With the banking sector earnings season about to kick off this week, I am actually closely watching for insights into the health of major banks such as $Citigroup(C)$ , $Wells Fargo(WFC)$
Indeed, to certain extent, I am quite optimistic about the earnings prospects for big banks, given the recent strength in the economy and the positive trends in the financial markets.
However, there are also concerns about the potential impact of lower interest rates on banks' net interest income (NII). Lower interest rates generally mean less money for traditional bankings as they earn less interest income on loans and other interest-bearing assets.
In terms of interest rates outlook, way back to the fourth-quarter of 2023 when Fed gave an affirmative signals of rate cut, market generally was expected for five Fed rate cuts in 2024. Moving forward to before the hotter than expected CPI report yesterday, the market looking forward to three rate cuts in a year.
With hotter CPI now, the market now expecting only three rate cuts, and the possibility of even fewer cuts if inflation remains above the Fed's 2% target, there is a chance that NII could be revised higher at some point. If the economy continues to hold up and inflation remains elevated, banks may benefit from higher interest rates than previously anticipated.
In terms of my investment plan, $Wells Fargo(WFC)$
I plan to closely monitor Wells Fargo's earnings report and guidance for any updates on NII expectations and overall performance. Depending on the outcome of the earnings release and market reaction, I may consider adding my position in Wells Fargo if I believe that the bank's long-term growth prospects remain favorable. However, I will also remain vigilant for any signs of weakness or deteriorating fundamentals that may warrant a reassessment of my investment thesis.
In a nutshell, while there are uncertainties surrounding the banking sector earnings season and the impact of interest rates on NII, I remain cautiously optimistic about Wells Fargo's prospects. I will continue to closely monitor developments and adjust my investment strategy accordingly to capitalize on opportunities while managing risks effectively.
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