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CPI and Bank Earnings Take Centre Stage

Stavros Tousios | Wednesday 11 October 2023

US equities rose on Tuesday as some Fed officials made the case for an interest rate peak ahead of the release of quarterly earnings from major US banks, including JPMorgan (JPM), Citigroup (C), and Wells Fargo (WFC). In addition, investors brace for the monthly US CPI report to be released on Thursday, October 12, for clues on whether the recent narrative grows more dovish or not.

Rising optimism saw the S&P 500 (USA500) closing 0.5% higher on Tuesday to put a 3-day winning streak in, with the Nasdaq (US-TECH 00) gaining about 0.6% and the Dow Jones Industrial Average (USA 30) tilting 0.4% higher. The rally occurred despite recent geopolitical tensions spiraling from Gaza, a root cause of concern for driving inflation higher amidst inflationary oil (CL) prices, potentially shifting the Fed’s view on monetary policy.

An image of big bank building and stock price charts

CPI Challenges Fed’s Fight Against Inflation

Inflation rose to 3.7% year-on-year for a second month in August, up from 3.2% in July, primarily driven by gasoline prices and household expenses, data showed on September 13. Core inflation, which excludes volatile food and energy items, also rose more than expected, from 0.2% to 0.3% month-on-month, posing challenges in the Fed’s fight against inflation. While goods prices have fallen due to supply chain improvements, the cost of services such as car repairs and recreation has increased, primarily due to rising employee wages. 

Last week’s Nonfarm payrolls were seen as raising concerns about inflationary pressure, but rising US yields have put a dent in the hiking rhetoric as their rise impacts financial conditions in a similar way as a rate hike. Despite the recent correction in yields, the Fed will still have to see some improvement in "super core" inflation before considering lowering rates, which removes housing inflation from the core.

Thursday’s CPI report is expected to increase 0.3% month-on-month and 3.6% year-on-year. Core CPI is also expected to rise by 0.3% month-on-month and 4.1% year-on-year, hence indicating a normalisation of inflation. Although analysts will be closely watching core inflation, rising energy prices could continue to drive sentiment.

Q3 Earnings Season for Major Banks on Tap

The Q3 earnings season for banks is expected to focus on the impact of the spike in the 10-year Treasury yield on capital levels and the stabilisation of deposits. Loan growth is expected to remain sluggish, while loan loss provisions continue to rise due to credit quality deterioration. 

All are likely to increase loan-loss provisions due to the possibility of a US recession and the need to lower business costs. In particular, JPMorgan reported strong Q2 earnings in July but set aside $2.9B in provisions to cover future loan losses, while Citibank reported an allowance of $1.81B in Q2.

In addition, JPMorgan is expected to outperform Citigroup and Wells Fargo in profitability despite challenges from a slow economy and high interest rates, followed by Bank of America (BAC) and Citigroup. JPMorgan Chase is predicted to have a roughly 25% increase in earnings per share (EPS) compared to the previous year, while Goldman Sachs (GS) and Citigroup are expected to report declines of 35% and 26%, respectively. 

JPMorgan is scheduled to release its Q3 '23 earnings on October 13, 2023. Full-year 2023 EPS and revenue growth for JPMorgan are 23% and 34%, respectively. Citigroup is expected to report the same day with a projected revenue of $19.26B and an EPS indicating a 4% rise but with a -21% year-on-year growth. 

Nonetheless, despite some analysts pointing out that Citigroup is undervalued at 0.4x book value and 0.47x tangible book value, the company’s return on equity (ROE) seems to be significantly lower than its competitors. 

Moreover, Wells Fargo, reporting also Friday, is expected to report lower earnings per share but higher revenue of $20.2B, up 3.5% year-on-year. However, the company has beaten consensus repeatedly, and investors will want to see whether there is another upward surprise. (Source:Yahoo Finance)

IMF Calls for Continued Fight Against Inflation

While investors focus on the inflation print and the start of the third-quarter earnings season, rising bond yields have become a concern for US Treasury Secretary Janet Yellen and the International Monetary Fund (IMF). 

Yellen mentioned that the recent sell-off in bonds, which sent yields to their highest levels since 2007, may cause some impact on market function, but it is considered “standard.” She also added that an overheated jobs market could shift her view, suggesting last Friday’s jobs report was not seen as a risk - for now.

Along with risks related to China's slowdown, the conflict in Gaza, and global economic growth, the IMF correlated the recent bond market rout to the banking crisis instigated by the SVB collapse back in March of 2023. The organisation called on the banks to continue their fight against rising inflation despite the higher-for-longer policy environment posing vulnerabilities as US regulators have limited lenders’ risks.

Conclusion

As the impact of rising yields becomes the centre of attention, investors brace for the release of inflation figures and the first round of quarterly earnings from major US banks. While the economic trajectory hangs on various factors, energy prices are one of the components that drove inflation higher last month and will likely remain an area of focus for investors and traders alike.


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