US investment banking is so back

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0:32Good morning from the Financial Times. Today is Thursday, July 17th, and this is your FT News Briefing. Donald Trump is attacking the Federal Reserve again, and U.S. investment banking is making a comeback. Plus, Japanese bond investors are worried about this weekend's election. I'm Sonia Hudson, and here's the news you need to start your day.

1:06Investors are worried about the Federal Reserve's independence again. U.S. President Donald Trump asked Republican lawmakers if he should fire Fed Chair Jay Powell. That's what a White House official told DFT yesterday. Powell's term ends next year. The dollar dropped 0.9 percent afterwards, but it trimmed some of those losses after Trump appeared to backtrack. Here's what he said in the Oval Office. I don't rule out anything, but I think it's highly unlikely unless he has to leave for fraud. The president has repeatedly gone after Powell for not cutting interest rates as quickly as Trump wants.

1:45But we have a lot of people that want that job very badly. And I'm only interested in low-interest people, frankly, because you don't need... Investors are betting that the threats to Fed independence will lead to higher inflation long term. They think that when Trump appoints the next Fed chair, that person will bow to political pressure and lower interest rates too much to rein in prices.

2:16Wall Street banks did surprisingly well in investment banking last quarter. All five major banks beat analyst forecasts when they reported earnings this week. President Trump's tariffs had caused a lot of turmoil earlier in the year, but now the tide has turned. Here to explain why is the FT's U.S. Banking Editor, Josh Franklin. Hi, Josh. Hi there. So Josh, we had you on the show earlier this week, and you were telling us that analysts expected another bad quarter for investment banking. What actually ended up happening when we got these earnings reports? So in the end, across the street, investment banking beat expectations from what analysts had expected.

2:59And you really did see some meaningful outperformances, especially at places like Goldman Sachs and JP Morgan. In some cases, people had expected investment banking fees to decline from a year earlier, and actually some of these banks eked out pretty sizable gains. Another important thing to keep in mind is even as investment banking has made a comeback, the big revenue generators for these banks, as far as their Wall Street activities are concerned, is on the trading side, equities and fixed income. At Goldman Sachs, you saw record revenues in equities trading for them, and that really has been responsible for the lion's share of revenues at these banks from a Wall Street perspective.

3:35And why is investment banking doing better than we thought it would? I think there's a couple of reasons. Firstly, if you look at the second quarter, April was kind of written off as a month after the Liberation Day tariffs from an investment banking perspective, just because around trade policy in the U.S. created such big uncertainty, both economically and also in financial markets, that it was very hard to get deals done. But then over the course of the quarter, as the market kind of digested this stuff and people realized that actually maybe the consequences of these policies aren't going to be as damaging or as severe as people were fearful of, you saw a greater willingness to do transactions.

4:13And then also, I think there's what you also saw bank leaders talking about this week was just there's a realization in corporate boardrooms that this uncertainty that they're having to live through with the Trump administration, geopolitics, whatever it is, is just the new normal. So if you do want to go out and buy a company, if you want to go out and take your company public, you may just have to swallow and accept the added uncertainty of the times that we live in. So if you want to make a deal, you just got to get over it. Exactly. Is what we've seen in the second quarter just a blip, or have things really changed for dealmaking in the long term?

4:50So I caution people not to get too ahead of their skis in terms of just how big a recovery this is going to be. Certainly for a couple of years now, investment bankers have been talking about an existential need for dealmaking activity. But we've heard leaders on Wall Street talking about early signs of a recovery in investment banking for going on two years now. I just think if history and recent history has been any guide, you need to believe it when you see it. And I think also investment banking relative to other parts of the business, you know, it's not catastrophic levels, but really not at elevated levels that we've seen in recent history.

5:26I guess I'm also wondering why were those estimates that you were talking about on Monday's show so far off. Have we just been totally misunderstanding the impact of Trump's trade war on Wall Street? So I think it's been very hard for people on Wall Street to gauge since the trade war started in earnest in April exactly how seriously and significantly to take these threats. But now recognizing that things are looking a little bit more solid and maybe not quite as painful as what they were thinking of three months ago, but we're also still potentially pretty early in this. There hasn't been a lot of trade deals announced.

6:02And on Wall Street, people talk a lot about stroke of pen risk right now, that you just don't know what could come out of the White House from one week to the next. Josh Franklin is the FT's U.S. banking editor. Thanks, Josh. Thanks very much.

6:20UK inflation rose unexpectedly in June, all the way to an 18-month high. Economists predicted the number would stay steady at 3.4%, which is what the figure was in May. Instead, it's now at 3.6%. UK inflation is outpacing major economies in Europe, including Germany, which was at 2 % in June. The new data is a setback for the Bank of England. It's been hoping to continue cutting interest rates to support the country's slowing economy.

7:01Yields on Japan's government debt are soaring. The country's 10-year government bonds, also known as JGBs, hit their highest level this week since the 2008 financial crisis. Investors are worried about Sunday's election and what it might mean for the country's fiscal health. The FT's Leo Lewis is here to explain why. Hi, Leo. Hi there. So, Leo, tell me more about this election and what's causing these yields to jump and prices to fall. Right. Yes. The Japanese bond market has been volatile for a couple of months, but all the more so this week in the final days before an election to the upper house of Japan's parliament.

7:44It's become clear that the electorate are planning to use this to kind of punish the ruling Liberal Democratic Party, punish the Prime Minister Shigeru Ishiba. And the political turmoil is spilling out into the bond market. Now, that bond market was already quite volatile. There are structural reasons for volatility in the JGB market. And one of those is that a lot of the traditional buyers of JGBs at the super long end, so that's the life insurers primarily, but also the banks have been changing their strategy somewhat, and that's in line with the demographics of Japan. It's getting older, the population is shrinking, and then you've added into that a sense of turmoil in Japanese politics.

8:27And the bond market has been where that has been expressed as a kind of set of investment worries. And that's why there's now a lot of attention on what's going to happen over the next few days. Okay. So it seems like the Liberal Democratic Party might lose seats in the upper house. Why is that such a big worry for bondholders? So the Liberal Democratic Party, you have to remember, has been in power in one form or another for basically 70 years. But the party is looking tired. It's being blamed for a number of the economic problems that Japan is experiencing. And primarily amongst those is inflation.

9:04And so one of the things that has been a big feature of the last few months and weeks has been the rise of what we would previously thought of as very extreme parties with some quite radical ideas. And what's happening is that the sort of mainstream of Japanese politics is having to adjust to some of the quite populist noises that these fringe parties are making. And that has involved ever more kind of grand pledges of fiscal spending. And it's those pledges of fiscal spending, essentially ways of keeping the electorate sweet, that are really unsettling the bond market, because the idea is that Japan is already very stretched.

9:43It's got a huge level of public indebtedness and that these very big pledges of spending create what some are already calling a kind of Liz Truss moment for Japan. Right. You're talking about that time when UK's Prime Minister Liz Truss sent the British bond market spiralling. Is there anything that Japan's finance ministry can do to avoid that? So look, what the Ministry of Finance has been looking to do is to address the sort of structural issues with the bond market. And the idea of the Ministry of Finance is to pull back on the issuance of the very long dated, the sort of 20, 30, even 40 year JGBs and to push things up at the lower end of the yield curve, the shorter dated bonds.

10:27And the idea is that that will give some calm to the market, that will give options to investors. And so it's given that a go. It has proved to be a calming factor over the last sort of month or so. But the trouble now is that the uncertainty around the election is rekindling that volatility. Leo Lewis is the FT's Tokyo Bureau chief. Thanks, Leo. Thank you very much.

10:58a quick note before we end the show today make sure to send in your questions about u.s politics and the economy from this week we've got an email you can send it to in the show notes and if you do we may just get you an answer on the ft's swamp notes podcast

11:19You can read more on all these stories for free when you click the links in our show notes. This has been your daily FT News Briefing. Check back tomorrow for the latest business news.

12:04Thank you.

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