Fed’s Powell pledges to combat inflation ‘forcefully,’ but warns of economic pain ahead
Federal Reserve Chairman Jerome Powell on Friday delivered a stark message on the state of the U.S. economy at the annual central bank gathering in Wyoming: Inflation remains painfully high, and cooling it will require forceful action that could soon bring “pain” to households and businesses nationwide.
In his hotly anticipated speech at the Kansas Federal Reserve’s Jackson Hole symposium, Powell reiterated a pledge to “forcefully” fight inflation that is still running near the hottest pace in 40 years and wrestle it closer to the Fed’s 2% goal.
“While higher interest rates, slower growth, and softer labor market conditions will bring down inflation, they will also bring some pain to households and businesses,” he said. “These are the unfortunate costs of reducing inflation. But a failure to restore price stability would mean far greater pain.”
Even with four consecutive interest rate hikes, including two back-to-back 75 basis point increases, Powell stressed that the Fed is not in a place to “stop or pause” – an unwelcome sign for investors who were predicting a rate cut next year.
The current benchmark federal funds range of 2.25% to 2.50% is around the “neutral” level, meaning that it neither supports nor restricts economy activity. But the Fed chief signaled that a restrictive stance will almost certainly be necessary in order to prevent inflation from becoming entrenched in the economy, which could further weigh on businesses.
“We are moving our policy stance purposefully to a level that will be sufficiently restrictive to return inflation to 2%,” he said, suggesting that “restoring price stability will likely require maintaining a restrictive policy stance for some time. The historical record cautions strongly against prematurely loosening policy.”
Dow drops 400 points after Powell reiterates Fed will continue to raise rates to fight inflation
Stocks fell sharply Friday after Federal Reserve Chair Jerome Powell said he will continue to raise rates to fight inflation in his Jackson Hole speech.
The Dow Jones Industrial Average dropped 407 points, or 1.22%. The S&P 500 fell 1.5% and the Nasdaq Composite slid 1.84%.
Those moves come after a hawkish speech out of the Fed chair as Wall Street sought information on the pace of future interest rate hikes.
“Restoring price stability will likely require maintaining a restrictive policy stance for some time. The historical record cautions strongly against prematurely loosening policy,” Powell said.
Meanwhile, traders absorbed one of the Fed’s favorite inflation measures, the personal consumption expenditures data, which on Friday showed price increases eased in July. The University of Michigan consumer sentiment index showed a better-than-expected reading.
“It was fine. It was hawkish enough, but it wasn’t over the top,” said Wells Fargo’s Michael Schumacher. “There was expectations for a very hawkish speech so it’s hard to measure up to that.”
Communication services and information technology were the biggest laggards in the S&P 500 as investors fretted over the likelihood of higher interest rates. Meanwhile, utilities and energy were the best-performing sectors in the broader market index.
The major averages were on pace for their second straight down week. The Dow is on track for a 1.2% decline. The S&P 500 and Nasdaq Composite are heading to slightly smaller declines of roughly 0.7% each.
CIBC Reports $1.67B Q3 Profit, Down From $1.73B A Year Ago
The Canadian Press – Canadian Press – Thu Aug 25, 5:18AM CDT
TORONTO — CIBC says it earned $1.67 billion in its third quarter, down from $1.73 billion in the same quarter last year.
The bank says its net income amounted to $1.78 per diluted share for the quarter ended July 31, down from $1.88 per diluted share a year earlier.
Revenue totalled $5.57 billion, up from $5.06 billion in the same quarter last year.
Provisions for credit losses totalled $243 million compared with a reversal of credit losses that amounted to $99 million in its third quarter last year.
On an adjusted basis, CIBC says it earned $1.85 per diluted share compared with an adjusted profit of $1.96 per diluted share a year ago.
Analysts on average had expected an adjusted profit of $1.83 per diluted share, according to financial markets data firm Refinitiv.
This report by The Canadian Press was first published Aug. 25, 2022.
Higher interest rates boost lending margins at TD and CIBC
Two of Canada’s largest banks are reaping rewards from higher interest rates as profit margins on loans increased in their fiscal third quarter, though growing economic unease threatens to undercut some of those gains in the near future.
Toronto-Dominion Bank (TD) reported a lower third-quarter profit than in the same period a year ago, partly because of high costs driven by inflation and rising loan-loss provisions. Canadian Imperial Bank of Commerce (CIBC) also saw earnings dip in the quarter, faced with the same headwinds.
But both banks recorded good gains in net interest margins – the difference between what banks charge on loans and pay on deposits. Those profit margins were squeezed in the COVID-19 pandemic as central banks cut interest rates to ultralow levels. But central bankers have rapidly jacked rates up again to fight high inflation, which is allowing lenders to reprice loans and deposits and eke out more profit.
Banks expect margins will continue to increase in the coming quarters, albeit at a slower pace. They also acknowledged, however, that with inflation running high, borrowing costs rising and significant economic uncertainty, demand for new loans – especially residential mortgages – could dip. And banks expect loan defaults will start to creep higher, from unusually low levels.
“If all the forecasts are correct with respect to what will happen in the economy, with the rising rates, with the slowing down a bit of credit demand, you’re going to see a bit of offsetting of those factors,” said Hratch Panossian, CIBC’s chief financial officer, in an interview.
Between expanding margins and cooling demand for credit, however, “we’re confident that net interest income will continue having strong momentum going forward,” he said.
In TD’s U.S. business, the gains were much larger, with margins up 46 basis points year over year to 2.62 per cent. The bank’s heavy focus on retail consumers and commercial clients makes it the most sensitive to interest rates among Canadian lenders, and that has set high expectations for the boost TD will get from rising rates.
“The bar was set very high here and while TD did not leap over it, the bank did gingerly step over it,” said Meny Grauman, an analyst at Scotia Capital Inc., in a note to clients.
Banks are also still expecting a rebound in borrowing on credit cards, which are a high-margin product because they charge high interest rates. Spending levels on cards are back above prepandemic levels, with transaction volumes up 10 per cent year over year at TD and spending levels reaching a new record. But the balance customers carry on those cards is still lower than it was prior to COVID-19. When that borrowing bounces back, it could also help banks’ lending margins.
“We are seeing a lot of pent-up demand,” TD chief financial officer Kelvin Tran said in an interview.
TD earned $3.21-billion, or $1.75 a share, compared with $3.54-billion, or $1.92 a share, in the same quarter last year. But the bank also booked a $678-million accounting loss on a hedging strategy it is using to manage interest-rate risk related to its US$13.4-billion acquisition of U.S.-based bank First Horizon Corp., which is awaiting approvals from regulators.
Adjusting to exclude the hedging costs and other items, TD said it earned $2.09 a share, above the analysts’ consensus estimate of $2.04 a share, according to Refinitiv.
In the same period, CIBC earned $1.67-billion, or $1.78 a share, compared with $1.73-billion, or $1.88 a share, a year earlier. Excluding costs related to CIBC’s acquisition of retailer Costco’s credit card portfolio and other items, the bank said it earned $1.85 a share, whereas analysts expected $1.84 a share.
In most cases, year-over-year profit comparisons have been hampered by increasing loan-loss provisions, weak capital markets results and rising costs. But underlying trends such as growth in loan balances and the health of consumer credit still look strong.
“Results are fairly solid in light of a challenging macroeconomic outlook,” said Rob Colangelo, vice-president and senior credit officer at Moody’s Investors Service, in an interview. “We could see some moderation in loan growth, you could see margins continue to expand. … Overall, the environment still bodes well for the banks.”
Even so, lenders are adopting a more conservative stance by adding provisions for credit losses to build reserves to cover loans that could default. TD added $351-million in provisions in the quarter and CIBC earmarked $243-million. In both cases, some of the increase was driven by changes to economic models that anticipate future problems with loans still being paid back today.
“This quarter, we have updated some of our economic scenarios to be more conservative,” TD’s Mr. Tran said. “There’s a lot of uncertainty in the market and we’re going to have to see how it plays out”
Toronto Dominion Bank TD-T +0.74%increase reported lower third-quarter earnings as costs rose faster than revenue and the bank set aside more loan loss provisions, but is starting to reap the benefits of rising interest rates in its core retail banking operations.
TD earned $3.21-billion, or $1.75 per share, in the quarter that ended July 31. That compared with $3.54-billion, or $1.92 per share, in the same quarter last year.
But TD’s earnings were affected by an interest rate hedging strategy implemented as the bank works to close its US$13.4-billion acquisition of U.S.-based bank First Horizon Corp., which created a net loss of $678-million.
Adjusting to exclude the hedging costs and other items, TD said it earned $2.09 per share, above analysts’ consensus estimate of $2.04 per share.
TD and CIBC’s net income margins, Canadian retail segment
The bank kept its quarterly dividend unchanged at 89 cents per share.
Among the five major banks that have reported earnings so far, TD is the third to surpass earnings estimates. Banks have been stockpiling provisions for credit losses – the funds set aside to cover loans that could default in future – in a reversal after a string of recent quarters in which they recovered loan loss reserves built up early in the COVID-19 pandemic.
In the fiscal third quarter, TD set aside $351-million in provisions, which was less than expected. Of that, $11-million was earmarked against loans that are still being repaid.
“This might be the first bank where we could view their reserve build as a little on the ‘light’ side,” said Darko Mihelic, an analyst at RBC Dominion Securities Inc., in a note to clients.
TD’s chief financial officer, Kelvin Tran, said in an interview that the bank updated some of its economic models to be more conservative. “There’s a lot of uncertainty in the market and we’re going to have to see how it plays out,” he said.
TD reported rising profits from retail banking, its core business, as it starts to benefit from rising interest rates. In Canada, retail profit was up 6 per cent to $2.25-billion, with loan volumes up 9 per cent. And in the U.S., retail profit rose 11 per cent to $1.44-billion.
TD is the most sensitive to interest rates of the major Canadian banks, and as central banks have rapidly increased benchmark rates, TD’s profit margins on loans are increasing. The bank’s U.S. net interest margin increased by 46 basis points year over year, and its Canadian margin was up 9 basis points. (100 basis points equal one percentage point).
“Everything else being equal, we would expect our margin to continue to expand,” Mr. Tran said.
Wholesale banking profit fell 18 per cent to $271-million in a challenging quarter for capital markets. But the division’s revenue declined by just 1 per cent.
On Wednesday, TD announced two new appointments to its board of directors: Mary Winston, a former chief financial officer at retailers such as Family Dollar Stores Inc. and Giant Eagle, as well as Cargojet Inc. founder and CEO Ajay Virmani.
Gold range-bound as investors wait for Fed chair’s speech
Gold traded in a narrow range on Wednesday as investors awaited more insight into the outlook for interest rates from U.S. Federal Reserve Chair Jerome Powell when he speaks at central bankers’ symposium at Jackson Hole later this week.
Spot gold fell 0.2% to $1,744.81 per ounce, trading in a $9 range. It advanced 0.7% in the previous session. U.S. gold futures dipped 0.3% to $1,755.90.
National Bank reports third-quarter profit down from year ago
National Bank of Canada NA-T -0.74%decrease reported its third-quarter profit fell compared with a year ago as it was hit by higher provisions for credit losses due to a less favourable economic outlook.
The Montreal-based bank says it earned net income of $826-million or $2.35 per diluted share for the quarter ended July 31, down from $839-million or $2.36 per diluted share a year ago.
Revenue totalled $2.4-billion, up from $2.3-billion in the same quarter last year.
Provisions for credit losses amounted to $57-million for the quarter compared with a reversal of provisions for credit losses of $43-million a year earlier.
On an adjusted basis, National Bank says it earned $2.35 per diluted share compared with an adjusted profit of $2.36 per diluted share a year ago.
Analysts on average had expected an adjusted profit of $2.34 per share, according to financial markets data firm Refinitiv.
Brent oil climbs above $100 a barrel amid talk about OPEC output cuts
Benchmark Brent oil climbed above $100 a barrel on Wednesday after Saudi Arabia suggested this week that OPEC could consider cutting output in response to poor liquidity in the crude futures market and fears about a global economic downturn.
Brent for October settlement reached a three-week high, trading up $1.30, or 1.3 per cent, at $101.52 a barrel by 0850 GMT. U.S. crude was up $1.18, or 1.3 per cent, at $94.92 a barrel.
Contracts for both crudes soared on Tuesday after Energy Minister Prince Abdulaziz bin Salman flagged the possibility of cutting production amid poor futures market liquidity and macro-economic fears.
OPEC sources later told Reuters any cuts by the Organization of the Petroleum Exporting Countries and its allies, known as OPEC+, were likely to coincide with a return of Iranian the market should Tehran secure a nuclear deal with world powers.
A U.S. official said on Monday that Iran had dropped some of its main demands on resurrecting a deal.
OPEC+ is already producing 2.9 million barrels per day less than its target, sources said, complicating any decision on cuts or how to calculate the baseline for an output reduction.
“The oil price and supply outlook suggest that an OPEC+ cut is not currently warranted,” PVM analyst Stephen Brennock said, outlining possible threats to supply underpinning the market.
“Global oil supply could take a hit as peak U.S. hurricane season approaches,” he said. “Elsewhere, future supply outages in Libya cannot be discounted while Nigeria’s oil fortunes show little sign of improving.”
U.S. crude stockpiles fell by about 5.6 million barrels for the week ended Aug. 19, according to market sources citing American Petroleum Institute figures. Analysts had estimated a drop by 900,000 barrels in a Reuters poll.
U.S. government figures are due out on Wednesday.
Market participants will be watching Federal Reserve Chair Jerome Powell’s speech at the Jackson Hole central bank symposium on Friday. He is expected to stress the Fed’s focus on controlling inflation.
RBC profit misses forecasts, challenging economic outlook prompts loan-loss provisions
Royal Bank of Canada’s third-quarter profit fell 17 per cent as the bank earmarked provisions against possible loan defaults, adopting a more cautious stance against a challenging economic outlook.
RBC RY-T -0.89%decrease earned $3.58-billion, or $2.51 per share, in the three months that ended July 31. That compared with $4.3-billion, or $2.97 per share, in the same quarter last year.
On an adjusted basis, RBC said it earned $2.55 per share, well below analysts’ consensus estimate of $2.66 per share, according to Refinitiv.
RBC kept its quarterly dividend unchanged at $1.28 per share.
The bank set aside $340-million of provisions for credit losses – the funds banks hold to cover loans that may default. Of that, $177-million is against loans that are still being repaid, but which could be at risk in future based on predictions that take weakening economic forecasts into account. That signals that RBC is rebuilding its buffer against possible loan losses after several quarters in which it released large amounts of provisions that it had stockpiled early in the COVID-19 pandemic.
The bank’s results were also hurt by weak results from its capital markets division, where profit of $479-million was down 58 per cent from elevated levels last year. That was partly due to $385-million in loan underwriting markdowns the bank took, primarily in its U.S. division, most of which are unrealized.
Even excluding those markdowns, RBC’s corporate and investment banking revenue fell 49 per cent, as equity and debt origination as well as loan syndication activity slowed dramatically.
The bank’s core personal and commercial banking division also reported a more modest 4-per-cent drop in profit, to $2-billion, though that was driven mostly by rising provisions for credit losses. Revenue was up 11 per cent from a year earlier, with average loan balances increasing 10 per cent and lending margins expanding.
Despite declines in equity and bond markets during the quarter, wealth management profit of $777-million was up 4 per cent.
RBC’s capital levels held steady, with a common equity Tier 1 (CET1) ratio of 13.1 per cent, down 10 basis points from the previous quarter. (100 basis points equal one percentage point). In part, that was because RBC bought back $1.3-billion in shares during the quarter.
