Pre-market stocks: How to read big bank earnings

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If market fluctuations tell 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, coming Friday, could help dispel some of that fog.

Wall Street will be looking for clues as to what is to come as the Federal Reserve continues to aggressively raise interest rates and cool the economy.

What is happening: Four of the largest banks in the country — JPMorgan Chase

(JMP)
Wells Fargo

(WFC)
Citigroup

(VS)
and Morgan Stanley

(MRS)
– publish third quarter results before the bell on Friday. Their CEOs will also answer questions from investors, analysts and journalists on their views on the broader economy.

Banks are able to charge customers more 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 begins to dry up. Analysts polled by Refinitiv expect lower earnings from the year-ago period at all four banks.

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

Loan Growth: The rate at which companies 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 companies are planning to expand over the next few months or are bracing for a downturn.

Analysts expect loan growth to remain strong in the third quarter. “Credit risk and loan loss exposure are starting to creep into the picture, but won’t be front and center in third-quarter 2022 results,” CFRA research director Kenneth Leon wrote in a statement. note.

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

Individual loan growth will likely decline, showing that Americans are starting to feel the pinch of rising interest rates. Mortgage rates are now twice as high as a year ago, and mortgage applications have recently fallen to their lowest level in 25 years.

Capital adequacy: Expect banks to answer questions about how much money they have. Recent turmoil in UK bond markets and negative headlines about Credit Suisse have raised concerns of a “contagion” effect in the US.

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

Still, investors are worried about the direct exposure to European banks.

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

Economic outlook: JPMorgan CEO Jamie Dimon has a knack for moving markets by predicting the economic downturn. This week, shares fell after he warned that the United States could enter a recession within the next six months. Expect more commentary on the 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 will have limited impact on price containment, reports my colleague Chris Isidore.

The U.S. producer price index, which tracks what U.S. producers receive for their goods and services, rose at an annual rate of 8.5% in September, down slightly from an 8.7-percent rise. percent in August, the Labor Department reported Wednesday. But the report showed prices rose 0.4% month-on-month.

Economists polled by Refinitiv expected the 12-month rise in wholesale prices to slow to an increase of 8.4% and the month-over-month increase to reach 0.2%, against a down 0.1% in August.

The fight to bring down inflation, which has been high for decades, has become a major concern for the Fed, which has raised interest rates at an unprecedented pace in an effort to cool the economy. But there are fears that the Fed is raising rates too quickly and soon pushing the US economy into a recession.

Federal Reserve officials expressed concern that inflation showed few signs of slowing in minutes from the central bank’s September meeting, released on Wednesday. They reiterated their commitment to raise interest rates.

“Many participants pointed out that the cost of taking too little action to reduce inflation likely outweighs the cost of taking too much action,” the minutes read. “Several participants stressed the need to maintain a restrictive position for as long as necessary.”

An explosive investigation of the wall street journal found that thousands of government officials 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 Republican and Democratic administrations, invested in companies actively lobbying their agencies for policy changes, the survey found.

Federal agency officials wield “tremendous power and influence over things that impact the daily lives of ordinary Americans, such as public health and food safety, diplomatic relations, and trade regulations,” he said. Don Fox, ethics attorney and former general counsel. to the US agency that oversees conflict of interest rules. These jobs 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 stronger disclosure and negotiation regulations across government. The same problems are also found in legislative power: There are currently no federal laws, regulations, or rules that absolutely prohibit a Member or House employee from holding any assets that may conflict with or influence the performance of their official duties.

black rock

(BLK)
delta

(DAL)
and Domino’s releases third quarter results before the bell.

The US Bureau of Labor Statistics releases the Consumer Price Index at 8:30 a.m. ET.

Coming later this week:

▸ Earnings reports from major banks like JPMorgan Chase

(JMP)
Wells Fargo

(WFC)
Citigroup

(VS)
and Morgan Stanley

(MRS)
.

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

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