Stocks traded flat this morning as investors processed the latest batch of earnings. The Dow fell slightly in response to “misses” from Goldman Sachs (NYSE: GS) and healthcare stocks. The S&P and Nasdaq Composite remained mostly unchanged through noon. Yields, meanwhile, nudged lower.
And though GS “missed,” industry peer Bank of America (NYSE: BAC) reported a better-than-expected first quarter, surpassing top and bottom-line estimates due to rising rates. BAC traded modestly higher after having already jumped on JPMorgan (NYSE: JPM) and Wells Fargo (NYSE: WFC) “beats” last Friday. GS differed from BAC in that it reported lower-than-expected revenue, which resulted from a $470 million loss on its Marcus loans business.
In general, however, banks have done well this earnings season, helped by very low expectations and consensus estimates.
“Today’s mood is about profitability concerns [which] may have been overdone for the quarter, but Fed tightening fears won’t be going away anytime soon,” said Oanda analyst Ed Moya.
A recession hasn’t shown up in earnings just yet, so investors understandably returned their focus to the May FOMC. The CME Group’s FedWatch tool is now showing an 85% chance of a 25 basis point rate hike (vs. a 15% chance of no hike), which is up significantly over the last handful of sessions.
Better-than-expected bank earnings are ironically hurting markets as a result. Bank CEOs have offered mostly optimistic forward guidance, but warnings of a coming credit crunch have also been consistent. This, too, is seemingly keeping a lid on stocks as Fed officials hint at rate increases.
“One more [25 bp hike] should be enough for us to then take a step back and see how our policy is flowing through the economy, to understand the extent to which inflation is returning back to our target,” said Atlanta Fed President Raphael Bostic.
Non-voting FOMC member and Richmond Fed President Tom Barkin made similar remarks, explaining that he wants “to see more evidence that inflation is settling back to our target” and that the “labor market has moved from red-hot to merely hot.”
St. Louis Fed President James Bullard, who is far and away the Fed’s biggest hawk, went so far as to say that rate hikes will need to “continue” if the Fed wants to hit its inflation goal of 2.0%.
Did Bullard mean that he wants another hike in June? Probably not. Treasurys are pricing in a rate pause in June, favoring it with 65% odds vs. a 24% chance of another 25 basis point hike. The CME Group’s FedWatch tool also shows a 10% chance of a 25 basis point cut.
But unless something changes dramatically within the next few weeks, May should see a hike followed by a pause in June. September, November, and December (there’s no October FOMC) are where the cuts will begin as signs of a sharp slowdown emerge from Bureau of Labor Statistics (BLS) reports.
This estimate is consistent with Treasury market odds, which place a higher chance of a rate cut in November than a pause or rate increase.
And so, as more earnings roll in, the “beats” should continue to pile up. The problem for bulls is that these are likely to be offset by rising rate hike odds, which will climb higher still in response to a better-than-expected earnings season, weakened by cautious forward guidance in anticipation of tight financial conditions later this year.
