August 19, 2022

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Stocks rise after bank earnings, interest rate hike fears subside

Stocks rise after bank earnings, interest rate hike fears subside

Suspension

US stocks rose on Monday after Goldman Sachs and Bank of America beat revenue expectations and amid growing evidence that the Federal Reserve will not put more pressure on interest rates at its next meeting.

The Dow Jones Industrial Average rose 0.2 percent, or 60 points, in afternoon trading, while the broader S&P 500 Index rose 0.4 percent, and the technology-heavy Nasdaq added 0.9 percent. Wall Street snapped a five-day losing streak on Friday, boosting the Dow Jones Excellent Index by more than 650 points, albeit not enough to lift the three major indexes out of the week’s negative column.

The bright mood reflects a belief that the central bank will not step up an already aggressive plan to raise interest rates to curb hyperinflation. After the Bureau of Labor Statistics released data last week showing The inflation rate was higher at 9.1 percent In June than a year earlier, many market watchers were concerned that the Federal Reserve might choose to raise interest rates by a full percentage point, or 100 basis points, at its July 27-28 meeting instead of the widely expected 0.75 percentage point.

A 100 basis point increase would be a huge jump, because the Fed hasn’t raised interest rates that much since the early 1990s. It would also show a clear rally earlier this year, fueling Fed critics who argued that officials acted too slowly to tackle price hikes and are only now fighting inflation from behind.

Mixed messages about the economy raise questions about the risks of a recession

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But the monetary and rate hike path reflects the Fed’s delicate balancing act. While rate increases are designed to cool an economy, they may also push it into recession, by slowing economic activity too aggressively and too quickly. As Fed officials have acknowledged, the need to stabilize prices may come at the cost of slower growth and layoffs.

Central bankers have raised interest rates three times this year: a quarter point in March, half a point in May and three quarters of a point in June, surprising some on Wall Street.

The latest monthly jobs report showed that the US labor market maintained its solid pace in June, keeping the unemployment rate at 3.6%. Moreover, corporate earnings and consumer spending remained resilient, highlighting the conflicting signals that officials and analysts are analyzing to get a sense of the direction the economy is headed.

Volatility may increase this week as Wall Street turns its attention to corporate earnings.

On Monday, Goldman Sachs reported better-than-expected quarterly results before the opening bell. Although revenue fell 23 percent, to $11.86 billion, it was $1 billion more than analysts’ estimates thanks to a 55 percent increase in fixed income revenue, including government and corporate bonds. Profits fell 48 percent to $2.79 billion as a result of the industry-wide decline in investment banking activities. Goldman shares rose 3.6 percent

Meanwhile, Bank of America reported a 5.6 percent jump in revenue, to $22.79 billion versus expectations of $22.67 billion. The bank benefited from higher interest rates, which resulted in a 22% increase in net interest income. But profits fell 32% to $6.25 billion in the second quarter. Stocks fell 1 percent.

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Results from Charles Schwab and IBM appear later on Monday, and from Netflix, Johnson & Johnson, Tesla, Twitter and a host of other companies in the coming days.

June inflation rose 9.1%, a new 40-year high, amid rising gas prices

And rising fuel costs are also weighing on US companies. Delta, the first major airline to report earnings in the second quarter, posted a quarterly profit as travelers sought higher airfares. Delta fuel prices are up 37 percent, compared to the previous three-month period. The airline said it has employed 18,000 employees since the start of 2021, bringing its headcount to 95 percent from its pre-pandemic level. Even with increased hiring, passengers are dealing with widespread flight cancellations. American Airlines and United Airlines announced earnings later this week and Southwest publications at the end of the month.

The global economic outlook has investors worried as signs of recession emerge amid rising inflation, putting central banks in the spotlight. The European Central Bank is set to meet on Thursday as the euro zone suffers from high inflation, a mounting energy crisis and other fallout from Russia’s invasion of Ukraine. The bank is expected to raise interest rates for the first time in 11 years.

Some economic data is showing signs of slowing, particularly in the previously hot housing market, reflecting the consequences of higher interest rates, which make loans more expensive for businesses and consumers.

A higher dollar could help the Fed fight inflation

Confidence among builders of single-family homes has fallen this month, according to a new survey. The National Association of Home Builders/Wells Fargo Housing Market Index, a monthly overview of market conditions, showed sentiment had dropped to levels not seen since the pandemic’s first summer, when the public health crisis engulfed the national economy. Homebuilders’ confidence is down 12 points compared to June’s numbers, and is following a downward trajectory that began in March, when the Federal Reserve began raising interest rates.

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The cold housing market reflects broader changes in the economy as policy makers work to control inflation. Near-zero interest rates in 2020 and 2021 helped fuel the housing market boom and coincided with record-shattering gains on Wall Street.