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The United States’ biggest banks are in the hot seat this week.

JPMorgan Chase, Citigroup and Wells Fargo kick off bank earnings on Friday morning. Goldman Sachs and Bank of America report quarterly results next week. The financials sector is expected to see annual earnings growth of 4.3% during the second quarter, according to FactSet.

Investors will watch bank earnings closely for clues about how the American consumer and economy are faring in the face of sky-high interest rates and cooling, yet still elevated, inflation.

Dave Sekera, chief US market strategist at Morningstar, says that he’s watching for insights on banks’ delinquency rates. Consumers have increasingly fallen behind on or missed payments in recent months as they get squeezed by high interest rates. The share of credit card balances in serious delinquency, defined as payments 90 days or more late, rose to its highest percentage since 2012 during the first quarter, according to the Federal Reserve Bank of New York.

Corporate earnings and economic data in recent months have signaled that consumers are more judicious about their spending. US retail sales edged higher at an unexpectedly weak pace in May. Target, Home Depot and Best Buy have reported that shoppers are spending less on discretionary items, while discount retailers are benefitting as Americans hunt for deals.

The US financial system appears to be in a solid place after last year’s regional banking crisis. All 31 banks evaluated in the Fed’s annual stress test, which assesses the financial resilience of banks under hypothetical fraught conditions, passed this year. But banks could see higher losses compared to 2023 if the economy were to experience a downturn, the Fed warned.

Recession isn’t the market consensus. Stocks have surged to repeated record highs in recent weeks as strong corporate earnings expectations, cooling inflation and a resilient labor market build the case for a soft landing, or a scenario in which the Fed brings inflation down without triggering an economic slump. Investors are wagering that the central bank will begin easing rates as soon as September, according to the CME FedWatch Tool.

Still, that doesn’t mean banks aren’t preparing for a less ideal scenario. Wall Street will keep an eye on their loan reserve levels. Those reserves contain cash that banks stockpile to protect themselves against potential defaulted loans.

Commercial banks and savings institutions insured by the Federal Deposit Insurance Corporation had roughly $218.6 billion reserved for loan losses during the first quarter of this year, according to FDIC data. That’s up from the $202.1 billion financial institutions set aside during the same period in 2023 and $175.5 billion the year before that.

JPMorgan Chase CEO Jamie Dimon said at the company’s global China summit in May that while consumers are still resilient, he believes a recession isn’t off the table.

“The worst outcome for all of us is what you call stagflation: higher rates and recession,” Dimon said in an interview with CNBC. “The world will survive that, but I just think the odds are a little bit higher than other people think.”

The biggest danger facing the American economy for years has been inflation, reports my colleague Matt Egan.

Now, another problem is emerging as a credible threat on the horizon: Unemployment.

Just as inflation continues to cool, yellow lights are flashing in the still-strong jobs market. The Federal Reserve must now confront the risk that it’s making a mistake by keeping interest rates too high for too long.

That’s why some economists are pleading with the Fed to ease up its inflation fight—before high interest rates, which it’s used to tame surging prices, grind the US economy into a recession.

“It’s time to cut rates,” said Joe Brusuelas, chief economist at RSM. “Inflation is fading as the primary focus of concern. The balance of risks is slowly tipping towards higher unemployment.”

Mark Zandi, chief economist at Moody’s Analytics, said the labor market is straining under the weight of high borrowing costs.

“The biggest danger is a policy mistake: The Fed keeps rates too high for too long,” Zandi told CNN in a phone interview. “Right now, the Fed is signaling a September cut. I think that’s okay, but if they wait any longer than that, I fear they are going to overdo it.”

Even Fed Chair Jerome Powell is acknowledging a significant shift in the risk calculus.

Read more here.

Target will stop accepting personal checks from customers starting July 15, the latest retailer to stop taking the increasingly rare form of payment and to try to make checkout less cumbersome for shoppers, reports my colleague Erika Tulfo.

The company cited “extremely low volumes” of checks in a statement to CNN.

“It’s hardly surprising Target has decided to stop accepting them,” said Neil Saunders, retail analyst at GlobalData. “That said, there will be small pockets of people, including more elderly consumers, who will lament that they are being phased out.”

The company said its stores will continue to accept other payment methods, including Apple Pay, SNAP/EBT, buy now/pay later services, Target Circle Cards, its store card, plus cash, credit and debit cards.

Around 61% of Americans are still writing checks, according to a 2024 report by Abrigo, a financial software solutions company. It also found that younger consumers, including Gen Z and Millennials, self reported writing more checks than older consumers from Gen X.

Target is not the only store to wave farewell to checks. Grocery store Aldi, for instance, notes on its website that it does not accept checks. Amazon-owned Whole Foods also does not take checks as a form of payment.

Read more here.

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