US Banks Are Set to Report Q1 Earnings Amid Inflation and Deposit Outflow Concerns

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This week marks the start of the first quarter earnings season, with investors turning their attention to the state of play in corporate America. Big banks including JPMorgan, Wells Fargo, Citi, and BlackRock are among the institutions set to report results on Friday. The previous week saw little change in the markets, with the Dow rising 0.7%, the S&P 500 fractionally lower, and the Nasdaq falling around 1%. However, the March jobs report released on Friday showed a slowdown in the hiring of the US economy, though this is not likely to stop another rate hike by the Federal Reserve next month.

According to data from the Bureau of Labor Statistics, 236,000 jobs were added to the US economy in March, with the unemployment rate dropping to 3.5%. Wall Street economists predict that there will be another 0.25% increase in the Fed's benchmark interest rate on May 3, but that this will be the final rate hike of the current cycle. Theodore Littleton, a senior economist at IFR Markets, suggests that this report shows that the labor markets are developing the way the Fed would like, but not quite quickly enough.

The inflation data from the Consumer Price Index (CPI) released on Wednesday will be critical to this calculation. The CPI is expected to show that headline inflation rose by 0.2% in March, marking the slowest pace of consumer price increases since August 2021. On a core basis, prices are expected to rise 0.4% over the prior month and 5.6% over last year in March. The cost of shelter, which rose 8.1% over the last year in February, has been the main contributor to elevated core inflation.

Investors will also be keeping a close eye on how the collapse of Silicon Valley Bank and Signature Bank last month has affected the country's biggest banks. Smaller regional banks have been offering updates on any deposit outflows in recent weeks, with JPMorgan, Citi, and Wells Fargo among the consortium that injected some $30 billion into First Republic to help the lender. The Federal Reserve has shown that $65 billion in deposits left the US banking system in the last week, with most of the decline coming from large banks.

In his annual letter to shareholders, JPMorgan CEO Jamie Dimon acknowledged that the current crisis is not yet over, and there will be repercussions from it for years to come. While avoiding a 2008-like scenario, in Dimon's view, does not make this bank crisis a good thing by any means, as any crisis that damages Americans' trust in their banks damages all banks.

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