JPMorgan Chase (NYSE: JPM) is currently the largest bank in the USA by total assets. Because of this status, JPMorgan is naturally able to feel the pulse of the country’s economy. The bank’s latest earnings conference call – for the fourth quarter of 2023 – was held two weeks ago and contained useful insights on the state of American consumers and businesses. The bottom-line is this: The US economy remains resilient, but there are significant risks that are causing JPMorgan’s management team to be cautious.
What’s shown between the two horizontal lines below are quotes from JPMorgan’s management team that I picked up from the call.
1. The US economy and consumer remains resilient, and management’s base case is that consumer credit remains strong, although loan losses (a.k.a net charge-off rate) for credit cards is expected to be “<3.5%” in 2024 compared to around 2.5% for 2023
The U.S. economy continues to be resilient, with consumers still spending, and markets currently expect a soft landing…
…We continue to expect the 2024 card net charge-off rate to be below 3.5%, consistent with Investor Day guidance…
…In terms of consumer resilience, I made some comments about this on the press call. The way we see it, the consumers find all of the relevant metrics are now effectively normalized. And the question really in light of the fact that cash buffers are now also normal, but that, that means that consumers have been spending more than they’re taking in is how that spending behavior adjusts as we go into the new year, in a world where cash buffers are less comfortable than they were. So one can speculate about different trajectories that, that could take, but I do think it’s important to take a step back and remind ourselves that consistent with that soft landing view, just in the central case modeling, obviously, we always worry about the tail scenarios is a very strong labor market. And a very strong labor market means, all else equal, strong consumer credit. So that’s how we see the world.
2. Management thinks that inflation and interest rates may be higher than markets expect…
It is important to note that the economy is being fueled by large amounts of government deficit spending and past stimulus. There is also an ongoing need for increased spending due to the green economy, the restructuring of global supply chains, higher military spending and rising healthcare costs. This may lead inflation to be stickier and rates to be higher than markets expect.
3. …and they’re also cautious given the multitude of risks they see on the horizon
On top of this, there are a number of downside risks to watch. Quantitative tightening is draining over $900 billion of liquidity from the system annually, and we have never seen a full cycle of tightening. And the ongoing wars in Ukraine and the Middle East have the potential to disrupt energy and food markets, migration, and military and economic relationships, in addition to their dreadful human cost. These significant and somewhat unprecedented forces cause us to remain cautious.
4. Management is seeing a deterioration in the value of commercial real estate
The net reserve build was primarily driven by loan growth in card and the deterioration in the outlook related to commercial real estate valuations in the commercial bank.
5. Auto loan growth was strong
And in auto, originations were $9.9 billion, up 32% as we gained market share, while retaining strong margins.
6. Overall capital markets activity is picking up, but merger & acquisition (M&A) activity still remains weak…
We are starting the year with a healthy pipeline, and we are encouraged by the level of capital markets activity, but announced M&A remains a headwind and the extent as well as the timing of capital markets normalization remains uncertain…
…Gross Investment Banking and Markets revenue of $924 million was up 32% year-on-year primarily reflecting increased capital markets and M&A activity…
…So as you know, all else equal, this more dovish rate environment is, of course, supportive for capital markets. So if you go into the details a little bit, if you start with ECM [Equity Capital Markets], that helps higher — and the recent rally in the equity markets helps. I think there have been some modest challenges with the 2023 IPO vintage in terms of post-launch performance or whatever. So that’s a little bit of a headwind at the margin in terms of converting the pipeline, but I’m not too concerned about that in general. So I would expect to see rebound there. In DCM [Debt Capital Markets], again all else equal, lower rates are clearly supportive. One of the nuances there is the distinction between the absolute level of rates and the rate of change. So sometimes you see corporates seeing and expecting lower rates and, therefore, waiting to refinance in the hope of even lower rates. So that can go both ways. And then M&A, it’s a slightly different dynamic. I think there’s a couple of nuances there. One, as you obviously know, announced volume was lower this year. So that will be a headwind in reported revenues in 2024, all else equal. And of course, we are in an environment of M&A regulatory headwinds, as has been heavily discussed. But having said that, I think we’re seeing a bit of pickup in deal flow, and I would expect the environment to be a bit more supportive.
7. …and appetite for loans among businesses is muted
C&I loans were down 2%, reflecting lower revolver utilization and muted demand for new loans as clients remain cautious…
…We expect strong loan growth in card to continue but not at the same pace as 2023. Still, this should help offset some of the impact of lower rates. Outside of card, loan growth will likely remain muted.
8. Management is not seeing any changes to their macro outlook for the US economy
So the weighted average unemployment rate and the number is still 5.5%. We didn’t have any really big revisions in the macro outlook driving the numbers, and our skew remains as it has been, a little bit skewed to the downside.
9. Management’s outlook for 2024 includes six rate-cuts by the Fed, but that outlook comes from financial market data, and not from management’s insights
[Question] Coming back to your outlook and forecast for net interest income for the upcoming year with the 6 Fed fund rate cuts that you guys are assuming. Can you give us a little insight why you’re assuming 6 cuts?
[Answer] I wish the answer were more interesting, but it’s just our practice. We just always use the forward curve for our outlook, and that’s what’s in there.
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