Here at home, earnings from big banks on Friday indicate that different types of banking are faring better than others. JPMorgan, Wells Fargo, and Citigroup topped expectations, with all three benefitting from higher interest rates thanks largely to rising consumer credit card borrowing. Leading on that front was JPMorgan, with interest income up +44% versus last year. However, interest expenses are also rising as banks are having to pay more to gain and keep customer deposits.
A sharp decline in deal making and investment banking activity is additionally offsetting gains elsewhere. Notably, Citigroup, which relies more heavily on investment banking than JPMorgan and Wells Fargo, saw profits fall -36% while revenues also declining from last year, although those results were better than some insiders had expected. It's also worth noting that while all three banks were mostly optimistic about the US economy, they were cautious about what lies ahead, warning of slower consumer spending and losses that could start mounting in credit card loans and commercial real estate.
Wall Street insiders largely expect similar results from the remaining big banks this week, which include Bank of America and Morgan Stanley on Tuesday, followed by Goldman Sachs on Wednesday. The bigger worries about the banking sector primarily revolve around small and midsize banks, which begin reporting this week.
Several regional banks have lowered their Q2 forecasts in recent weeks, warning that higher interest rates on deposits are eating into profits more than initially expected.
Regional banks also face higher risks on the commercial real estate front amid plummeting office property values. Bears have long been warning that a slowdown in lending by regional banks due to their multi-pronged cash flow issues will be a drag on the overall economy that could result in a deeper and more prolonged recession.
Wall Street this week is also anxious to see the first Q2 results from big tech companies with Tesla and Neflix both reporting on Wednesday. Overall, investors this reporting season are closely watching for signs of deteriorating margins as inflation continues to recede and companies lose their pricing power.
Remember, S&P 500 companies reported earnings declines in Q4 2022 and Q1 2023 and are expected to report a loss of around -7% in Q2. Bears believe the impact of falling margins and slowing consumer spending will ultimately extend the "earnings recession" into at least the last half of 2023.
Wall Street analysts remain more optimistic, though, with earnings growth projected at +0.1% in Q3 and +7.6% in Q4. Bulls also believe the strong US labor market and large surplus of cash many big US companies are sitting on can keep any slowdown from turning too ugly. They also believe the Fed is now in a better position to cut rates if an when the economy were to run into a more significant problem, perhaps in mid 2024.
Americans Haven't Felt This Good About the Economy in Almost Two Years: The first July reading of the University of Michigan Consumer Sentiment Index, a commonly followed measure of consumer confidence in the US economy just increased to the highest level since September 2021, with a reading of 72.6 on Friday. The print came in significantly higher than the 65.5 economists had expected and reflected a 13% increase from the month prior. That marks the fastest pace since December 2005, when the economy was recovering from Hurricane Katrina. Consumers have had plenty to be bullish about recently, including a month of largely strong economic data, upbeat reports to kick off second-quarter earnings, and waning fears of a second Federal Reserve rate hike in the back half of the year propelling the 2023 stock market rally higher. A 19% surge in long-term business conditions and a 16% increase in short-run business conditions were the primary drivers behind Friday's surprise print, according to the University of Michigan. The report did, however, include a slight uptick in consumers' inflation expectations. Source Yahoo Finance
Bridgewater's Co-Chief Investor Warns Not to Celebrate the Death of Inflation Just Yet: Reports of inflation's death are greatly exaggerated according to Bob Prince who is Bridgewater's Co-Chief Investor. Inflation has come down but it is still too high, and it is probably going to level out where it is, said Prince. Adding that we're likely to be stuck around this level of inflation. Over the last 12 months, price growth has slowed from a 40-year high of 9.1% to a two-year low of 3%, which isn't far off the Federal Reserve's 2% target. The US central bank has raised interest rates from almost zero to north of 5% since last spring to achieve that result. With the inflation threat receding, investors anticipate the Fed will begin cutting rates soon, providing a boost to asset prices and economic growth. As a result, they've piled into stocks in recent weeks, and futures markets are pricing in a bunch of rate reductions by the end of next year. However, Prince predicted that core inflation, which excludes volatile food and energy prices will remain elevated, and the Fed will defy expectations and keep rates around their current level. He also raised the prospect of prices surging again and suggested that holding cash might be a shrewd way to weather the upcoming volatility. The big risk right now is that you get a bounce in energy prices when wages are still strong, it's just not a good environment to be holding assets generally in bonds or stocks. Ray Dalio, Bridgewater's billionaire founder, also issued a bearish outlook during a recent appearance. He flagged the risk of a "balance-sheet recession," where consumption and investment fall because households and businesses are spending more of their income repaying their debts, going on to say that things are going to get worse in the economy. Crazy times! (Source Business Insider)
Rental Glut Ahead as Most Units Since the Mid-80s Come Online: The highest number of new multifamily apartments since the 1980s is expected to hit the rental market this year. The supply will continue to outweigh demand—with sluggish rent growth as a result. A rental construction boom is underway, with a historically high number of large multifamily units under construction, according to Census data. CoStar Group, a commercial real estate services and analytics firm, says it expects +520,000 new multifamily units to hit the market this year. That would be the most units to come online since the mid-1980s, Jay Lybik, CoStar Group’s national director of multifamily analytics, told Barron’s. And there’s more on the horizon: Lybik says he expects an additional 457,000 units to hit the market next year. Vacancy rates will likely continue to rise, and rent growth will remain low as a result, according to a report from CoStar apartment listings website Apartments.com. It’s not a new trend: The second quarter was the seventh straight quarter that multifamily supply has outstripped demand, CoStar data show. Source Barrons
Midwest Farmers May Have Short Window to Stockpile Cheap Diesel: Farmers in the US Midwest are getting an unexpected windfall: cheaper fuel. The only catch? The bargains aren’t likely to last very long. Wholesale diesel prices dipped below $2 a gallon last week for the first time in nearly two years, before recovering to just above that level. The spot market discount — a spread that measures Chicago’s physical market strength against futures trading in New York — sank below 60 cents a gallon, the lowest in records going back to 2006. Fuel has become more affordable as oil refiners ramped up operations to a four-year high to chase profits. Ready access to heavy Canadian crude also means Chicago-area processors tend to pay less for feedstock than the coastal facilities. Fuel inventories in the Midwest grew by +25% in just two months to reach the highest level since December 2021 last week, according to government data. But the deal may not last. Wholesale prices for fuel delivered at the end of July are currently about 40 cents a gallon more than immediate deliveries. That’s signaling higher costs down the road as the market adjusts to the higher inventories. Source Bloomberg
Tesla's First Cybertruck Rolls Off Production Line: Tesla has finally built its first Cybertruck, ending years of delays for the much-anticipated vehicle. Elon Musk's company tweeted Saturday that it'd made its first Cybertruck at its Texas factory. Production is now expected to ramp up. Tesla initially planned to start shipping the vehicle in 2021, but pushed back that date to make some design changes. It was delayed again last year to change certain features and components, a source told Reuters. It's still unclear how much the Cybertruck will cost. In 2019, Tesla said it would be $40,000, but that's likely to change with inflation and other factors. The price is expected to increase based on the specification. According to a crowdsourced reservation tracker from Electrek, there are about 1.9 million preorders for the futuristic-looking vehicle. Source Bloomberg
US Homeowners Are Tapping $9 Trillion in Real Estate Wealth: Americans are increasingly tapping their greatest source of wealth, getting home equity lines of credit to borrow against the value of their properties, which skyrocketed in the pandemic real estate rally. Helocs have become more popular as mortgage rates surged from record lows, making cash-out refinancing unattractive to most homeowners. In recent years, lenders scarred by the financial crisis kept a tight grip on Helocs, which are considered relatively risky for banks because the credit line functions as a “second lien” that’s paid off after primary mortgage obligations. But 30-year loan costs at almost double early 2022 levels have squashed the refi boom, making financial institutions more open to Helocs. Typically, there’s an upfront fee for opening a Heloc, but interest doesn’t accrue until the funds are used. And for homeowners sitting on a mountain of equity, it can end up being a costly option. The rates are often variable, determined by broader lending conditions, meaning the Federal Reserve’s aggressive inflation-fighting campaign can increase costs for borrowers. In 2022, annual Heloc originations rose 34% from the prior year, to 1.41 million individual loans. That was the highest total since 2008, according to credit reporting agency TransUnion. And while 2023 figures aren’t yet in, the number of Heloc accounts has risen in each of the last three quarters for which data is available
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