© Reuters. FILE PHOTO: A sign outside the headquarters of JP Morgan Chase & Co in New York, September 19, 2013. REUTERS/Mike Segar/File Photo
By Tatiana Bautzer, Saeed Azhar and Niket Nishant
NEW YORK (Reuters) -The biggest U.S. consumer lenders are set to post higher profits for the third quarter, in contrast with investment banks still facing a dealmaking slump, analysts said.
JPMorgan Chase (NYSE:), which kicks off earnings for big U.S. lenders on Friday, will set the tone for large banks. It is predicted to post a roughly 25% jump in earnings per share (EPS) versus a year earlier, LSEG estimates showed.
Goldman Sachs and Citigroup (NYSE:) are expected to report the biggest EPS declines of 35% and 26% respectively, according to LSEG estimates. Morgan Stanley’s EPS is also forecast to drop.
“This quarter is all about higher interest rates for longer,” said Mike Mayo, an analyst at Wells Fargo. “They will affect banks’ funding, lending, ability of borrowers to repay loans, losses in securities and capital requirements.”
JPMorgan, the nation’s largest lender, is “best positioned” to handle higher rates and could surprise markets with stronger-than expected results, said Bank of America analyst Ebrahim Poonawala, who raised his earnings estimate.
U.S. employers added 336,000 positions in September in a return to the fevered hiring seen during the pandemic, potentially bolstering the case for another interest rate increase by the Federal Reserve. Another hike, and the persistence of elevated borrowing costs, could pour cold water on a nascent recovery in dealmaking.
Wall Street CEOs have cited the return of some initial public offerings, including for SoftBank (TYO:)’s Arm Holdings (NASDAQ:), as signs of a market revival after months in the doldrums. The outbreak of war in Israel could further dampen market sentiment.
“There is a constructive environment, and investment banking fees tend to be higher through the end of the year,” said Jason Goldberg, a banking analyst at Barclays. A broader improvement for capital markets may not come until 2024, he said.
Despite the renewed optimism, investment banking activity remains depressed. Global investment banking fees are down almost 17% in the third quarter from the same period a year earlier, to $15.2 billion, according to data from Dealogic.
Markets could be further shaken by surging U.S. Treasury yields, knocking investor confidence and posing some risks to banks that hold a large volumes of the securities on their books.
As rates rise, bond prices fall, representing losses on paper that would be realized if the banks sold the bonds. After Silicon Valley Bank collapsed in March partly because of losses from its securities portfolio, investors have focused on the risks posed by paper losses on bond holdings across the industry.
Unrealized losses from securities will show a “significant increase” to as much as $670 billion across the industry in the third quarter, estimated Richard Ramsden, a banking analyst at Goldman Sachs. That compares with $558 billion in the second quarter, according to data from the Federal Deposit Insurance Corporation.
For instance, Bank of America had more than $100 billion of unrealized losses on its securities portfolio that it aims to own until maturity, which have weighed on its shares. Its stock is the worst performer among the top six U.S. lenders, falling nearly 18% so far this year.
The KBW index of bank shares, which includes regional lenders, has dropped almost 23% in 2023.
Earnings from regional lenders will also remain in focus after a trio of bank failures earlier this year roiled the industry.
“Investors should be very careful with the regional banks, which have more ties to the fragile commercial real estate loan market and some regional banks have weaker balance sheets, which is concerning,” wrote James Demmert, chief investment officer of Main Street Research, which manages about $2 billion in assets.
Large banks’ consumer divisions are expected to remain a bright spot in their earnings. The strong job market has propped up household spending, although the pace of purchases has slowed, bank executives have noted in recent weeks.
Consumer delinquencies on loan payments have also picked up, but remain at low levels historically.
“It’s still credit normalization, as opposed to a real concern about credit losses getting to recessionary type levels,” Ramsden said. More broadly, “we’re back into this environment where investors think interest rates are going to remain higher for longer,” he said.
EPS ESTIMATES FOR THIRD QUARTER
Bank 3Q23 3Q22 % change
Citi 1.20 1.63 -26%
JPMorgan 3.91 3.12 +25%
Bank of America 0.82 0.81 +1%
Morgan Stanley 1.33 1.47 -9.5%
Goldman Sachs 5.35 8.25 -35%
Wells Fargo 1.24 0.85 +46%
* Median estimate. Source: LSEG
Fed pivot to interest-rate cuts seen likely to start in May
© Reuters. FILE PHOTO: The Federal Reserve building is seen in Washington, U.S., January 26, 2022. REUTERS/Joshua Roberts/File Photo
By Ann Saphir
(Reuters) – A stronger-than-expected U.S. labor market won’t keep the Federal Reserve from pivoting to a series of interest-rate cuts next year, but it could take until May for it to deliver the first reduction, traders bet on Friday.
Employers added 199,000 workers to their payrolls in November, the Labor Department’s monthly jobs report showed, more than the 180,000 that economists had expected, and the unemployment rate unexpectedly fell to 3.7%, from 3.9% in October.
Hourly earnings ticked up 0.4% from a month earlier, more than expected and an acceleration from the prior month. But the labor force participation rate also rose, to 62.8%, easing the prospect that an overheated job market will short-circuit progress on the Fed’s inflation battle.
A separate report Friday showed U.S. consumer sentiment improved more than expected in December as households saw inflation pressures easing.
The U.S. central bank is expected to keep rates in the current 5.25%-5.50% range when it meets next week, leaving policy on hold since July. Traders before Friday’s jobs report had put about a 60% probability on a March start to Fed rate cuts, but after the data reduced that to just under 50%, with a first reduction seen as more likely to come in May.
Further rate cuts are priced in for the rest of 2024, with the policy rate seen ending the year in the 4%-4.25% range as the Fed adjusts borrowing costs downward not as an antidote to a weaker labor market but rather to keep pace with an expected continued cooling in inflation.
The pace of that improvement in inflation will help determine the timing of the Fed’s pivot to rate cuts, analysts said.
“We maintain our call for the Fed to start cutting rates by mid-year, but it is contingent on inflation continuing to trend lower and further weakening in economic activity,” wrote Nationwide economist Kathy Bostjancic after the report.
Fed policymakers will release their own views of where the economy, inflation, and interest rates will go next year when they wrap up their last meeting of the year on Wednesday.
US consumers’ moods brighten as inflation worries subside – UMich
© Reuters. FILE PHOTO: A person arranges groceries in El Progreso Market in the Mount Pleasant neighborhood of Washington, D.C., U.S., August 19, 2022. REUTERS/Sarah Silbiger/File Photo
(Reuters) -U.S. consumer sentiment perked up much more than expected in December, snapping four straight months of declines, as households saw inflation pressures easing, a survey showed on Friday.
The University of Michigan’s preliminary reading of its Consumer Sentiment Index shot up to 69.4, the highest since August, from November’s final reading of 61.3.
The median expectation among economists in a Reuters poll had been for the index to edge up to 62.0.
“Consumer sentiment soared 13% in December, erasing all declines from the previous four months, primarily on the basis of improvements in the expected trajectory of inflation,” survey Director Joanne Hsu said in a statement.
The survey’s preliminary gauge of current conditions rose to 74.0 from last month’s final level of 68.3, while the expectations index climbed to 66.4, the highest since July, from 56.8 in November.
Consumers’ outlook for inflation in the year ahead plunged to 3.1% – the lowest since March 2021 – from November’s final expectation of 4.5%. The 1.4 percentage point decline was the largest monthly drop in one-year inflation expectations in 22 years.
Over a five-year horizon, consumers expect inflation to average a three-month low of 2.8%, down from 3.2% in November, which had been the highest since March 2011, when it reached the same level.
Russian inflation accelerates in November, rate hike beckons
© Reuters. FILE PHOTO: People shop at a local market in the town of Rostov in the Yaroslavl Region, Russia April 15, 2023. REUTERS/Evgenia Novozhenina/File Photo
MOSCOW (Reuters) – Inflation in Russia accelerated in November, data from state statistics service Rosstat showed on Friday, cementing expectations that the central bank will hike interest rates as it meets for the final time this year on Dec. 15.
The central bank has now raised rates by 750 basis points since July, including an unscheduled emergency hike in August, under pressure from a weak rouble, tight labour market and strong consumer demand. Analysts widely expect another hike, to 16%, next week.
High interest rates are one of several irksome economic challenges facing President Vladimir Putin, who on Friday said he would run again for president next year, although none seem insurmountable thanks to Russia’s success in evading a Western oil price cap helping to drive a recovery in economic growth.
In November, annual inflation stood at 7.48% year-on-year, up from 6.69% a month earlier and just shy of analysts’ expectations of a 7.6% reading.
The data suggests that annual inflation will exceed the central bank’s expectation of year-end inflation at the upper end of the 7.0%-7.5% range, which is well above its 4% target.
On a monthly basis, the consumer price index (CPI) rose 1.11% in November after a 0.83% increase in October, the data showed, coming just below analyst forecasts of a 1.2% increase. That was the fastest monthly rise since April 2022.
In the week up to Dec. 4, consumer prices rose 0.12%, separate Rosstat data showed.
Russian households regularly cite inflation as a major concern, with many having no savings after a decade of economic crises, while rising prices dragged living standards down across the country.
Rosstat gave the following details:
RUSSIAN CPI Nov 23 Oct 23 Nov 22
Mth/mth pct change +1.11 +0.83 +0.37
– food +1.55 +1.35 +0.40
– non-food +0.53 +0.55 +0.06
– services +1.23 +0.48 +0.76
Y/Y pct change +7.48 +6.69 +11.98
Core CPI y/y pct change +6.36 +5.50 +15.06
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