Can Tories prevent a massive defeat?

This is an audio transcript of the FT News Briefing podcast episode: ‘Can Tories prevent a massive defeat?’

Marc Filippino
Good morning from the Financial Times. Today is Monday, July 17th, and this is your FT News Briefing.

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The European Union wants other countries to step up their game when it comes to cutting carbon emissions. And more US banks will report earnings this week. We’ll see whether they can continue the good vibes from Friday. Plus, the Conservative party is bracing for a massive blow out during the UK’s general election next year.

George Parker
You get into a kind of doom loop situation where people think they’re going to lose. They start behaving like they’re going to lose. Discipline breaks down and it becomes a self-fulfilling prophecy.

Marc Filippino
The FT’s political editor George Parker says there is a path to victory. It’s a very narrow. I’m Marc Filippino and here’s the news you need to start your day.

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US banks will continue reporting second-quarter earnings this week. Last week, JPMorgan reported some incredible numbers, a 67 per cent year on year jump in net income, which was well above estimates. This week, Morgan Stanley, Bank of America, Goldman Sachs and a bunch of midsized regional banks report. To walk me through what to expect, I have with me Joshua Franklin, the FT’s US banking editor. Hi, Josh.

Joshua Franklin
Hey, Marc.

Marc Filippino
So, Josh, recap for me what we saw last week.

Joshua Franklin
So we really saw again how the big banks — JPMorgan, Wells Fargo, Citigroup — have really benefited from the Federal Reserve lifting interest rates over the last 15 months or so. They’ve made bumper profits from their lending activities and they’ve been able to do this really because they haven’t been rewarding savers with higher savings rates as they’ve been charging borrowers higher rates on their loans. There has been an expectation that the banks would eventually start having to compensate savers more to stop them from leaving. But it’s really, it’s looking like banks are gonna be able to keep savings rates low for quite a long period of time. And this has led all the big banks that reported last week to increase their guidance for how much they expecting to make from their lending activities this year.

Marc Filippino
Josh, we have Bank of America and Morgan Stanley reporting this week. Could we potentially see similar results there?

Joshua Franklin
Definitely with Bank of America, it’s gonna be very interesting to see whether or not it’s the same story for them. Also sounding bullish about their ability to charge more for loans while also not having particularly high savings rates. Morgan Stanley, It’s gonna be an interesting story to see just how much their wealth management business that they’ve been growing a lot over the last 10 years or so, whether or not that can really pick up the slack from a slowdown in investment banking and trading that we’ve been seeing, which is really the other big part of their business.

Marc Filippino
What about Goldman Sachs? I know they’re kind of in a league of their own.

Joshua Franklin
It’s really interesting. Goldman earnings for the second quarter, it’s kind of one of the biggest mysteries at the moment on Wall Street, because analysts which normally try to predict what companies will make for any given quarter are normally kind of clustered around quite a similar range. With Goldman this quarter, it’s the widest range in quite a long time. What analysts are predicting for their profits might be, it’s as low as just over $100mn in profits that Goldman made, so barely eking out a profit to as high as 1.7bn. So analysts are really unsure. But what they do agree on is it is not gonna be a strong quarter. Their core businesses of investment banking and trading really are struggling at the moment. And they don’t have the same diversification that some of their rivals have.

Marc Filippino
Now, a few midsized regional banks are reporting earnings this week, too. Josh, what are you looking for in those earnings, especially after the collapse of other midsized regional banks earlier this year?

Joshua Franklin
It’s really been really just the story so far for a lot of this year, for the kind of small and regional banks, has been the opposite for the big banks. So the big banks have been able to charge more for loans without having to pay significantly more for deposits, whereas the regional banks really have been having to pay a lot more for deposits to convince savers to keep their money in the wake of Silicon Valley Bank collapsing. So their profitability measures have really come under scrutiny for investors over the last few months. And I think that’s gonna be the interesting story this quarter of what the outlook is for them from a profitability standpoint.

Marc Filippino
Josh Franklin is the FT’s US banking editor. Thanks, Josh.

Joshua Franklin
Thanks, Marc.

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Marc Filippino
The European Union is putting pressure on big polluters to cut emissions faster. EU senior officials told the FT they wanna see China, India and the United States do more. European consumers and industries are also starting to balk at the high costs that come with a green shift. So the EU wants the other big polluters to share more of the burden. Members of the bloc are starting to fight about Brussels’s next round of climate targets, specifically a 2040 target to reduce emissions. The EU has committed to cut greenhouse gas emissions by 55 per cent in 2030 and to reach net zero by 2050.

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The UK has to call a general election next year and when it does, members of the UK Conservative party think they’re in for a massive defeat. So is that it? Labour wins big and Tories get blown out of the water? Well, it’s a little bit more nuanced than that. Here to discuss is the FT’s political editor, George Parker. Hi, George.

George Parker
Hi there.

Marc Filippino
All right, So, George, remind us how the Conservatives dug themselves into such a deep hole.

George Parker
Well, the first thing to say about the Conservative party, currently led by Rishi Sunak, the prime minister, is it’s an election-winning machine. But at the moment, they are in a hole. As you say, they’ve find themselves at the wrong end to some very daunting looking statistics. So currently in the UK we have the highest level of taxation since the second world war. We’ve got some of the highest inflation rates in the developed world at the moment. So on a range of things, including the fact that the Conservative party is currently typically about 20 points behind the opposition Labour party in opinion polls, it all adds up to a pretty desperate situation.

Marc Filippino
Yeah, and none of that is even taking into account the partygate scandal with former prime minister Boris Johnson. The economic collapse under former prime minister Liz Truss. So what are members of the Conservative party telling you? What is the mood like?

George Parker
Well, at the moment there’s a series of summer parties going on around Westminster just before the House of Commons breaks for its summer holidays. And the mood is pretty dire. You know, you meet people gazing wistfully into their glasses of champagne and saying that they’re heading for a historic defeat. The party’s run out of energy. It’s basically losing its moral compass in some respects. It’s been rocked by a series of scandals as well as bad economic news. So you meet people who say that this will be a very serious defeat for the Conservative party, their first since their election win back in 2010.

Marc Filippino
So is that it, we’re just kind of bracing for a major Tory loss or is there some path to victory?

George Parker
Well, there are two ways this could go. And Conservative election strategists talk about a narrow path to victory. And for the Tories to follow that narrow path, a lot of things have got to go right. Party’s got to become a lot more disciplined than it is at the moment. It’s got to stop arguing amongst itself. They’ve got to get in behind the prime minister and they’ve got to hope the economy turns around. Almost everything has to go right. The more likely scenario, according to most Conservative MPs at the moment, is that things go wrong and they can’t get out of this downward spiral. And there is a danger when parties have been in power for a long time. You get into a kind of doom loop situation where people think they’re going to lose. They start behaving like they’re going to lose. Discipline breaks down and it becomes a self-fulfilling prophecy.

Marc Filippino
One of the things I take away from your big read, George, was the comparison to the last major Conservative blowout, which is in 1997 when Tony Blair won for Labour. Now, Keir Starmer is not Tony Blair, but how does he stack up as a competitor and does his presence do anything to Conservative’s chances?

George Parker
You’re right to say that Keir Starmer is in no way comparable to Tony Blair. Tony Blair, Brussels enthusiasm. People were very excited about the prospect of this young Labour leader becoming prime minister back in 97. There isn’t that kind of excitement around Keir Starmer. What he has done, though, is presented himself and the Labour party as a plausible alternative to a chaotic government, and that’s part of the big trick of being in opposition, of course, is to reassure people that change, when things are going tough in your lives, won’t be a dangerous choice.

Marc Filippino
So, George, we have local by-elections in the UK this week for a few Conservative seats, including Boris Johnson’s old seat. Do we have a sense of what the outcome of that might look like?

George Parker
Well, these by-elections, there are three of them, as you say, on Thursday it seems quite likely the Conservatives will lose all three of these seats. That will send their party off to the summer holidays feeling pretty gloomy. And for Rishi Sunak, the last thing he needs now is the chance for the electorate to go and cast a, well, such a massive protest vote. So those results on Thursday will be fascinating to watch. But the Tories are braced for what one ally of Rishi Sunak called “horrible defeats”.

Marc Filippino
George Parker is the FT’s political editor. Thanks as always, George.

George Parker
Thanks a lot.

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Marc Filippino
You can read more on all of these stories at FT.com for free when you click the links in our show notes. This is just for the summer, so take advantage while you can. This has been your daily FT News Briefing. Make sure you check back tomorrow for the latest business news.

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