NEW YORK — Soaring U.S. Treasury yields dragged down third-quarter earnings at major Wall Street banks through weak bond trading. Wall Street is watching closely for any further rate increase by the Federal Reserve, on the view that September consumer price index growth may have picked up after sharp gains in global oil prices and U.S. diesel prices.
JP Morgan, the largest U.S. bank, opened the earnings season in earnest on the 13th with revenue of $50.91 billion and earnings per share of $5.57, both below market estimates of $51.22 billion and $5.90. The miss was unusual given that the bank had beaten EPS expectations in 16 of the past 20 quarters.
The shortfall stemmed from bond-related income that failed to meet expectations as bond prices declined. Bond trading revenue came in at $5.4 billion, $550 million below market forecasts — a larger gap than the $310 million by which the bank's total revenue fell short. Total expenses came to $27.3 billion, $90 million more than initially expected. Revenue rose just 8% from a year earlier while costs climbed 12%, worsening results.
Investors judged that solid earnings at the large banks were not enough to fully dispel concerns about bond market instability, prolonged high interest rates and fourth-quarter equity market uncertainty. The 10-year U.S. Treasury yield, the benchmark for global bond markets, topped 5.3% early this month, the highest in 24 years since May 2002. On the day they reported results, JP Morgan fell 0.86%, Wells Fargo 3.10%, Goldman Sachs 0.23% and Citigroup 5.60% — all steeper declines than the S&P 500 (-0.02%), the Nasdaq (-0.15%) and the Philadelphia Semiconductor Index (-0.23%).
Adding to the pressure, Bank of America was fined $1.2 billion the same day by the U.S. Treasury Department for allegedly failing to act on suspected transactions tied to a Chinese money laundering network and on suspected illicit financing along the southern U.S. border. In a statement, the bank said it had committed billions of dollars and thousands of staff to fighting financial crime, and that the penalty would reduce third-quarter EPS by 17 cents.
With wider bond market volatility weighing on profitability at the large banks, market participants are focused on the timing of any further Fed tightening. The market expects the September CPI figure, due from the U.S. Labor Department on the 14th, to show a 3.6% rise from a year earlier, up from 3.4% in August.
New York Federal Reserve Bank President John Williams, considered a dove within the Fed, said in an interview with Bloomberg that there would be no need for additional rate increases next year. JP Morgan Chief Executive Jamie Dimon warned the same day that a one-percentage-point rise in rates would be more painful.