How to read big bank earnings

By Nicole Goodkind, CNN Business

If market swings tell us anything, it’s that investors are rattled by economic uncertainty. The outlook remains cloudy with the possibility of recession on the horizon. Big bank earnings, coming Friday, could help clear some of that fog.

Wall Street will be looking for clues about what’s to come as the Federal Reserve continues to aggressively hike interest rates and cool the economy.

What’s happening: Four of the nation’s largest banks — JPMorgan Chase, Wells Fargo, Citigroup and Morgan Stanley — report third-quarter earnings before the bell on Friday. Their CEOs will also answer questions from investors, analysts and reporters about their views on the wider economy.

Banks are able to charge more for customers to borrow when interest rates go up — so in theory, this should be a good environment for them. But a weakening economy also means demand for loans is beginning to dry up. Analysts surveyed by Refinitiv expect profits to fall from the year-earlier period at all four banks.

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

Loan growth: 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 over the next few months or if they’re preparing for a slowdown.

Analysts expect that loan growth stayed strong during the third quarter. “Credit risk and loan loss exposure are beginning to creep into the picture, but will not be front and center for Q3 2022 results,” wrote CFRA Research Director Kenneth Leon in a note.

But Wall Street estimates show that loan growth is expected to decelerate in Q4 and into next year.

Growth of Individual loans will likely decline, showing that Americans are beginning to feel the pinch of rising interest rates. Mortgage rates are now two times the level they were a year ago, and mortgage applications recently fell to a 25-year low.

Capital adequacy: Expect banks to take questions about how much money they have on hand. Recent upheaval in UK bond markets and negative headlines about Credit Suisse have caused concern about a “contagion” effect in the United States.

It’s unlikely the turmoil will lead to another Lehman Brothers-esque financial crisis: The 2010 Dodd-Frank Act forced banks to double their capital ratios and quadruple their liquidity. Large banks also participate in annual stress tests performed by the Federal Reserve to measure their capital adequacy.

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

The other issue, wrote UBS analysts 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 be less well positioned to return capital to shareholders through buybacks.” That will likely weigh on stock valuations.

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

Inflation won’t quit. Neither will the Fed

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

The US Producer Price Index, which tracks what America’s producers get paid for their goods and services, rose at an annual pace of 8.5% in September, down slightly from the 8.7% rise in August, the Labor Department reported Wednesday. But the report showed prices rose 0.4% month-over-month.

Economists surveyed by Refinitiv had been expecting the 12-month rise in wholesale prices to slow to an 8.4% increase, and the month-to-month increase to come in at 0.2%, compared to the 0.1% decline in August.

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

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

“Many participants emphasized that the cost of taking too little action to bring down inflation likely outweighed the cost of taking too much action,” the minutes read. “Several participants underlined the need to maintain a restrictive stance for as long as necessary.”

Federal officials are reportedly trading stock in companies they oversee

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

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

Federal agency officials hold “immense power and influence over things that impact the day-to-day lives of everyday Americans, such as public health and food safety, diplomatic relations and regulating trade,” said Don Fox, an ethics lawyer and former general counsel at the U.S. agency that oversees conflict-of-interest rules. These trades 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 throughout the government. The same issues are also to be found in the legislative branch: There’s currently no federal statute, regulation, or rule that absolutely prohibits a Member or House employee from holding assets that might conflict with or influence the performance of official duties.

Up next

BlackRock, Delta and Domino’s report third quarter earnings 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 big banks like JPMorgan Chase, Wells Fargo, Citigroup and Morgan Stanley.

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

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