The Trading Floor: CPI Relief & Wall Street Rakes in Record Profits

Welcome back to the Trading Floor segment of the Market Maker podcast by AmplifyMe, and as usual, I'm joined by co-founder Piers Curran to just talk about two main subjects that have happened in markets this week. The first one is UK inflation unexpectedly slowed to 2.5% in December, and it was, well, about this time last week we were talking about very doom and gloom with the yield situation, which of course many of you reacted to, Piers. I think we had something like well over 150 comments on, on YouTube. A lot of opinion, uh, on what's been going on.

Yeah, people getting fired up by a bond yield discussion. Love it.

Well, yeah, I never thought I'd, I'd see that, but it seems to be actually thinking back in time from the trust that previous episodes in markets, you know, it just goes to show how important fixed income and yields are integral to a market. Reactions. But also we're going to talk about softer core US CPI. I was actually there live with over 200 students who were leaning on me to explain to them in real time what all this information means, and I had all the charts up. And obviously the market just was explosive when the news dropped into what looked, superficially at least, a fairly in-line data set. So be interested to get your perspective on why the market did what it did and also whether or not this is any fundamental shift in what people are thinking about US economy, the Fed policy, and so on. And then also the second topic we'll talk about is the big banks— JPMorgan, Goldman Sachs, Wells Fargo, four of the five largest banks in America. They were up everything ranging from 2% to 7% respectively after their Q4 results. And so wanted to see where that strength is coming from and how it is shaping up for some of those Wall Street titans as well. So yeah, Piers, why don't we kick it off with the CPI?

Yeah, well, epic market moves this week. I mean, like when you wake up and, you know, some of the headlines, well, certainly from the US side, we'll talk UK briefly first, but from the US side, biggest rally in stocks since Donald Trump's election win. So on the day, Yeah, you had some really big pops to the upside. Stocks went through the roof. You got yields, bond yields dropping, dollar weakening. But yeah, this is all about inflation. And we'll talk UK first because the UK and the US reported their December inflation data, both on the same day yesterday, obviously at different times. The UK government, they pump out their economic numbers at 7 AM. Which is a change, actually. Remember, they used to— it used to be, well, you'll know better than me, but I think it was 9:30, wasn't it?

Yeah, yeah.

9:30 used to be the hit-the-button time for the UK government every day when they wanted to release whatever measurement about the economy. But obviously 9:30 AM, that's what the market's already open. So you'd get, you know, real-time market reaction. I mean, is it— you'll know maybe— why did they change it to 7:00 AM? Was it just because that's pre-market open and they wanted to get the information out there while market movement wasn't Live.

Yeah, I mean, I don't have the official answer, but what you're saying, what you're describing, makes sort of sense. The central bank's objective is to communicate in as smooth and orderly a fashion as possible, and it would make sense to drop that information— you will know as a trader, right— where, yeah, you've got time to rationalize information rather than impulsively react. So yeah, you're probably right.

Anyway, UK dropped their figures at 7 AM, the US was at 1:30 PM. This is all London time, but, um, You know, the key takeaway— well, the big word to describe both of these things and the market's reaction to all of it is relief. This is the word. It's like, uh, oh God, thank, thank God for that. And it's relief because the inflation numbers were soft, minor soft. I mean, it's kind of tiny stuff, but the numbers were lower than expected on the core inflation front. Okay, so that's what we call a soft data set where inflation's lower. The reason why it's relief is because go back over the last— it's really since September and we've had an uptick in inflation. You've got to go back further though. The story post-COVID, of course, big inflation spike, inflation to 10%. Then from like 2022, back end of '22, 2023, 2024, declining inflation rates as we're getting inflation coming back to target. It's just that decline back to target stalled, and it stalled at about 3%. Remember, Bank of— the central banks want it at 2%. And just in Q4 of last year, not only did it stall and flat, it actually started to tick back up. And that's the whole narrative of market sentiment going into 2025. Fears that inflation may well tick back up, preventing central banks from cutting, leaving interest rates relatively very elevated, and this causing lots of issues because there's a huge amount of debt and lots of interest payments to make all over the planet. This was exacerbated— that whole narrative and sentiment was exacerbated on Friday last week when we had a key piece of information from the US. It was their jobs report, their November nonfarm payrolls data, and the data came in super hot. So job creation was 256,000, you know, much higher than what was expected. 160,000 was expected. And so this is inflationary, right? Signal that the US economy is still super strong. And Trump's coming, maybe tariffs, maybe all these things. And, and, and it was a cocktail to just, um, throw fuel on that fire of inflation concern, right? So that's the backdrop going into Wednesday, yesterday's session. And everyone's going, oh no, inflation's going to be high, inflation's going to be high. And it wasn't. And it came in actually lower than expected. It was like, oh God, thank Maybe 2025 is going to be fine. Maybe the central bank will be able to cut. And both on the Bank of England and the Fed side, rate cut expectations went up, as, as in the number of cuts and the first cut in 2025, that the probabilities went up. All right, so that, that's the backdrop. Big sigh of relief, and markets reacted in that manner.

Yeah, I think I read a good summary in an FT newsletter. I know we'll dive into the bank numbers in a moment, but they were generally saying strong results, equity trading, bond issuance, and so on, which you'll, I'm sure, go on to explain. But the read-through on Main Street economy was positive as well. Solid spending— this is looking at banks— solid spending, credit, uh, credit quality, rising business optimism. And they say if inflation doesn't re-emerge and geopolitics does not get any worse, There has been also that deal we've seen, uh, in the Middle East as well in the last few days. Could 2025 actually be a good year?

Well, actually, it's interesting. I don't know if you're quoting from Jamie Dimon now, or maybe you read what he said and you're kind of putting it in your own words, but that's basically exactly what he said on the earnings call. Um, he said, you know, the economy's looking good. You know, we go into 2025 and it is solid. And remember, these banks— and yeah, we'll get into the banks later— but the banks are in a perfect position to be able to monitor conditions on the ground because they're seeing money flow, right? They're seeing the volume of money that's getting spent and even what it's getting spent on, and the revenues coming into bank account. They've got great eyeballs on the numbers at the coalface. So You know, if they're painting a positive picture, then that's a really interesting signal. So basically, Dimon's saying, yeah, economy's strong, but as long as inflation doesn't go back up, number one. And then actually, number two was his geopolitical. He actually said geopolitics is his biggest, along with inflation, is his biggest concerns that he's monitoring in 2025. If neither of those two flare up and cause an issue, 2025 should be solid.

I definitely know that there's, there's dialogue between business leaders, Jamie Dimon for sure being one of those, and the incoming president Donald Trump. And again, we go back to a discussion we had a few weeks ago about the sequencing of Trump policy. And I just wonder whether Trump would want to jeopardize that quality of the first year of the economy. With tariffs. Um, so yeah, it's definitely gonna be interesting. I'd imagine there's a lot of business pressure to be like, you know what, Trump, I don't know about that.

I mean, that makes sense when you say it out loud. I don't know though. You know what Trump's like? He'll just barrel in and start punching, won't he? And don't forget, there's that big emphasis on the first 100 days. As a president? What have you got done in the first 100 days? And they try and scramble, and everything they've been talking about on the campaign trail, it's like a tick checkbox. So how many of those items can I immediately kind of get the ball rolling on? But tariffs won't go up immediately. It'll be, right, let's sit down. It'll be, I'm going to put your tariff— I'm going to put tariffs up on your products coming into my country. Let's talk. He won't actually do it. He'll say, I'm going to, let's get around the table and discuss. So you're right, tariffs might not like immediately go up. So that inflationary pressure from tariffs, it's hard to predict. Yeah, second half of 2025, maybe. So in the meantime, is the economy hot enough? Forget tariffs. Is the economy hot enough to drive inflation up on its own? Is really, I think, the first half of the year's sort of conundrum to try and figure out.

Can we just pivot back slightly to the UK though? Because last week we were talking, you know, slight signs of looming danger if the situation were to continue. So where are we at at the moment?

Well, we said last week that, remember, that the bond yield situation was pretty alarming. Bond yields on the long end were rising at a really fast rate, and they were hitting levels we haven't seen for decades. Okay, and it's a concern, um, but remember we said that, you know, it's probably short-term upside pop, probably won't last, probably will settle down. And what's happened yesterday is the perfect sort of, uh, water being thrown on that fire. Because you've got this inflation print that was lower than expected. Just, just to be clear, the headline inflation in the UK was 2.5%. That was down from last month's 2.6% and lower than expected. We were expecting 2.6%, right? So it's a tick lower. But I do want to caveat all of it. Let's not get too excited here. It's a tiny blip lower. Okay, yes, people were all worried about the upside and it's gone down, so there's a big relief. Now that relief will dissipate and it will be, okay, actually it's still high and it's still above the Bank of England's target. And one month's data, well, you can't really draw too many conclusions. Let's see what happens in the inflation reports when they come through in February, right? So it's not like this is the perfect resolution— inflation solved, central banks are going to start cutting at their next meetings. That's not true. But from the bond yield point of view, big, big drop in 10-year and 30-year UK gilt yields yesterday. So on the 10-year, we were up at 4.9%, give or take, and it dropped back to almost 4.7%, uh, which is a monster, monster move in like one day. Um, so it's just come back off those highs. So when we said last week things will probably calm down, what's happened is they've calmed down really quickly because of that little extra catalyst, because of the soft inflation data. So this is going to help. The pressure will come off the government a little bit, but now it's about— it's— they're still— bond yields are still really high. When I say they've come off sharply, they've, they've really dropped back to the levels we were seeing at the start of January. Those levels at the start of January were still multi-decade highs. So yes, they've come down, but they're still super high. So we're now in a holding pattern, I'd say. To really wait for next inflation figures. Unfortunately, we've got to wait another month to see actually really what's, what's, where's the trend here.

All right. Well, let's, let's move on and let's talk a little bit about Wall Street and how you want to tackle this. Do you want to go through each firm, JP, GS, Citi, or is there enough commonality where there's a pretty consistent theme amongst these financial firms?

Yeah, I think there's, well, firstly, there's definitely commonality. Let's start there. And they've all blown it out of the, you know, it's been a phenomenal quarter. So we're talking here, remember, Q4 2024. So all the, you know, banks kick off earnings season. So earnings season has begun and we're going to, in the coming weeks, we're going to get numbers from companies from across all sectors as they report on how well they performed in October, November, December 2024 and blanked banks have blown the doors off. It's been a bumper quarter and a bumper year actually, as banks round out '24 with some, you know, feeling very smug. You can see that in the share prices yesterday. So we had 4 out of the 5 biggest American banks report yesterday. JP Morgan, the biggest, Goldman Sachs, Citigroup, Wells Fargo. They're all up sharply. 2%, 6%, 6.5%, 6.7%. Were the gains on their share prices just yesterday. So huge moves, and it actually rounds off a great year because actually, if you look at the bank index performance in 2024 relative to, let's say, the S&P 500, the bank index— and actually, one of the most popular ones that people monitor, just for people's info, is called the KBW Bank Index. If you want to Google that, that's a closely monitored one. But that was up 30%. On the year, and the S&P was up about 20%. So big outperformance over the broader market, and that's because of two things broadly. If you look at across the whole year, first, not thing number one, you know, high interest rates giving them then a large spread, that giving them the ability to have a larger spread between the rates they charge when they're lending money versus the interest costs they're paying on their deposits, right? And that's their net interest income, is the spread between those two. And that's been really high because of the high interest rate environment. And so they've been cashing in on their loan book.

And is that why— I'm assuming when you had that scale of percentage differences the likes of Wells Fargo and Citi had a little bit more of a pronounced move on the intraday.

Yes, that's right. And it's about, you know, this whole inflation chat we've been talking about and what's hap— what's going to happen to interest rates in 2025. This is hugely important for bank performance and share price performance of banks because we're, you know, we're starting to look at the year ahead and actually in In one respect, ironically, if inflation does stay stubbornly high, meaning the central banks can't cut, on the one hand, that is good news for banks because this high interest rate environment continues and then their net interest income stays strong. That's fine to a point, you know, obviously if interest rates staying high ultimately crashes the economy, well then obviously it can flip and turn into a, into a clear negative. But, but for now in the US, Strong economy, high interest rate environment. I mean, absolutely perfect conditions for these banks. Now, add on to that Q4, where you had a bumper quarter for the trading desks of these banks, all because of our good friend, friend of the pod, Donald Trump, and the massive market action and volumes that got traded pre-election. So October was a huge month for markets as it became clearer and clearer Trump was going to win, and people were prepared to make bets in markets for that outcome. And then post-election, he obviously did win, and then we had further big, big moves, right? And so this is trade volume, and this is how banks make money. Their trading desks is all about the flow. So the, the the more volume that gets traded, the more money they make. Okay, so it's been a huge month for equity and fixed income desks particularly. And Trump's coming, and that's already had a positive impact on deal flow on the banking side, right? So M&A deal flow is already up in Q4. So the investment banking divisions, you know, generally speaking, also had a good— so it's like a perfect storm. Like for these banks, everything is sweet right now, and that's come through in their figures.

Yeah, and you mentioned how these banks have a good finger on the pulse of the economy, because what was quite interesting was, uh, at GS, asset and wealth management revenue exceeded expectations. That was up 8%. Perhaps someone like Citi is a better bellwether for this type of information, and their wealth and services units they grew significantly. So, yeah, seems like, yeah, under the surface as well in the US economy, the consumer's feeling fairly robust.

Yeah. And, and that means all parts of these giant banks, they've got so many kind of revenue streams. Um, and it just so happens the conditions in the US, it's literally all revenue streams. Are firing simultaneously. And that's why you get the kind of standout headline stats. So Goldman's— for, let's drill down into a few of these and talk some numbers here. Goldman's doubled their profit compared to the year before, right? So Q4 2024, their profit was $4.1 billion. The same quarter in '23, it was $2 billion. So their profits have doubled Um, revenues up 23%. This is like a, this is like a growth tech stock type, type of, you know, revenue increase here.

So, so obviously, uh, David Solomon's parking his DJ career has, has paid off there, but it does go, it kind of reminds me like with politicians where it's almost like if you can ride out the storm, hmm, and then the tide changes and now it's like no one's mentioning anything about David Solomon now. And it's looking even more positive probably in the environment for deal-making fees and, and particularly with Trump and so on for trading environment. But yeah, what a diff— what a difference 6 months has made.

It feels like saved by the economy. David Solomon. I mean, I would say if the economy hadn't been strong like this and then— and, and I don't know, I don't know, let's say there have— let's say there were way more rate cuts, unless trade volume, you know, all of these things have happened that have been positive, but banks are really out of his control, like, by and large. I mean, that's a bit harsh to say that, but I think he's been saved by economic conditions. Um, but if we drill down, right, the headline revenue up 23% as a whole for the whole bank. Drill into some of these different divisions. Their equities trading division, record ever quarter, up 32%. Um, they, they brought in $3.5 billion of revenue. Um, their fixed income division was up 35%. They brought in $2.7 billion. And then the other big piece of the jigsaw is their investment banking revenues, and that was up 24%. I mean, that's— so when I say Q4 was— we've all been talking about 2025 deal flow is going to be is going to be back, baby. It's already back, you know, up 24%. Now I know this is off a very low base because remember all these percentage growth figures are compared to Q4 2023, and all right, 2023 was one of the worst years. In fact, I think it was the worst year for deal flow this century. So all right, you're coming off some very low kind of comps here. But nevertheless, 24% up, $2.1 billion being brought in from the investment banking division. And then, as you say, wealth management increased as well, more modestly. I mean, that was up 8%, but still, it's clocking in at a revenue of double the investment bank. That was at $4.7 billion coming from their asset and wealth management division.

Probably the one thing that Citi has that the others don't, at least right now, is they're going through a big strategic change. And I know there was an update from the CEO, Jane Fraser. So what was the latest there? And I know there was a buyback announced. What was the size of that?

Yeah, well, that's right. You know, I would say for, again, Jane Fraser, she's been on a multi-year, what's it been, a couple, at least 2 years of this big, you know, turnaround story for the bank. Um, restructuring for sure. Uh, lots of kind of restructuring of divisions, lots of redundancies, just trying to streamline, reconfigure. I would say this earnings report, it's like we, you know, all this hard, painful, costly work that we've been through in the last 48 months, we've turned the corner. And this now partly is because of the economic conditions a bit like the David Solomon story, you know, obviously when conditions are like this, banks can't help but absolutely smash it. So for her, this is perfect to just get them firing and accelerating again. And to the point where, yeah, she said basically the bank's progress in its transformation strategy has been fantastic. And she announced a $20 billion share buyback. So if you ever needed proof that, you know, successful restructuring, tick, uh, I think that piece of news right there gives you that.

Okay, brilliant. Well, look, we'll wrap it up there. I know it's the end of the week, so thank you very much for sharing those insights, Piers. As ever, given the volume of comments, we do love them, good and bad. Once you agree and disagree, so please go for it, whether it's on YouTube or Spotify. And if you don't follow the show, because I know a number of you who watched the last episode because it did, did pop a little bit, gonna say small viral, it managed to get, you know, a couple of tens of thousands of downloads, which was great. And so yeah, a lot of those people aren't subscribers. So if you did enjoy the show and you enjoy conversations And I've got a really good special episode coming Monday, which means you must subscribe and hit the bell icon because it's gonna be a conversation with someone we've never had on the podcast before. Nothing else being said. All right, Piers. Thanks very much. Have a good weekend, everyone.

All right. See you later.