Stuck Between the Fed and Inflation

Stocks and bonds are meandering rather listlessly as investors digest the latest economic news and earnings announcements. At the moment, the Dow is flat and the S&P 500 is down .2%. Bonds are selling off a bit, allowing yields to move a little higher. Traders are reaching a grudging acceptance that the Federal Reserve might raise interest rates again soon.

Wholesale inflation slowed unexpectedly last month and supply chains continue to normalize. The Producer Price Index (PPI) fell .5% from the prior month, driven by a 1% drop in goods prices and a more moderate .3% decline in services. Headline PPI’s annual rate decelerated to 2.7%, and Core PPI—excluding food & energy—slowed to 3.4%. Those rates are the lowest in two years.

Consumer spending is also coming back down to earth. Retail sales fell 1.0% in March. True, much of the decline was due to lower gasoline prices, which is a good thing. But even excluding autos & gas, sales fell .3% from the prior month. And the year-over-year rate of growth slowed to 2.9%. So things are returning to normal. Some economists, however, wonder if we’re falling right through normal, to recession. Clearly, the Federal Reserve is winning its battle against inflation, and needs to slow its roll in order to keep that from happening.

Another earnings season is upon us. JP Morgan (JPM) kicked it off with a surprise. The bank reported much stronger than expected first quarter sales and profits. And management raised its full-year profit forecast. While investment banking and equity trading businesses were soft, traditional banking fared extremely well and deposits came in higher than expected. The stock surged 7%. CEO Jamie Dimon, who has been predicting a recession, now says “that may be pushed off a bit.”

PNC Financial Services Group (PNC) said bank deposits grew slightly last quarter and profits rose 18% from a year ago. However, management revised down its 2023 forecast. Revenue will grow about 4-5% vs. the previous estimate of 6-8%. And loan growth is now seen at 1-3% vs. the prior estimate of 2-4%. The CEO noted a lack of visibility in the current environment, and hinted that banks may have to raise deposit interest rates. The stock moved slightly higher following the announcement, probably because traders have spent the last month pricing-in the worst-case scenario for banks. So expectations were exceedingly low.

Blackrock (BLK), one of the largest investment managers in the US, saw its stock gain 3% on solid first quarter results. The firm attracted $40 billion in assets during the quarter, benefiting from clients shifting out of low-yielding bank deposits and into investment accounts. Charles Schwab (SCHW) noted the same trend. The online broker, which makes its money lending out cash deposits in its customer accounts, said cash deposits have fallen by 30% from a year ago as customers invest excess cash to get a better yield. That’s not great for Schwab’s profit margin, but on the other hand, the firm attracted over $50 billion in new assets as more people look to invest. And that is good for profits. The stock is up 3% this morning.