2023.02.20 4,200 to be the major resistance

Producer Price Index (PPI) rose 0.7% MoM, higher than market expectations of 0.4%, hitting a new high since June 2022. For the week ending 10th Feb, the MBA’s (Mortgage Bankers Association) weekly mortgage applications survey reported its Market Composite Index decreasing 7.7% WoW on a seasonally adjusted basis, its lowest level since the beginning of 23. Applications to refinance home loans dropped 13% WoW, -76% YoY. Mortgage applications to purchase a home fell 6% WoW, -43% YoY, reflecting a more uncertain outlook for the U.S. economy.

The Consumer Price Index (CPI) rose 6.4% in January, higher than market expectations of 6.2%, and rose 0.5% MoM, higher than market expectations of 0.4%, the largest increase since June 2022. Core CPI, a measure of inflation that strips away food and energy prices, rose 0.4% in January (December +0.3%), and the annual core CPI inflation increased 5.6% YoY, higher than market expectations of 5.5%. According to Manheim data, wholesale used vehicle prices, on a seasonally adjusted basis, increased 2.5% in January, rising for two consecutive months. At present, energy prices such as gasoline and natural gas are going up, together with the strong labor market, inflation may strengthen again. The CPI still has not reached the 2% target set by the Federal Reserve. The market believes that the Fed will continue to increase interest rates. We expect the US stock market to have a higher chance of a correction in the near term. The S&P 500 index is expected to trade between 3,500 points and 4,200 points.

Although the risk of recession may slow down the growth of loans, higher interest rates can increase the banks’ net interest margins. Banking sector performance is expected to improve in 2023.

Wells Fargo (WFC) is a diversified, community-based financial services company that provides banking, investing, mortgage, personal and business financing to customers. In 4Q22, Wells Fargo’s revenue was US$19.66 bn, +6% YoY, and its net profit was US$2.86 bn, -50% YoY. Although the company’s profit declined in the fourth quarter, the company’s net interest income was US$13.43 bn, +45% YoY.

In the fourth quarter of 2022, the company reported ROE was 8%. Mgmt has a longer-term ROE target of 15%. Mgmt noted the path to achieving a sustainable 15% ROE in the medium term requires capital optimization, increase in efficiency and investment returns. The company has reduced expenses by $7.5 bn over the past two years, and Mgmt expects to cut another $3.2 bn in 2023. In addition, with interest rate hikes, Mgmt expects that the net interest income in 2023 will be 10% higher than the market expectation. Looking forward, Wells Fargo is in a favorable position in terms of profit growth and ROE, and the company is expected to outperform its peers. It is recommended to buy at US$46.0, target at US51.5, US$43.0 stop loss.

Citigroup (C) is a diversified financial services company that provides a wide range of banking and other services to global customers. In 4Q22, the company’s revenue was US$18.01 bn, +6% YoY, and its net profit was US$2.51 bn, +21% YoY. The company’s institutional client business revenue was US$9.16 bn, while the personal banking and wealth management revenue was US$6.1 bn.

Despite the decline in net profit, the company’s fixed income transactions and net interest income in 4Q22 were better than expected, and costs and credit charges were in line with market expectations. Mgmt expect the company’s IB business and wealth management business to improve in 2023, and the company’s overall revenue is estimated to have a mid-single-digit growth in 1Q23. It is recommended to buy at US$50.0, $, target at US$56.0, US$47.0 stop loss.