Friday sees the unofficial start of Q4 earnings season with reports from the largest US banks. There are a couple of other key companies reporting, such as United Health and Delta Airlines. But the financial industry is most likely to be keenly focused on what the banks have to say.
This will be especially relevant for the Forex market this time around as traders try to gauge exactly what will happen with interest rates this year. There is a wide gap between what the Fed says it will do, and what the market has already priced in. Presumably, the large US banks are more keyed into what’s going on in the financial regulatory space, and will be able to provide better insight into the trajectory of interest rates this year.
Bank earnings are intimately related to interest rates. After all, the vast majority of their income comes from the differential in interest rates they charge customers compared to borrowing money. This generates the key financial performance indicator used to evaluate banks, the Net Interest Margin (NIM). In order for banks to secure their income through the rest of the year, they need to have a good understanding of what will happen with interest rates.
In order to secure their portfolios, banks must set aside money in case of contingencies. This is the “provisions” line in their earnings reports. The money set aside directly impacts the bank’s profitability. Over the last year, banks have been setting aside a lot of funds, at the expense of their profits, in expectations that there might be a recession. If banks start to reverse those provisions in order to take profits, it means they are serious about expecting the economy to have missed a hard landing. That could provide increased confidence across the market, boost stocks and drag on the dollar.
If banks report profits well above market consensus, markets could regain their appetite for risk. That might carry through the rest of earnings season as lower borrowing costs would help support corporate profits across the board. On the other hand, a miss of expectations in bank earnings could redouble worries among investors. While that would likely drag on the stock market, the dollar might regain its strength.
Which banks also do better will be important as well, as there are still echoes of last year’s banking crisis. JPMorgan, for example, is seen as the best performer as it continues to integrate First Republic Bank. But Bank of America has a lot of exposure to the bond market, and could see its profitability hurt if yields don’t continue on a downward trajectory.
The CEOs of the major banks will likely dedicate an important amount of their time talking about the outlook for the economy and interest rates. That might be seen as expert opinion on what to expect for the dollar at least in the next few months. Some use the opportunity to communicate with the Fed, such as JPMorgan’s Jaime Dimon, who repeatedly warned that too high interest rates could cause a recession.
What’s also important is that these CEOs also talk about the behavior of their clients. That is, whether there is an increase in borrowing, how much credit card debt there is, and whether US consumers are continuing to spend. All of that can contribute to developing a more detailed picture of what to expect for the world’s largest economy.
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- Source: https://www.orbex.com/blog/en/2024/01/why-us-bank-earnings-are-so-important-to-forex-this-earnings-season
