US banks rose strongly yesterday and will remain in focus as JP Morgan, Citigroup, and Wells Fargo release Q3 earnings.
· US stocks reversed higher after hotter-than-expected US inflation data
· GBP/USD holds gains & FTSE rises on optimism that the Chancellor will backtrack some tax cuts
· US retail sales are expected to rise 0.2% MoM as the consumer remains resilient
Stocks in Europe and on Wall Street performed a sharp reversal yesterday and ended the session on higher ground.
Hotter-than-expected US inflation data cemented expectations for a 75 basis point rate hike in November and even saw the market start to price in a 1% rate hike next month. The CPI data confirms that inflation is much stickier than initially feared, which means that the Fed could be required to keep interest rates higher for longer.
The selloff in US stocks was short-lived, and the turnaround coincided with an improved mood in the global bond market and optimism over developments in the UK.
Chancellor, to backtrack?
In the UK, attention remains firmly focused on Westminster and the BoE. The pound rallied 2% against the dollar yesterday, and the gilt market staged a recovery as the BoE’s hard deadline appeared to be working. The UK central bank bought a record £4.68 billion in gilts to shore up the market as pensions sold to cover their positions. News that the government is considering scrapping parts of the min-budget is also helping the mood surrounding UK assets. The question is, what happens from here?
The market will want to hear something from the Chancellor today for the pound to hold onto its gains and the gilt market to retain a sense of order. Should the BoE stick to its deadline today and the Chancellor fail to make any statement today, the selloff in gilts and the pound could continue on Monday.
The strong close on Wall Street has transferred to Europe, which is set to push higher on the open. The eurozone economic calendar is quiet today; attention will be on US bank earnings and US retail sales in the US session.
US banks earnings
US banks will kick off earnings season today. A close eye will be on bellwether JP Morgan, as well as sector peers Citigroup, Wells Fargo, and Morgan Stanley. The earnings come to a rather bleak economic backdrop with fears of a recession rising. However, rising interest rates will have helped boost net interest income, and strong commercial loan volumes are likely to offset slowdowns in mortgage demand. US banks will likely set aside $4 billion for potential losses from bad loans. This is smaller than those set aside at the start of the pandemic. At this point, losses are not expected to rise sharply. However, as the economic outlook continues to deteriorate over the coming months. guidance will be watched closely.
US retail sales
The US consumers have been resilient this year despite the deteriorating economic picture and surging prices. Expectations are for retail sales to rise 0.2% MoM in September after rising 0.3% in August. Sales in July were downwardly revised to -0.4%. Still, this is only the second fall in sales this year. Weaker-than-expected sales could unnerve the market, heightening recession fears and pulling stocks lower.
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