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First Two Big Banks Outpace Street’s Q3 Estimates Despite Hitch in Trading

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October 12, 2017

(Thursday Market Open) Despite declines in trading revenue, two of the biggest U.S. banks managed to easily beat Wall Street’s earnings projections early Thursday as reporting season got underway. Even so, pre-market trading pointed toward a lower open after another record-setting session the previous day. 

JPMorgan Chase & Co. (JPM) reported better than expected results, but shares fell in pre-market trading as investors appeared to focus on one negative in the quarter: Trading revenue. That metric fell 21%, likely hurt by lack of volatility in the markets. This was something JPM had warned investors about, and its CEO said last month the company expects volatility to pick up and help trading revenue in the long term.

On the positive side, JPM’s earnings of $1.76 a share rose from $1.58 a share a year earlier and beat Wall Street analysts’ consensus of $1.67. Revenue increased 2.7% to $26.2 billion, compared with projections for $25.7 billion. The company appeared to benefit from solid loan growth.

Citigroup (C) also beat Wall Street’s projections with EPS of $1.42, compared with analysts’ expectations for $1.30.  Revenue of $18.17 billion compared with estimates for $17.85 billion. Shares climbed in pre-market trading despite the company reporting a 16% drop in year-over-year fixed income revenue. Equity-trading revenue, however, rose 16%.

One factor that has negatively impacted the major banks across the board in recent quarters has been a decline in revenue generated from fixed income, currencies and commodities trading. CEOs warned in the past of declines in trading revenue and several have recently reiterated those warnings, again citing low volatility. 

More bank earnings approach early Friday when Bank of America (BAC) and Wells Fargo (WFC) report.

With the major indices setting new all-time highs once again Wednesday, the Dow Jones Industrial Average ($DJI) is closing in on 50 record highs for the year. Still, Wednesday’s trading range was relatively tight as investors got ready for today’s bank earnings.

The main event Wednesday was the release of the Fed’s minutes from its September meeting. While the minutes seemed to reinforce market sentiment about a likely rate hike before the end of the year, they also continued to show Fed members worried about the lack of inflation. Their primary concern, judging from the minutes, is whether this situation is temporary or if it might represent some sort of long-term trend in which the economy won’t see the resurgence of inflationary pressures.

After Fed minutes, probability of a rate hike by the end of the year fell slightly to 86.7%, according to CME Group Fed funds futures. While there’s no guarantee, that compares with just a 41% chance a month ago. Hawkish talk from the Fed has contributed to the market’s expectations for a hike. Though Fed officials debated inflation in the minutes, they also sounded committed to raising rates by the end of the year if the economic outlook stays the same.

Looking at sector performance Wednesday, it was a little hard to find any patterns. Some of the more aggressive sectors like info tech and consumer discretionary gained, but so did some of the so-called “defensive” ones like utilities. Financials fell ahead of bank earnings, but not by too much. Telecom took the biggest fall of the day, but that sector has been on a tear, so it wouldn’t be surprising if profit taking came into play.

Another interesting thing to watch Wednesday was the strong performance of the Dow Jones Transportation Average ($DJT), which climbed nearly 0.5% after Delta (DAL) reported better than expected Q3 performance. United Continental (UAL) helped give the DJT a boost earlier this week after raising its guidance, though the stock gave back some of those gains Wednesday. Some of the railroad and shipping companies also had a good day. All of this could be telling us a positive story about the economy’s vigor, because transport companies often represent the canary in the coal mine, but the rest of earnings season is likely to reveal a lot more in terms of granularity.

Aside from bank earnings, the other big news early Thursday was the September producer price index (PPI). The overall number rose 0.4%, in line with Wall Street analysts’ expectations compiled by Briefing.com. On a more interesting note, core PPI, which doesn’t include food and energy, also rose 0.4%, compared with expectations for just 0.2%. Tomorrow’s Consumer Price Index (CPI) could help provide more insight into the pricing picture (see below).

Financial Sector

FIGURE 1: TRACKING CLOSELY.

It’s often said that the financial sector takes its direction from Treasury bond yields, and this chart seems to bear that out. Financials and 10-year bond yields (purple line) have moved in almost perfect harmony over the last month as bank earnings season approaches and as the futures market projects higher odds of a rate hike by the end of the year. Data sources: Standard & Poor’s, CME Group. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.    

Dollar Treads Water: The U.S. dollar may be up from recent lows, but it hasn’t gained much ground vs. other currencies this week despite growing expectations for a rate hike by year-end. The U.S. Dollar Index, which tracks the dollar vs. a basket of other currencies, traded at just over 93 early Thursday, which is above 2017 lows down near 91 last month but well under highs above 100 struck back in January. Weakness in the dollar, at least compared to where it was earlier this year, could be a storyline for many major U.S. companies as earnings reports come in. Investors might want to pay particular attention to industrial and info tech giants when they report to see if the weaker dollar gave them some extra oomph in Q3. Also listen for what the travel industry has to say, as weak greenback can sometimes be a two-way street for companies like airlines and cruise ships. While it might encourage more travel to the U.S. by tourists from abroad, it could cut into U.S. travelers’ desires to see the rest of the world. 

Oil Price/Production Seen Higher: Usually when volume of a product goes up, prices tend to fall. That might not be the case with crude oil, if the U.S. Energy Information Administration (EIA) is correct. The EIA came out with updated price and production forecasts for 2018 on Wednesday, and now sees U.S. crude prices averaging $50.57 next year, up 2% from its previous estimate and above the estimate of $49.69 for 2017. At the same time, the EIA says it expects U.S. production of 9.92 million barrels per day next year, up a shade from its previous estimate and from the estimate of 9.24 million barrels a day in 2017. To put that 9.92 million-barrel-a-day estimate into perspective, the all-time record average daily production was 9.6 million barrels a day in 1970, and the record modern low was 5 million barrels a day in 2007. Though the EIA could well be on target, it does raise eyebrows to see that sort of production estimate at a price barely higher than $50. The question is whether a higher average price than that might be needed to draw producers into pumping out so much. We shall see.

Inflation Awaited: If you cast your mind back a month ago, you’ll likely recall a surprisingly robust year-over-year price growth of 1.9% in the consumer price index (CPI) for August. At that time, some analysts said the report might indicate the start of stronger price conditions after the long period of weak inflation that’s stumped many, including some at the Fed. Following that was last week’s September payrolls report which showed a surprising jump of 0.5% in hourly wages, another element some on Wall Street pointed to in order to warn of a possible inflation awakening, though that’s questionable considering huge job losses in low-wage industries that month due to hurricanes.

Considering all that, we approach tomorrow’s September CPI data looking for any possible confirmation of a more inflationary trend but cautious that it might not be here. Look carefully at the core numbers in Friday’s CPI, which strip out volatile food and energy prices that might have temporarily risen due to the hurricanes. Wall Street analysts look for overall CPI to rise a rather hefty 0.6%, according to Briefing.com, but see core CPI up just 0.2%. The numbers come out before the market opens tomorrow.

Good Trading,
JJ
@TDAJJKinahan

Economic calendar

FIGURE 2: THIS WEEK'S ECONOMIC CALENDAR.

Source: Briefing.com

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