Earnings season kicks off on Wall Street in earnest with three of the big banks set to report second quarter numbers on Friday, the same day that key US inflation and retail sales numbers are due. Meanwhile the Bank of Canada meets amid expectations it could be ready to hike rates.

Bank earnings

Earnings season begins this week with three of the biggest US banks due to release their second quarter numbers. Citigroup (C), JPMorgan Chase & Co (JPM) and Wells Fargo & Co (WFC) will set the pace with results due on Friday.

US banks enjoyed a boost after the Federal Reserve gave the all-clear to return all earnings to shareholders this year. Expectations are already pretty high for earnings – although perhaps not as high as they were at the start of the year when the reflationary Trump trade was at its peak.

Nevertheless, financials as a whole should post earnings growth in excess of 6% this quarter, according to data from FactSet.

US inflation & retail sales

The big macro data comes from the US with key CPI inflation and retail sales numbers that could shift the dial on interest rate expectations.

Last month the Labour Department said its Consumer Price Index dipped 0.1%. The CPI inflation gauge has fallen twice in the last three months. In the 12 months to May, inflation rose by 1.9%, the weakest reading since November. Meanwhile, the core personal consumption expenditures price index rose 1.4% in May, down from 1.5% the previous month. As recently as February it was as high as 1.8%. Retail sales – a key driver of the economy – are also losing their lustre, declining by the most in 16 months in May.

Slacker inflation in recent months has gone against the Fed’s tightening cycle and raised doubts about just how many more times the central bank will hike.

Softer consumer spending and lower inflation is likely to pressure the Fed to row back on its commitment to raise interest rates at least once more this year. Complicating the picture, the yield on 2-year and longer-dated government bonds has contracted, raising concerns about a potential Fed policy ‘mistake’ that could herald a recession. The Fed has been forced to admit that inflation is declining and will not hit its 2% target this year. The worry is that if the Fed hikes too quickly the yield curve will invert with short-term rates above longer-term rates – a scenario that economists fear as it can cripple bank lending.

However, some better data in the last week or so, coupled with a notably hawkish shift from central banks globally, has seen the yield on the 10-year note rise again, which gives the Fed some breathing space.

More lacklustre inflation will fuel bets the Fed will hold off further rate hikes, while anything above 2% should see the Fed hold course for now.

Bank of Canada

The Bank of Canada could be ready to raise interest rates for the first time in seven years when it meets on Wednesday.

Policymakers have been shifting expectations in recent weeks, preparing for what looks like a hike. Deputy Governor Carolyn Wilkins said in mid-June that Canada’s economy was picking up and had moved beyond the “oil shock”. Governor Stephen Poloz has dropped hawkish hints of his own and the market is now pricing in a near evens chance that the central bank will raise rates. With the decision in the balance, the loonie could be in for a choppy session on July 12th.

Source: ETX Capital

Last Updated: November 3rd, 2021