Investment Viewpoint: US banks and fixed income markets in focus

Written by Sebastian Orsi, Senior Research Analyst, and Elizabeth Geoghegan, Head of Fixed Income Strategy

06 February 2024

Simplify the complex with clear and concise market insights direct from our investment experts every week.

Equity markets with Sebastian Orsi, Senior Research Analyst 

Despite a lacklustre Q4 earnings season for US banks, recently their share prices have risen a lot. Why are they outperforming?

  • There are three key reasons why US banks are outperforming: interest rates, credit risk and regulations.
  • Currently, very high short-term interest rates are still inducing customers to switch out of deposits into savings accounts or money market funds. Banks are still seeing funding costs creep up. With rate cuts expected this year, the rising cost of interest-bearing debt should slow and possibly reverse. So, net interest income could start to grow through 2024.
  • Credit risk has been a fear for banks due to recession risk, particularly around commercial real estate given post-pandemic shifts in tenant demand and the impact of higher rates on valuations and funding. Data suggests the US consumer is okay: spending growth is slowing, but it’s normal growth; consumer delinquency rates are trending to peak in H1 2024 given a stronger-than-expected US economy. Commercial real estate risk is a bigger issue for some smaller banks but will likely be a slow burn. 
  • There is more optimism about how US regulators will implement final Basel 3 capital rules. Previously, there were concerns that a hard-line approach would be taken, but regulators are now looking to build consensus on less draconian changes. This means that big banks should be able to distribute a lot more cash to shareholders over the next few years through dividends and buybacks.
  • Last week, some smaller banks weighed on the sector – and while they are exposed to certain issues, they are unlikely to be systemic problems. The sector is dominated by larger banks, where we’re still constructive on the outlook. Overall, valuations are still relatively modest, and earnings growth and revisions should improve. So, we think there’s still upside potential for the sector.

Fixed Income with Elizabeth Geoghegan, Head of Fixed Income Strategy

How did fixed income markets fare in the first month of the year – and what do the recent moves mean for our fixed income view?

  • Fixed income markets were down in January, as yields rose, particularly government bond yields. The Euro Aggregate Bond index was down 0.33%, while the Euro Government index was down almost 0.50%.
  • We anticipated a pullback in yields at the end of December as we viewed market excitement surrounding the rate cuts as too high. However, whilst yields did increase in January from as low as 1.80% in December to as high as 2.35% mid-January, the market focus on cuts this year and into the future creates a significant hurdle for any upward yields moves.
  • As we entered February late last week, yields initially moved a little lower owing to the FOMC meeting and European CPI. Although CPI was slightly higher than expected, it was still the lowest core inflation reading since March 2022, further supporting the disinflation narrative. At the FOMC meeting, Fed chair Jerome Powell pushed back on the pricing for a rate cut in March. However, the fact that the explicit tightening bias was dropped from the statement helped to drive yields lower in the US and Europe. However, these moves were reversed on Friday afternoon following a better-than-expected nonfarm payrolls release.
  • In last week’s edition of Investment Viewpoint, we noted the relatively range bound nature of bund yields with the yield staying between 2.20% and 2.35%. The drop in yields at the end of January of course moved below this level. Although it was not a significant deviation, and yields did move back in range after the non-farm payrolls, there are a few factors which support a more constructive view on longer duration once more. These include, but aren't limited to, the increase in dovish central bank commentary, continued disinflation trends, a focus by the ECB on forward wage inflation estimates rather than the actual data, and higher real yields. 

The week ahead: what to watch out for

The euro area Retail Sales report for January will be released. We need to see some improvement here to lift the euro area economy. Meanwhile, the main sentiment indicators (PMIs) from the euro area and China should give some sense of how companies are feeling in the regions. In the US, the main data release will be the ISM non-Manufacturing survey. Of the main data releases from the US, this was the only one showing any slowdown at the end of last year. It will be interesting to see if this trend continues showing lower momentum.

The results season carries on with more Consumer companies reporting this week. They should have benefitted from strong US consumption but could be held back by weaker trends in the euro area and China. Caterpillar results will be out, it is viewed as a ‘bellwether’ company for the construction, mining and agricultural industries.  


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