The Eclipse The Market Doesn't See Coming?

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Hakyung Kim and Lisa Kailai Han of CNBC report Dow tumbles 475 points, S&P 500 suffers worst day since January as inflation woes erupt:

Stocks sold off Friday as inflation and geopolitical worries once again dented investor sentiment on Wall Street. A broad decline in major bank shares also weighed on the market.

The Dow Jones Industrial Average slid 475.84 points, or 1.24%, closing at 37,983.24. The S&P 500 tumbled 1.46% at 5,123.41. The Nasdaq Composite pulled back by 1.62% at 16,175.09.

At one point in the trading session, the Dow was down by nearly 582 points, or 1.51%. The S&P 500 slid as much as 1.75%.

Week to date, the broad market index dropped 1.56%, and the 30-stock Dow fell 2.37%. Meanwhile, the tech-heavy Nasdaq is 0.45% lower for the week.

JPMorgan Chase shares declined more than 6% after the banking giant posted its first-quarter results. The bank said net interest income, a key measure of what it makes through lending activities, could be a little short of what Wall Street analysts are expecting in 2024. CEO Jamie Dimon also warned about persistent inflationary pressures weighing on the economy. 

Wells Fargo slipped 0.4% after reporting its latest quarterly figures. Citigroup dropped 1.7% despite posting a revenue beat.

Oil prices continued their rise on reports that Israel is preparing for a direct attack by Iran this weekend, in what would be the biggest escalation of tensions in the region since the outbreak of the Israel-Hamas war last October. U.S. crude settled at $85.66 a barrel after rising above $87.

That, coupled with fresh U.S. imports data, added fuel to inflation concerns that have put pressure on the market.

“We’re getting further risk off sentiment heading into the weekend. You’re seeing there’s a flight to safety trade, with the dollar stronger, and we’re seeing equities sell off,” said Rob Haworth, U.S. Bank Wealth Management senior investment strategist.

“That comes on the heels of the inflation data that tells us the economy’s still pretty hot and inflation is sticky; that’s what led [investors] to really adjust their expectations around the Fed. … That’s some of why they’re getting cautious headed into the weekend,” said Haworth.

Consumers are also growing worried about the persistent inflationary pressures. The consumer sentiment index for April came in at 77.9, below the Dow Jones consensus estimate of 79.9, according to the University of Michigan’s Surveys of Consumers. Year-ahead and long-run inflation expectations also ticked up, reflecting frustrations over sticky inflation.

David Hollerith of Yahoo Finance also reports high interest rates are getting more challenging for even the biggest banks:

A key revenue source for three giant banks fell during the first three months of the year, showing that even the biggest financial institutions are struggling with the same challenges facing the rest of the industry as interest rates remain elevated.

JPMorgan Chase (JPM), Wells Fargo (WFC), and Citigroup (C) all said Friday that their net interest income dropped from the fourth quarter to the first quarter. It was down 4% at JPMorgan, 4% at Wells Fargo, and 2% at Citigroup.

For JPMorgan, it was its first sequential drop in nearly three years. Its stock fell by more than 6%, its largest single-day drop since 2020. The stock of Citigroup was down nearly 2%, while Wells Fargo was flat.

Net interest income is a critical measure for many banks, since it measures the difference between what banks earn on their assets and pay out on their deposits.

Smaller banks have struggled to boost this measure over the last year as interest rates and deposit costs soared. Now there are some signs in the first quarter that high rates are starting to weigh on growth even at the nation’s largest lenders.

JPMorgan said in a press release that its net interest income dropped due to "deposit margin compression and lower deposit balances."

Depositors are seeking out higher yields, as they have at smaller banks, and moving their money into products such as certificates of deposits where JPMorgan has to pay a higher rate.

"As customers move out of checking and savings, they may choose to go into CDs," CFO Jeremy Barnum told reporters Friday in response to a question from Yahoo Finance. "That means that the bank is paying more for the internal migration."

"That is the sort of deposits migration that we’re expecting" for the rest of 2024, he added.

It is certainly still true that the big banks are better positioned than their rivals to withstand a period of elevated interest rates and that they will still be able to earn plenty of money from lending.

Citigroup’s net interest income in the first quarter, for example, was $1 billion higher than expected, and JPMorgan did boost an estimate of net interest income for all of 2024 to $89 billion, excluding trading, up from a previous estimate of $88 billion.

But that was flat when compared to 2023. Both Wells Fargo and Citigroup expect their net interest income to be down for the full year.

'Rates might be higher'

Deposit pricing pressure is also rising at Wells Fargo and Citigroup, which disclosed they are shelling out more for that funding than a year ago.

That pressure is likely to intensify now that investors no longer expect a rate cut from the Federal Reserve in June, due to hotter-than-expected inflation data this past week and a surprisingly resilient economy.

Wells Fargo's average deposit cost was 1.74%, which was higher than 1.58% in the fourth quarter and 0.83% in the year-ago period. Its overall profits dropped 7% from a year earlier.

"Rates might be higher than what people expected a week ago," Wells Fargo Chief Financial Officer Mike Santomassimo told analysts. "We do have to wait and see how clients are going to react."

At Citigroup, its average rate paid on deposits rose to 3.70%, up from 3.61% from the previous quarter and 2.72% from the year-ago period. Its overall profits dropped 27% from a year earlier.

Citigroup also provided some updates about an ambitious restructuring of the bank that is resulting in thousands of job losses. It said it eliminated 7,000 positions as part of a target of reducing headcount by 20,000 by 2026.

'We are a little bit cautious'

There were a number of positives in the banks' results Friday.

Overall profits for JPMorgan were still up by 6% from a year ago, to $13.4 billion, beating Wall Street expectations.

It also set aside less money for future loan losses and investment banking fees jumped 21% to $2 billion, a sign that a Wall Street revival may be underway.

But most of that came from debt underwriting, as opposed to advisory work.

"We are a little bit cautious," Barnum said about any pickup in M&A activity.

JPMorgan’s boss, Jamie Dimon, offered more warnings about the road ahead for the US economy, repeating a theme he hammered home in his annual shareholder letter released earlier in the week.

"Many economic indicators continue to be favorable," Dimon said. "However, looking ahead, we remain alert to a number of significant uncertain forces."

He cited wars and geopolitical tensions, "persistent inflationary pressures" that "may likely continue," and a campaign of quantitative tightening from the Federal Reserve.

When Jamie Dimon talks, the market listens and today it didn't like what it heard.

Dimon has been busy this week warning that global economic risks ‘could eclipse anything since second world war’.

Alright, it's Friday, we started the week with a solar eclipse and are ending it with what appears to be another inflationary eclipse.

What remains to be determined is whether this new inflation scare is transitory or another sticky monster that will wreak havoc on markets as rates creep up.

Let me give you my take on why banks sold off today, I basically think "it's all about the economy, stupid":

Remember banks are cyclical stocks, they do well when the economy does well but they lead the economic cycle before unemployment heads up significantly.

Big banks make money on lending (spread or net interest income), capital markets (trading) and investment banking (advisory and underwriting).

Right now, there's not much going on in investment banking as everyone is in wait and see mode, so banks are cutting there and if the economy rolls over, they will be cutting more employees.

High rates typically bolster net interest income but if they start rising above a certain level that jeopardizes capital markets and their deposits and deal activity.

Worse still, bank credit has collapsed signalling more trouble ahead:

What about the inflation eclipse? Is there another one coming?

I don't know but that is a very important question because if you think inflation will re-emerge stronger in the second half of the year, then you get out of nominal bonds and real estate, buy TIPS and be very selective with your dividend stocks because most of them will get hurt if rates creep higher.

Right now, the market is clearly worried about inflation re-emerging after this week's red hot CPI report:

And that's the reason why bonds are selling off and gold is rallying:

Where does that leave this market? Is this the beginning of something much more ominous?

Truthfully speaking, nobody has any idea but it's fair to assume we are in a rough patch here and risk assets are vulnerable to any negative shock:

And one last thing, rate cuts are NOT bullish when the economy is in a recession:

Alright, it's Friday, enough market/ macro talk, time to kick back and relax this weekend.

Below, former Treasury Secretary Lawrence Summers says he wasn't surprised to see that US inflation rose in March, but the Federal Reserve should not be cutting interest rates now. "On current facts, a rate cut in June it seems to me would be a dangerous and egregious error comparable to the errors the Fed was making in the summer of 2021,” Summers said on Bloomberg Television’s Wall Street Week with David Westin.

Second, Bryn Talkington, Requisite Capital Management managing partner, Amy Sheffield, VantageRock co-founder, join 'Closing Bell' to discuss if anything meaningful changed for bullish investors, if investors should be less bullish, and the takeaways from this week.

Lastly, Tom Lee, Fundstrat Global Advisors managing director, joins 'Closing Bell' to discuss what changed this week, if the last mile of inflation will be harder than initially thought, and more.

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