Citigroup tops earnings estimates on better-than-expected trading revenue
Here are the numbers:
$2.02 per diluted share vs $1.55 a share Refinitiv estimate
Revenue: $19.19 billion vs $18.15 billion estimate
How big of a hit will Citigroup take on its exposure to the Russian invasion of Ukraine? That will be one question posed to Citigroup CEO Jane Fraser, who took over the New York-based bank a year ago. In that time, she’s announced plans to exit more than 13 markets outside the U.S. in a bid to improve the bank’s returns.
Citigroup, the most-global of big U.S. banks with operations in more than 100 countries, likely has the most significant exposure to the Ukraine conflict. Analysts will be keen to understand the various impacts of the war on the firm, including on its planned sale of a Russian consumer banking unit.
Last month, Fraser gave analysts a new set of financial targets, including a medium-term goal for returns on tangible common equity, a key banking industry metric, of about 11% to 12%. The event was a chance for the bank to reset expectations after years of underperforming peers including JPMorgan Chase and Bank of America.
Like the rest of the industry, Citigroup is expected to experience a slowdown in investment banking revenue, somewhat offset by a benefit from rising interest rates.
Despite already trading at the lowest valuation among peers, Citigroup shares have lost 17% this year, compared with the 10.5% drop of the KBW Bank Index.
On Wednesday, JPMorgan said first-quarter profit slumped 42% as it posted losses tied to Russia sanctions and set aside money for future loan losses. After the report, its shares fell and hit a 52-week intraday low.
Musk’s best and final offer was to pay $54.20 per share for 100% of Twitter, and said that if his offer was not accepted he’d have to reconsider his position as a shareholder, according to an SEC filing. “I invested in Twitter as I believe in its potential to be the platform for free speech around the globe, and I believe free speech is a societal imperative for a functioning democracy,” Musk wrote. “However, since making my investment I now realize the company will neither thrive nor serve this societal imperative in its current form.” Musk said the takeover attempt is “not a threat, it’s simply not a good investment without the changes that need to be made.
Royal Bank of Canada and TD Bank were among the first big Canadian lenders to announce Wednesday that they were following the Bank of Canada and hiking their prime rates by 50 basis points. Bank of Nova Scotia and Canadian Imperial Bank of Commerce also said they’d raise their prime rates.
The prime rate of the banks will rise from 2.70 per cent to 3.20 per cent starting Thursday, April 14.
The Bank of Canada raised its key rate to 1 per cent from 0.5 per cent.
Bank governor Tiff Macklem said Wednesday even with the rise, rates were still far below the neutral rate, which the bank calculates at somewhere between 2 and 3 per cent.
“If demand responds quickly to higher rates and inflationary pressures moderate, it may be appropriate to pause our tightening,” Macklem said. “On the other hand, we may need to take rates modestly above neutral for a period to bring demand and supply back into balance and inflation back to target.”
Kevin Carmichael: Brace for more big hikes because the Bank of Canada is far from finished
Governor Tiff Macklem and his deputies raised the benchmark interest rate by half a percentage point on April 13, an aggressive move since central banks generally prefer to move in quarter-point increments.
Policy-makers also said they would initiate “quantitative tightening,” which means the central bank will remove itself as an active participant in the bond market. The Bank of Canada purchased hundreds of billions of dollars of bonds during the recession to put additional downward pressure on interest rates, and had been reinvesting what it earned when those assets matured. The reinvesting will now stop.
The outsized increase in borrowing costs, which took the benchmark interest rate to one per cent, was widely anticipated; the central bank had telegraphed that stronger-than-forecast inflation would force it to accelerate its march to a more normal interest-rate setting.
Less anticipated, perhaps, was the extent to which the economy is straining on the central bank’s reins. Macklem’s new quarterly economic forecast has gross domestic product increasing at an annual rate of six per cent in the second quarter, which is a rate of growth you would expect in the earliest days of a recovery, not when the recovery is over and the jobless rate at a modern low.
“The Canadian economy is strong,” he said in the opening statement at his quarterly press conference. “The economy has fully recovered from the pandemic, and it is now moving into excess demand.”
By “excess demand,” Macklem meant the central bank’s forecast suggests the economy is now growing faster than its capacity to generate goods and services without stoking inflation. The Bank of Canada revised its estimate of the “output gap,” an important concept in central banking, if mostly meaningless to the rest of us, to between -0.25 per cent and 0.75 per cent, compared with an estimate of -0.75 per cent and 0.25 per cent in January.
All that growth would be something to cheer if it wasn’t paired with equally strong inflation. The Bank of Canada acknowledged it underestimated how much the consumer price index would increase in the first quarter, and now predicts an average monthly gain of 5.6 per cent, compared with the 5.1 per cent it forecasted in January.
Policy-makers expect average headline inflation of 5.8 per cent in the second quarter, and forecast that price increases will remain well above the high end of their comfort zone — one per cent to three per cent — for the rest of the year.
“Today’s decision suggests the BoC is going on offence,” Charles St.-Arnaud, chief economist at Alberta Central and a former Bank of Canada staffer, said in a note to clients. “The door remains open to further (half-point) hikes.”
The Bank of Canada said the war in Ukraine was the primary reason it underestimated inflation. Russia and Ukraine are big exporters of oil, natural gas, wheat and other commodities, and prices for those important inputs have soared since Russian President Vladimir Putin’s invasion of Ukraine on Feb. 24.
As a result, the economy came out of the downturn firing on all cylinders. That’s creating more demand than there is supply, putting extra pressure on prices amid a war, drought, COVID-19 lockdowns and sundry other disruptions that have already put upward pressure on prices.
The Bank of Canada emphasized it is far from finished. Its new forecast discovered the economy is probably now operating at a level that exceeds estimates of what it can produce without stoking inflation. And yet the benchmark rate is still below its pre-pandemic level.
A second half-point increase when the central bank next updates its policy rate on June 1 would surprise no one.
Policy-makers said they are worried households and businesses will absorb current inflation as the new normal. The Bank of Canada is relying on its credibility with the public to keep expectations anchored.
Broad increase in U.S. producer prices underscores tough inflation battle for Federal Reserve
U.S. monthly producer prices increased by the most in more than 12 years in March amid strong demand for goods and services, the latest sign of persistently high inflation that could compel the Federal Reserve to aggressively tighten monetary policy.
The report from the Labor Department on Wednesday also showed strong underlying inflation pressures at the factory gate, raising doubts that a decline in the cost of goods, excluding food and energy, in March reported in Tuesday’s consumer prices data would be sustainable. Economists expect the U.S. central bank will hike rates by 50 basis points next month, and soon start trimming its asset portfolio.
“The broad-based increases reinforce yesterday’s CPI report that will keep the Fed on its aggressive tightening path in the coming months,” said Will Compernolle, a senior economist at FHN Financial in New York. “Supply chain easing, especially on the goods side of production, will be an important source of disinflation for the Fed to successfully achieve its goal of price stability.”
The producer price index for final demand increased 1.4 per cent, the largest gain since the government revamped the series in December 2009, after rising 0.9 per cent in February.
Goods prices increased 2.3 per cent, matching February’s advance. A 5.7 per cent rise in energy prices accounted for more than half of the increase in the PPI last month. There were increases in gasoline and electricity, but natural gas prices fell. Energy prices jumped 7.5 per cent in February.
Food prices climbed 2.4 per cent, though the cost of beef and veal fell 7.3 per cent. Wholesale prices of iron and steel scrap also rose, but the cost of cold rolled steel sheet and strip declined.
Inflation was initially fanned by a massive cash infusion from the government to cushion against the devastating impact of the coronavirus pandemic, which unleashed strong demand for goods and strained supply chains. Supply bottlenecks had started to ease, but progress was stalled by the Russia-Ukraine war. Renewed lockdowns in China to contain rising COVID-19 cases are also seen disrupting supply chains.
Services inflation is also building up amid the rolling back of pandemic restrictions on businesses. Wholesale services prices jumped 0.9 per cent in March after climbing 0.3 per cent in February. A 1.2 per cent rise in margins for final demand trade services, which measure changes in margins received by wholesalers and retailers, accounted for more than 40 per cent of the rise in services.
Stocks on Wall Street were higher. The dollar was steady against a basket of currencies. U.S. Treasury yields fell.
The Fed in March raised its policy interest rate by 25 basis points, the first hike in more than three years. Minutes of the policy meeting published last Wednesday appeared to set the stage for big rate increases down the road.
The cost of transportation and warehousing services also increased strongly last month. There were also gains in prices of hotel and motel accommodation, airline fares, in-patient care as well as hardware, building materials and supplies retailing.
But the cost of securities brokerage, dealing and investment advice fell 5.4 per cent. Portfolio management fees also decreased.
In the 12 months through March, the PPI jumped 11.2 per cent, the largest year-on-year increase since the current series was introduced in November 2010, after advancing 10.3 per cent in February.
Economists polled by Reuters had forecast the PPI rising 1.1 per cent and accelerating 10.6 per cent year-on-year. Excluding the volatile food, energy and trade services components, producer prices accelerated 0.9 per cent in March. The so-called core PPI increased 0.2 per cent in February. In the 12 months through March, the core PPI soared 7.0 per cent after rising 6.7 per cent in February.
The government reported on Tuesday that monthly consumer prices increased by the most in 16-1/2 years in March. But core goods prices dropped by the most in two years, restraining monthly underlying consumer inflation in March. That offered cautious hope that inflation, which by all measures has far exceeded the Fed 2 per cent target, has peaked.
Following last month’s strong core PPI readings, some economists said it was too soon talk about a sustained moderation in the monthly pace of core inflation. Based on the CPI and PPI data, economists are estimating that the core personal consumption expenditures (PCE) price index rose by about 0.3 per cent in March after climbing 0.4 per cent in February.
The core PCE price index is one of the inflation measures watched by Fed officials. It is forecast increasing by 5.3 per cent year-on-year in March after accelerating 5.4 per cent in February, which was the biggest rise since 1983.
“We would caution however that the ‘peak’ in core inflation could appear to be more of a ‘plateau’ over the coming months,” said Veronica Clark, an economist at Citigroup in New York. “While core PCE might not climb any higher on a year-on-year basis, we would increase 5%
Remember the bet on rebounding airline stocks? It’s now worth another look
Airline stocks have been a disappointing bet over much of the past year: We are more or less free to travel, yet stocks such as Air Canada, Delta Air Lines Inc. and Southwest Airlines Co. are still well off their highs.
But the impressive gains on Wednesday, following upbeat quarterly earnings from Delta, suggest that a bet on the sector’s recovery might still be worth pursuing.
Airline stocks cratered in the early stages of the pandemic, when lockdowns grounded planes and airline survival was an open question amid alarmingly large losses. Air Canada shares fell as much as 75 per cent in the first three months of 2020.
But the stocks are a key element of the so-called reopening trade – a group of companies that also includes cruise lines, cinemas and malls, which some investors expect to rebound sharply as the economy reopens and lives return to normal.
A year ago, as vaccines rolled out and authorities eased up on travel restrictions, the trade appeared to be paying off: In April, 2021, many near-dead stocks were up 100 per cent to 200 per cent from their pandemic lows.
But the strategy has floundered over much of the past 12 months.
In the case of airlines, Southwest is down 32 per cent over the past year (prior to Wednesday’s rebound). United Airlines Holdings Inc. is down 24 per cent over the same period, and the shares are still 50 per cent below their price at the start of 2020.
Air Canada fits right into the trend: The shares have fallen 23 per cent from their recent highs in June, and they are 56 per cent below their record highs in 2020.
However, the underpinnings still look compelling and are supported by Delta’s quarterly financial results released on Wednesday.
The airline reported a loss of US$940-million over the three months ended March 31, a period when the Omicron variant disrupted travel plans. However, the U.S. airline said that it was profitable in March and indicated that a return to normal is within reach as demand for travel surges.
Delta said that it will operate at 84 per cent of its 2019 capacity in the second quarter, as demand for both business travel and tourism picks up in spite of soaring costs.
Although Delta’s fuel costs surged 33 per cent over the previous quarter and are expected to rise further in the second quarter, airlines have been passing on these additional costs to consumers.
According to Hopper Price Tracker, the average round-trip U.S. domestic airfare this month is approaching US$350, up almost 50 per cent since the start of the year and higher than April ticket prices in 2019.
“Consumers have not been travelling over the past two years, so this is a category they are prioritizing,” Ed Bastian, Delta’s chief executive officer, said in a conference call with analysts.
Delta’s share price rose 6.2 per cent Wednesday, suggesting that investors are embracing the optimism.
The stocks of other airlines also rallied, signifying that Delta is perhaps not an outlier. Air Canada’s share price gained 5.8 per cent and Southwest rose 7.5 per cent.
Are there still elements to air travel worth worrying about?
Definitely. Rising interest rates could slow the recovery or perhaps push the North American economy into recession. And the Omicron subvariant, which has disrupted travel in Europe, shows that the pandemic is by no means over.
But with airline stocks still far below 2019 levels, the downside risks appear to be largely built in to share prices. What’s not built in: Travel patterns returning to normal as more routes reopen, consumers willing to pay more to get away and airlines returning to profitability.
The reopening trade has stalled. But it’s not dead.
Asia-Pacific stocks mixed as data shows China’s exports rose more than expected
Asia-Pacific stocks were mixed on Wednesday.
U.S. consumer prices rose 8.5% in March as compared with a year ago, the fastest annual gain since December 1981, according to official data released Tuesday.
The Reserve Bank of New Zealand on Wednesday announced its decision to raise the official cash rate by 50 basis points to 1.5%.
Mainland Chinese stocks were mixed ahead of the release of dollar-denominated China trade data for March, as concerns around the mainland’s Covid situation continue to weigh on investor sentiment.
Wall Street futures edged higher early Wednesday as investors continued to weigh the latest U.S. inflation figures and brace for the start of earnings season. Major European markets were mixed with the latest policy decision from the European Central Bank due tomorrow. TSX futures futures were positive as crude prices advanced on the situation in Ukraine and investors await an expected rate hike from the Bank of Canada.
In the early premarket period, futures tied to the key U.S. indexes were flat to modestly positive. On Tuesday, U.S. stocks gave up an early rally after U.S. March inflation data came in largely in line with forecasts to finish in the red. New U.S. CPI figures on Tuesday showed prices jumped 8.5 per cent annually in March, the biggest rise since late 1981.
The Nasdaq closed off 0.3 per cent while the S&P 500 and Dow slid 0.34 per cent and 0.26 per cent, respectively. The S&P/TSX Composite Index ended down 0.34 per cent.
For Canadian investors, the Bank of Canada’s rate decision just after the start of trading is the session’s key event. The markets have priced in another rate increase with many analysts suggesting an oversized half percentage point hike could be in the offing as the BoC looks to battle spiking inflationary pressures in the economy. Strong recent economic figures, including last Friday’s employment report which showed the jobless rate hit a record low in March, are also seen as bolstering a bigger move by the central bank.
“A 25-basis-point move is more or less a given, and in the past few days there have been growing calls for a move of 50 basis points given that the Fed is likely to move more aggressively in May,” Michael Hewson, chief market strategist with CMC Markets U.K., said in an early note.
“Today is the perfect opportunity for the Bank of Canada to act much more decisively and go for a 50-basis-point move, moving rates to 1 per cent.”
The decision is due at 10 a.m. ET and will be followed by a news conference with Bank of Canada governor Tiff Macklem. On the global front, the Bank of New Zealand hiked its key rate by half a percentage point early Wednesday, the biggest increase in more than two decades.
On the corporate side, U.S. earnings season kicks off with JPMorgan Chase & Co. reporting results ahead of the start of trading. Other big U.S. banks including Citigroup, Goldman Sacks and Morgan Stanley will follow, releasing quarterly earnings on Thursday morning.
JPMorgan posted a drop in first-quarter earnings, hit by a slowdown in dealmaking amid the Ukraine conflict and a decline in trading revenue. The largest U.S. bank by assets posted a profit of US$8.28-billion, or US$2.63 per share, in the quarter ended March 31, compared with US$14.3-billion, or US$4.50 per share, a year earlier.
In this country, Cogeco Inc and Cogeco Communications will report after the close of trading.
Overseas, the pan-European STOXX 600 was mostly flat in morning trading. Britain’s FTSE edged up 0.16 per cent. Germany’s DAX slid 0.29 per cent. France’s CAC 40 advanced 0.14 per cent. The European Central Bank is set to deliver its latest policy decision on Thursday morning. Some economist are predicting that the ECB will hold policy steady as it looks to balance high inflation with slowing growth.
In Asia, Japan’s Nikkei ended up 1.93 per cent. Hong Kong’s Hang Seng gained 0.26 per cent.
Commodities
Crude prices rose in early going after after peace talks between Ukraine and Moscow stalled.
The day range on Brent is US$104.06 to US$105.60. The range on West Texas Intermediate is US$99.87 to US$101.99. Both benchmarks gained more than 6 per cent on Tuesday.
On Tuesday, Russian President Vladimir Putin blamed Ukraine for a deadlock in talks and said Russia had no option but to press on with its offensive. The comments added upside pressure to crude prices, again raising concerns over supply.
“Putin’s Ukraine negotiation dead-end comments…dampened hopes that a negotiated settlement could relieve tight energy markets,” OANDA senior analyst Jeffery Halley said.
Price gains, he said, were also supported by OPEC’s refusal to increase production above already agreed amounts and falling Russian production.
However, weak data out of Asia kept a lid on the morning’s action. China said crude imports fell 14 per cent from year-earlier levels amid strict COVID-19 restrictions. Japan, meanwhile, reported its biggest monthly fall in core machinery orders in nearly two years, dragged down by a steep drop in demand from IT and other service companies, according to a Reuters report.
Elsewhere, gold prices edged up on the Ukraine-Russia headlines as investors sought out safer holdings.
Spot gold was up 0.2 per cent at US$1,970.21 per ounce by early Wednesday morning, after hitting a near one-month peak of US$1,978.21 on Tuesday. U.S. gold futures were down 0.3 per cent at $1,970.80.
“Gold is benefiting from some safe-haven demand this week as inflation fears grow, China growth stumbles and the war in the Ukraine gets set for round two,” Mr. Halley said.
Currencies
The Canadian dollar was flat while its U.S. counterpart edged higher against a group of world currencies.
The day range on the loonie is 79.05 US cents to 79.30 US cents.
Key for the loonie will be this morning’s Bank of Canada rate announcement.
“RBC Economics expects the Bank of Canada to hike interest rates by 50 basis points at today’s meeting,” Elsa Lignos, global head of FX strategy with Royal Bank, said.
“The move will follow up on the 25-basis-point rate hike in March and come alongside the widely-expected start of ‘quantitative tightening’ as the central bank begins to reduce asset holdings.”
However, she also said a half percentage point increase “may be a more finely balanced decision than market pricing suggests.
“The Bank could still opt for 25 basis points or a ‘neutral/dovish’ 50 basis points – both of which would disappoint for CAD,” she said.
On world markets, the U.S. dollar index, which measures the greenback against a group of currencies, edged up 0.1% up to 100.52, its highest levels since April 2020, according to figures from Reuters. The index is up almost 3 per cent this month.
The yen led losers against the U.S. dollar with the Japanese currency falling 0.8 per cent to cross the 126 yen to the U.S. dollar level for the first time since May 2002.
The euro fell to US$1.0821 overnight, its lowest level against the greenback in more than a month and hovered at US$1.0837 in early London trading, Reuters reports.
In bonds, the yield on the U.S. 10-year note was higher at 2.761 per cent by early Wednesday morning.
Economic news
(8:30 a.m. ET) U.S. PPI final demand for March.
(10 a.m. ET) Bank of Canada policy announcement and monetary policy repor
The Bank of Canada is expected to announce its second interest rate hike of the year at Wednesday’s policy meeting, with economists predicting it will be the largest in two decades – half a percentage point – in response to rising inflation rates.
How many more rate hikes are expected this year? What will they mean for inflation? Here’s everything we know so far ahead of the announcement.
Is the Bank of Canada expected to announce another rate hike at its next policy meeting?
There is a broad consensus among economists that the Bank of Canada will raise its policy interest rate by half a percentage point, even though the bank usually moves in increments of a quarter of a percentage point. This would be the central bank’s first oversized hike since May, 2000.
When was the last interest rate hike? Will there be more?
The bank raised its policy interest rate to 0.5 per cent from 0.25 per cent in early March – the first hike since 2018 and the start of what is expected to be a succession of increases that could bring borrowing costs back to prepandemic levels some time next year.Bank of Canada overnight lending rateAt month’s end0246%200120052009201320172021Nov. 30, 20064.25%THE GLOBE AND MAIL, SOURCE: BLOOMBERGSHARE×
Borrowing costs are still well below historic levels, so economists and investors expect the bank to move quickly. Financial instruments that track market expectations about rate hikes suggest the bank will raise its policy rate at each of its six remaining decision dates in 2022: April 13, June 1, July 13, Sept. 7, Oct. 26 and Dec. 7. That would move the policy rate above its prepandemic level of 1.75 per cent.
Bank of Canada Governor Tiff Macklem has said higher borrowing costs are needed to prevent inflation expectations from becoming unmoored and to ensure that demand in the economy does not outstrip supply, further pushing up consumer prices.
“For households and businesses that are already feeling the pinch of inflation, the higher cost of borrowing can be doubly painful. But tighter monetary policy is necessary to lower the parts of inflation that are driven by domestic demand,” he said early last month.
Why are bankers predicting an oversized interest rate hike and what is its significance?
Canada’s top central bankers have hinted in speeches over the past month that an oversized hike is on the table. The Bank of Canada’s Business Outlook Survey, released on April 4, adds to the argument that the central bank may need to make such a move.
According to a Reuters poll, a majority of economists are also calling for a half-point hike this month, including the five biggest banks in Canada, as well as National Bank. The Big Five also expect another half-point rate increase at the June meeting, even though the wider poll expects the pace to slow to quarter-point hikes each month, taking the policy interest rate to 2 per cent by the end of 2022.
Bank of Canada deputy governor Sharon Kozicki has said the central bank is “prepared to act forcefully” to bring high inflation under control, meaning rate increases could be bigger – and come sooner.
What does the rate hike mean for inflation?
The Bank of Canada’s decision to start tightening monetary policy is in response to the highest inflation in decades, which has eroded the purchasing power of the Canadian dollar and challenged the central bank’s credibility as an inflation fighter. It has also become clear in recent months that the Canadian economy has largely rebounded from the pandemic-induced recession and no longer needs emergency monetary policy support.
Interest rate increases theoretically bring down both inflation and people’s expectations for future inflation.
“The lesson from history is that if inflation expectations become unmoored, it becomes much more costly to get inflation back to target,” Mr. Macklem said in early March, which would mean the bank would have to raise interest rates higher and faster.
What’s the global landscape when it comes to interest rate hikes in other countries?
The Bank of Canada is not alone in signalling a more aggressive path for higher rates. Other central banks, most notably the U.S. Federal Reserve, have pivoted in recent months to forecasting a rapid rise in borrowing costs.
On March 16, the Fed raised its policy rate for the first time since cutting it at the outset of the pandemic. Fed officials expect to increase the rate at least six more times this year, according to projections published in mid-March.
Fed Chair Jerome Powell said the central bank needs to move “expeditiously” toward tighter monetary policy. It is expected to deliver two back-to-back 0.5-percentage-point interest rate hikes in May and June to tackle runaway inflation, according to economists polled by Reuters who also say the probability of a recession next year is 40 per cent. The U.S. Labor Department said Tuesday that U.S. inflation jumped 8.5 per cent in March from 12 months earlier, the sharpest increase since December 1981.
Meanwhile, the Bank of England raised interest rates for the third time in a row on March 17 in a bid to stop fast-rising inflation. The bank’s Monetary Policy Committee voted to raise the interest rate to 0.75 per cent from 0.5 per cent, taking the benchmark for borrowing costs back to its pre-pandemic level.
