The Journal. - Introducing: WSJ's Take On the Week

Episode Date: October 9, 2023

We're off today for the holiday, but we still have an episode for you!WSJ's Take On the Week is a new WSJ show that breaks down the most important things to watch in business and financial news to help you make smarter investment decisions. This week, host Dion Rabouin looks at big banks, a big yield and a big release for Taylor Swift.If you like the show, follow it for more.  Learn more about your ad choices. Visit megaphone.fm/adchoices

Hey, it's Kate. We're off today for the holiday, but wanted to tell you about a new show from the Wall Street Journal. It's called WSJ's Take on the Week. Every Sunday, our colleague, Deanne Raboan, talks to Wall Street Journal reporters about news that moves markets

to help you make smarter investing decisions. If you like the show, be sure to follow it. Here it is. What's good, everybody? I'm Dion Reboan for The Wall Street Journal, and this is WSJ's Take on the Week, the show where we break down the most important things to watch in business and financial news. We cut through the noise to get you ready for what matters. and financial news. We cut through the noise to get you ready for what matters. Last week, the September jobs report came in much stronger than expected. Bond yields kept rising,

and some short-term government bonds are now paying well over 5.5 percent to investors. The yield on Treasury bills is so high that billionaire bond investor Jeffrey Gunlach, who has made his fortune through well-timed and risky trades, told a crowd last week that it was time to, quote, T-bill and chill. I got a chance to talk with San Francisco Fed President Mary Daly late last week at the Economic Club of New York. She told me that the big run-up in bond yields has done some of the Fed's work for them. Higher government bond yields push mortgage rates higher and make it more expensive to borrow money. That's similar to what happens when the Fed raises rates. If they stay at these levels, well then the need for us

to jump in and do another rate hike has been diminished. But we don't know that they'll stay at these levels because right now we don't know what exactly is driving them. So if they loosen again or if the economy reaccelerates or just doesn't continue, it's slowing and inflation doesn't keep coming down, well, then we'll be in a different position. We'll have more from my conversation with San Francisco Fed President Mary Daly in next week's episode. Be sure to subscribe so you don't miss it. episode. Be sure to subscribe so you don't miss it. This week, we're expecting to get the CPI inflation report on Thursday, and it will certainly be top of mind for investors given that prices for everything from food to gas to auto insurance have risen in the past two months. We'll focus in on Delta, which this week is expected to tell us how travel is holding up.

And to cap things off, we'll talk about the impact of fans getting to see Taylor Swift on the big screen this week. Could the opening of her new film move the needle for movie theaters and signal a shift in Hollywood dealmaking? But first, with Citi, Wells Fargo, and J.P. Morgan set to kick off earnings season this Friday, we're going to talk about the health of the U.S. banking sector and what the big pickup in bond yields could mean for the banks and their customers. Last March and May, we witnessed the second, third, and fourth largest bank failures in the history of the United States. All three of the banks that failed, First Republic, Silicon Valley Bank, and Signature Bank, were regulated by the Federal Reserve. And in the weeks leading up to their failures, we also saw a big increase in bond yields.

So with yields on U.S. government bonds rising to their highest levels in more than 15 years, we thought this would be a great time to bring together my colleagues Nick Timros, who covers the Fed, and Rachel Ensign from WSJ's banking team, to talk about the state of banking and how banks are doing today. So this week, we've got the American Bankers Association's annual conference, and then you've got the IMF World Bank meetings, and we finish up the week with J.P. Morgan, Wells Fargo, and Citigroup reporting earnings on Friday. I want to send this question to you first, Rachel. What are the big questions you're hoping we get answers to this week? So the thing that's really interesting about bank earnings is what it says about the broader

economy. It will be really interesting to see what these bank CEOs say about consumer spending, about the health of people's bank accounts. And they have such a window into consumer behavior because tens of millions of Americans swipe their cards every day to pay for everything. And it will be really interesting to see, are people continuing to spend? Is it slowing down? Are they spending down their savings? Have they kept up their savings? That should be a big topic on the earnings calls. And also how the banks are responding to that, right? Yeah. I mean, how that plays out in the bank's financials is going to be a huge focus, too. When people are continuing to borrow and continuing to spend, that's generally good for banks. And there is also a really big

question of, as the Fed has continued to raise rates, are people going to keep moving their money out of their bank accounts in search of higher yielding alternatives? That has happened pretty quickly in a way that some of the banks weren't really expecting, and it's been pretty bad for profits. Or it's made profits worse than they were. Less great. It's made profits less incredibly fantastic. But they thought, you know, the Fed raising rates would be just this wonderful thing for bank profits, and it's been more of a mixed bag than was anticipated. So it'll be interesting to see if that continues. That's a perfect segue to bring in Nick. Nick, we've got a couple Fed speakers at

that ABA, the American Bankers Association conference. Why are they there and what are we hoping to hear? The big story from the Fed's perspective on the banking issues is that this is sort of the dog that hasn't barked, right? This was something that prompted the Fed to slow its pace of interest rate increases at the beginning of the summer. And wait, let's step back. When you say this, what are you referring to? Well, we're talking about the bank failures, the SVB crisis. I mean, there was a serious concern that you were going to see a big pullback in lending, that the flight of deposits that happened after the Silicon Valley bank collapsed,

which kicked off the failures of Signature Bank and First Republic Bank, was going to lead to a pullback in credit. And you have seen in survey data, anecdotal data, that banks are tightening lending standards, but you haven't seen it really hit the economy the way some people feared that it would. So what I'll be listening for at the banking conference is how do Fed officials see the potential for bank stress, the potential for a pullback in lending to complement what they're doing on monetary policy, which is raising the cost of borrowing to try to slow down demand? Are they getting more than they bargained for?

You haven't really seen that yet when it comes to bank lending. So talk to me about that, because I think what's really interesting about March and today, right, seven months ago, that crisis we saw was largely because banks weren't ready for the interest rates and bond yields to rise as high as they did. And today we're seeing a kind of similar thing happen with regard to rates. While the Fed isn't hiking the way they were in March, we're seeing yields rise really significantly. Does it seem like banks are ready this time? Banks fund themselves, the large banks especially, they don't fund themselves at the front end, the overnight rate market.

They fund themselves in the belly of the curve, the five-year, seven-year yield. And as the long end now prices higher, as yields rise for longer dated securities, that could be an additional source of pressure. It's raising banks cost of funding. At the same time, they may earn more on their loans, but it's also going to slow the economy more. So that's something that until August, we really hadn't seen higher yields from the long end. Rachel, what are you hearing from the banks about this? This higher for longer world, like Nick said, is something that banks hadn't been anticipating. A lot of people who work at these banks have forgot what it was like to

live in a world of significantly higher rates. I think the question right now for the banks is this acute phase of the crisis or whatever you want to call it seems to be over. But is it more of a slow death now for a lot of these banks that are smaller than the very biggest? Basically, you have these four massive banks in the U.S., including three that are reporting earnings on Friday, and Bank of America that will report earnings the following week. But there are some really serious existential problems for any bank smaller than those banks. And it may not be you fail in one day, but can these banks really survive in a viable way long term? I don't really think that there is a clear answer to that yet.

Yeah. And Nick, this ABA convention that we're going to see this week where I think you'll be in attendance. Are we going to hear about the health of some of those regional players or some of those smaller banks? And what is the Fed going to be looking to hear about those? So the Fed, their bank supervisors are on the ground inside these banks. So they're getting information in real time. They identified a handful of banks after Silicon Valley Bank that they thought might face similar pressures. And they've been working behind the scenes with those banks to get them to sort of get their house in order.

I suppose what you'd be looking for, are there other shoes to drop out there? And what might those be? We really haven't gone through serious credit losses yet because the unemployment rate's low, the economy's been doing well. But what are we going to hear from the banks about provisioning for potential

losses? People point to office property, commercial real estate exposure, whether work from home is going to lead to lower valuations for central business district properties. And so what's going to happen there? I think people are trying to figure out what corners are there to look around that haven't been looked around yet. That was WSJ chief economics correspondent Nick Timuros and WSJ banking reporter Rachel Ensign. Up next, Delta Airlines recently announced seven-time Super Bowl winner Tom Brady will be a long-term strategic advisor for the company. But in the short term, it's experiencing some challenges from rising costs. We'll hear from a Wall Street analyst who will tell us what to look for in Delta's earnings report. Summer is like a cocktail. It has to be mixed just right.

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Bacardi. It's trade dress and the bat device are trademarks of Bacardi and Company Limited. Rum, 40% alcohol by volume. It's October. Time to make those holiday travel plans. For the big airlines, though, they're looking back at the summer. That's what Delta is set to tell us about in its earnings report this week. The airline is expected to report earnings on Thursday, and investors are betting the company will say higher fuel prices and maintenance costs did a number on its bottom line. Analysts think earnings will be lower in the third and the fourth quarter this year than they were last year. The company is also making some modifications after an overhaul of its frequent flyer program was met

with anger from customers. Delta declined to comment. To get a sense of what this means for Delta, the travel sector, and the economy more broadly, I am joined by Sheila Kailu, Managing Director at Jefferies Aerospace, Defense, and Airlines Equity Research Team. Delta recently joined American Frontier Spirit and really most airlines in cutting their earnings expectations for Q3. They cited rising fuel costs and a couple of other things. But is there any reason to think that they're going to outperform these now diminished expectations? Delta is our only buy rating within the airline space. And we actually really think it has a few levers to pull, which is partially its premium offering to the cabin, its offering within the transatlantic

customer base, as well as its MRO business, as well as its SkyMiles program and its loyalty business. When you say MRO, what do you mean by that? Can you break that down for folks? So basically, Delta has an MRO, which is a maintenance, repair, and overhaul shop. And it's the largest airline MRO provider in North America and the third largest globally. That means they're doing basically heavy engine overhauls, which an engine has to do every six years given the time on wing an engine flies. So key differentiator in that it creates more reliability for the airline. It also creates cost savings because Delta potentially has the opportunity to repair just instead of replacing. You brought up SkyMiles as a major reason for some optimism about Delta.

Delta proposed making some changes to their SkyMiles rewards program, and folks didn't like that a lot. I can tell you our producer Jess Jupiter threw an absolute fit in our recent meeting talking about it. She was very angry. I know a lot of other folks were as well. What's your sense of how Delta's kind of rebounded and responded to that? I think Delta's making it harder to earn or maintain status with the airline just given the stickiness that they've seen, right? So it's made it less special. So they've had to sort of limit some of its offerings within its SkyMiles program. And they've had to make some modifications, obviously, all of it arriving

slowly. They're kind of cutting down on their medallion qualifying dollars you earn across your partners. And we'll see how those changes affect the customer and the stickiness of the brand. Personally, you know, going back to our original discussion, I know I mentioned MRO and everybody who's not a specialist in airlines is probably like, what is she talking about? But I think the maintenance and the quality of the airline always being on time and just reliable is a differentiator for me more than getting into a Sky Club. Got it. So given all that, what are you looking to hear from Delta on this earnings report? We want to see what yields are doing domestically and internationally.

It'll tell us a lot about consumer behavior, number one. The second is that premium offering, premium versus main cabin. And then the third is, you know, is there a stickiness to what Delta's trying to do? Can loyalty travel awards continue to grow? Is Delta a true brand or is it just an airline? That was Sheila Kailu, who covers the aerospace, defense and airline sectors for the investment bank Jefferies. Up next, Beyonce and Taylor Swift are coming to a theater near you. I'll tell you why there could be a lot more writing on this week's box office receipts than just Taylor's reputation.

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and Mango Starfruit. Try them today only at Tim's. At participating Tim's restaurants in Canada for a limited time. It's time for Tim's. It's time for dance. One more thing before we get out of here. This week, Taylor Swift's new concert film comes to theaters. And while this is a movie about her, it's also a story about disruption.

Because Taylor's moves laid the path for another global superstar to come to the movies, Beyonce. My colleague Alexander Gladstone says AMC, the company distributing Taylor's movie, also put together a deal to bring Beyonce's new concert film to theaters. But it was after they saw that Taylor Swift, that she had that film coming out, and there was a lot of hubbub about that.

Swift's movie ticket presales have already topped $100 million worldwide, according to AMC. On day one, sales crushed a 103-year-old AMC record for single-day advance ticket sales revenue. And for the company, Alex says concert films could be part of a big-picture push toward a profitable future. concert films could be part of a big picture push toward a profitable future. AMC is a company that has been burning cash for three and a half years now. And the question is, are they finally going to break even? This Taylor Swift film and Beyonce film, I believe, puts them in a pretty good position to finally break even in either this quarter or next. Beyonce cooking up a deal with AMC is a cool story. Her movie is set for release on December 1st.

But what's most interesting to me is what this could tell us about the future of content distribution. While the major Hollywood studios, including Disney, Warner Brothers, Netflix and Amazon, were busy hammering out an agreement with the Writers Guild of America and are trying to negotiate with the Screen Actors Guild that is still on strike. Deals are being made that potentially cut the studios out of the movie production and distribution process. Concert films aren't new,

but this could usher in a new way for concert films to come to the big screen. And if Beyonce can do it, why not Bruno Mars? Why not Shakira? There's a short list of global superstars who can do this sort of thing today, but we've already seen some of the walls for distribution come down with streaming. There's the potential for entertainers to start bringing content to audiences in a new way that's more profitable for creators and for movie theaters.

It could be something of a renaissance. And that's everything you need to know to take on the week for Sunday, October 8th. The show is produced by Jess Jupiter. Jonathan Sanders is our booking producer. Michael LaValle and Jessica Fenton are our sound designers. Michael also wrote our theme music. Aisha Al-Muslim is our development producer. Scott Salloway and Chris Zinsley are the deputy editors. And Falana Patterson is the head of news audio for The Wall Street Journal. For even more, head to WSJ.com. I'm Dion Rabot. Stay smart.