Jeremy Sterngold, Head of Fixed Income
This week marked the start of the US results season, whereby companies start reporting on their first quarter earnings. As usual, the largest US banks were some of the first companies to publish their earnings. While a great deal of attention was placed on the Coinbase IPO this week, we were looking to see what these earnings were able to tell us about the potential shape of economic recovery through 2021.
With the US Congress recently passing a $1.9 trillion stimulus package to boost the economy, a lot of focus has been on the $1,400 stimulus cheques included in the package. The strong global growth forecasts for 2021 are based on a gradual, but continuous, re-opening of economies with consumers eager to enjoy leisure activities, thus supporting job creation. Indeed, with images circulating in the UK of punters enjoying their first pint in a pub this year, we can see how economic growth might rebound from here. Previous stimulus cheques have seen a variety of different consumer behaviours, including reducing debt, paying outstanding bills and buying new goods.
Retail sales data for March showed month-over-month growth of 8.2%, excluding automotive and petrol sales. The headline figure was an even stronger 9.8%. The stimulus impact was felt in “big ticket items” such as electronic good sales which were up 10.5%. However, food and drink services were up an even larger 13.4% and clothing sales were up 18.3%. It shows that, while the stimulus had an impact on consumer spending, the re-opening and loosening of restrictions amid a successful vaccine rollout has driven a massive boost to leisure spending. So, do bank earnings offer us any further insight on consumer behaviour?
Looking through the results of the large “bellwether” US banks, such as JP Morgan, Bank of America, Citigroup and Wells Fargo, there are two distinct trends:
Firstly, these banks have written back some provisions over the quarter. In essence, this means that the losses the banks were expecting in the first half of 2020 failed to materialise at the projected magnitude. As such, they have revised the outlook on lending losses, particularly on credit cards, where average balances have declined over the past year. This shows that consumers have paid down debts with their stimulus cheques and as such bank profitability has improved.
Secondly, we note that deposit balances have increased significantly across the largest banks, for both households and businesses. This is not a surprise given the elevated savings ratios we have seen through the COVID-19 crisis, but it also shows that consumers who didn’t need to pay down debts have increased their savings.
Looking through these results, we see that, as a whole, the US consumer remains on a strong footing, which should result in favourable financing conditions for the coming quarters should they seek to borrow. As states have re-opened, consumer activity has picked up as people enjoy their newfound freedoms to dine out and browse clothing shops.
Going forward, assuming vaccination programmes end most restrictions, it is clear that consumption of leisure sectors will increase given the strong pent-up demand. However, given the increase in savings and further debt repayments, it is less clear how eager consumers will be to draw on their increased savings. Hence, while we expect a strong recovery in activity, we see both large upside and downside risks to economic growth projections. Consumers may just be spending heavily now as they rediscover “going out”, but this could fade later as newly found habits stick. Alternatively, we may see demand surge for restaurants and holidays for longer than expected as people look forward to “normality” and catching up for lost time. Given the large array of economic views, we expect to see markets remaining volatile the coming quarters.
 Percentage of pay cheques saved
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