Equity outlook, sticky inflation, and banks earnings preview

The fragmentation game leads to sticky inflation

The US March CPI report yesterday gave yet again the signal that core inflation remains stubbornly high with the US services CPI excluding energy at 6.6% annualised rate using the average m/m figures for the past six months. This figure will continue to come down but as we have said so many times before the question is where inflation settles. We remain in the camp that inflation will remain more sticky than the current pricing and that core services inflation rate in the US could settle around 4% or above.

The fragmentation game that we described in our Q2 Outlook is essentially a roadmap for what to expect as regions fragment across the three pillars of technology (computing power), energy, and defense. Fragmentation means higher costs because it is the opposite dynamic of globalisation and ever expanding supply sides and with the labour force stagnating, or even declining in some countries, there will continue to be pressure on wage costs which at this point must be the single biggest risk and concern for companies as that component is the most important going forward for operating margins.

Earnings preview: What will banks tell investors tomorrow?

The Q1 earnings season is on with Delta Air Lines reporting Q1 results that disappointed a bit against estimates but Q2 guidance on EPS at $2-2.25 was well above estimates of $1.61 suggesting airliners are seeing no slowdown in pricing or demand despite fears of that due to high inflation hitting consumers. But tomorrow is when the earnings show really starts with Q1 earnings (reporting time in GMT) from JPMorgan Chase (11:00) , Wells Fargo (11:00), and Citigroup (12:00). Analysts expect Q1 EPS (y/y growth) of $1.13 (+28%) for Wells Fargo, $1.67 (-31%) for Citigroup, and $3.38 (+21%) for JPMorgan Chase.

The trade in banking stocks was driven by rising net interest margins with regional banks seeing the biggest tailwinds, but with the recent banking crisis funding costs are on the rise for banks and the trade has died for now. JPMorgan CEO Jamie Dimon wrote in his recent shareholder letter that the banking crisis is not over yet and it is still a bit unclear how the crisis has impacted different banks. One thing do know from Federal Reserve is that deposits overall in the US banking system has continued to decline with the latest data point from 29 March at $17.2bn down 5.3% from 13 April 2022.

We expect major US banks to have benefitted from the crisis on the funding side as their size and SIFI label have provided them with safe-haven inflows of deposits while smaller banks are likely to show pressure on the funding side. We also expect the outlook to be mixed with US banks highlighting the resiliency of households and corporates but also acknowledging rising funding costs and tighter lending standards leading to lower loan growth and earnings growth over the next year. The 12-month forward EPS growth in the S&P 500 banks index is -0.6%