Big banks are about to signal if we’re heading into recession: Morning Brief


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Thursday, July 14, 2022

Today’s newsletter is by Brian Cheung, an anchor and reporter covering the Fed, economics, and banking for Yahoo Finance. You can follow him on Twitter @bcheungz.

High inflation is erasing income gains.

An ugly stock market is slashing wealth.

And the conversation has shifted from: “When will the recession come?” To: “Are we in recession already?”

And some of the world’s biggest financial institutions may offer an answer to these questions.

Quarterly results from big banks will begin rolling out Thursday morning, with JPMorgan Chase (JPM) and Morgan Stanley (MS) set to report, while Wells Fargo (WFC) and Citigroup (C) are due out Friday, followed by Bank of America (BAC) and Goldman Sachs (GS) results expected Monday.

And investors will be focused on one takeaway from these results: How are companies in charge of keeping the economy’s financial wheels on track positioned in this environment?

“The big question is the r-word: recession,” Wells Fargo Securities bank analyst Mike Mayo told Yahoo Finance on Wednesday. “For all the negatives that are out there for the short term, there are some very big positives.”

On the one hand, an extremely uncertain economic outlook may push the banks to bump up their buffers — or “reserves” — on the expectation that borrowers may later fail to meet interest payments on credit cards, mortgages, or business loans.

On the other hand, loans continue to be in demand through the post-pandemic boom — with few signs of an immediate tick up in loan delinquencies or charge-offs.

The nation’s largest bank hinted at these pressures last month, when JPMorgan CEO Jamie Dimon warned investors to “brace” themselves. “I said there’s storm clouds but I’m going to change it…it’s a hurricane,” Dimon said at a conference in New York on June 1.

Jamie Dimon, CEO of JPMorgan Chase, leaves after the launching of the Advancing Cities Challenge, in Pantin, a suburb of Paris, France, November 6, 2018. REUTERS/Benoit Tessier

Jamie Dimon, CEO of JPMorgan Chase, leaves after the launching of the Advancing Cities Challenge, in Pantin, a suburb of Paris, France, November 6, 2018. REUTERS/Benoit Tessier

Dimon’s remarks suggest banks may gear up for disaster even if the proverbial hurricane has yet to make landfall. JPMorgan, for its part, already stashed more money in its reserves last quarter to account for “higher probabilities of downside risks.”

Banks will also have to be transparent about how bad things could get in the economy.

New U.S. accounting rules known as Current Expected Credit Losses, or CECL, will require banks to more proactively bake in estimates of losses on its assets. Mayo said current conditions shouldn’t support the case for overly pessimistic projections; he says loan loss and credit quality will likely look good.

Analysts at Deutsche Bank similarly said Tuesday they “don’t assume [an] across-the-board reserve build” for big banks this quarter, despite strong loan growth which could otherwise call for more cautious preparations on losses.

And rather than a macroeconomic concern, Mayo sees a more pressing worry for these firms coming from a downturn in investment banking revenues, with a spill across stock and bond markets — in part due to rapidly rising interest rates — making for a tough trading and M&A environment.

Tough comparisons to the strong trading quarters of last year may also sour investor appetite for bank stocks. Or as Mayo told Yahoo Finance: “Second quarter earnings should be a little yucky.”

The question for investors is if recession preparations will make earnings even yuckier in the quarters to follow.

What to Watch Today

Economic calendar

  • 8:30 a.m. ET: PPI final demand, month-over-month, June (0.8% expected, 0.8% during prior month)

  • 8:30 a.m. ET: PPI excluding food and energy, month-over-month, June (0.5% expected, 0.5% during prior month)

  • 8:30 a.m. ET: PPI excluding food, energy, and trade, month-over-month, June (0.5% expected, 0.5% during prior month)

  • 8:30 a.m. ET: PPI final demand, year-over-year, June (10.7% expected, 10.8% during prior month)

  • 8:30 a.m. ET: PPI excluding food and energy, year-over-year, June (8.2% expected, 8.3% during prior month)

  • 8:30 a.m. ET: PPI excluding food, energy, and trade, year-over-year, June (6.6% expected, 6.8% during prior month)

  • 8:30 a.m. ET: Initial jobless claims, week ended July 9 (235,000 expected, 235,000 during prior week)

  • 8:30 a.m. ET: Continuing claims, week ended July 2 (1.380 million expected, 1.375 during prior week)

Earnings

Pre-market

  • JPMorgan Chase (JPM) is expected to report adjusted earnings of $2.88 per share on revenue of $31.98 billion

  • Morgan Stanley (MS) is expected to report adjusted earnings of $1.57 per share on revenue of $13.33 billion

  • Conagra (CAG) is expected to report adjusted earnings of 64 cents per share on revenue of $2.93 billion

  • First Republic Bank (FRC) is expected to report adjusted earnings of $2.08 per share on revenue of $1.47 billion

  • Cintas (CTAS) is expected to report adjusted earnings of $2.67 per share on revenue of $2 billion

Post-market

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