Premarket stocks: How to read big bank earnings

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If market volatility tells us anything, it’s that investors are rocked by economic uncertainty. The outlook remains bleak with the possibility of a recession on the horizon. Big bank proceeds next Friday could help clear that fog a bit.

Wall Street will be looking for clues as to what’s to come as the Federal Reserve continues to aggressively hike interest rates and cool the economy.

What’s happening: Four of the country’s largest banks — JPMorgan Chase (JPM), Wells Fargo (WFC), Citigroup (C) and Morgan Stanley (MS) — report their third-quarter results before the market close on Friday. Their CEOs will also answer questions from investors, Analysts and reporters on their views on the broader economy.

Banks are able to charge customers more for loans when interest rates rise – so in theory this should be a good environment for them. However, a weakening economy also means that the demand for credit is falling. Analysts polled by Refinitiv expect all four banks to see their profits fall year-on-year.

Barring disappointing headlines, Wall Street analysts are focused on three key factors: credit growth, capital adequacy and the economic outlook.

Credit growth: The interest rate at which companies borrow money from big banks doesn’t just tell us something about the health of a financial institution itself. It also tells us a lot about whether companies are planning to expand in the next few months or preparing for a slowdown.

Analysts expect credit growth to remain strong in the third quarter. “Credit risk and credit default risk are beginning to creep into the picture, but will not be the focus of third-quarter 2022 results,” Kenneth Leon, CFRA’s research director, wrote in a note.

However, Wall Street estimates show that credit growth is likely to slow in the fourth quarter and into next year.

Personal credit growth is likely to slow, showing that Americans are beginning to feel the effects of rising interest rates. Mortgage rates are now double what they were a year ago and mortgage applications recently fell to a 25-year low.

capital endowment: Expect banks to answer questions about how much money they have on hand. The recent turmoil in UK bond markets and negative headlines about Credit Suisse have raised concerns about “contagion” in the United States.

The turmoil is unlikely to lead to another Lehman Brothers-style financial crisis: the 2010 Dodd-Frank Act forced banks to double their capital ratios and quadruple their liquidity. Large banks also participate in annual stress tests conducted by the Federal Reserve to measure their capital adequacy.

Still, investors are concerned about direct exposure to European banks.

The other problem, UBS analysts wrote in a note, “is that while banks have sufficient capital and deposit flows to support credit growth, they are less resilient than in recent years, and we expect that.” banks are less well positioned to return capital to shareholders through buybacks.” That will likely weigh on stock valuations.

Economic outlook: JPMorgan CEO Jamie Dimon has a knack for moving markets by predicting an economic downturn. Stocks tumbled this week after he warned the US could enter a recession within the next six months. Expect more commentary on the future outlook and warnings from CEOs trying to prepare investors for the weaker days ahead.

A key indicator of inflation rose faster-than-expected in September, raising concerns that the US Federal Reserve’s aggressive rate hikes are having a limited impact on price controls, my colleague Chris Isidore reports.

The US Producer Price Index, which measures what American producers are paying for their goods and services, rose at an 8.5% annual rate in September, down slightly from the 8.7% rise in August, the Labor Department reported on Wednesday. But the report showed that prices rose 0.4% month-on-month.

Economists polled by Refinitiv had expected the 12-month rise in wholesale prices to slow to 8.4% and the month-on-month increase to be 0.2%, compared with a 0.1% decline in August.

Fighting decades of inflation has become a key concern for the Fed, which has been raising interest rates at an unprecedented pace in a bid to cool the economy. However, there are concerns that the Fed is raising rates too quickly and the US economy could soon slide into recession.

Federal Reserve officials expressed concern that inflation showed little sign of abating in minutes of the central bank’s September meeting released on Wednesday. They reiterated their commitment to raise interest rates.

“Many participants stressed that the cost of doing too little to reduce inflation is likely to outweigh the cost of doing too much,” the minutes read. “Several participants stressed the need to maintain a restrictive stance for as long as necessary.”

A bombastic investigation by the Wall Street Journal found that thousands of government officials reportedly own or trade stocks that are directly affected by their agency’s decisions.

More than one in five senior federal employees in 50 federal agencies, from the Commerce Department to the Treasury Department, in both the Republican and Democratic governments, has invested in companies that actively advocate for policy change in their agencies, the research found.

Federal officials have “immense power and influence over things that affect Americans’ daily lives, such as public health and food safety, diplomatic relations and regulation of trade,” said Don Fox, ethics attorney and former general counsel at the US agency , which oversees the rules on conflicts of interest. These deals represent a clear conflict of interest and violate the spirit of the law, he told the Journal.

The bottom line: This report highlights the need for more comprehensive disclosure and trade regulations across government. The same problems are found in the legislature as well: Currently there is no federal law, regulation or rule absolutely prohibiting a member or domestic worker from holding any assets that might interfere with or interfere with the performance of official duties.

BlackRock (BLK), Delta (DAL) and Domino’s report third-quarter results before the bell.

The US Bureau of Labor Statistics releases the consumer price index at 8:30 a.m. ET.

Coming later this week:

▸ Earnings reports from major banks such as JPMorgan Chase (JPM), Wells Fargo (WFC), Citigroup (C) and Morgan Stanley (MS).

▸ The US Census Bureau is expected to release retail sales data for September.