Fixed Income & Equities Markets Week in Review

The major US equity indices posted a positive week of performance, even as volatility ramped amidst a rise in credit concerns and tariff gamesmanship.

The banking industry kicked off earnings season this week with 3rd quarter results. The large money center and investment banks (JPMorgan Chase, Bank of America, Citi, Wells Fargo, Goldman Sachs, and Morgan Stanley) beat revenue and earnings expectations. As expected, capital markets and investment banking results were a standout. Company management teams noted consumer resilience, a pickup in loan growth and no notable deterioration in credit quality. Net interest income was generally solid and fee income was a bright spot. However, some disappointing news came from JPMorgan Chase (JPM). In September, subprime auto lender Tricolor declared bankruptcy. Then, automotive parts manufacturer First Brands also filed for bankruptcy. In discussing JPM’s $170 million charge-off related to Tricolor, CEO Jamie Dimon said that his antenna goes up when things like that happen, adding that “when you see one cockroach, there's probably more.” These events caused investors to question whether credit risk cracks could be developing in the riskier areas of the credit market.

On Thursday, concern rose further when regional bank Zions Bancorp (ZION) announced that it would write off two loans from borrowers it accused of fraud. Western Alliance Bancorp (WAL) also alleged fraud against a mortgage warehouse borrower. Regional banks came under notable pressure during the trading day. On Friday, most of the regionals rebounded after positive earnings reports from Truist Financial, Fifth Third Bancorp, Huntington Bancshares, and Ally Financial. Overall, loan loss provisions for these regionals were lower than expected. In addition, several bank analysts called these events idiosyncratic credit events. For now, concern about this topic has eased but there will be heightened focus on future details about credit risk, collateral integrity and underwriting standards…and whether there are “more cockroaches” in the banking system. There will be a lingering question: are these isolated issues or will it become systemic?

Volatility was also fueled during the week by US-China trade headlines that spilled over from last week’s threat by President Trump to initiate an additional 100% tariff on China goods—on top of existing tariffs. New export restrictions on rare earth minerals and new docking fees for US ships in China were at the center of the increased trade dispute. Concern eased at the end of the week after President Trump commented that his proposal for 100% additional tariffs on Chinese exports was not sustainable, that the US is “going to do fine with China,” and that he gets along well with Chinese President Xi and plans to meet with him in South Korea later this month.

The economic data vacuum continued to weigh on equity investors’ minds as the government shutdown entered day 17--with little progress made on a solution. ACA tax credits remain a key point of contention. Although data collection remains suspended, the Bureau of Labor Statistics (BLS) will publish a September Consumer Price Index (CPI) on October 24th, as some workers at BLS have been called back into the office to work on it (and because of the need to calculate the annual adjustment for Social Security checks prior to the November 1st deadline). As such, the Federal Reserve will have this data in hand in time for its October 28-29 FOMC meeting. However, data beyond September remains an open question, as investors continue to look for alternative sources of economic, inflation, and labor data.