Inflation and bank earnings: What to know this week

First quarter earnings season will get underway in earnest this week with big banks reporting results on Friday as investors turn their attention slightly away from Fed policy and towards the state of play in corporate America.

Some of America’s largest financial institutions will report results before the market open on Friday, including JPMorgan (JPM), Wells Fargo (WFC), Citi (C), and BlackRock (BLK). Also featuring on the weekly schedule will be Wednesday morning’s inflation reading from the Consumer Price Index (CPI) and the monthly retail sales report out Friday morning.

Last week, markets were little-changed during a holiday-shortened trading week with U.S. markets closed for Good Friday. The Dow rose about 0.7% while the S&P 500 was fractionally lower and the Nasdaq fell about 1%.

The main event last week came with markets closed on Friday as the March jobs report showed hiring slowed in the U.S. economy last month, though likely not by enough to forestall another rate hike from the Federal Reserve next month.

Data from the Bureau of Labor Statistics showed there were 236,000 jobs added to the economy last month while the unemployment rate fell to 3.5%.

Wall Street economists were largely in agreement on Friday that another 0.25% increase in the Fed’s benchmark interest rate is likely coming on May 3, but that this would be the final rate hike of the current cycle.

“Overall the [March jobs] numbers still indicate that labor markets are developing the way the Fed would like, though perhaps not quite quickly enough,” said Theodore Littleton, senior economist at IFR Markets, in an email on Friday.

“It certainly doesn’t dissuade the FOMC from getting in at least one last rate hike, with wage gains lower but still running at a rate that they don’t consider consistent with their overall inflation target.”

Data from the CME Group showed Friday investors are placing a roughly 70% chance on the Fed raising rates next month.

Key to this calculation, of course, will be Wednesday’s CPI data, which is expected to show headline inflation rose 0.2% over the last month and 5.2% over the last year in March, an increase that would mark the slowest pace of consumer price increases since August 2021.

On a “core” basis, which strips out the more volatile costs of food and energy, prices are expected to rise 0.4% over the prior month and 5.6% over last year in March.

This would mark the first time since January 2021 that “core” inflation rose more against the prior year than the headline reading.

A persistent rise in the cost of shelter, which rose 8.1% over the last year in February, has kept core inflation elevated. In a press conference last month, Fed Chair Jerome Powell said inflation in the housing market coming down — which has largely been driven by rent renewals from a year ago — “is really a matter of time passing.”

“We forecast that next week’s CPI report will show only modest deceleration,” wrote Barclays economists led by Marc Giannoni in a note to clients last week.

On the earnings side, all eyes will be on how ripples from the collapse of Silicon Valley Bank and Signature Bank last month impacted the country’s biggest banks.

In recent weeks, smaller regional banks like Western Alliance (WAL) and First Republic (FRC) have sought to calm investor nerves by offering updates on any deposit outflows. JPMorgan, Citi, and Wells Fargo were part of a consortium last month that injected some $30 billion in deposits into First Republic to shore up the struggling lender.

Last week, data from the Federal Reserve showed another $65 billion in deposits left the U.S. banking system, with Bloomberg’s Alex Tanzi noting most of this decline came from large banks. In each of the prior two weeks some $120 billion flowed out of small banks while some $126 billion left the overall banking system during the week ended March 22.

In his annual letter to shareholders published last week, JPMorgan CEO Jamie Dimon wrote: “As I write this letter, the current crisis is not yet over, and even when it is behind us, there will be repercussions from it for years to come.”

Jamie Dimon, Chairman and CEO of JPMorgan Chase, arrives to testify during a Senate Banking, Housing, and Urban Affairs Committee Hearing on the Annual Oversight of the Nation's Largest Banks, on Capitol Hill in Washington, DC, September 22, 2022. (Photo by SAUL LOEB / AFP) (Photo by SAUL LOEB/AFP via Getty Images)

Jamie Dimon, Chairman and CEO of JPMorgan Chase, arrives to testify during a Senate Banking, Housing, and Urban Affairs Committee Hearing on the Annual Oversight of the Nation’s Largest Banks, on Capitol Hill in Washington, DC, September 22, 2022. (Photo by SAUL LOEB / AFP) (Photo by SAUL LOEB/AFP via Getty Images)

Dimon noted that while these events have been challenging, they are “nothing” like what happened in 2008. But avoiding a 2008-like scenario, in Dimon’s view, does not make this bank crisis a good thing by any means.

“Any crisis that damages Americans’ trust in their banks damages all banks — a fact that was known even before this crisis,” Dimon wrote.

“While it is true that this bank crisis ‘benefited’ larger banks due to the inflow of deposits they received from smaller institutions, the notion that this meltdown was good for them in any way is absurd.”

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