Over Delivering: Big Banks Beat Expectations After Tough Quarter, but Market Eyes Middle East Warily

(Friday market open) Big bank earnings this morning threatened to take a back seat as geopolitical worries helped spark a rally in crude oil and sent more investors fleeing toward the perceived safety of fixed income. The benchmark 10-year U.S. Treasury note yield gave up 9 basis points as conflict continued to flare in Israel.

JPMorgan Chase (NYSE:JPM), the first large bank to report and a company often seen as a bellwether for the industry, enjoyed light share gains after reporting better-than-expected earnings (see more below). Wells Fargo (NYSE:WFC) and Citigroup (NYSE:C) also delivered positive results.

“All major banks and most regional banks are trading higher following strong earnings reports,” says Randy Frederick, managing director of trading and derivatives at the Schwab Center for Financial Research. “The Israel situation is an equal counterbalance to this news, resulting in what appears to be a flat open.”

Today’s yield retreat was a sharp U-turn from yesterday, when Treasury yields revived from two-week lows. Lighter-than-expected demand in Thursday’s long-term U.S. Treasury auction sent yields higher and pushed stocks to their first negative close this week. September inflation data that slightly exceeded estimates also hurt bonds and stocks.

Still, it’s encouraging—from a technical standpoint—that the S&P 500® Index (SPX) found support at the lows yesterday and finished well off weakest levels. Growth-oriented sectors like tech and communication services led the charge back. Financials also climbed late in the day ahead of major bank earnings, though that sector remains well off the broader market’s pace year-to-date.

Even after Thursday’s retreat, the SPX enters Friday up nearly 1% for the week and on pace for its second positive weekly performance in a row after falling four straight weeks in September. However, the outcome today and in coming sessions likely will reflect the course of 10-year U.S. Treasury note yields after they spiked about 12 basis points to 4.71% on Thursday—the highest level since last Friday. Stocks remain on pins and needles when it comes to yields.

That said, chances of an additional Federal Reserve rate hike this year appear low despite the slightly warm inflation data, though rates are likely to remain elevated well into next year.

Morning rush

The 10-year Treasury note yield (TNX) fell 9 basis points to 4.62%.
The U.S. Dollar Index ($DXY) was steady at 106.57.
Cboe Volatility Index® (VIX) futures were up slightly at 17.26.
WTI Crude Oil (/CL) jumped 3% to $86.40 per barrel.

Oil prices spiked this morning amid concerns about the conflict in Israel after falling earlier this week in response to a heavy U.S. supply build-up. Another factor lifting oil is new U.S. sanctions on two tanker companies for breaching a cap on Russian oil prices.

Just in

JPMorgan Chase kicked off bank earnings by exceeding Wall Street’s expectations on earnings per share and revenue. Once again, results were bolstered by net-interest income, which is the money it made lending minus what it paid to customers. Business activity as measured by loans, an important metric for banks, looked healthy, rising 17%. But deposits fell 3%, a sign perhaps that like other banks, JPMorgan Chase could be struggling to retain customers in an era when even short-term Treasury bonds offer 5% yields.

Earnings per share of $4.33 compared with analysts’ average estimate of $3.95. Revenue of $39.9 billion exceeded the average analyst estimate of $39.6 billion.

“Currently, U.S. consumers and businesses generally remain healthy, although, consumers are spending down their excess cash buffers,” said Jamie Dimon, the company’s influential chairman and CEO, in the earnings press release. “However, persistently tight labor markets as well as extremely high government debt levels with the largest peacetime fiscal deficits ever are increasing the risks that inflation remains elevated and that interest rates rise further from here.”

Wells Fargo followed a few minutes later and delivered an earnings per share beat of its own. Like JPMorgan Chase, it got a boost from net-interest income in Q3. Revenue also topped expectations and shares jumped 2% in premarket trading. In its release, Wells Fargo cited a “resilient” economy, but said it’s seeing the impact of a “slowing economy with loan balances declining and charge-offs continuing to deteriorate modestly.”

Citigroup, the third massive bank this morning, delivered better-than-expected earnings per share of $1.52. Analysts had expected $1.22. Revenue of $20.1 billion came in above expectations for $19.3 billion. Shares popped in premarket trading on the news. In its press release, the company cited “headwinds” and “an increasingly cautious consumer.” Activity in the company’s Markets division was driven by strength in fixed income, and Citigroup said it sees “signs of life” in the equity capital markets business.

Beijing price check: China’s September inflation data sparked new worries about the sluggish economic recovery there. Inflation was flat month-over-month when analysts had expected a 0.2% rise. It had risen 0.1% in August, briefly cooling fears of deflation. Separately, Chinese exports fell 6.2% in September, an improvement from August’s 8.8% drop and better than analysts had expected. China has suffered five months in a row of declining exports.

What to watch

Preliminary October University of Michigan Consumer Sentiment is on deck just after the open today. Analysts expect a slight backtrack to 67.5 for the headline figure, from 68.1 in September, according to Briefing.com. Both sentiment and expectations have moderated since midsummer, and year-ahead inflation expectations fell to 3.2% in September. That’s a metric to watch.

Earnings season is well underway amid a host of data, but Monday belies that with a mostly empty calendar. October’s Empire State Manufacturing data from the New York Federal Reserve is about the only event worth noting, and business activity in the report’s region of coverage was nearly unchanged in September.

Stocks in spotlight

Week to date, 10 of the 11 S&P 500 companies reporting have beaten Wall Street analysts’ estimates for earnings per share, so reporting is off to a solid start, although it should be noted that analysts tend to be conservative in their estimates.

Big banks again will dominate early next week, including Bank of America (NYSE:BAC), Goldman Sachs (NYSE:GS), and Morgan Stanley (NYSE:MS). Some regional banks will also report, shifting focus toward the lending and deposit picture in a sector hard hit last spring, when several small banks failed as interest rates accelerated. Two smaller banks on tap next week are Regions Financial (NYSE:RF), and Northern Trust (NASDAQ:NTRS).

Airlines also will get their day on the tarmac as the week advances, with United Airlines (NASDAQ:UAL) and American Airlines (NASDAQ:AAL) both reporting. Railroads could give a sense of the nation’s freight demand. CSX (NASDAQ:CSX) and Union Pacific (UNO) are two train companies on deck.

Health also enters the mix as Abbott Labs (NYSE:ABT) and Johnson & Johnson (NYSE:JNJ) report. The J&J earnings call could lend perspective on some of the weight-loss drugs now upending much of the medical industry and their possible impact on companies in the bariatric surgery business. Like J&J.

Eye on the Fed

Early today, the probability that the FOMC will raise its benchmark funds rate from its current 5.25% to 5.50% target range following its October 31–November 1 meeting was 12%, down from 27% a week ago, according to the CME FedWatch Tool. Odds that rates could be a quarter-point higher coming out of the December 12–13 meeting were about 31%, down from 42% a week ago.

CHART OF THE DAY: LOW FINANCES. Financial sector stocks (IXM—candlesticks), which include the major banks, enter earnings season down for the quarter and down for the year, but roughly matching the recent performance of the S&P 500 Index (SPX—purple line). Data source: S&P Dow Jones Indices. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.

Thinking cap

Ideas to mull as you trade or invest

CPI Redux: A couple of themes emerged after yesterday’s mostly in-line September Consumer Price Index (CPI) report. Treasury yields initially dropped on the news and then gained ground as investors digested 0.4% headline and 0.3% core CPI growth. Core annual inflation has now come down in 12 consecutive months. However, monthly data show some reacceleration in core inflation growth, and the closely watched core CPI services excluding housing rose 0.6%, the highest in a year. Year-over-year numbers painted a brighter picture, including a 2% rise for all items excluding food, shelter, and energy. This doesn’t take in every element but is in line with the Fed’s 2% goal. In sum, it was the kind of report that you could interpret more than one way, and the market appeared to struggle drawing a firm conclusion. “The slightly hotter-than-expected CPI supports the notion that disinflation won’t be linear, but will have month-to-month volatility, especially at the headline level if oil price volatility persists,” says Liz Ann Sonders, chief investment strategist at Schwab.

Vixteen! The Cboe Volatility Index (VIX) defied expectations by declining in a week marked by conflict in the Middle East, fresh U.S. inflation data, wobbly oil prices, and the start of earnings. Instead of rising, the VIX—often called the market’s “fear index”—fell below 16 intraday Thursday for the first time since late September, implying smaller daily movements in the S&P 500® Index. A lower VIX goes hand in hand with a rallying stock market. The SPX is up around 1.4% for the month. Don’t necessarily expect low volatility to last, however. VIX futures are in contango, meaning prices on contracts further out are above today’s levels, rising above 18 by January and to nearly 20 by next spring. That said, a certain amount of contango in VIX futures is normal, and not necessarily indicative of a rise in the VIX in coming months.

Washington watch: In the nearer term, the VIX could struggle to fall much from here. “We’re unlikely to see September low levels again (below 14) unless we see a new Speaker of the House and/or another congressional continuing resolution on the budget,” says Schwab’s Randy Frederick. Without a permanent speaker the House can’t function normally, raising fears of a government shutdown.

Calendar

Oct. 16: October Empire State Manufacturing.

Oct. 17: September Retail Sales, September Industrial Production, September Capacity Utilization, and expected earnings from Lockheed Martin (LMT), Goldman Sachs (GS) Johnson & Johnson (JNJ) and United Airlines (UAL).

Oct. 18: September Housing Starts and Building Permits, and expected earnings from Abbott Labs (ABT), Morgan Stanley (MS), Procter & Gamble (PG), Travelers (TRV), Netflix (NFLX), and Tesla (TSLA).

Oct. 19: Initial Jobless Claims, September Existing Home Sales, September Leading Economic Indicators, and expected earnings from American Airlines (AAL), AT&T (T), Philip Morris (PM), Union Pacific (UNP), and CSX (CSX).

Oct. 20: Expected earnings from American Express (AXP) and Regions Financial (RF).

The Schwab Center for Financial Research is a division of Charles Schwab & Co., Inc.

Charles Schwab & Co., Inc. (“Schwab”) and TD Ameritrade, Inc., members SIPC are separate but affiliated subsidiaries of The Charles Schwab Corporation. TD Ameritrade is a trademark jointly owned by TD Ameritrade IP Company, Inc. and The Toronto-Dominion Bank.

TD Ameritrade® commentary for educational purposes only. Member SIPC.

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