00:00Gabrielle, I know that it's a big day with CPI and bank earnings, but honestly, I couldn't stop looking at
00:04IBM.
00:05I thought it was such an interesting story because IBM comes out and says, look, our customers, they need to
00:09spend on chips.
00:10They need to spend on hardware. Their things are getting really expensive, so they kind of have less of a
00:14cushion to spend on software.
00:16We've been talking a lot about the huge chip spend, and I wonder for a lot of companies if this
00:21is like the second wave of threat
00:22for a lot of tech companies and software companies that basically CapEx are being absorbed by just how expensive chips
00:28are right now.
00:29Yeah, I think this is really an example of how software is the poster child this year for investors thinking
00:36and pricing in not just AI disruptors,
00:39but also those that are most at risk of being disrupted, not because of fundamentals themselves.
00:44If we look at the software group as a whole, grew earnings close to 30 percent in the first quarter,
00:50set to still be strong.
00:52But of course, there are questions around the business model.
00:54And we think still a lot of CTOs are very focused on the AI story, AI adoption, rationalizing token usage.
01:03So maybe there are still some wrinkles for the group in the short term.
01:06But medium term, there's still a lot of very solid businesses within the software group,
01:12especially those that really have very vertical businesses, proprietary data, and that can add AI solutions on top of it.
01:20I mean, this is why the banks did so well equity trading, right?
01:23Because IBM drops literally a fifth of its market cap in one day and then it sort of clambers back
01:28up and you have the memory stock selling off and so on.
01:32What about inflation? Are we out of the woods?
01:35There's so much excitement within the market.
01:37I do think still tech and these AI questions are driving a lot of that action beneath the surface.
01:44But undoubtedly, the macro news that we got this morning is a relief for investors, especially listening to Governor Walsh.
01:53Sorry, to Governor Waller yesterday in his speech, one of the more hawkish voting members talking a lot about how
02:00he was worried about the reacceleration and core inflation.
02:02This month's print is a huge relief.
02:06Now, as he said yesterday, one month doesn't make a trend, but at least having seen softer prices across the
02:14core components at least takes a hike in July off the table and can keep the Fed on hold, we
02:20think, for the remainder of the year.
02:22That's a big risk that we're seeing decrease for markets.
02:25Well, Waller was like poetry yesterday, can I just say? Sternly staring at inflation until it melts before our withering
02:31gaze is not an option.
02:33But it almost feels like if you were to stare at this month's report and pray for a similar one,
02:38that it is withering away.
02:39And the pass-through from higher energy costs, it's not there.
02:42Do you expect that to repeat?
02:44Or considering that war has reignited in the Middle East, or at least escalation has, that there will be elements
02:49of pass-through of higher energy costs?
02:52I was in the room there at that lunch with Governor Waller, and he got a lot of laughs, including
02:56for that one poetic line.
02:58I do think one of the things that he and other more hawkish Fed members have been pointing to is,
03:04look, we're not just worried about the headline.
03:06Of course, sustaining around $4 a gallon for gasoline is an important, necessary, but not exclusive condition for the Fed
03:16to get more comfortable around inflation.
03:18And he was really honing in to core inflation, and that's why this flat reading this morning is a big
03:26relief.
03:26And if sustained, could really take the pressure off from these more hawkish members.
03:31And it was undoubtedly good.
03:32I think it's just also worth mentioning it wasn't just a couple of special items.
03:37There were some that declined, like auto insurance.
03:39But if you look at other important components of core services and core goods, they were soft, especially shelter really
03:46only rising.
03:47If you look at rent 0.1 or owner's equivalent rent 0.2, that is a more normal pace of
03:54price increases.
03:56It does feel, though, that this market and any investor in it is a little bit not quite on solid
04:01ground.
04:01I mean, you had a 10 basis point move in one direction with the two-year, and then it reversed
04:05that move precisely because we didn't know what we were going to get, Gabriella.
04:09So what do you tell investors?
04:11I mean, how invested should they be in growth, in the riskier stuff?
04:15How invested should they be in less risky items?
04:18I do think still this macro question, specifically the inflation and rates question, is still key if you look at
04:25the fixed income market and if you look at currencies.
04:28And so really, I think the short end of the curve is where you've seen the biggest adjustment post-Iran
04:35war kickoff.
04:37Still a short end, that's price for inflation, price for a Fed rate hike.
04:42The two-year has moved up 80 basis points this year.
04:45And actually, we think it creates a lot of value on the short end because we don't think we'll see
04:51sustained inflation pressure in the core and then ultimately the Fed won't have to hike.
04:55So opportunity there.
04:56For stocks, though, that's where really the intra-stock churn is the most important question.
05:03And that is all about AI, AI, AI, and specifically AI CapEx.
05:08And that's where the upcoming few weeks of tech-related earnings are going to be so important.
05:14The market is so jittery, especially looking at your high-flying semiconductor, especially memory names, to any kind of whisper
05:22of a deceleration in the pace of CapEx.
05:25Well, the Bank of America team is pointing out that investment and asset managers are very, very bullish right now.
05:30Their cash levels dropped to 3.6%.
05:33It was above 4%, saying that it rings the contrarian alarm bells.
05:36What are you seeing among your clients?
05:38Is there exuberance in equities right now?
05:40What we're seeing is a lot of enthusiasm for investing in across the capital markets and really the giant sucking
05:49sound of AI.
05:50And so a lot of enthusiasm in following the money from the hyperscalers, the CapEx spenders, to the whole AI
05:58ecosystem supply chain that's benefiting from those CapEx dollars.
06:02I mean, the kind of earnings growth we're seeing is extraordinary, 100% earnings growth for the semiconductor group.
06:11We're seeing close to 40% for hardware, for power.
06:15It's just astounding.
06:16And really, we're seeing a lot of excitement investing in across public equities as well as private capital as well
06:24to fund this whole AI CapEx surge.
06:27Now, where we are seeing some more concern for investors is just how far things have run.
06:31And we have been talking to a lot of investors about thinking about, are we thinking about sizing and actual
06:39stock selection carefully?
06:40Because these AI tantrums that we started to see in June seem to be a feature now, not a bug.
06:46And you have to imagine the Fed is thinking about that as well, right?
06:48Because there's a part of this economy that is very dependent on that wealth that's being created by the stock
06:54market.
06:54But just on that, are you at all concerned about the labor market?
06:59Because you don't see any rate hikes for the end of the year.
07:01But it does feel like if we got one more soft jobs report, maybe we'd suddenly be starting to think
07:06about a cut again.
07:07I think this is what was interesting about the speech from Governor Waller yesterday, who was one of the most
07:14dovish members last year.
07:15Very worried about the labor market.
07:17It was basically no job creation for the vast majority of 2025.
07:23And then things have really improved since then.
07:26I wouldn't say it's a hot labor market, but it's normalized to a good, healthy pace of about 111,000
07:33jobs created over the last three months.
07:35So I do think for those that might have been worried about something breaking in the labor market, the past
07:42few months of data have really calmed these fears.
07:44It's an OK economy.
07:46And I think if you think outside of AI, that's where you don't see a lot of interest.
07:51It's not an economy falling off the cliff, but it's also not that exciting.
07:55So where is just good enough economic growth good?
07:59I think banks fall in that camp.
08:01But we would not be chasing what was an initial rotation into your more cyclical consumer names.
08:07Just very quickly, Gabby, because we're basically out of time.
08:09Did you take comfort in the bank numbers this morning?
08:11I think you're seeing really good numbers, not just from capital markets, which there was already a lot of expectation
08:17about, but also about loan growth, picking up, including CNI loans, good regulatory environment, and very low defaults, delinquencies, and
08:28net provision.
08:29So I do think the macro read-through is very good, and including for banks, which we like.
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