Stocks Mildly Higher, BoJ Faces Test

European Stocks Up, BoJ Policy Decision in Focus 

European stock markets traded mildly higher in early trade on Monday but with the US closed it will be a thin day. Last week stocks notched another rise -  the FTSE 100 continued its ascent towards the all-time high, Stoxx 600 rose about 1.8%, the S&P 500 up more than 2%, the Nasdaq climbed more than 4% as investors hoovered up ‘cheap’, oversold tech. The S&P 500 climbed 0.4% on Friday to 4,000 where it is seeing significant resistance. Futures are a bit firmer this morning but caution as the US stock market is closed today for Martin Luther King Day. Asian shares were broadly higher though the Nikkei in Tokyo declined as investors looked ahead to whether the Bank of Japan will further tweak its ultra-loose monetary policy this week. 

Earning Season; Interest Up 

Earnings season began in earnest on Wall Street on Friday. In short, interest income has soared, investment banking revenues are down and there is a degree of cloth-cutting with a recession seen ahead. JPMorgan (JPM) – loan loss provisions don’t look good, reflective of cautious macro outlook, but interest income is yuge. The question mark over this outperformance is just how long it can last with markets already pricing in rate cuts later in the year. Management said they will have to pay more for deposits in 2023 - reckoning on $74bn in net interest income this year, well below analyst forecasts. Essentially, it's likely that banks will have to start paying savers a lot more and this will eat into their income from interest which has so far benefitted from rising rates. This has implications beyond JPM and indicates a wider challenge for banks.  

Bank Revenue Rises, Investment Banking Fees Decline  

Bank net revenue was $35.6 billion, up 17%. Net interest income (NII) was $20.3 billion, up 48%. NII excluding the markets division was $20.0 billion, up 72%, driven by higher rates. Lower investment banking fees saw noninterest income decline 8% to $15.3bn, with net income at the Corporate & Investment Bank down 27%. Commercial banking income rose 15% with net revenues +30%. Across the bank expenses rose 6%, a deceleration from recent quarters. In Consumer net revenues rose 29% with net income up 10% to $4.5bn. Banking & Wealth Management net revenue was $9.6 billion, up 56%, driven by higher deposit margins. Home lending revenues declined by almost half.  The provision for credit losses was $2.3 billion, reflecting a net reserve build of $1.4 billion and net charge-offs of $887 million. Management noted the “modest deterioration” in the bank’s macroeconomic outlook, now “reflecting a mild recession in the central case”.  

US Inflation Finally Slows; Mixed Consumer Sentiments 

Cooling US inflation was the big story last week and positive for risk. Today’s early data showed German wholesale prices fell 1.6% in December; so more of the same ‘inflation has peaked’ narrative. UK inflation figures are out on Wednesday – Bank of England chief economist Huw Pill was warning last week of second round effects and a tight labour market keeping inflation higher for longer.  Jamie Dimon said: “The U.S. economy currently remains strong with consumers still spending excess cash and businesses healthy. However, we still do not know the ultimate effect of the headwinds coming from geopolitical tensions including the war in Ukraine, the vulnerable state of energy and food supplies, persistent inflation that is eroding purchasing power and has pushed interest rates higher, and the unprecedented quantitative tightening.”  

University of Michigan consumer sentiment data improved somewhat - current conditions rose to its highest level since April with I guess a sense that with gas prices down, unemployment at a 50-year low, and inflation easing, things might be not so bad. Year-ahead inflation expectations fell for the fourth straight month, declining to 4.0% in January from 4.4% in Dec. However, 5-year inflation expectations rose to 3.0% from 2.9%.  

Elsewhere: Fed vs Markets, BoJ vs Inflation, Oil Still Slippery 

But this is what the Fed is guarding against. Financial conditions may be easing too quickly – exactly what the Fed is seeking to avoid. 

Elsewhere, the Bank of Japan offered to buy another 1.3 trillion yen of Japanese government bonds to defend its 0.5% yield target – on top of the 5 trillion yen of bonds it bought on Friday. Despite this the 10yr yield was at 0.516% this morning – beyond the target range. This lifted the yen to its best since May. There is going to be more and more pressure on the JGB market and the BoJ, which could further tweak policy when it meets this week. USDJPY showing weakness here with the ‘death cross’ last week. Inflation has returned to Japan and the BoJ has a lot of catching up to do so it might be easier to just pull the plaster off quickly. 

Oil prices fell, handing back some of last week’s gains ahead of forecasts from the IEA and OPEC. Trend is clearly bearish though a higher low was made, indicating the bearish impetus might be softening, but we need to make a new high above $81.50, clearing the 50-day line, before bulls can get too excited.