The biggest banks on Wall Street were very cautious about economic headwinds in the future and they also opted to reduce risks in some areas, while they assess the possibility and severity of an economic recession. In fact, Jamie Dimon of JPMorgan said that the current environment was quite similar to a ‘storm’.
The economic backdrop is a tough one for banks, as consumers are worried about surging inflation and markets are under pressure, which is hurting investment banking. Moreover, it has also inverted positions of the yield curve of the US Treasury, which has made it challenging for banks to generate income.
James Gorman, the Chief Executive of Morgan Stanley, said that ‘complicated’ was the word that came to mind for describing the current economic environment. He was referring to the hikes in interest rates, the Russia and Ukraine conflict, and the economic threats that exist.
However, he did add that the complications were not on the same level as in 2008, but the financial stress in the system is quite evident. Plus, he added that the banking system is stronger than it had been last time when the economy went into recession.
A day after US inflation data showed a 9.1% increase in consumer prices in June, banks kicked off their earnings report. It began with JPMorgan Chase & Co and Morgan Stanley. The former’s provision for credit losses was around $1.1 billion, while the latter’s for the quarter was $101 million, as opposed to $73 million a year earlier.
Wells Fargo & Co and Citigroup are also scheduled to post their earnings. Jamie Dimon of JPMorgan said that they had managed certain exposures, like steering clear of supreme lending and cutting down bridge loans. He said that they were cautious about how they were running a risk, but they cannot avoid the storm.
Gorman of Morgan Stanley said that as opposed to competitors, their team had proven to be more prudent in terms of equities and fixed income. Gorman also said that they were not using their excess capital for ramping up its fixed income operators because they wanted some cash to spare in an uncertain environment.
Dimon did not clarify what they believed would be the economic outcome but said that it could vary between soft and hard lending, depending on how much interest rates are hiked for combating inflation.
The biggest sore spot for the US economy is none other than inflation and according to an official of the Federal Reserve, it has become a ‘puzzle’. Christopher Waller, the Governor of the Fed, said that while the labor market has remained robust, it appears that the real economy is slowing down.
He also added that they were confident about the economy withstanding further hikes in the interest rates. According to Dimon, the quantitative tightening of the Fed, the Ukraine crisis, the volatile markets, and the energy and food prices would be the economic headwinds to watch. But, executives said that JPMorgan’s consumers still had healthy spending.