0:00

Hey, it's Kate. We're off

0:02

today for the holiday, but wanted to tell

0:04

you about a new show from The Wall Street

0:07

Journal. It's called WSJ's

0:09

Take on the Week. Every Sunday,

0:12

our colleague, Deon Rabowin, talks

0:14

to Wall Street Journal reporters about news

0:17

that moves markets to help you

0:19

make smarter investing decisions.

0:22

If you like the show, be sure to follow it. Here

0:24

it is.

0:28

What's good, everybody? I'm Deon

0:30

Rabowin for The Wall Street Journal, and this

0:32

is WSJ's Take on

0:34

the Week, the show where we break down

0:37

the most important things to watch in business

0:40

and financial news. We cut through

0:42

the noise to get you ready for what

0:44

matters.

0:46

Last week, the September jobs

0:48

report came in much stronger than

0:50

expected. Bond yields kept rising,

0:53

and some short-term government bonds are now

0:55

paying well over 5.5% to investors. The

0:59

yield on Treasury bills is so high that

1:02

billionaire bond investor Jeffrey Gunlack,

1:04

who has made his fortune through well-timed

1:06

and risky trades, told a crowd last

1:08

week that it was time to quote, T-bill

1:11

and chill. I got a chance

1:13

to talk with San Francisco Fed President Mary

1:16

Daly late last week at the Economic Club

1:18

of New York. She told me that the big run-up

1:20

in bond yields has done some of the

1:22

Fed's work for them. Higher government

1:24

bond yields push mortgage rates higher

1:27

and make it more expensive to borrow money. That's

1:29

similar to what happens when the Fed raises rates.

1:32

If they stay at these

1:34

levels, well then the need for

1:36

us to jump in and do another rate hike has been

1:38

diminished. But we don't know that they'll stay

1:40

at these levels because right now we don't know what

1:43

exactly is driving them. So if they loosen

1:45

again, or if the economy re-accelerates

1:48

or just doesn't continue its slowing

1:51

and inflation doesn't keep coming down, well then we'll

1:53

be in a different position.

1:55

We'll have more from my conversation with San

1:57

Francisco Fed President Mary Daly in

1:59

next week's episode. episode. Be sure to subscribe

2:01

so you don't miss it. This

2:04

week we're expecting to get the CPI

2:06

inflation report on Thursday and it

2:08

will certainly be top of mind for investors

2:11

given that prices for everything from food to

2:13

gas to auto insurance have risen

2:15

in the past two months. We'll focus

2:18

in on Delta which this week is expected

2:20

to tell us how travel is holding up. And

2:23

to cap things off, we'll talk about the impact

2:25

of fans getting to see Taylor Swift

2:27

on the big screen this week. Could the

2:29

opening of her new film move the needle

2:31

for movie theaters and signal a shift

2:34

in Hollywood deal making? But

2:38

first, with City, Wells Fargo

2:40

and JP Morgan set to kick off earning

2:42

season this Friday, we're going to talk

2:44

about the health of the US banking sector

2:47

and what the big pickup in bond yields could

2:49

mean for the banks and their customers.

2:52

Last March and May we witnessed the

2:54

second, third and fourth largest

2:57

bank failures in the history of the United

2:59

States. All three of the banks that

3:01

failed, First Republic, Silicon Valley

3:03

Bank and Signature Bank were regulated

3:05

by the Federal Reserve. And in the weeks

3:08

leading up to their failures, we also saw

3:10

a big increase in bond yields. So

3:12

with yields on US government bonds rising to

3:14

their highest levels in more than 15

3:16

years, we thought this would be a great

3:19

time to bring together my colleagues, Nick

3:21

Temeros, who covers the Fed and

3:23

Rachel Ensign from WSJ's banking

3:26

team to talk about the state of banking

3:28

and how banks are doing today. So

3:31

this week we've got the American Bankers

3:34

Association's annual conference. And

3:36

then you've got the IMF World Bank meetings.

3:38

And we finish up the week with JP Morgan,

3:40

Wells Fargo and City Group reporting earnings

3:42

on Friday. I want to send this question to you

3:45

first, Rachel. What are the big questions

3:47

you're hoping we get answers to this week?

3:50

So the thing that's really interesting about

3:52

bank earnings is what it says about the broader

3:54

economy. It will be really interesting

3:56

to see what these bank

3:59

CEOs

3:59

say about consumer

4:02

spending, about the health of

4:05

people's bank accounts, and they

4:07

have such a window into

4:09

consumer behavior

4:10

because tens of millions of Americans

4:13

swipe their cards every day to pay

4:16

for everything. And it will be

4:18

really interesting to see are people

4:20

continuing to spend, is it slowing down?

4:23

Are they spending down their savings? Have

4:25

they kept up their

4:26

savings? That should be a big topic

4:28

on the earnings calls. And also how the banks

4:30

are responding to that, right?

4:32

Yeah, I mean

4:33

how that plays out in the bank's financials

4:36

is going to be a huge focus too. When

4:38

people are continuing to borrow and continuing

4:41

to spend, that's generally good

4:43

for banks. And there is also

4:45

a really big question of as the Fed has continued

4:48

to raise rates, are people going to

4:50

keep moving their money out of their bank accounts

4:53

in search of higher yielding alternatives?

4:55

That has happened pretty quickly

4:58

in a way that some of the banks weren't

5:00

really expecting and it's been pretty bad for

5:02

profits. Or it's made profits

5:04

worse than they were. Less rates.

5:06

It's made profit. I don't want

5:08

to over say it. It's incredibly fantastic. But they thought

5:11

the Fed raising rates would be

5:12

just this wonderful thing for bank profits

5:15

and it's been more of a mixed bag than

5:17

was anticipated. So it'll

5:18

be interesting to see if that continues. That's

5:21

a perfect segue to bring in Nick. Nick,

5:24

we've got a couple Fed speakers at that ABA,

5:27

the American Bankers Association Conference.

5:29

Why are they there and what are we hoping

5:32

to hear? The big story

5:34

from the Fed's perspective on the banking

5:36

issues is that this is sort

5:38

of the dog that hasn't barked,

5:41

right? This was something that prompted

5:43

the Fed to slow its pace of interest

5:45

rate increases at the beginning

5:48

of the summer. And wait, let's step back. When

5:50

you say this, what are you referring to?

5:51

While we're talking about the bank failures, the SBB

5:54

crisis, I mean, there was a serious concern

5:56

that you were going to see a big

5:59

pullback in lending. that the

6:01

flight of deposits that

6:03

happened after the Silicon Valley

6:05

Bank collapsed, which ticked off

6:08

the failures of Signature Bank and First Republic

6:10

Bank, was going to lead to a pullback

6:12

in credit. And you have seen in survey

6:14

data, anecdotal data, that

6:17

banks are tightening lending standards, but

6:19

you haven't seen it really hit the economy

6:22

the way some people feared that it would. So

6:25

what I'll be listening for at the banking conference

6:28

is how do Fed officials see

6:30

the potential for bank stress,

6:33

the potential for a pullback in lending

6:35

to complement what they're

6:37

doing on monetary policy, which

6:39

is raising the cost of borrowing to try to slow

6:41

down demand. Are they getting more than

6:43

they bargained for? You haven't really

6:46

seen that yet when it comes to

6:48

bank lending. So tell me

6:50

about that, because I think what's really interesting

6:52

about March and today, right,

6:55

seven months ago, that crisis

6:57

we saw was largely because banks weren't

6:59

ready for the interest rates and

7:01

bond yields to rise as high as they did. And

7:04

today we're seeing a kind of similar thing happen

7:07

with regard to rates. While the

7:09

Fed isn't hiking the way they were in March,

7:11

we're seeing yields rise really significantly.

7:14

Does it seem like banks are ready this time?

7:17

Banks fund themselves, the large banks

7:19

especially, they don't fund themselves at the front end,

7:21

the overnight rate market. They fund themselves

7:24

in the belly of the curve, the five-year, seven-year

7:27

yield. And as the long end

7:29

now prices higher, as yields rise

7:32

for longer dated securities,

7:34

that could be an additional source of pressure.

7:37

It's raising banks' cost of funding at

7:39

the same time they may earn more

7:41

on their loans, but it's also going to slow the

7:43

economy more. So that's something

7:46

that until August we really hadn't seen

7:48

higher yields from

7:50

the long end.

7:51

Rachel, what are you hearing from the banks about this?

7:54

This higher for longer world,

7:56

like Nick said, is something that banks

7:59

hadn't been anticipated. A lot of people

8:01

who work at these banks have forgot

8:03

what it was like to live in a

8:05

world of significantly higher rates. I

8:08

think the question right now for the banks is

8:11

this acute phase of the crisis

8:13

or whatever you want to call it seems to be over, but

8:16

is it more of a slow

8:19

death now for a lot of these banks that

8:21

are smaller than the very biggest? Basically

8:23

you have these four massive banks

8:26

in the US, including three that are reporting

8:28

earnings on Friday and Bank

8:30

of America that will report earnings

8:32

the following week. But there

8:35

are some really serious existential problems

8:37

for any bank smaller than those banks. And

8:40

it may not be you fail in one

8:43

day, but can

8:45

these banks really survive

8:47

in a viable way long term? I

8:50

don't really think that there

8:51

is a clear answer to that yet.

8:53

Yeah, and Nick, this ABA

8:55

convention that we're going to see this week

8:58

where I think you'll be in attendance, are

9:01

we going to hear about the health of some of

9:03

those regional players or some of those smaller

9:05

banks? And what is the Fed

9:07

going to be looking to hear about those? So the

9:09

Fed, their bank supervisors are

9:12

on the ground inside these banks. So

9:14

they're getting information in real time. They

9:16

identified a handful of banks after Silicon

9:19

Valley Bank that they thought might

9:21

face similar pressures and they've been

9:23

working behind the scenes with those banks to

9:26

get them to sort of get

9:28

their house in order. I suppose what you'd be looking

9:30

for are there other shoes to drop out

9:32

there

9:33

and what might those be? We really

9:35

haven't gone through serious credit

9:37

losses yet because the unemployment rate's low,

9:39

the economy's been doing well. But what

9:42

are we going to hear from the banks about provisioning

9:44

for potential losses? Full

9:46

point to office property, commercial

9:49

real estate exposure, whether

9:52

work from home is going to lead

9:54

to lower valuations for

9:57

central business district properties

9:59

and

9:59

So what's going to happen there? I think people are trying to

10:02

figure out what corners are there

10:04

to look around that haven't been looked around yet.

10:07

That was WSJ chief

10:09

economics correspondent Nick Timaros and

10:12

WSJ banking reporter Rachel Ensign.

10:15

Up next, Delta Airlines recently

10:17

announced seven times Super Bowl winner

10:19

Tom Brady will be a long term

10:22

strategic advisor for the company. But

10:24

in the short term, it's experiencing

10:26

some challenges from rising cost. We'll

10:29

hear from a Wall Street analyst who will tell us what

10:31

to look for in Delta's rule.

10:45

It's October. Time to make those

10:47

holiday travel plans. For the big

10:49

airlines, though, they're looking back at the summer.

10:52

That's what Delta is set to tell us about in its

10:54

earnings report this week. The airline

10:56

is expected to report earnings on Thursday

10:58

and investors are betting the company will say higher

11:01

fuel prices and maintenance costs did

11:03

a number on its bottom line. Analysts

11:06

think earnings will be lower in the third

11:08

and the fourth quarter this year than they were

11:10

last year. The company is also making

11:12

some modifications after an overhaul

11:15

of its frequent flyer program was met with

11:17

anger from customers. Delta

11:19

declined to comment to get a sense

11:21

of what this means for Delta, the travel

11:23

sector and the economy more broadly. I

11:26

am joined by Sheila Kailoo, managing

11:28

director at Jeffries Aerospace Defense and

11:30

Airlines equity research team. Delta

11:33

recently joined American Frontier

11:35

Spirit and really most airlines

11:38

in cutting their earnings expectations for Q3. They

11:41

cited rising fuel costs and a couple

11:43

of other things. But is there any reason

11:45

to think that they're going to outperform these

11:47

now diminished expectations?

11:50

Delta is our only by rating within the

11:53

airline space. And we actually

11:55

really

11:56

think it has a few levers to pull, which

11:59

is partially It's premium offering to

12:01

the cabin. It's offering within

12:03

the transatlantic customer base, as

12:06

well as its MRO business, as well as the SkyMiles

12:09

program and its loyalty business.

12:10

When you say MRO, what do you

12:12

mean by that? Can you break that down for

12:14

folks?

12:15

So basically, Delta has

12:18

an MRO, which is a maintenance, repair,

12:20

and overhaul shop. And

12:23

it's the largest airline MRO provider

12:25

in North America and the third largest globally.

12:27

That means they're doing basically heavy engine

12:29

overhauls, which an engine has to do every

12:32

six years, given the time on wing

12:34

an engine flies. So key differentiator

12:37

in that it creates more reliability for

12:39

the airline. It also creates cost savings

12:41

because Delta potentially has the opportunity to repair

12:43

just instead of replacing.

12:45

You brought up SkyMiles as a major

12:47

reason for some optimism about Delta.

12:50

Delta proposed making some changes to their SkyMiles

12:53

rewards program, and folks didn't like

12:55

that a lot. I can tell you our producer,

12:57

Jess Jupiter, threw an absolute fit

13:00

in our recent meeting talking about it. She

13:02

was very angry. I know a lot of

13:04

other folks were as well. What's your

13:06

sense of how Delta's kind of rebounded

13:08

and responded to that?

13:10

I think Delta is making it harder to earn or

13:12

maintain status with the airline, just

13:14

given the stickiness that they've seen,

13:16

right? So it's made it less special. So they've had

13:19

to sort of limit some of its

13:21

offerings within its SkyMiles program.

13:24

And they've had to make some modifications, obviously

13:26

all of it arriving slowly. They're

13:28

kind of cutting down on their medallion qualifying

13:31

dollars you earn across your partners. And

13:34

we'll see how those changes affect

13:36

the customer and the stickiness of the brand. Personally,

13:40

going back to our original discussion, I know I mentioned

13:42

MRO and everybody who's not a

13:44

specialist in airlines is probably like, what is she talking

13:46

about? But I think the maintenance

13:49

and the quality of the airline always

13:51

being on time and just reliable

13:53

is a differentiator for me more than getting into

13:55

a Sky Club.

13:56

Got it. So given all that, what

13:58

are you looking to hear from Delta?

15:59

pre-ticket pre-sales have

16:01

already topped $100 million

16:04

worldwide, according to AMC. On

16:06

day one, sales crushed

16:09

a 103-year-old AMC record for

16:11

single-day advanced ticket sales revenue. And

16:14

for the company, Alex says concert films

16:16

could be part of a big-picture push toward

16:19

a profitable future.

16:20

AMC is a company

16:23

that has been burning cash

16:25

for three and a half years now. And

16:28

the question is, are they finally going to break

16:30

even? This Taylor Swift film

16:33

and Beyoncé film, I believe, puts them

16:35

at a pretty good position to finally

16:37

break even in either this quarter

16:39

or next.

16:41

Beyoncé cooking up a deal with AMC

16:43

is a cool story. Her movie is set

16:45

for release on December 1st. But

16:47

what's most interesting to me is

16:50

what this could tell us about the future of content

16:52

distribution. While the major

16:54

Hollywood studios, including Disney, Warner

16:56

Brothers, Netflix, and Amazon, were busy

16:58

hammering out an agreement with the Writers Guild of America

17:01

and are trying to negotiate with the Screen Actors

17:03

Guild that is still on strike, deals

17:06

are being made that potentially cut the studios

17:08

out of the movie production and distribution

17:11

process. Concert films

17:13

aren't new, but this could usher

17:15

in a new way for concert films to come to

17:17

the big screen. And if Beyoncé can do

17:19

it, why not Bruno Mars?

17:21

Why not Shakira?

17:22

There's a short list of global superstars

17:25

who can do this sort of thing today, but

17:27

we've already seen some of the walls for distribution

17:29

come down with streaming. There's the potential

17:31

for entertainers to start bringing content

17:34

to audiences in a new way that's more

17:36

profitable for creators and for

17:38

movie theaters. It could

17:40

be something of a renaissance. And

17:45

that's everything you need to know to take

17:47

on the week for Sunday, October 8th. The

17:50

show is produced by Jess Jupiter. Jonathan

17:52

Sanders is our booking producer. Michael

17:54

LaValle and Jessica Fenton are our sound

17:56

designers. Michael also wrote our

17:59

theme music. Aisha al-Muslim

18:01

is our development producer. Scott Salloway

18:03

and Chris Zinsley are the deputy editors. And

18:05

Falana Patterson is the head of news audio

18:08

for the Wall Street Journal. For even

18:10

more, head to WSJ.com.

18:12

I'm Dionne Rabeau. Stay smart.