European stock markets traded mildly higher early on Monday. The FTSE 100 continued its ascent towards an all-time high, Stoxx 600 rose about 1.8 per cent. Futures are a bit firmer this morning but caution as the US stock market is closed today for Martin Luther King Day. Asian shares were broadly higher though the Nikkei in Tokyo declined as investors wondered whether the Bank of Japan will further tweak its ultra-loose monetary policy this week.
Cooling US inflation was the big story last week and positive for markets. Today’s early data showed German wholesale prices fell 1.6 per cent in December; so more of the same ‘inflation has peaked’ narrative. UK inflation figures are out on Wednesday – and Bank of England chief economist Huw Pill warned last week a tight labour market could keep inflation higher for longer.
Earnings season began in earnest on Wall Street on Friday. In short, interest income has soared, investment banking revenues are down and there is a degree of cloth-cutting with a recession seen ahead. But, having gone through JPMorgan (US: JPM) numbers there's some flashing warning signs for all banking stock investors, albeit better news for savers.
The bank's loan loss provisions do not look good, reflective of cautious macro outlook, but interest income has thus far been huge. The question mark over this is just how long it can last with markets already pricing in rate cuts later in the year. JPMorgan management said they will have to pay more for deposits in 2023 – reckoning on $74bn in net interest income this year, well below analyst forecasts.
Essentially, it's likely that banks will have to start paying savers a lot more and this will eat into their income from interest which has so far benefitted from rising rates. This has implications beyond JPMorgan and indicates a wider challenge for banks.
University of Michigan consumer sentiment data improved somewhat – current conditions rose to its highest level since April with I guess a sense that with gas prices down, unemployment at a 50-year low, and inflation easing, things might be not so bad. Year-ahead inflation expectations fell for the fourth straight month, declining to 4.0 per cent in January from 4.4 per cent in Dec. However, 5-year inflation expectations rose to 3.0 per cent from 2.9 per cent.
But this is what the Fed is guarding against. Financial conditions may be easing too quickly – exactly what the Fed is seeking to avoid.
Oil prices fell, handing back some of last week’s gains ahead of forecasts from the IEA and OPEC. Trend is clearly bearish though a higher low was made, indicating the bearish impetus might be softening, but we need to make a new high above $81.50, clearing the 50-day line, before bulls can get too excited.
Neil Wilson is the Chief Market Analyst at Finalto
