I’ve included below some comments from the earnings calls from JPM, BAC and DAL. The consensus out of the bank executives is that we’ll have a ‘mild’ recession (the CEO’s at Davos this week I’m sure will echo the same thing) but I think it’s important to think more broadly than this. We could have a mild recession but something that is drawn out. We could have a mild recession that is followed by a mild recovery. We instead could have a harsh recession but one that is quick and followed by a sharp rebound. This debate should be more than just mild vs harsh, soft vs hard. I’m more worried about mild and protracted but throwing mud in this whole analysis will be China and its full reopening and the impact of that. I’m very optimistic about what a full China reopening will have for growth in the 2nd half of 2023 but that growth might be more focused on the Asian region, parts of Europe and South America since that is where most of the Chinese business is. It will also throw a wrench in the Fed’s plan for lower inflation I believe.
The other focus will be on profit margins which you can read below on Delta as higher labor costs offset the optimism of good revenue growth. Falling inflation (aka, revenues) while wages stay elevated will lead to margin compression.
JPM:
“The net reserve build of $1.4 billion was driven by updates to the firm’s macroeconomic outlook, which now reflects a mild recession in the central case, as well as loan growth in card services, partially offset by a reduction in pandemic related uncertainty.”
“Starting with a quick update on the health of US consumers and small businesses based on our data. They are generally on solid footing, although sentiment for both reflects recessionary concerns not yet fully reflected in our data.”
“Cash buffers for both consumers and small businesses continue to slowly normalize, with lower income segments and smaller businesses normalizing faster. Consumer cash buffers for the lower income segments are expected to be back to pre-pandemic levels by the third quarter of this year.” So ‘normalizing’ means smaller cash buffers.
“deposits were down 6% sequentially, driven by the rising rate environment, resulting in migration to investments and other cash alternatives…We’ve never had rates go up this fast. So, I expect there will be more migration to CD’s, more migration to money market funds. Lot of people out there competing for it, and we’re going to change savings rates. Now, we can do it at our own pace and look at what other people are doing. We don’t know the timing, but it will happen.”
BAC:
“q/o/q, non-interest bearing deposits are down 8%, low interest bearing deposits are up 2%…56% of the $1 trillion in consumer deposits remain in low and in no interest checking accounts. And because of all that, overall rate paid in this segment remains low at 6 bps.”
“We have seen the mix of global banking interest bearing deposits move from 35% last quarter to 45% in quarter 4. And obviously, we’re paying higher rates on those deposits to retain them…I would note, relative to the last cycle, that the Fed increases have been rapid and we’d expect to pay higher rates as we continue to move through the end of the interest rate cycle.”
“Our scenario, our baseline scenario contemplates a mild recession. That’s the base case of the economic assumptions in the blue chip and other methods we use.”
“we’re moving off the bottom in credit cost towards a level which is normalizing to pre-pandemic, but that level was very low in the grand context of banking.”
“Consumer deposit balances continue to show strong liquidity with the lower cohorts of our consumers continue to hold several multiples of balance that they have as the pandemic began. These balances are drifting down, but they still have plenty of cushion left. And while their spending remains healthy, we continue to see the pace of that y/o/y growth slow.”
“If you look at our 90 days past due in the credit card data that we show you every quarter, that tends to give you a pretty good leading indicator of what’s coming down next quarter. So you can see the 90 days past due have picked up just a little bit, 30 days past due have picked up just a little bit. We’re still below where we were pre-pandemic, but that would tell you on the consumer side, it looks like it’s drifting just a little higher…But the commercial portfolio continues to look very strong.”
DAL:
“Demand remains strong as passengers return to the skies and industry returns to the long term trend to GDP, all while supply constraints continue. I believe our industry will see tens of billions of dollars of incremental demand in the next few years coming out of the pandemic…As always, we remain mindful of the macroeconomic trends and have demonstrated that we have the tools to effectively manage a changing economic climate.”
“Corporate travel demand was steady through the quarter with corporate domestic sales 80% recovered to 2019 levels…Consumer demand remains healthy with advanced bookings significantly ahead on both yield and load factor for each month of the March quarter compared to 2019.”
“We are seeing robust demand across our expanded footprint in Europe and expect the spring and summer to set new record revenues. Latin America is performing very well, led by Mexico, the Caribbean and Central America, with the recovery in deep South America now accelerating…In the Pacific, we are expecting record first quarter profits in both Australia and Korea as our multi-yr international transformation delivers on anticipated results. Japan is also building momentum and we expect a very strong summer there. And lastly, with China indicating its reopening, we expect to rebuild capacity in line with demand starting later this year.”
“For the March quarter, we expect to deliver a 4% to 6% operating margin…Importantly, we are embedding the assumed impact of all labor cost increases throughout our guidance metrics.” Keep in mind Q4 operating margins finished 2022 at 8%.
Higher labor costs, though plateauing, relative to falling inflation and pricing power equates to lower corporate profit margins and what we should be further listening out for in coming weeks.
China reported Q4 GDP that surprised to the upside and also December figures like retail sales, industrial production and fixed asset investment that all exceeded expectations. We should take all of this with a grain of salt however and I still treat it as old news as the analysis on China really only now matters in Q1 as the country fully opens up and life’s previous normalities reassert themselves.
The big story out of Asia this week will be what the Bank of Japan says and maybe does with regards to further altering its YCC policy. The 10 yr yield is above the 50 bps range at .52%. The 9 yr yield is at .63%, the 15 yr yield is at 1.15% and the 40 yr at 1.77%. What a bizarre yield curve.
Hopes for a China recovery and much lower than feared energy costs has the German ZEW investor confidence in their economy rising a lot in January. The index rose to +16.9 from -23.3 and that was well better than the estimate of -15. The Current Situation though in contrast only saw a slight gain to -58.6 from -61.4. European bond yields are modestly higher and stocks are taking a breather after a big run. The euro is up slightly vs the US dollar.
German ZEW