Bank earnings are upon us.
JP Morgan, PNC Financial, and Citigroup all reported strong earnings and revenues, Wells Fargo reported good earnings but revenues were a bit shy. JPM chief, Jamie Dimon said, "U.S. consumers and businesses are healthy overall and with pro-growth initiatives and improving collaboration between government and business, the U.S. economy can continue to improve.
So, optimism on the economy is running high, and banks are supposed to be able to demonstrate that. More demand for loans! Steeper yield curve!
But there are concerns. Investors are trying to reconcile a more optimistic outlook on the economy with troubling trends in bond yields and loan growth. Here's the problem: a lot is expected to go right with bank earnings. Financials are expected to see a 15 percent gain in earnings in the first quarter. That is a lot. The gain is based on expectations that interest rates would be moving up, loan growth would improve, and credit risks would remain low.
But it's not quite playing out that way. Here's what's happening.
Interest rates are indeed up - the 10-year yield was at roughly 1.75 percent a year ago, it's at roughly 2.21 percent today. That's a big jump, and it's happened because the Fed has been raising rates and inflation expectations were higher. But rates have been trending downward recently--we were at 2.6% a month ago. What's that all about? How can investors reconcile expected FED rate hikes with rates trending lower? That's a problem.
Further, there have been some cracks in the credit market. For example, delinquencies have been rising on auto loans and non-prime card loans. It's small, but it has investors talking.
Most importantly, loan growth has been anemic. How anemic? Total loan growth is up only 0.4 percent in Q1 compared to the same period last year, and has been particularly disappointing with Commercial & Industrial (C&I) loans, where there has been virtually no growth.
And another thing - deposits are up, but loan growth is flat. That is not a good sign. In an expansionary environment, you see deposits go down and loan growth going up. The opposite is happening.
In other words - corporate America is sitting on their hands, and we don't know why. The optimism has not found its way into corporate behavior."
There is so much interest in bank earnings and particularly in the management outlook. They will avoid talking about Trump tax cuts but they can't avoid talking about loan growth and why bond yields are moving down and what the impact of a flatter yield curve will mean for them.
For the moment, the optimists are still in charge. Bank stocks are 10% off their recent multiyear highs in early March but still nearly 20% above where they were on the eve of the election (the S&P 500 is up only 10%).
Bottom line: a lot is riding on the commentary of a couple dozen bank CEOs in the next few weeks.
Last week, the National Federation of Independent Business (NFIB) reported that 85% of those hiring or trying to hire reported few or no qualified applicants for their open positions - that could be a problem.
Producer Prices (PPI) were light across the board. Inflation - what inflation?
But, Friday's economic data was very weak and points to a slow first quarter. Retail sales fell 0.2 percent in March with February revised a sharp 4 tenths lower to minus 0.3 percent. Most components show declines, especially motor vehicles for a 3rd straight month and restaurants for a 2nd straight month. In another unexpected result, consumer prices fell 0.3 percent in March with the core rate also negative, at minus 0.1 percent.
This news points to slooooow growth with little inflation, a combination that should push back expectations for Federal Reserve rate hikes.
BUT - SURPRISE - The University of Michigan Consumer Sentiment Index is on fire and continues to push higher.
European and Asian markets were mixed to down last week, once again following the U.S.'s lead, not only because of geopolitics, but concerns heading into the French elections have investors nervous. And there are still concerns that Greece will try to leave the Euro, or get kicked out, and Italy is still cause for concern.
In Asia, China reported their GDP was growing faster than expectations.
Earnings season will kick into high gear this week and we will be hearing from more big banks. Goldman Sachs, Bank of America, Morgan Stanley, Travelers and BB&T. As I said earlier, there will be a lot of focus not just on the previous quarter's numbers, but more importantly, their outlook.
The economic calendar consists of some housing data, industrial production and the leading indicators.
While the fundamentals of the earnings and the economic data are important - I expect that more attention will be on the geopolitical landscape - and as I said last week, there is slim to no chance of them fading any time soon, so stay tuned and we'll keep you posted.