Second quarter earnings results announced this morning by JPMorgan Chase (JPM) held solidly good news for the U.S. economy. Not as much good news for the bank and the banking sector in general, though. JPMorgan Chase is the first of the big banks to report with Citigroup (C) and Wells Fargo (WFC) on deck tomorrow.
Loans of all kinds extended by JPMorgan Chase rose $106 billion from the second quarter of 2015. That’s a 16% increase. “We had broad-based demand for loans pretty much across categories, whether it was auto, business banking, cards, so I would say that speaks well for the U.S. economy and the consumer in particular,” Chief Financial Officer Marianne Lake said.
Figuring out how the bank itself did in the quarter is harder. As reported earnings were $1.55 a share, up from $1.54 a share in the second quarter of 2015, and ahead of the $1.43 a share estimated by analysts. (Net income was down year to year from $6.29 billion in 2015 to $6.2 billion on a lower share count because of share buybacks.)
But that as reported earnings figure included all kinds of one-time charges and credits including an accounting gain and a legal benefit plus a gain from the sale of the bank’s stake in Visa Europe and a loss on the bank’s investment in Square. Adjusting for all those one-time gains and losses earnings came to $1.50 a share, down from $1.54 in the second quarter of 2015 but still above Wall Street estimates of $1.43 a share.
Revenue growth wasn’t as robust as you might expect from growth in the bank’s loan portfolio or those earnings per share figures. Revenue climbed just 2.8% year over year to $25.2 billion powered by a big 35% jump in revenue from fixed income trading. Revenue from equity trading rose just 1.5%.
Earnings grow was so much stronger than revenue growth because JPMorgan Chase continued to cut costs. Non-interest expenses fell 6%. Compensation costs at the corporate and investment bank fell 6% in the first six months of 2016.
I’d look to see if consumer units at Citigroup and at Wells Fargo tomorrow report that same strong picture. (Pay special attention to Wells Fargo’s big mortgage unit.) If consumer lending is as strong tomorrow at those banks as at JPMorgan Chase today that’s good news for the economy as a whole. Make sure to pay special attention to provisions for credit losses. That item rose to $1.4 billion at JPMorgan Chase, an increase of $467 million, from the second quarter of 2015. The bank said that was a result of the increase in the loan portfolio and not a sign of a deterioration in credit quality. See if other banks echo that comment.
The U.S. economy added only a net 38,000 jobs in May, according to the jobs report from the Bureau of Labor Statistics this morning. Economists surveyed by Bloomberg had projected job gains of 90,000 to 215,000 with the median forecast at 160,000.
The details below the shockingly bad headline number made ugly reading. The government statisticians revised the April job gains, already weak at 136,000, down to 123,000. The unemployment rate sank to 4.7% from 5%, but only because more Americans left the workforce. Even noting the one-time effect of the Verizon strike in May–which took 35,000 workers out of the job count–the longer term trend is decidedly soft: The economy has averaged a gain of 116,000 jobs a month for the last 12 months. That’s down from an average of 229,000 in the same period last year.
No wonder that the markets have decided that today’s jobs report takes a June interest rate increase from the Federal Reserve almost completely off the table. Odds of a June move, based on prices in the Fed funds futures market, fell back to just 4% from 22% yesterday. (The odds of a June increase were at 4% before the release of the Fed minutes for April and a series of speeches from Fed officials designed to stress the Fed’s intention to raise interest rates sooner rather than later.) Odds for a July interest rate increase fell to 31% from 55% yesterday.
Other economic news this morning supported the market’s negative conclusions about the jobs market and U.S. economic growth. The service sector index from the Institute for Supply Management fell in May to 52.9 from 55.7 in April. Anything above 50 signals expansion in the sector but the trend is in the wrong direction. The employment sub-index for the services sector fell for the first time since February.
Some of the restraint in the market’s reaction comes, I think, because investors are figuring out which way to jump. Oil was down as of 1:30–with West Texas Intermediate falling 1.63% to $48.37 and Brent dropping 1.42% to $49.33%–on the theory, I’d speculate, that slower U.S. growth, if confirmed, would mean lower U.S. demand. Yet other commodities moved up on the theory that a delay in any interest rate increase from the Fed would mean a weaker dollar–and commodities priced in dollars go up in nominal terms when the dollar falls. Following on that theory the dollar fell strongly against the euro–to 1.1341–and the yen and dropped 1.3% against the 10 currencies in the Bloomberg Dollar Spot Index.
On the same weak dollar is good theory emerging market assets climbed with the iShares MSCI Emerging Markets ETF (EEM) rising 1.35%–although I think you can make a strong case too for slower U.S. economic growth being bad for the global economy and for growth in commodity prices and developing economies in particular.
Gold climbed 2.39% to $1239.93 an ounce as of 1:30 as some investors sought a safe haven from volatility, but the VIX volatility index (VIX), which measures volatility for the S&P 500 by looking at what prices traders are willing to pay to hedge against volatility has barely moved from recent very low levels. The Vix was up just 0.81% as of 1:30 today.
With so much uncertainty in the market’s reaction to the news it’s hard today to figure out whether to go long or short and in what. Especially because there’s a very good chance that the market’s reaction on Monday, after a weekend of cogitation, will be very different than what it has been today.
“For ’tis the sport to have the engineer/Hoist with his own petard: and’t shall go hard/But I will delve one yard below their mines,/And blow them at the moon.”
So Hamlet says to his mother Queen Gertrude before setting off to England where his father expects him to meet his death.
And so says the recent action in the U.S. stock market.
With U.S. stocks bumping up against the top of the recent trading range of 2100 on the Standard & Poor’s 500 index–and near the May 2015 all-time high for the index at 2135–markets need good news to push stock prices higher. What kind of good news? Anything really that promises earnings growth in the second half of 2016. Stronger consumer spending on higher incomes. More job growth. More business investment. Stronger housing sales.
But every one of those pieces of good news also increases the likelihood that the Federal Reserve will raise interest rates at its June 15 or July 27 meetings. That’s why the unexpectedly strong news today on manufacturing has produced such a tepid response from U.S. stocks. The Institute for Supply Management’s index for the manufacturing sector climbed to 51.3 from 50.8 in April. That’s way above the median forecast of 50.3 among economists surveyed by Bloomberg. (In this survey anything above 50 indicates that the sector is expanding.) Prices (aka “inflation”) also picked up with the manufacturing index of prices climbing to 63.5, the highest level since June 20111, from 59 in March.
The next big worrisome petard (which is a bomb, I discovered) comes on Friday when the Bureau of Labor Statistics reports the jobs number for May. Economists are expecting 158,000 net new jobs although the recent strike of 36,000 Verizon workers will throw the data onto contested ground. Many on Wall Street think that 80,000 net new jobs will be enough to let the Fed march ahead toward a rate increase.
But one way or another–and with the added wrinkle of the Verizon strike and its effect on the jobs report–you can understand why no one is willing to go very strongly bullish or bearish ahead of the news.
As of the close today in New York the Dow Jones Industrial Average was up 0.01% and the Standard & Poor’s 500 stock index was up 0.11% to 2099.33. (Talk about knocking on the door at 2100.)
Concern about the future has constrained the U.S.stock market’s reaction to very good news about current consumer spending.
As of 1:30 today, Tuesday May 31, the Standard and Poor’s 500 index was off 0.15% or 3.14 points to 2095.92. The index had opened at 2100.13, just above the 2100 level that has marked the top of the recent trading range, after closing on Friday at 2099.06.
A report from the Commerce Department this morning showed consumer spending picking up by 1% in April. Wages and salaries gained 0.5%. All that argues that the U.S. economy is set to rebound after weak growth in GDP in the fourth and first quarters. Economists had expected consumer spending to climb 0.7% in April.
But the Conference Board index for May that measures consumer expectations for the next six months fell to 79, the lowest level since November 2015 from 79.7.
There’s a good likelihood that the difference between actual consumer spending and consumer worries about the next six months will get resolved in favor of actual dollars over emotions. But nonetheless, the drop in future expectations is enough to take some of the shine off consumer spending.
Add in the recognition that higher consumer spending means stronger economic growth means greater likelihood of an interest rate increase from the Fed in June or more probably July and you can understand the market’s stutter step as it thinks about breaking above 2100.
The speeches, interviews, and presentations from members of the Federal Reserve keep on coming. And they all say, “We’re prepared to raise rates soon.”
Over the weekend Eric Rosengren, head of the Federal Reserve Bank of Boston, told the Financial Times that he’s ready to back a rate increase.
The heads of the St.Louis, San Francisco, and Philadelphia Federal Reserve banks are due to speak today. (Update: In his remarks today Patrick Harker, head of the Philadelphia Fed, said he could see as many as two or three interest rate increases in 2016.)
Fed chair Janet Yellen is on tap for a speech on Friday.
All this speechifying has driven the odds for an interest rate increase at the Fed’s June 15 meeting to 32%, according to Bloomberg’s calculation, from as low as 4% before the release last week of the Fed’s minutes from its April meeting.
And all this talk makes Friday’s announcement of revisions to first quarter GDP growth even more important. Right now economists are looking for the revision to increase the growth rate to 0.9% from 0.5%. That would be a “fact” to back the Fed’s argument that the economy is strong enough to take an interest rate increase in stride. And that the first read on first quarter growth would be succeeded by stronger growth in the second half of the year.
The Standard & Poor’s 500 finished down a slight 0.21% for the day, against dropping below the 2050 level that has been support for this market recently.