KBWB - Catalyst Watch: CPI Major Bank Earnings

2023-07-07 23:46:18 ET

Summary

• The June payrolls rose by 209,000, below expectations, but the unemployment rate fell to 3.6%, which may worry the Fed due to higher than expected wage growth.
• The Consumer Price Index (CPI) is expected to rise by 0.3% before the Fed meeting in July, which could lead to a decline in U.S. inflation.
• The ongoing chip battle between the U.S. and China could escalate, despite both sides stating they want to de-escalate tensions and avoid a trade war.

Listen below or on the go on Apple Podcasts and Spotify Catalyst watch for the week of July 9. Seeking Alpha Managing News Editor Kim Khan says investors can expect CPI midweek and major bank earnings at the end of the week (01:45). Hot topics: What key issues will be in focus for the banks? (03:09) U.S. or China, who stands to benefit as new curbs are implemented? (04:16)

Julie Morgan: Kim, I know the big story for next week is CPI, but let's pause just for a moment and talk about the jobs numbers that just came out. We're recording now on Friday, July 7 and so the jobs numbers just came out. Tell me about those.

Kim Khan: Yeah, we had June payrolls rise by 209,000 coming in below expectations. That's the first time in many months it's missed. And it was kind of a weird jobs report as there was a huge jump in the ADP private payroll numbers the day before double estimates, saying nearly 500,000 jobs were added and the markets really traded off that. And you had rates spiking and stocks going down.

And this is all despite the fact that the investing community everybody says, oh, everybody knows ADP isn't really correlated the official figure as we all kind of dismiss it, but I guess this one was too much of a temptation not to dismiss. So this jobs figure today looked really, really kind of anemic compared to yesterday's ADP number and below expectations.

But actually underneath it was another gain of more than 200,000 jobs and the unemployment rate falling again down to 3.6%. So I think the market eventually focused on that and saw like another solid jobs report and something that may worry the Fed is higher than expected wage growth.

Julie Morgan: Tell me about CPI next week.

Kim Khan: Well, CPI is coming out next Wednesday and it's going to be the last big number before the Fed meeting in July. The expectations are for a 0.3% rise on headline and on core, which should bring down the annual rates again. So people are looking for this continued decline in U.S. inflation, hoping that trend continues and the Fed will of course be watching very closely. The market seems to have already made up its mind. It's pricing in more than 90% chance that they're going to hike by a quarter point at their next meeting.

Julie Morgan: Okay, so tell me this, what does this mean for everyone outside the Fed? I mean, just basic, you and I.

Kim Khan: We can take a step back and look what these numbers mean for the real economy and it can paint a different picture. So let's say CPI comes in as expected, or maybe even a little softer, a little cooler than expected. You could see some of the housing and rent equivalent numbers coming down, some predicting that as a whisper number. And what that means is, of course inflation goes down, prices are going down.

But if you combine that with today's average hourly earnings rise of 0.4% in the employment report, suddenly you've got rising incomes and lowering inflation. So you've got a big jump in real income. So suddenly people have more money in their pockets and things are costing less. That's good, that's solid for the U.S. economy.

Julie Morgan: Now let's switch gears just a little bit and talk about earnings for next week. When we look at earnings for next week, we have Delta Airlines on Thursday, and then we have big bank names on Friday. We have JPMorgan Chase , Wells Fargo and Citigroup . Kim, tell me, what do you believe are some of the key issues that the banks will focus on?

Kim Khan: Well, I think that interest income is going to be big for the banks. They have been doing a lot of business on rising interest rates, and that's going to be important for them. Of course, we've also got some residual effects from the regional banking crisis. People are going to want to hear about how these big banks benefited from the business that was lost by these three big regional banks that collapsed.

We're also going to have a focus on execution for the investment banks, and that's mainly on investment bank wealth management and deal making. That's been a rocky road for a lot of these big names. They've had some layoffs in different departments dealing with that to adjust for that. So maybe one name is going to come out and stronger as the strongest deal maker, and that could be the big post earnings pop that we see.

Julie Morgan: Now let's talk about Treasury Secretary Janet Yellen . We know that she's in China this week. Tell me, what is that visit all about?

Kim Khan: She's kind of going in there as the good cop versus maybe Antony Blinken is the bad cop, trying to smooth over relations with China. As we've seen a kind of chip battle heating up between the two world's two biggest economies. The U.S. is reportedly curbing shipments of AI chips. That's something that they haven't officially said yet, but that's something that could happen.

And China is hitting back with curbs on exports of Gallium and Germanium. And these metals are essential in making microchips that's going to affect the kind of global supply chain for chips. So we've had these things escalating. Both sides say they don't want to have any kind of trade war, they want to de-escalate tensions. But we'll see if anything actually happens on the diplomatic front more than just lip service to that.

Julie Morgan: Now, something that I have paid attention to is the fact that Janet Yellen, it seems that she's making it clear to everyone, the global economy, that this is not a decoupling of the U.S. and China as far as their economies are concerned.

Kim Khan: Yeah, definitely. And I don't think she could if she wanted to. It's not like it's Chris Martin and Gwyneth Paltrow having a conscious decoupling. You can't just announce it and that happens. But I like the word decoupling. And they're also saying it's not a decoupling but a de-risking is another phrase.

But Jeffrey's Market strategist Chris Wood had a good note out recently, and he's saying that if this plays out, basically time is on China's side in these situations. If you kind of implement these curbs, China is just going to buy as many of these chips as possible until the export ban goes into effect.

And then there's also the problem with it, they can enforce it because there could be a black market for lots of different chips. So maybe China has the advantage in this and maybe the U?S. doesn't want to play as much hardball. And that's why Yellen is visiting.

Julie Morgan: There's a topic that we are avoiding because we know that you guys are sick of hearing about this, but we've got to touch on it just a little bit. Just a little bit. Threads . Now, when we think about it from an investment point of view, it's going to be a while before this really affects Meta's bottom line .

Kim Khan: Yeah, it's going to be way out in a couple of years. There's some analysts notes out there, I don't know the exact numbers saying it will eventually be accretive, and that's going to help Meta .

But what happens in the meantime to the business between that? There's a lot of things that could overwhelm that. It could go on the back burner if it doesn't get enough sign up. So that's a long way to go before it's actually going to be a big part of the earning statement .

Julie Morgan: And Kim, next week, of course, we will have a poll in the Wall Street Breakfast newsletter, our daily one page news summary. Do you possibly have a sneak peek at what we'll see?

Kim Khan: Well, we're kicking off earnings season, so I think it makes sense for us to ask people what they think is going to happen with this latest earnings season. It's going to be an interesting one, especially if you're going to be counting the number of times AI is mentioned on conference calls. We should probably kind of figure out an over under for that.

Julie Morgan: So in addition to appearing in the Wall Street Breakfast newsletter, our daily one page news summary, I'll also remind you about it here on the Wall Street Breakfast podcast. That's it for us today. Thanks so much for listening and we'll see you next time.

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