Inflation data, banks kick off earnings season: What to know this week

A stock market rally to kick off 2023 will be put to the test next week when investors face a highly-awaited inflation reading and the start of fourth quarter earnings season, which will be led by big banks.

Thursday morning will bring December’s Consumer Price Index (CPI), a release likely to dictate bets on whether the Federal Reserve raises interest rates by 0.25% or 0.50% at the start of next month.

Economists expect headline CPI rose 6.6% over the prior year in December, a downshift from the 7.1% increase seen in November, according to data from Bloomberg. On a month-over-month basis, CPI likely stayed flat.

Core CPI, which removes the volatile food and energy components of the report and is closely tracked by the Fed, is also expected to have risen at a slower pace last month, coming in at 5.7% after a 6% increase in November. Over the prior month, core CPI is expected to rise 0.3% after a 0.2% jump in November.

Policymakers monitor “core” inflation more closely due to its nuanced look at key inputs like housing, while the headline CPI figure has moved largely in tandem with volatile energy prices this year.

JPMorgan (JPM), the largest consumer bank in the U.S., will also deliver quarterly financial results along with industry peers Citigroup (C), Bank of America (BAC), and Wells Fargo (WFC) on Friday morning as fourth quarter earnings season gets underway.

Wall Street’s banking giants — which have warned about the state of the economy, seen tremendous drop-offs in dealmaking revenues, and even begun trimming their workforces — are expected to offer the Street disappointing results.

Another ‘encouraging’ jobs report

On Friday, U.S. stocks soared after the latest monthly jobs report showed nonfarm payrolls rose by 223,000 in December as the unemployment rate dropped to 3.5%.

While these figures suggest an imbalance between labor supply and demand is still at hand, investors celebrated cooling wage growth as a sign the Fed may scale back its rate-hiking ambitions.

For the week, the S&P 500 and Dow Jones Industrial Average each gained roughly 1.5% while the technology-heavy Nasdaq Composite rose 1%. All three major averages surged more than 2% Friday.

“This is an encouraging jobs report for the Fed that shows the narrow path to a soft landing remains a possibility with wages cooling without requiring widespread job destruction,” Josh Jamner, investment strategy analyst at ClearBridge Investments said in a note Friday. “This print on its own doesn’t clearly support a 25- or a 50-basis-point hike at the next Fed meeting in February, and as a result, Thursday’s CPI release could prove crucial for that decision.”

The Federal Open Market Committee (FOMC), the group of Fed officials that vote on policy changes, is set to convene January 31-February 1 and deliver the first rate increase of 2023 and eighth of the current hiking cycle. Last month, the Fed raised interest rates by 50 basis points, bringing total increases to its benchmark policy rate to 4.25% in 2022.

Alexandra Wilson-Elizondo, head of multi-asset retail investing at Goldman Sachs Asset Management, said Friday’s jobs report adds to a series of economic releases that continue to place equal odds of a 25- or 50-basis-point rate increase at the next meeting. In other words, uncertainty remains.

“The [December jobs] report will most likely add to the growing narrative of a disinflationary environment crossing with a robust economy, and therefore a soft landing,” Wilson-Elizondo said in emailed comments. “This could prove positive for stocks in the short-term; however, our positioning remains risk-off into 2023.”

Wilson-Elizondo added: “It’s hard to see how risky assets can compete with approximately 5% yields in money market funds until more clarity is delivered on the inflation and growth mix. We expect the Fed to remain restrictive until there is clear evidence that tightness in the labor market is consistently improving.”

WASHINGTON, DC - SEPTEMBER 21: U.S. Federal Reserve Board Chairman Jerome Powell speaks during a news conference following a meeting of the Federal Open Market Committee (FOMC) at the headquarters of the Federal Reserve on September 21, 2022 in Washington, DC. Powell announced that the Federal Reserve is raising interest rates by three-quarters of a percentage point. (Photo by Drew Angerer/Getty Images) — WASHINGTON, DC – SEPTEMBER 21: U.S. Federal Reserve Board Chairman Jerome Powell speaks during a news conference. (Photo by Drew Angerer/Getty Images)

Bank earnings lead the way

JPMorgan, Citigroup, Bank of America, and Wells Fargo, along with asset management conglomerate BlackRock (BLK), are all set to report results in a flurry before the market open on Friday.

Banks typically benefit from central bank policy tightening, with higher interest rates boosting their net interest income — or the spread between a bank’s earnings on lending activities and interest it pays to depositors — and net interest margins. However, challenging market conditions that have dealt a blow to dealmaking, a primary profit driver, are poised to offset other aspects of their business.

“We are not likely to see any traction in investment banking, as equity and debt underwriting, as well as merger and acquisition markets, are expected to have disappointing performance,” Kenneth Leon, research director at CFRA Research, said in a note.

Leon also warned of “significant declines” in equity underwriting, including IPOs. According to a report on the IPO market last month from EY, 2022 saw just 1,333 initial public offerings worldwide based on data through Dec. 14, with these debuts raising a total of $179.5 billion — a 45% drop in listings raising and 61% fewer dollars raised compared to 2021.

Another notable component of bank earnings will be any insights credit card balances and savings accounts offer on the health of U.S. consumers.

Data last week from JPMorgan Asset Management, the bank’s investment management arm, estimated “excess savings” for U.S. households now stand at $900 billion, down from a peak of $2.1 trillion in early 2021 and roughly $1.9 trillion at the beginning of last year. The drop shows inflation has effectively wiped out half of the savings Americans have accumulated since the pandemic began.

UNITED STATES - SEPTEMBER 22: Jamie Dimon, CEO of JPMorgan Chase, arrives for the Senate Banking, Housing, and Urban Affairs Committee hearing titled Annual Oversight of the Nations Largest Banks, in Hart Building on Thursday, September 22, 2022. (Tom Williams/CQ-Roll Call, Inc via Getty Images) — UNITED STATES – SEPTEMBER 22: Jamie Dimon, CEO of JPMorgan Chase, arrives for a Senate Banking Committee hearing. (Tom Williams/CQ-Roll Call, Inc via Getty Images)

Even JPMorgan chief executive Jamie Dimon warned in a recent interview that inflation may tip the U.S. economy into recession this year.

“Inflation is eroding everything I just said,” Dimon noted, referring to consumer balance sheets that for now have held up, “and that trillion and a half dollars will run out sometime midyear next year.”

Elsewhere on the calendar, investors will also get get a measure of real average hourly earnings, readings on import and export prices, and a consumer sentiment check from the University of Michigan’s closely watched survey.

Earnings from Bed Bath & Beyond (BBBY), which said it was facing bankruptcy last week, Delta Air Lines (DAL), and UnitedHealth (UNH) are also notable reports on tap.

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Economic Calendar

Monday: Consumer Credit, November ($25.000 billion expected, $27.078 billion during prior month)

Tuesday: NFIB Small Business Optimism, December (91.4 expected, 91.9 during prior month); Wholesale Trade Sales, month-over-month, November (0.4% during prior month); Wholesale Inventories, month-over-month, November Final (1.0% expected, 1.0% during previous month)

Wednesday: MBA Mortgage Applications, week ended Jan. 6 (-10.3% during prior week)

Thursday: Consumer Price Index, month-over-month, December (0.0% expected, 0.1% during prior month); CPI excluding food and energy, month-over-month, December (0.3% expected, 0.2% during prior month); Consumer Price Index, year-over-year, December (6.6% expected, 7.1% during prior month); CPI excluding food and energy, year-over-year, December (5.7% expected, 6.0% during prior month); Real Average Hourly Earnings, year-over-year, December (-1.9% during prior month, revised to -2.1%); Real Average Weekly Earnings, year-over-year, December (-3.0% during prior month, downwardly revised to -3.3%); Initial jobless claims, week ended Jan. 7 (214,000 expected, 204,000 during prior week); Continuing claims, week ended Dec. 31 (1.694 million during prior week)

Friday: Import Price Index, year-over-year, December (2.2% expected, 2.7% during prior month); Import Price Index, month-over-month, December (-0.7% expected, -0.3% during prior month); Import Price Index excluding petroleum, month-over-month, December (-0.3% expected, -0.3% during prior month); Export Price Index, year-over-year, December (6.3% during prior month); Export Price Index, month-over-month, December (-0.7% expected, -0.3% during prior month); University of Michigan Sentiment, January Preliminary (60.5 expected, 59.7 prior reading)

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Earnings Calendar

Monday: Acuity Brands (AYI), AZZ (AZZ), Commercial Metals (CMC), PriceSmart (PSMT), Tilray (TLRY), WD-40 (WDFC)

Tuesday: Albertsons (ACI), Bed Bath & Beyond (BBBY)

Wednesday: KB Home (KBH), Shaw Communications (SJR)

Thursday: Taiwan Semiconductor Manufacturing (TSM),

Friday: Delta Air Lines (DAL), JPMorgan (JPM), Citigroup (C), Bank of America (BAC), BlackRock (BLK), First Republic Bank (FRC), Wells Fargo (WFC), UnitedHealth (UNH)