LIVE MARKETS-Bank earnings at the crossroads
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BANK EARNINGS AT THE CROSSROADS (1225 EST/1725 GMT)
After a tough 2022 with the S&P 500 bank index .SPXBK falling 21.6% compared with the benchmark S&P 500's .SPX drop of 19.4%, investors will tune into banks' fourth-quarter conferences for clues about 2023.
The sector kicks off the Q4 earnings season Friday with JPMorgan Chase JPM.N, Wells Fargo WFC.N, Bank of America BAC.N, Citigroup C.N and Bank of New York Mellon BK.N all reporting.
As if that wasn't busy enough, smaller investment bank Jefferies Financial JEF.N front-runs them all with its report due after-market-close Monday Jan. 9. Jefferies' report can prompt volatility in shares of bigger banks as its results provide the first glimpse at the latest market conditions.
According to aggregated analyst estimates gathered by Refinitiv, 2023 has signs of hope for long investors in banks. While consensus shows earnings for the 18 banks in the SPXBK falling 7.7% in Q4 and 19% for the full year 2022, its shows a 13.7% increase for 2023.
The Q4 outlook has weakened in recent days as consensus had a 1.4% earnings decline as recently as Dec. 30. Still the latest data shows analyst expectations for a Q4 revenue increase of 9.2% vs 4.6% for 2022 and 8.3% for 2023.
Chris McGratty, head of U.S. bank research for Keefe, Bruyette & Woods sees a sharp difference between traditional commercial banks and investment banks which, have been hurt by weakness in capital markets as volatility caused clients to shy away from initial public offerings, secondary offerings and mergers.
"2022 was for traditional commercial banks very good. You had very good credit quality and very good interest income growth because margins expanded," he said.
"For 2023 there's a chance that could flip. The traditional commercial banks are going face headwinds from margins expanding at the same rate because deposit betas are accelerating. You're also looking at slowing loan growth and probably some higher credit costs," said McGratty.
"On the other hand, for the biggest investment banks we expect a rebound in capital markets, and that will benefit them. Right capital markets revenues are weak but at some point that revenue stream should pick up."
Still, there is caution in the air as seems to talk about 2023 without including words like "uncertainty" and "recession." So McGratty sees investors focusing much more on management's expectations for 2023 than Q4 itself.
ROSY HEADLINE, BUT MIND THE THORNS: A JOBS REPORT DEEP DIVE
The Labor Department can always be counted on to put on a show on the first Friday of every month, and this was exception.
There were positive surprises throughout the hotly anticipated data - some of which put a glossy topcoat on some cloudier underlying trends - but by and large, judging the reaction of the stock market, investors liked what they saw.
The U.S. economy added USNFAR=ECI, beating the 200,000 consensus but a 12.9% drop from the November .in the last month of 2022
The report marks the 24th consecutive month of job adds above the 200,000 level, and the upside surprise of 2022.
"The latest U.S. jobs data is another reminder that the world’s largest economy remains largely intact despite what inflation did in 2022," writes Richard Carter, head of fixed interest research at Quilter Cheviot.
"With the jobs market continuing to be red hot and corporate earnings holding up in the face of tighter monetary policy, the fabled 'soft landing' may be achievable after all," Cheviot adds.
On the other hand the report is unlikely to move the regarding the Fed's battle against inflation.
"The Fed will see this jobs report as a green light for further rate hikes in early 2023," says Bill Adams, chief economist at Comerica Bank.
Speaking of the "i" word, perhaps the most anticipated element of the report was wage inflation, which delighted markets by cooling down more than analysts expected.
Average hourly earnings growth cooled to 0.3% from November and 4.6% year-on-year, landing below economists' respective projections of 0.4% and 5.0%.
That would appear to be good - Powell & Co have clearly expressed their concerns that hot wage growth suggests broader inflation will hover well above the Fed's 2% target for longer than many might hope.
But it also speaks to the sort of jobs that were filled last month.
Of the 223,000 added last month, about 80% - or 180,000 - were in the services sector, which likely had a stronger hand in the wage growth cool-down than any easing in labor market conditions.
"You saw the slight tick down in earnings growth because we're filling lower wage jobs," says Tom Hanlin, investment strategist at US Bank Wealth Management. "We would still stay there's still upward pressure on wages."
The graphic below shows hourly earnings growth along with other major indicators, and the distance that remains between most of them and that magic 2% Fed target.
"If inflation continues to slow, a pivot to rate cuts is still possible later this year, but it is around the corner," Adams adds.
Market observers will also that wage growth was cooler than core CPI for all of last year, which means "real earnings" have been in decline for months, a state of affairs that bodes ill for an economy that derives 70% of its growth to consumer spending.
The jobless rate USUNR=ECI moved in the opposite direction one would expect to see amid restrictive policy rates, shaving off 0.1 percentage point from the prior month's downwardly revised rate to land at 3.5%.
Add to that a slight 0.1 percentage point uptick from November's upwardly revised labor market participation rate to 62.3% in December, and the dropping unemployment rate is even more of a head-scratcher: when folks jump back into the labor pool to search for work, that typically pushes the jobless rate higher.
Even so, the participation rate remains stubbornly below the pre-pandemic rate.
"Labor participation is really slow to recover, especially in the 55 and over cohort, which saw a lot of early retirement in the wake of the pandemic," Hanlin says. "That's the baby boom. That's a big cohort in terms of ."
Broken down by duration, the freshly unemployed accounted for a larger slice of the total pie, while the long-term jobless saw their pie slice shrink.
This could reflect a recent surge in layoffs, particularly in the tech and tech-adjacent megacap firms, as reflected in Thursday's Challenger report and echoed by Amazon.com's AMZN.O yesterday that it intends to cut its headcount by 18,000.
Another gloomy aspect to the report can be found in the breakdown of unemployment by race and ethnicity.
The jobless rate among Black Americans held firm at 5.7%, while White unemployment eased to an even 3%, resulting in a White/Black jobless gap of 2.7 percentage points, from 2.4 percentage points in November.
And while some might applaud the so-called "real" unemployment - which includes those only attached to the labor market and workers on part-time shifts due to economic reasons - dropping to 6.5% from 6.7%.
Not to be a party pooper, but the of Americans working part time because that's all they can find grew by 3.4% to 3.8 million.
Wall Street has chosen to accentuate the positive, with all three major U.S. stock indexes wearing bright green in a broad rally that equally favored value .IVX and growth .IGX.
WALL STREET LIKES STRONG DECEMBER JOBS DATA (1030 ET/ 1430 GMT)
Wall Street on Friday took comfort in decelerating wage growth in a jobs report for December that showed a strong labor market that could lead the Federal Reserve to err on the side of caution and keep interest rates higher for longer.
Energy .SPNY and consumer staples .SPLRCS led the S&P 500 sectors higher, while healthcare .SPXHC was the sole percentage decliner.
Dow industrials and the benchmark S&P 500 gained, but the Nasdaq posted lower gains as the spector of higher rates somewhat dampened the appeal of growth stocks.
Federal funds futures showed rates fell below 5% for June and were at 4.53% in December. The likelihood the Fed will raise rates by 50 basis points on Feb. 1 remained high at 75%. FEDWATCH.
The data offered investors the chance to pick what they liked, or what Jason Pride, chief investment officer at Glenmede in Philadelphia, called a "choose-your-own-adventure" report.
The deceleration in average hourly earnings lines up with slowing consumer price index reports of recent months, but the jobs market is still too tight and hints that the wage growth slowdown may be sustainable, Pride said.
Worker pay is failing to keep up with the rise in prices at the consumer level, creating a source of stress on household budgets, said Mark Hamrick, senior economic analyst at Bankrate.
"How that equation unfolds in the months ahead will be key, including whether inflation pressures relent," he said.
Quincy Krosby, chief global strategist at LPL Financial in Charlottesville, Virginia said the labor report helps underpin the Fed's goal to moderate the ability of workers to demand higher wages. Small business owners have been reporting demand for higher wages has eased, she said in a .
The Dow Jones Industrial Average .DJI rose 0.99%, the S&P 500 .SPX gained 0.99% and the Nasdaq Composite .IXIC added 0.74%.
Here's a snapshot of market prices:
WALL ST FUTURES JUMP ON SLOWING U.S. WAGE DATA (0915 ET/ 1315 GMT)
Stock index futures jumped on Friday as data showed the U.S. labor market remained strong in December but the decline in average hourly earnings pointed to less pressure on inflation and hope the Federal Reserve can ease its interest rate hikes.
Nonfarm payrolls increased 223,000 last month, the Labor Department said, but average hourly earnings rose 0.3% after a 0.4% increase the prior month. That lowered the year-on-year increase in wages to 4.6% from 4.8% in November.
While wage growth is running above the Fed's inflation target of 2%, it's less hot than before. But wages are keeping up with rising consumer prices, pointing to difficulty for the economy and how the Fed reacts to the data.
E-mini futures for the S&P 500 EScv1 rose 0.88%.
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