there spending. We're seeing good, healthy activity across our commercial client base as well. And so we're not seeing the impact of that yet for sure.

But, you know, I think we're certain that the economy will slow as rates go up. But, you know, I'll leave, you know, timing and depth of a recession maybe to others to project. But I think we'll certainly see that slowing happen over the coming quarters. And I have to ask you, obviously, about the $2 billion hit. Obviously, you're still dealing with big regulatory and litigation costs. And any sense of what inning we're in here? Well, I think these costs are just part of the process that we need to go through to put some of these past issues behind us. And we're working really hard to do that. We're making good progress on it.

But as we've been trying to say now for a number of quarters, we still have a lot of work to do. We're still working through that with as much urgency as we can. And the costs we saw in the quarter are just reflective of the progress we continue to make in that work effort. Investors seem to agree. Stock up 3%. Mike, thank you for joining me today with some color on those results. Mike Santomasimo.

Thanks, Sarah. CFO of Wells Fargo. And Monday, don't miss my first on CNBC interview with Bank of America CEO Brian Moynihan. It's at 2 p.m. Eastern time, ahead of closing bell on Power Lunch. I'll be there for that. Look at Kroger and Albertsons. Stock stories of the day.

They are both trading in the red today on news of a nearly $25 billion deal to combine the companies. We will talk to the CEO of Kroger about the strategy behind the acquisition and the potential concerns of regulators. It's a CNBC exclusive. Dow's down 350. You're watching Closing Bell on CNBC. Huge deal news today. Kroger officially buying rival grocery company Albertsons in a $24.6 billion deal. Both stocks are pulling back on the news. Joining me now exclusively from Cincinnati, Ohio, Kroger CEO Rodney McMullin. Rodney, welcome. Thank you for taking the time. Thank you. Hi, Sarah. Great to see you again.

You too. Look, I'm wondering how long this deal has been in the works because Albertsons announced back in February it was pursuing strategic options. How did it come together? Yeah, if you look, it really started getting serious about, I would say, two months ago. And Vivekk the CEO of Albertsons we've known each other for years and years and years and it really was a conversation that the two of us had in terms of there should be something here that makes sense that ends up being good for customers good for our associates good for the communities and really creating a new competitive company

that really, if you think about competing against the big box super centers and the online players, just improving that. So really Vivek and Chan, the chair there, and Steve Feinberg is really thinking about together, how do we create something that really helps the customer and the communities. Well, the stock reaction I wanted to ask you about, Rodney, because your stock is down

8 percent. Albertson stock is pulling back either lack of confidence that this deal gets done or that it adds value for Kroger. What is your reaction to that reaction? Well, if you look, you know, short term, I always remember giving Warren Buffett credit one time about short term. It's a voting machine. Long term, it's a weighing machine. And we feel really strong over time that this is really good and creates value. And if you had a chance to listen to any of our earnings call, you know, this increases our TSR model, our commitment of 8 to 11 percent.

It increases it for the next four years. So it's a great value for our shareholders and improves cash flow as well. What about the regulatory piece of this? A lot of concern that this will not pass muster with the antitrust authorities combining such big, both of you have such big presences, huge employee workforces. Why do you have confidence that you can get this through? Well, we've been working with our outside counsel from an FTC standpoint for a while. Obviously, we're going to sit down and be very cooperative with the FTC. And it really gets back to the conversation, the comments I made before.

We actually believe this will increase competition. If you look at the synergies that the combined companies will create, we will invest half a billion dollars or $500 million in lower prices for customers, and especially in this inflationary environment, that's a huge help. We also will spend $1.3 billion on customer experience as well, which that also adds to it, and it creates more solid jobs for our associates across the country, and obviously those are great union jobs. And between the two companies, we'll have over 700,000 associates. So from all the work that we've done and working with our outside counsel, we really think and believe this will

increase and improve competition looking forward. But don't you think it's going to be an uphill battle, Rodney, to try to convince this administration that's already been skeptical of corporate consolidation at a time where food prices in September rose 13 percent from last year and an administration that has been very friendly to the unions? Yeah, that's one of the reasons why we shared that we expect that closing won't be until early 2024. And we believe that there's a great reason for the two to allow the two companies to merge. And it really does, as I said before, allows the companies to be more competitive against, you know, those online players and the big super centers. So, you know, for us, we look forward to setting down and having the conversation and feel that it's going to be very, very good for everybody. Just want to point out to everyone that session lows for the S&P down 2.3 percent. The Dow's down 400. Another turbulent day here and a big turn in terms of sentiment throughout the day. Rodney,

you mentioned that as part of this, you're going to be investing in price or lowering prices at Albertsons, but I think the math works out to about 1%. Is that enough? Yeah, we think that's a great first start. As you know, if you look at Kroger, we've been investing in pricing for the last 15 years. And we've done it, looked at it market by market in terms of where to make the price investments and how. And we think the $500 million is an awesome first start. And if you look over time, our strategy will always be to continue through process change, get costs out of the business, and then turn around and give some of that to the customer. And as you know, certainly in this inflationary environment, it's even more important to try to help support the customer's budget even more so.

The other thing that's really important is if you look at the combined company, R Brands, is a $43 billion area. And R Brands also provides a great opportunity where you don't have to give any compromise in terms of quality, but you're able to stretch the budget as well. And when you look at the two companies, we have an incredible our brands portfolio. The other the other concern that I've heard today from traders and analysts has to do with the plan to divest some stores in order to appease the regulatory authorities? And just who's going to be the buyer for some of these stores and at what price? So you're spinning that off into a separate company. What can you tell those that are questioning what type of deal you're going to get on the other side? Well, we feel very comfortable that we'll be able to find buyers that are strong, great operators for the stores.

And obviously, we didn't have any conversations with anyone before the announcement. But I know when talking to our investment bankers, they've already had people reaching out. And if you look at the structure of the deal in terms of being able to create spin co, that's one option as well to make sure that you have a strong, viable competitor that's able to compete and do it successfully in the future. I think there's a clause in the deal that if the government does require more than 650 divestitures, then you, then Kroger can walk away from the deal. Why did you choose that number? It really is, you know, if you think about the, everything within the agreement is a negotiation

in terms of trying to balance the risk and the shareholder return. And it was really the number that made sense overall. Now we don't think and would be surprised to get anything close to that, but you always have to have some type of out in the agreement. So what, so you've been making the case about price.

What would it mean for the consumer? So Walmart still has 22% or so market share as of last year in grocery. Your combination would be, I think, around 13%. But then the next pure play grocer, Ajo Delhaize, would only be, I don't know, 5% or so. Ballpark numbers. But what would it mean for the consumer? Why is that not anti-competitive? Yeah, I think you have to look at it two ways. One is the way you did, but then market by market. And if you think about in certain markets, you have an awesome

local competitor in HEB, other places, Publix. And every market has its own local competitors. Then you have Aldi and Lidl that's more broad-based across a broader part of the country. And you have Costco as well. So, you know, it's really important. And I know you have to look at it market by market. And there's, as you know, you've followed our industry a long time. There's tons of competition. And over time, the customers are always going to get a better and better deal. What about the investors? You know, interesting track record when it comes to historical comparisons on deals. There's

Albertson Safeway. That faced a number of issues. Albertson tried to go public a number of times. The Amazon Whole Foods deal wasn't all that it was cracked up to be. They only have 3% market share. Everyone was scared they were going to take over the whole sector. So how can you ensure long-term that this one is right? Yeah, if you look for us, and several years ago, we merged with Fred Meyer. And Fred Meyer has been an awesome merger. And if you look at some of the things that Fred Meyer had with the Marketplace store and that, we've been able to scale it across all of Kroger. if you look at some of the things that Fred Meyer had with the marketplace store and that we've been able to scale it across all Kroger. If you look at Harris Teeter would be another example and on their fresh areas and on their online business we were able to scale that across Kroger and if

you look at Roundy's would also be fresh. So we have a great track record of merging with companies, and I call them reverse synergies in terms of things that they do awesome and bring it into the whole company. And what we find is when we merge with companies, everybody can learn from each other, and how do you get the best of both? And we have a strong track record of being able to do that with several previous mergers and expect to do the same with Albertsons because they have great talent, great leadership, and they do some things amazingly well. And we'll be able

to share those ideas and take it even to the next level for the customers and our associates. Well, we know it's not set to close till 2024, so hopefully we'll have a lot of time between now and then to talk about how the integration is going. But for now, Rodney, thanks for joining me on the big deal announcement. Thank you. Appreciate it. Rodney McMullin, CEO, chairman of Kroger. Take a look at the markets. Down 2% or so on the S&P 500, down 332. We hit session lows a few moments ago and have come back a little bit.

We're still down more than a percent on the week for the S&P, with every sector lower right now, led down by energy, healthcare, communication services, interestingly, holding up the best. The U.K. has been at the epicenter of market worries this week, with investors closely watching those fast-moving headlines surrounding Prime Minister Truss and her U-turn on fiscal policy. We're going to talk to the former chair of JPMorgan International about what could come next and why it matters for your money. And as we head to break, check out some of today's top search tickers on CNBC.com. Ten-year yield right on top, center of the action. Bonds are selling off today. Yields are a little bit higher. Ten-year goes above 4%. Followed by J.P. Morgan, an earnings winner, the S&P 500, Dow, and Tesla, which is down 7%. Got a downgrade. We're going to talk about that later in the market zone.

We'll be right back. Breaking news right now on Atlanta Fed President Rafael Bostic. Steve Leisman here with the details on the news line. Steve. Sarah, thanks. They are there. President Bostic has acknowledged making trades that have violated the Federal Reserve's conflict of interest and trading rules. The Federal Reserve Board's ethics office have found three specific issues, the first being that he held treasuries, more than $50,000 of treasuries. He had extensive trading during the blackout period. And he also, sorry, one second here looking at it, he omitted a substantial number of securities

transactions from his disclosures. These are being reviewed by the Ethics Board. He has said that these were inadvertent trades, too, that he was unaware that these trades had to be, that the manager of his funds had to be aware of and following the Federal Reserve Board's rules. He also traded, by the way, during a certain blackout period of trades during 2020. So clearly this reminds us, Steve, of the Fed trading scandal that happened. What was it, last year that led to some resignations of regional Fed presidents? Yes, there were two Federal Reserve presidents, Robert Kaplan and Eric Rosengren, both of whom resigned as a result. We don't know what action is going to be taken relative to Rafael Bostic.

The Atlanta board put out a statement saying they were satisfied with the explanation that these trades were inadvertent. That they were inadvertent. OK, we'll keep us posted on that. I guess how it unfolds, obviously, still issues there. Steve Leisman, take a look at the market. The Dow is falling sharply today. It's still on pace for a positive week after yesterday's surge. Here's the up and down action on Wall Street. It's been one of those stomach-churning weeks. Monday down 93, Tuesday up 36, Wednesday down 28. You get the picture. And then Thursday was that huge swing, quite a reversal. We were down 550 on the back of a CPI report that mixed expectations, then finished up 827 points, thanks in part to a rebound in the

British pound. We're down another 1% right now, 294 points. Volatility, as I said, a lot of it can be attributed to what's happening in the UK. And today, some big news, a major U-turn from Prime Minister Liz Truss announcing plans to now reverse part of the government's controversial tax plan, including abandoning the plan to prevent corporate tax rates from rising. At the same time, also firing her finance minister after just six weeks on the job. Investors have certainly been following every twist and turn of the saga with bond and currency markets, especially seeing huge amounts of volatility. We've got a special guest, our old friend Wilfred Frost,

who is now a Sky News anchor and CNBC contributor joining us. Welcome back to Closing Bell, Wilfred. I've been waiting for this day for a long time. My pleasure. I'm sorry it's not better news to be joining you with. Well, so tell us, are these actions going to be enough? Because it doesn't look like the bond market has fully calmed down. No, I mean, look, today we did see the prime minister reverse that corporate tax change that only saves about 15 billion pounds. We did see her appoint a new finance minister, someone who's expected to be more orthodox and less cavalier. But we also have to remember today, Sarah, that that Bank of England two week long special operation did expire. That was designed to lower the long end of the yield curve to try and help those UK pension funds exposed to liability

driven investments, LDIs, to lower their leverage. And we hope over the last two weeks that they've done that. But that move in the long end of the yield curve higher, particularly into the close today, is a little bit of a worrying sign. But I think the takeaway today is monetary policy and the expiry of that Bank of England scheme has outweighed anything that the government could announce on the fiscal side. So what happens to her? Is there going to be pressure on her to resign still? Or has she, I don't know, fixed it with a new chancellor? No, I mean, today she's bought herself more time. The question genuinely is, is it days or is it months? And I think what's fascinating is markets that have pressured a new prime minister

after just 38 days to U-turn on her signature policy and to fire her most senior minister, someone who's a close ally of hers. And it could well be markets from here that decide if she does get days or months. Her MPs, who will ultimately decide her fate from here, are dissatisfied and disenchanted, not least because of terrible poll ratings. But if the markets improve, if the markets show confidence in her government in the immediate term, it might buy her a little bit more time from here. This reset today, it wasn't a considered careful reset in the middle of a government. It was a desperate attempt to keep the wolves at bay in the short term. Well, clearly she got the message. So you mentioned

that the Bank of England policy has been outweighing the fiscal policy, even though that's what sparked it here in the market reaction. What happens next with the Bank of England? Are they done with this emergency bond buying thing? Well, their current policy, which was two weeks long, has now ended and expired. And we wait to see if it was enough. I mean, the encouraging thing was that the Bank of England governor was very clear it was going to expire today. So pension funds who had exposure to LDIs had no excuse if they didn't deleverage. The worrying thing is yields only really lowered for the first half of that two-week period. So there is a risk that some pension funds, despite being given that window, may not have successfully de-leveraged.

We'll wait to see next week. And the question, if they fail to de-leverage, will be, will the Bank of England do a new scheme? Or will the government confidence be enough to prevent yields rising again? We'll see on Monday. Wilfred, we miss you. And I got to say, you didn't make the best trade when it comes to getting paid in pounds versus dollars. Don't remind me. Don't remind me. And I miss you, too. Thanks for having me. All right. Maybe I'll come visit you and go shopping. Wilfred Frost. For more, let's bring in former JPMorgan Chase international chairman and former Bank of Israel Governor Jacob Frankel, who is at the IMF World Bank meetings in Washington, Jacob, where all the discussion is on central banking and how they should respond to inflation and now to financial

stability concerns like the U.K. and whether those things are going to be at odds. And this is going to prevent them from moving forward with the inflation fight. What do you think? Well, indeed, the last few days have demonstrated again that financial markets are extremely sensitive to news, extremely judging without any mercy, conducting referendum on a daily basis on what is coming to them and this means that therefore that policies must be presented to the market in a very clear way transparent and clear and i think that what is happening there now in addition to the fundamentals that we are not going to go into i think that the communication with the market did not pay enough attention that the market listens and reads through

when there is lack of depth in the preparation and in the presentation. In any event, the fact of the matter is that we are part of a more global scene. Central banks all over the world, and I'm now in the United States or the Federal Reserve, for example, clearly have been behind the curve. But it is not just behind the curve in the sense that inflation came as a surprise, but really behind the curve in a much earlier sense. You spoke about financial markets. For a long time, interest rates were kept too low for too long. And, of course, it was a good reason.

We need to make sure that the economy recovers post-pandemic and all of this kind of thing. But unconventional monetary policy must be temporary by definition. And I think that what happened here, that by pushing interest rates down excessively, investors were pushed to chase after yield. They have taken excessive risk. Pricing of risk was distorted. Corporation engaged in buybacks instead of investment in plant and equipment. And there has become, as a result, a disconnect between the financial sector and the real economy. And for a while, people thought that there is no inflation anymore. But there was inflation. It was not in the CPI. It was in the stock market. S1 would have been 20-0. You were warning about that for a long time,

that the asset markets were showing the inflation and that the central banks were staying too long at the party and not anticipating it. I think the question now, Jacob, is how the Fed reacts at this point. It's trying to catch up, and there are now calls for it to potentially moderate or slow down

because of what's happening in the economy and in the markets. What would you say to do? Yes, well, there were two parts of what you remarked. You said how the Fed reacts and what should it do. I think it's a general rule. The Fed should not be a reactive body. It should be an anticipatory, a leading body. Should drive the car through a front mirror

rather than the back view mirror. It should look forward. And therefore, the statement that said we are data dependent, we will not move until we see it in the data, forces to be behind the curve. So fortunately now, everyone realizes that this was a bad strategy and we need to look forward. But the question is, what now? First, there is a large gap that has been created from where the Fed needs to be to where it is. So it is clear, and that's why

the steps were very welcome of raising interest rates with significant steps of 75 basis points each round. And I expect it to continue in the next Fed announcement. The question is now, however, what next? Should the Fed yield to the calls of saying, be careful, go slowly? You think not. Well, I am sure not. And the reason is that one of the important instruments of central banks is credibility, credibility and clarity. So therefore, by being behind the curve for so long, some credibility was eroded. So one of the purposes of raising interest rates now is first to move to the right direction, to the right place, but also to rebuild credibility. I want to say one more point. We are focusing on the interest

rate as if this is the main issue. It's an important one. But during the period of QE, a lot of assets were accumulated in the balance sheet of the central bank. And now we are going to the phase of QT, namely quantitative tightening, instead of quantitative easing. When you are talking about quantitative tightening, the quantities that we need now, the Fed needs to transmit to the market, the quantities are huge.

And therefore, a really unsettled equilibrium. One needs here, one needs to go slowly, but in a very clear way. And the path needs to be declared in advance. I would not, at any event, give up today the fight against inflation because this is the sine qua non for monetary policy. Let's admit, much of the trouble that we have

did not come from monetary policy. We have a war. We have food. We have hope. We have energy. We have all of these things that have nothing to do with monetary policy.

But unity is still key. Well, Jacob, point received. Thank you very much for coming on and sharing some of your views and what you think Sancho Baker should be doing. I know you're doing that all week long at the IMF World Bank meetings. Appreciate it. That's Jacob Brink, a former governor of the Bank of Israel. Looking at the Dow down about 323 points or so.

S&P is down 211. You've still got every sector lower. We're a little bit off the lows of the session, which we hit just moments ago. NASDAQ comp down 2.7%, getting hurt the most on those higher yields. Down about 3% overall for the week. Tesla is tumbling.

That's not helping. Following a big price target cut. Coming up, the headwind one Wall Street firm is warning about here next. Up next, we'll break down what today's flat retail sales data says about the state of the consumer and retail stocks. That story plus banks rallying and Tesla tumbles when we take you inside the Market Zone. We are now in the closing bell Market Zone. CNBC Senior Markets Commentator Mike Santoli here to break down these crucial moments of the trading day. Plus, we've got Leslie Picker on bank earnings

and Phil LeBeau on Tesla's big move lower. We'll kick it off broad, though, with Mike Santoli. The Dow down 335, only one of the major averages that is higher for the week, Mike. And the 2% decline in the S&P comes, I know bond yields are higher and the dollar stronger, and that seems to be the story here. But it comes, I was going to say, on a day where bank results are mostly better and those stocks are reacting positively.

Yeah, for sure. It's not a one-way move, although the S&P 500 has spent time every day this week under this 3,600 level, which it had only been below once before. So clearly there's a heaviness here because yields have that pressure on oil and energy stocks down today, I think, are one of the pieces of the of the puzzle that's not always been in place this year. So that's certainly a weight as well. It doesn't necessarily undo whatever was achieved yesterday. We can argue about what that was, except to say that it found a lot of automatic buyers with the S&P around 3,500. People were leaning a little bit too negative. And you clearly got a big flurry of short covering

and people saying enough's enough. Today, you'd like to see fall through to the upside. We're not getting that. Leaves everybody sort of apprehensive about what there is from here. October starts getting a little better seasonally, but it's hard to just lean on that alone. Let's hit the data point of the day, which was retail sales. It is a consumer economy. Out this morning, flat in September, but if you look under the hood, a more nuanced picture of the consumer. So strip out autos and gas, and retail sales were up 0.3 percent. Resilient consumer, higher prices, boosting groceries and clothing sales. And department

stores were a big winner. Sales there up more than 1 percent from August. Shares of major department stores having a pretty good October so far. Macy's, Nordstrom, Kohl's all outperforming the broader market and the rest of the retail space. And we should note the holiday shopping season has started even earlier this year. Amazon, Target and Walmart all with Black Friday type sales events this week. But independent checks on Amazon's two-day prime event pointing to weaker spending than its July sales. Some big declines today. Target's down 5 percent. Bath and Body Works down 5.

Amazon's down 5 percent. Mike, a lot of the growth is really happening in inflation, right, and the higher prices. What sort of view does it give on the consumer as it relates to some of these stocks? Yeah, the year-over-year increase in retail sales at the top line is basically the same as the recent annual CPI number. So it is mostly price. Consumers have the wherewithal to cover it. There's a little bit of a bridge from credit, no doubt about that. I don't think there's really a sense out there that there's pent-up appetite for a lot of things. It seems as if the goods binge is well over. What's also interesting is,

this for the second time this week, Vice Chair of the Fed, Lael Brainard, pointed to the fact that there were fat profit margins in the retail sector. That could be a cushion for how you can essentially kind of slow down the economy, bring inflation down and not cause a lot of unemployment. That may be good news, ideally, for the economy and for the Fed's goals. Not great news for retailers. So it just sort of keeps the pressure on. No question about it. Let's hit the bank stocks because they are big movers today

after earnings from some of the biggest names on Wall Street. JPMorgan Chase, Citigroup, Wells Fargo, all beating estimates thanks to higher net interest income, thanks to the Fed. But Morgan Stanley is under pressure after missing on both the top and bottom lines following a 55 percent plunge in investment banking revenue. Leslie Picker joins us. Leslie, investment banking has been a tough space all year. Any green shoots from today's results? Yeah, you could see just from the price reaction there, Morgan Stanley has about 17% of its revenue coming from investment banking

relative to about 10% for some of its peers. So as a result, the weakness there led to a miss on both the top and bottom line and declines on both the top and line for the quarter. We have a nice full screen which shows just how poor investment banking has been this quarter. For Morgan Stanley, it was down 49%. You can see there, J.P. Morgan down 43%, Citi down 64%. And, you know, I spoke with some executives about this, Sharon Yashaya, the CFO of Morgan Stanley. I asked her what the pipeline looks like and whether we

can start to see some improvement because we've had several quarters that look just like this. And she said basically that their CEOs, the C-suite across corporate America is waiting for the markets to stabilize before they really consummate deals in a big way. So it could be quite some time. And Jamie Dimon of JP Morgan said on the call, he urged analysts to model lower their investment banking revenues next quarter compared to this quarter based on what they see in the pipeline today. So green shoots, not too many on the horizon, at least in the near term, Sarah. Overall, Leslie, as far as what's driving these better results, I guess the net interest income and the margins,

which we talked to Wells Fargo about at the top of the hour, is a big story with the Fed raising rates, although First Republic is having a pretty awful day. It's the worst performer in the S&P, down 16.7% on this idea that net interest margins may be peaking. What are you hearing about that? Yeah, you hear kind of the tale of both sides of that, this idea that potentially on the deposit side, they could start to see more significant outflows from deposits, which would require them

to, of course, raise the interest that they pay to depositors to hold those in their banks and loan against that. And that, of course, would cut into their margins for loan making. And that's something that would completely shift the dynamic. However, among the bigger banks, those with the scale, those that you showed on the board right there, they actually, by and large, raised guidance, beat analyst estimates for NII. And that's been a very clear bright spot for the banks. The question becomes, now that the terminal Fed funds rate appears to be a little bit higher, a lot of people are expecting it to be higher. You know, what does that actually do for margins?

Because this is just such an unprecedented environment that we're experiencing right now. Leslie Picker, Leslie, thank you very much. Let's hit Tesla because it is among the worst performers in the S&P 500 and dragging on the Nasdaq, part of a nearly 3% drop right now for that index. Wells Fargo slashing its price target on Tesla to 230 from 280, citing headwinds from rising interest rates. Phil Abode joins us now. Phil, what do you make of that call? Did they highlight anything new? Well, no, they pretty much said it's the interest rate is behind their call on the price target being slashed. But if you read the notes, Sarah, it's actually pretty bullish about what they're expecting from Tesla over the next couple of years. In fact, they raise their estimates between 23 and 26. So even though they cut the price target, they're raising their estimates,

and they point out the Inflation Reduction Act is a tailwind, probably best suited for Tesla among all the companies that are trying to take advantage of the rotation towards electric vehicles here in the U.S. Mike, Tesla's down. ARK Innovation Fund, which has Tesla as a major holding, down 5% right now, and the NASDAQ down 3%. So clearly the rate story has more to play out here on this sector. Right.

It's the rates. And really it's just a matter of, you know, where the greatest, again, crowding and valuation premiums were in this market. Tesla is sort of experiencing the recoil from exactly what sprang at higher in that 2020 to 2021 period. I do think the results are pretty solid in Tesla's terms, but they're not really accelerating. And there was a massive premium in here all along based on hopes and dreams and Musk's genius and all the rest of it. And, you know, that somewhat has been muted. And when you don't have price momentum in the stock, it's tough to keep up the enthusiasm, I think, more broadly for the name. Just looking at some new 52-week lows today.

Tesla is one of those trading at lows we haven't seen since June 2021. Match Group, all-time lows. Generac, Seagate, Realty Income. So ending this way on a Friday, what are the next catalysts? Because we're going into earnings season. And I don't know, from the bank results, Mike, it doesn't feel like the market is too focused on it with all the hubbub around interest rates and currencies. Well, the bank stocks themselves are responding to the numbers.

We're going to get a greater critical mass of earnings. I don't know that you can really craft a storyline out of whether earnings are good market-wide or they're not good. But usually what happens is you're going to get pockets of whether earnings are good market-wide or they're not good. But usually what happens is you're going to get pockets of strength. You're going to have, in general, better than forecast. And then you see how it shakes out in a couple of weeks. I think that the welcome break would be if we can just concentrate on things like the flow of earnings as opposed to the macro stresses. Again, we keep talking about it.

Yields in the dollar are going to dictate whether you can take advantage of those kinds of relief. And treasuries are weaker across the curve. We're seeing the 10-year above 4 percent, the 2-year above 4.5 percent. We are in the two-minute mark here of trading to go. What do you see in the internals right now? Pretty negative. You know, yesterday was about an 8 or 8.5 to 1 up day in volume. Today, it's just about the reverse of that. So it's just sloshing back and forth. Yesterday, a lot of folks said 40% of all the volume was in ETFs. So it was very much an index, fast money type move. Take a look at small versus large this week. Small caps continue to do OK on a relative basis. They've really kind of led the market lower and they've kind of outperformed a little bit. That's one of those little glimmers you can look for. The volatility index not doing much, but it's still above 30, which is still an agitated situation.

And the VIX futures are showing that we expect continued unsettled markets. So off the highs, but not very much, Sarah. We are, yeah, just about the lows of the day right now. Take a look at the Nasdaq in particular. That is down 3.2 percent, continuing to sink. All the big cap tech names are weighing right now. Apple, the worst of the group. Tesla is right down there with it. Amazon's also with almost 5 percent move lower. So it's a pretty heavy selling here. It's almost like a delayed reaction to the hotter than expected CPI inflation report yesterday. After that big rally we got intraday when the British government changed its tune on policy in the pound rally.

There's the S&P down 2.6%. Every sector is lower here into the close. The worst performer, consumer discretionary. You've got energy and materials there at the bottom of the list as well. Technology, though, getting hit pretty hard. Down more than 3% for the NASDAQ on the week. The S&P 500 down 1.5%. And the Dow is positive on the week,

up 1.2%, but still down 360 at the close. Have a good weekend, everyone.