CPI Next as More Big Banks, ASML Unveil Earnings

Colette Eau Claire (0:05)

Welcome to the Schwab Market Update Podcast, where we prepare you for each trading day with a recap of recent news and a look at what's ahead.

I'm Colette Eau Claire, and here is Schwab's Early Look at the Markets for Wednesday, October 14th. After mixed results from big US banks kicked off earnings season yesterday, investors braced for more bank earnings and the September consumer price index before the open. Consensus for CPI points to a sharp 0.6% month-over-month increase in the headline figure, according to briefing.com, but only a 0.2% rise in core CPI that excludes volatile food and energy prices. Year-over-year headline CPI is expected to rise 3.7%, while core annual CPI is seen hitting 2.5% compared with 3.6% and 2.4% the prior month. CPI and PPI are key to weather rate hike odds shift, said Lizanne Saunders, chief investment strategist at the Schwab Center for Financial Research or Skiffer. As of late Tuesday, odds of an October hike stood at 22%, according to the CME FedWatch tool, but the market factors in at 89% chances of a hike before year end. We still expect a hike later this year, said Colin Martin, head of fixed income research and strategy at Skiffer. Beyond CPI headlines, it's important to get a sense of monthly inflation breadth, meaning the percentage of CPI components up more than 3% year over year. That percentage reached 60% in August, and that probably needs to decline sharply in September for the Fed to feel there's been progress. Fed officials have emphasized the importance of this metric. Treasury yields back from Monday's holiday dropped early Tuesday after Fed Governor Christopher Waller said higher yields are curbing demand in interest rate-sensitive sectors, Bloomberg reported. That implies yields are doing some of the Fed's job for it. However, the strength in treasuries behind that yield slide didn't last, and the benchmark 10-year yield ended down just two basis points. Late selling might have reflected pre-CPI anxiety. In an interview with Bloomberg late Tuesday, New York Fed President John Williams said one more rate hike is appropriate this year, and he doesn't see the need for another in 2027 He expects inflation to cool next year, Bloomberg reported.

In a sign of recent financial industry struggles, the usually reliable JP Morgan Chase missed expectations, while Wells Fargo offered mixed results. However, Citigroup and Goldman Sachs both topped consensus. Overall, the four big banks reporting Tuesday had a combined third quarter profit of $32 billion, up 14% annually, the Wall Street Journal noted, while combined revenue rose 9% to $115 billion, powered by strong consumer spending and AI loan demand. Today brings results from Bank of America and Morgan Stanley. Last month, Bank of America warned that its third quarter investment banking revenue could slow and forecast flat trading revenue. There were several reasons, some of Tuesday's bank results disappointed, though the industry looks healthy overall, judging from their releases. With JPMorgan Chase, it was an 8% quarter-over-quarter investment banking fee drop. Those fees were up 14% from a year earlier, and the company reported strong levels of client activity. Nevertheless, the quarterly drop reinforced ideas that the strong start to the year for initial public offerings or IPOs across the banking industry flagged in the third quarter. This came as some prominent firms postponed IPOs, possibly due to tighter financial conditions as yields rose. Fixed income trading growth also slowed across the industry, possibly due to the bond market slump. There were things to like in JPMorgan's results, including average loans up 10% year-over-year and a 6% rise in net interest income. That's the difference between what a lender earns on loans and pays out on deposits. Wells Fargo saw net interest income rise 5%, evidence that banks can profit in a rising rate environment and that high yields haven't yet hurt the loan business. Both banks cited solid consumer and business trends and posted solid loan growth. Combing through bank results, JPMorgan Chase posted earnings per share of $5.57 short of the $5.90 consensus, while revenue of $50.91 billion missed consensus of $51.22 billion. Wells Fargo's revenue was up 2% year-over-year but short of consensus. It was the third time in four quarters Wells Fargo has missed revenue consensus, Market Watch noted.

Goldman Sachs reported a strong quarter, with earnings per share powering past consensus. Revenues rose 23% annually, driven by global banking and markets, though that business suffered a sequential loss. Citigroup reported earnings and revenue that topped consensus. Revenue rose 8% year-over-year, driven by growth in services, wealth and markets and banking. Equities trading had a strong quarter, and net interest income rose 20% annually.

Tech remained under pressure Tuesday after another tough day in South Korea's markets. Memory stocks slumped this week on worries about possible Chinese competition with cheaper offerings. Micron, SK Hynex and Sandisk all fell a second straight day.