Morning Jog

Trading and Spending

Despite the well-rehearsed dance of CEOs providing earnings guidance to Wall Street analysts, only to beat the earnings estimates just so, every earnings quarter has its share of surprises. One constant: a retail or consumer company CEO blaming poor earnings on the weather. The season is irrelevant; too much rain, snow or sun are all a fine carpet to sweep a weak earnings quarter under. Everyone either stayed home or went directly to the beach…mother nature…what can we do.

Big banks have an equally impressive refuge for any slipups – market volatility.  Markets in turmoil and volatility spiking is surely no bueno. But a lethargic trading environment isn’t ideal either.

This week was a busy one for bank earnings and the consistent theme across all was the decline in revenues from their trading business.  While uncertainty about trade and economic policy abounds, the low-volatility, up-trending markets have not presented an attractive trading environment for hedge funds and other institutional clients to step in with conviction.

(Source: Bloomberg)

No need to shed tears for the banks, however. Trading revenues may be down, but fortunately for them, other divisions picked up the slack. Consumers are happily borrowing and spending — mortgage and credit card businesses are booming and helping banks to record profits.

With low unemployment, low interest rates and (slowly) rising wages, consumers are generally upbeat about the economy; a non-trivial factor considering that 70% of US economic growth is personal consumption.

Retail sales, after falling last year, have shown signs of recovery, increasing for the fourth month in a row in June.

(Source: St. Louis Fed)

Whether this resurgence in consumer spending is a reflexive rebound from last year’s trough, or something more permanent that can sustain economic momentum is the critical question. People spend when they feel confident and Friday’s consumer sentiment reading was largely unchanged from June, so no signs of distress. But sentiment is notoriously fickle and no doubt the stock market sitting at all time highs is helping a lot of folks feel happier.

Enjoy your weekend.