Stocks before the market: How to read big bank earnings

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If market volatility tells us anything, it’s that investors are reeling from economic uncertainty. The outlook remains cloudy with the possibility of a recession on the horizon. Big bank earnings next Friday could help clear that fog.

Wall Street will be looking for signs of what’s to come as the Federal Reserve continues to aggressively raise interest rates and cool the economy.

What happens: Four of the nation’s biggest banks — JPMorgan Chase ( JPM ), Wells Fargo ( WFC ), Citigroup ( C ) and Morgan Stanley ( MS ) — report third-quarter earnings before the bell on Friday. Their CEOs will also answer questions from investors, analysts and journalists for their views on the wider economy.

Banks are able to charge more for customers to borrow when interest rates rise — so in theory, this should be a good environment for them. But a weakening economy also means that demand for loans is starting to dry up. Analysts polled by Refinitiv expect earnings to decline from the prior period at all four banks.

Beyond the disappointing data, Wall Street analysts are focusing on three important factors: loan growth, capital adequacy and the economic outlook.

Increase in loans: The rate at which businesses borrow money from big banks doesn’t just tell us about the health of a financial institution itself. It also tells us a lot about whether businesses plan to expand in the coming months or whether they are preparing for a slowdown.

Analysts expect loan growth to remain strong in the third quarter. “Credit risk and loan loss exposure are starting to enter the picture, but will not be the focus of Q3 2022 results,” CFRA research director Kenneth Leon wrote in a note.

But Wall Street estimates show loan growth is expected to slow in the fourth quarter and next year.

Personal loan growth will likely slow, showing that Americans are starting to feel the pinch of rising interest rates. Mortgage rates are now twice what they were a year ago, and mortgage applications recently fell to a 25-year low.

Capital adequacy: Expect banks to get questions about how much money they have on hand. The recent turmoil in UK bond markets and negative headlines about Credit Suisse have raised concerns of a “contagion” effect in the United States.

The turmoil is unlikely to lead to another Lehman Brothers financial crisis: The Dodd-Frank Act of 2010 forced banks to double their capital ratios and quadruple their liquidity. Big banks also participate in annual stress tests conducted by the Federal Reserve to measure their capital adequacy.

However, investors are concerned about direct exposure to European banks.

The other issue, UBS analysts wrote in a note, “is that while banks have sufficient capital and deposit flows to support loan growth, it is less robust than it has been in recent years and we expect banks to they are less well placed to return capital to shareholders through acquisitions.” This will likely weigh on stock valuations.

Economic prospects: JPMorgan CEO Jamie Dimon has a knack for moving markets by predicting recessions. This week, stocks plummeted after he warned that the US could enter a recession within the next six months. Expect more comments on the future outlook and warnings from CEOs trying to prepare investors for weaker days ahead.

A key measure of inflation rose faster than expected in September, raising concerns that the Federal Reserve’s aggressive rate hikes are having limited impact on price control, my colleague Chris Isidore reports.

The U.S. Producer Price Index, which tracks what America’s producers are paid for their goods and services, rose at an annual rate of 8.5% in September, slightly lower than the 8.7% rise in August, it said on Wednesday the Ministry of Labour. However, the report showed prices rose 0.4% month-on-month.

Economists polled by Refinitiv had expected the 12-month rise in wholesale prices to slow to an 8.4% increase and the month-on-month increase to come in at 0.2%, compared with a 0.1% drop in August .

The struggle to reduce decades of high inflation has become a major concern for the Fed, which is raising interest rates at an unprecedented pace in an effort to cool the economy. However, there are concerns that the Fed is raising interest rates too quickly and could soon plunge the US economy into recession.

Federal Reserve officials expressed concerns that inflation showed little sign of abating in minutes from the central bank’s September meeting, released on Wednesday. They reiterated their commitment to raise interest rates.

“Many participants emphasized that the cost of doing too little to reduce inflation likely outweighed the cost of doing too much,” the minutes said. “Several participants emphasized the need to maintain a restrictive stance for as long as necessary.”

A bombshell investigation by the Wall Street Journal has found that thousands of government officials reportedly own or trade stocks that are directly affected by decisions made by their agencies.

More than one in five senior federal employees at 50 federal agencies, from the Commerce Department to the Treasury Department, in both Republican and Democratic administrations, have invested in companies that actively lobby their agencies for policy changes, the survey found.

Federal agency officials have “enormous power and influence over things that affect the daily lives of everyday Americans, such as public health and food safety, diplomatic relations and trade regulation,” said Don Fox, an ethics attorney and former general counsel. to the US agency that oversees conflict-of-interest rules. Those transactions present a clear conflict of interest and violate the spirit of the law, he told the Journal.

The bottom line: This report highlights the need for greater disclosure and trading regulations across government. The same issues are also found in the legislative branch: There is currently no federal law, regulation, or rule that absolutely prohibits a member or employee of the House from owning assets that might conflict with or interfere with the performance of official duties.

BlackRock ( BLK ), Delta ( DAL ) and Domino report third-quarter earnings before the bell.

The US Bureau of Labor Statistics releases its Consumer Price Index at 8:30 am. ET.

Coming later this week:

▸ Earnings reports from major banks such as JPMorgan Chase (JPM), Wells Fargo (WFC), Citigroup (C) and Morgan Stanley (MS).

▸ The US Census Bureau is expected to release September retail sales data.

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