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Market Update

Big banks report strong Q3 earnings

October 18, 2021
  • william smith headshot


    Bill Smith

    Associate Director
    Balance Sheet Risk Management

    Financial Institutions | Kennett Square, PA


Building on the previous week’s gains, the major U.S. equity indices finished the week in the green, while short and mid-term Treasury yields moved notably higher as investors digested the latest economic data releases, the minutes from the latest FOMC meeting, and Q3 earnings releases.

Economic data

  • Economic releases were in plentiful supply last week with updates to the Consumer Price Index (CPI), Producer Price Index (PPI), jobless claims, the Empire Manufacturing Index, and retail sales dotting last week’s calendar.
  • Inflationary pressures continued to firm according to Wednesday’s CPI release.
    • Consumer prices increased 0.4% in September bringing the yearly inflation rate to 5.4%, the largest annual increase since 2008.
    • While many of the reopening-sensitive segments, such as airfares and hotel fares cooled over the month, the monthly increase was primarily driven by higher food and shelter prices.Thursday’s PPI release fell modestly below expectations but indicated that wholesale prices increased at a still robust 0.5% with the yearly figure posting a series high 8.6% gain.
  • After posting a record high over the summer, the Empire Manufacturing Index fell below both the consensus estimate and September’s reading as supply chain bottlenecks and labor shortages continue to limit growth in the manufacturing industry.
    • Notably a measure of general business conditions declined 14 points in October, while the prices paid component edged higher to 78.7, the highest reading since June.
  • The labor market appears to be handling the effects of the COVID-19 delta variant well with jobless claims for the week of October 9 dropping to a pandemic-era low 293,000 claims.
  • Retail sales defied expectations for a 0.2% decline and instead rose 0.7% in September.

FOMC minutes

  • Market participants were laser focused on Wednesday’s release of the September 22 FOMC meeting minutes as they looked for clues to inform their tapering timeline estimates.
  • The dismal September jobs report cast doubt on a November FOMC meeting tapering announcement at the beginning of the month, but those doubts seem to have been put to rest following the latest minutes which indicated that broadly speaking, FOMC members expect to begin reducing asset purchases in mid-November or mid-December of this year.
  • Officials discussed reducing Treasury holdings at a pace of $10 billion per month and MBS purchases at $5 billion per month, noting that the chosen path must be “straightforward and appropriate.”
  • Notably, it appears officials will likely look past the September jobs report as some officials have argued that the headwinds in the labor market are supply driven and cannot be corrected with monetary policy.
  • Following the minutes, many analysts now expect the FOMC to announce a launch of the asset purchase reduction program at the November 2-3 FOMC meeting.

Interest rates

  • While the first half of October saw notable rises in the long end of the Treasury curve, last week saw short and mid-term Treasury yields rise substantially with the five-year Treasury yield rising roughly eight basis points over the week to 1.13%.
    • Although mid-term yields picked up last week (5–10 basis points depending on the tenor), the relative cost of executing a one-year forward, five-year, pay-fixed Fed Funds interest rate swap only increased two basis points.
  • On a week-over-week basis, the Treasury yield curve flattened notably with the 2s/10s basis falling from its recent high of 129 basis points to 118 basis points.
  • With the Fed expected to launch tapering shortly, the market’s expectation for the first Fed rate hike pulled forward last week to September 2022 compared to December 2022 the week prior.
  • While the curve flattened last week, the curve has steepened considerably over the last month as has been a welcomed development for banks’ net interest margins across the country.
    • This pick-up in margin is reflected in the largely positive Q3 earnings releases and guidance we have seen from financial institutions thus far (noted below) and is consistent with trading activity we have seen on our desk of late as clients look to monetize the current shape of the yield curve.

Big banks’ Q3 earnings

  • Several of the largest U.S. financial institutions reported third quarter earnings last week.
  • Generally, the reporting banks topped earnings estimates and issued optimistic forward guidance.
    • Specifically, JPMorgan, Wells Fargo, and Bank of America all reported quarter over quarter increases in loans to the tune of 1–2% with each highlighting their expectation for more pronounced loan growth in the coming quarters.
  • Finally, with 2021 M&A deal flow setting records only three quarters into the year, Morgan Stanley and Goldman Sachs reported record, or near-record investment banking and deal advisory revenue in the third quarter.

The look forward

Upcoming economic data releases

  • Industrial Production – Monday
  • Housing Starts – Tuesday
  • Beige Book – Wednesday
  • Jobless Claims – Thursday
  • Conference Board U.S. Leading Index – Thursday
  • Existing Home Sales – Thursday
  • Markit U.S. Manufacturing/Services PMI – Friday

Upcoming Federal Reserve speakers

  • Quarles, Kashkari – Monday
  • Daly, Barkin, Bostic, Waller – Tuesday
  • Bostic, Quarles – Wednesday
  • Waller, Williams – Thursday
  • Fed Chair Powell, Daly – Friday

Rates snapshot

Market implied policy path (Overnight indexed swap rates)

Source: Chatham Financial

About the author

  • Bill Smith

    Associate Director
    Balance Sheet Risk Management

    Financial Institutions | Kennett Square, PA


Chatham Hedging Advisors, LLC (CHA) is a subsidiary of Chatham Financial Corp. and provides hedge advisory, accounting and execution services related to swap transactions in the United States. CHA is registered with the Commodity Futures Trading Commission (CFTC) as a commodity trading advisor and is a member of the National Futures Association (NFA); however, neither the CFTC nor the NFA have passed upon the merits of participating in any advisory services offered by CHA. For further information, please visit

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