June 14, 2017

The major stock market averages opened higher despite a weak retail sales report. The Dow and SPX are currently up 9 pts & .2%, respectively. The Nasdaq is up .3%. The defensive sectors are catching a bid for a change (real estate, utilities, consumer staples). Financials is the only sector in the red after some less than stellar earnings reports. WTI crude is trading up around $46.45/barrel. Bonds are sharply higher in price, lower in yield after a soft inflation report. The 5- and 10-year Treasury note yields dipped to 1.86% & 2.32%, respectively. 

JP Morgan (JPM) reported second quarter results that beat Wall Street forecasts. On a year-over-year basis revenue climbed 3% and earnings per share rose 20%. The beat was primarily driven by higher net-interest margins due to the Federal Reserve’s recent rate hikes. Net-interest margin rose 11 bps to 2.33%. The bank’s return on equity (ROE) reached 12%, which is considered healthy. Loan growth was up 8% y/y, which is good news.  Investors, however, are choosing to focus on the fact that securities trading was down about 14%. The stock is down 1.6% at the moment. On the earnings conference call, CEO Jamie Dimon addressed with some frustration our government’s inability to get things done. “There would be much stronger growth if there were more intelligent decisions and less gridlock.” He outlined his priorities for our nation: repairing infrastructure, reducing business regulation, reforming the tax code, and improving education.

Wells Fargo (WFC) reported zero percent revenue growth and 4% earnings growth for the quarter. Earnings did beat Wall Street’s consensus forecast, but only due to some 1-time benefits (i.e. gain on the sale of Wells Fargo Insurance Services). So analysts are not viewing this as a strong quarter for the bank. Total deposits grew 5% and loans were up 1%. The net-interest margin declined a few basis points to 2.74%, probably due to weaker retail bank loans. In addition, Wells is a big mortgage originator, and mortgage banking income fell 18%. The bank’s return on equity came in at 11.95%. The stock is down 1.95% at the moment.  

The Consumer Price Index (CPI) decelerated sharply to 1.6% y/y growth in June. Retail inflation is moving farther away from the Federal Reserve’s long-term target of 2%. Core inflation—excluding food & energy—fared slightly better, rising 1.7% y/y as expected. Healthcare prices continue to race ahead, but in June we saw lower prices for gasoline, apparel, autos and cellphone service. 
Here’s the way Barron’s reacted: “The Fed may be blaming this stretch of weakness on special factors, but that argument is losing force.”  

US retail sales decelerated to 2.8% y/y growth in June. That’s the slowest rate of growth since August of last year, and it comes as a disappointment to economists. Here again, weakness stood out in department stores, restaurants, and gasoline stations. On the other hand, online “non-store” retailers experienced a sharp rise in sales, along with building materials. This is not good news, as it will subtract from economic growth (GDP) for the second quarter. 

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