Economy

NEW YORK (Reuters) -Several large U.S. regional banks reported lower profits on Wednesday, in a further sign that the income boost from interest rate hikes by the Federal Reserve is starting to wane. Charles Schwab (NYSE:SCHW), Citizens Financial (NYSE:CFG) and US Bancorp (NYSE:USB) said that, along with one-off charges, the rising cost of retaining customer deposits ate into fourth-quarter net interest income (NII), the difference between what banks earn from lending and pay on deposits. Fed rate hikes last year aimed at taming inflation boosted many lenders’ NII, a core business for most regional banks. But growing competition for deposits from the country’s biggest banks is eating into their profits and in some cases subduing loan growth.Big banks have benefited from an exodus of deposits from small institutions, which were seen as riskier, after Silicon Valley Bank and two other regional lenders collapsed last year. Potential Fed rate cuts this year will likely further dent NII, some banks have warned.Charles Schwab’s quarterly profit fell 47%, partly due to a 30% drop in NII on higher deposit costs. Schwab paid an average of 1.37% on deposits, compared to 0.46% a year earlier, it said.Citizens reported a 71% decline in profit, with NII down 12%. US Bancorp’s profit fell 14% as NII dropped 4.2%. On Tuesday, PNC Financial (NYSE:PNC), another big regional lender, said profits shrank, with NII contracting 8%.Citizens warned that its NII this year could be 6% to 9% below the $6.24 billion it made in 2023. Shares of Charles Schwab dropped 1.3%, US Bancorp fell 1.7%, while Citizens was up 1.9%.”For banks, loan demand would be fairly tepid through the first half of the year, and then start to pick up again in the second half,” Citizens Financial CEO Bruce Van Saun told Reuters in an interview on Wednesday. At 11 U.S. regional banks with assets of $50 billion to $100 billion, analysts expect earnings per share to drop from 2023 mostly due to increased deposit costs, according to LSEG estimates, Reuters previously reported.The KBW regional bank index was last down 1%, in line with the broader market. Still, it is up about 10% since March when the industry crisis erupted, and some analysts think the sector remains attractive despite NII declines.”It seems logical that the recent trend higher in share prices is met with near-term turbulence (from both NII softness and normalizing credit trends) – however, we believe the regionals remain attractive over the next 12-18 months as we fully price in the 2025 outlook,” Citi analysts wrote. As with the largest U.S. lenders which reported earnings on Friday, regional banks also took big one-time charges to replenish the Federal Deposit Insurance Corporation’s (FDIC) deposit insurance fund, which was dented by the crisis.JPMorgan, Bank of America, and Citigroup posted lower profits on Friday, in part due to lower NII.Executives at these top banks were generally upbeat on the economy, noting American consumers remained resilient even as defaults on consumer loans are returning to pre-pandemic levels. But major questions hang over markets, including whether the economy will avoid a recession and, as inflation eases, when the Fed will start to cut rates. Strong U.S. retail sales data on Wednesday showing the economy on a solid footing cast further doubt over market expectations of a Fed rate cut in March.”I am a little on the cautious side,” JPMorgan Chief Executive Jamie Dimon told CNBC on Wednesday when asked about the U.S. economy.Speaking to FOX Business Network’s “Mornings With Maria” at Davos on Wednesday, Bank of America CEO Brian Moynihan said the daily debate about where the Fed will take rates continued to create uncertainty for consumers and businesses.”When the Fed’s done, then the capital markets reopen. Then people say, OK, 3.5 to 4% unemployment rate. I got my job, I got my wages, you know, things settle in.” More

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Holiday sales across both brick-and-mortar and online channels rose to $964.4 billion in the November through December period, coming largely above the NRF’s prior expectation of a rise between 3% and 4%, in the range of $957.3 billion to $966.6 billion. Data from the Commerce Department earlier on Wednesday showed December retail sales rose by 0.6%, better than the 0.4% increase expected by economists polled by Reuters – a sign that the U.S. economy was on strong ground at the start of 2024.The much-awaited report from the NRF, a retail trade group, shows that Americans dug into their pockets despite tighter shopping budgets, taking advantage of steep discounts for their Christmas purchases. “In some ways… the economy’s probably getting back into some kind of normalcy,” NRF Chief Economist Jack Kleinhenz told Reuters in an interview. Apparel firms including Lululemon (NASDAQ:LULU), Abercrombie & Fitch and footwear maker Crocs (NASDAQ:CROX) lifted their holiday-quarter sales targets last week, boosted by fresher styles and leaner inventories. While a strong labor market and elevated wages have helped keep consumer health intact, Kleinhenz warned that the strength might not be sustainable, “largely because I think job growth is going to start to decelerate”.”I’m not sure that the unemployment will rise, but… I sense that we’re adjusting to a different pace for 2024 than what we saw in 2023.”While holiday hiring for some retailers was lower than prior years, the NRF estimated that holiday jobs totaled 439,500 for November and December, compared to its initial expectation that retailers would hire between 345,000 and 450,000 seasonal workers. More

(Reuters) -The U.S. government will crack down on companies that violate export rules, with stiffer penalties to deter future violations involving countries like China, Russia and Iran, a Department of Commerce official said late on Tuesday. “There are going to have to be some penalties that get everyone’s attention,” Matthew Axelrod, assistant secretary for export control at Commerce, said at a New York University School of Law event on corporate compliance and enforcement in Manhattan. “I think we’re on the cusp of that.”Axelrod said he viewed the $300 million penalty Seagate Technology paid in April after shipping over 7 million hard drives to China’s Huawei in violation of U.S. export control laws as a “down payment.””You can expect to see more big-ticket corporate resolutions going forward,” he said. Last year, U.S. Deputy Attorney General Lisa Monaco described more aggressive enforcement of export controls and sanctions for national security, and said sanctions were the new Foreign Corrupt Practices Act (FCPA).Axelrod said he thinks Monaco meant she wants companies to invest in compliance. “She wants companies thinking about their national security risk the way they think about their FCPA risk,” he said. Axelrod said Munich, Germany-based Siemens AG (OTC:SIEGY)’s prosecution years ago for paying bribes to foreign government officials drove compliance with the FCPA. In 2008, Siemens paid $450 million to the Justice Department in criminal penalties, and $350 million to settle with the U.S. Securities and Exchange Commission, along with a penalty of about $800 million to Munich authorities. Executives also faced charges.”Siemens got everyone’s attention on the FCPA,” Axelrod said.Axelrod co-leads a Disruptive Technology Strike Force that was created last year, along with Matthew Olsen, assistant attorney general for national security. On Tuesday, Axelrod said the strike force has prioritized protecting advanced technologies from illegal acquisition and use by nation state actors like Russia, China and Iran The Department of Commerce, which regulates and enforces export control rules, has drawn fire amid reports of U.S. technology illegally ending up in China and Russia in violation of regulations. On Tuesday, Axelrod also announced enhancements to voluntary self-disclosure policies designed to get minor violations resolved more quickly and enable authorities to concentrate on more serious violations.”We want to clear out the underbrush of lower level administrative cases …to focus more of our time and attention on the bigger ticket items on which we’re now going to be imposing higher penalties,” he said. More

Retail sales increased 0.6% in December, buoyed by a pickup in clothing and accessory stores as well as online nonstore businesses. Economists expected a rise of 0.4%.
Sales ex-autos climbed 0.4%, better than the 0.2% estimate, and the “control group” increased 0.8%.
On a year-over-year basis, retail sales ended 2023 up 5.6%. The numbers are not adjusted for inflation, so sales show that consumers are more than keeping up with inflation.

Holiday shopping turned out even better than expected in December as shoppers picked up the pace to close out a strong 2023, the Commerce Department reported Wednesday.
Retail sales increased 0.6% for the month, buoyed by a pickup in clothing and accessory stores as well as online nonstore businesses. The results were better than the 0.4% Dow Jones estimate.

Excluding autos, sales rose 0.4%, which also topped the 0.2% estimate.
The report comes amid speculation about how much strength the U.S. economy possessed heading into the new year, when growth is expected to slow. However, a resilient consumer could signal more momentum and possibly give the Federal Reserve some caution about how to proceed on interest rates.
Stock market futures held negative following the release.
“The Fed was already hammering away on its ‘no rush to cut rates’ message, and today’s stronger-than-expected retail sales won’t give them any reason to change their tune,” said Chris Larkin, managing director of trading and investing for E-Trade from Morgan Stanley.
On a year-over-year basis, retail sales ended 2023 up 5.6%. The numbers are not adjusted for inflation, so sales show that consumers are more than keeping up with an annual inflation rate of 3.4% as measured by the consumer price index. The CPI increased 0.3% in December, also lower than the retail sales increase.

Another measure of retail sales strength that excludes sales from auto dealers, building materials stores, gas stations, office suppliers, mobile homes and tobacco stores rose 0.8% for the month. The Commerce Department uses this so-called control group when computing gross domestic product.
Bank of America economists cautioned that the strong December numbers were “driven by a large shift in seasonal factors” that could be offset when the January data is released.
The report showed broad-based strength in sales for the month, though there were a few areas of weakness. Both clothing and accessory stores and online retailers saw 1.5% increases on the month.
“Consumers shunned brick and mortar stores in favor of online shopping,” said Jeffrey Roach, chief economist at LPL Financial. “The behavioral change that happened during the pandemic will likely persist and successful retailers will adjust to this new model.”
Health and personal-care store receipts declined 1.4% and gas stations saw a 1.3% drop as fuel prices eased. Furniture and home furnishing stores sales also fell 1%.
On a yearly basis, food services and drinking places saw the biggest gains, rising 11.1% though sales were flat in December. Both health and personal care and electronics and appliances saw 10.7% increases. Gas stations dropped 6.6%.
In other economic news Wednesday, import prices were unchanged in December, despite the Wall Street estimate for a 0.5% decline and following a 0.5% drop the previous month. Export prices, however, slid 0.9%, the same as in November.
The reports come with markets anxious over the direction of Fed policy. Current market pricing anticipates the central bank enacting six quarter-percentage point rate cuts in 2024, twice what Fed officials indicated in December. Stronger-than-expected economic growth and inflation could force the Fed into keeping policy more restrictive.
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ORLANDO, Florida (Reuters) – As the amount of cash parked at the Federal Reserve’s overnight reverse repo facility (ON RRP) hurtles towards zero, the Fed’s visibility on the minimum level of bank reserves needed to ensure the financial system functions smoothly also diminishes.Once the banking system gets close to what is considered the ‘lowest comfortable level of reserves’ (LCLOR), the Fed is in murkier territory where credit conditions could suddenly be adversely affected, as happened in late 2019.The daily RRP is sometimes seen as a gauge of excess reserves in the system and a barometer of how broader liquidity conditions are evolving. If it goes to zero, the Fed may be forced to tread more carefully in reducing its balance sheet.At the current pace, the RRP balance will likely evaporate completely by the middle of the year. Many market participants and Fed officials see no problem with that, others are wary.Two of the most influential U.S. central bankers have since addressed the issue publicly, and from slightly different angles. Fed Governor Christopher Waller on Tuesday showed little concern about an RRP balance of zero: “There’s no reason for it to have anything in it,” he said at an event hosted by the Brookings Institution. Dallas Fed President Lorie Logan, meanwhile, earlier this month said: “While the current level of ON RRP balances provides comfort that liquidity is ample in aggregate, there will be more uncertainty about aggregate liquidity conditions as ON RRP balances approach zero.” The two voices carry weight. Waller’s views are generally thought to be pretty closely aligned to those of Chair Jerome Powell, while Logan was recently in charge of managing the Fed’s trillions of dollars of Fed assets at the New York Fed. BELOW $600 BLN AND FALLINGThe RRP is often considered to be a proxy for overall bank reserves and liquidity in the system, and therefore a guide post for the Fed in terms of how it views the pace of reducing its balance sheet via quantitative tightening. The RRP balance on Tuesday fell to $583 billion, the lowest since June, 2021. In June last year it exceeded $2 trillion, indicating that around $1.5 trillion of liquidity has been drained from the system in seven months.Logan’s remarks are a reminder that the Fed wants to avoid a repeat of 2019. In September that year bank reserves dropped below the LCLOR needed to ensure the financial system plumbing functioned, repo rates shot up and the Fed was forced to halt QT and inject liquidity into the banking system.The LCLOR is an unknowable number until it is breached and a moving target. Total bank reserves held at the Fed stand at $3.5 trillion, more than double September 2019 levels of $1.4 trillion but down from a peak of $4.3 trillion two years ago. Deutsche Bank U.S. rates strategist Steven Zeng estimates that the RRP will continue falling briskly, by around $450 billion in the current quarter and down to zero by June. “I don’t see any need for concern – Fed officials mostly expect the RRP to go to zero. But they will have to take greater care in monitoring liquidity conditions to avoid a repeat of 2019,” Zeng warns.CAUTIOUS APPROACHA more rapid decline might bring forward the timing of discussions around QT but not necessarily a change in policy or the pace of running down the balance sheet, at least not initially. At the pace of contraction Zeng and others expect, it’s not inconceivable that the RRP evaporates completely between Fed policy meetings. This is something officials would probably want to avoid, especially if they haven’t already communicated their QT strategy to the market. If the Fed errs on the side of caution, it may tie the pace of QT to the RRP, effectively automatically slowing the balance sheet runoff once liquidity is no longer quite so ample.Strategists at JP Morgan, on the other hand, believe the RRP should remain large enough in order to ensure there is no money market malfunction or liquidity shock, even if the ‘LCLOR’ is not under threat.”There’s a growing consensus that RRP balances enable smooth functioning in money markets, thus allowing the continued effective transmission of monetary policy,” they wrote last week.This is more in line with the latest New York Fed survey of primary dealers carried out before the Fed’s Dec. 12-13 policy meeting.It shows Wall Street’s titans’ median forecast is for the Fed to end QT in the fourth quarter this year, with total bank reserves projected to be $3.125 trillion and the RRP balance at $375 billion.That’s down significantly from a projected $625 billion in the October survey, but still comfortably above zero. Those taking a benign stance on the RRP may have that put to the test sooner rather than later.(The opinions expressed here are those of the author, a columnist for Reuters.) (By Jamie McGeever; Editing by Andrea Ricci) More

The Centers for Medicare & Medicaid Services (CMS), a division of the Department Of Health And Human Services, said the rule will begin primarily in 2026.The rule applies to health insurance companies providing government backed-insurance plans such as Medicare for those aged 65 and above, and the Medicaid plan for low-income individuals. Some physician organizations in recent years have pushed back against the use of prior authorizations, which they say increased the paperwork for doctors and leads to restrictive coverage in some cases.”When a doctor says a patient needs a procedure, it is essential that it happens in a timely manner,” Health and Human Services Secretary Xavier Becerra said. “Too many Americans are left in limbo, waiting for approval from their insurance company.”Under the new rule, prior authorization decisions are required to be sent within 72 hours for urgent requests, and seven calendar days for standard non-urgent requests. For some insurers, the new timeframe for standard requests cuts current decision time in half, according to the CMS. It also requires all payers to include a specific reason for denying a prior authorization request, which will help re-submissions of the request or an appeal when needed.UnitedHealth Group (NYSE:UNH)’s insurance unit as well as health insurer Cigna (NYSE:CI) said last year they would cut down the use of prior authorization. More

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