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Core Inflation, Retail Sales Falling: Should Banks Worry?

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Banks have been in the limelight since the Presidential elections. Improving U.S. economy along with a rising rate environment and optimism over lesser regulations with the passage of the Financial Choice Act should continue benefiting the banks’ financial performance.

But if we carefully go through a bevy of economic data released this week, two important matters drew attention. First, the U.S. Bureau of Labor Statistics’ data shows that core inflation (all consumer goods excluding food and energy) decelerated further in May. The same has been continuously falling since the beginning of this year. To be more precise, core inflation declined to 1.7% last month from 2.3% reported in January.

For 2017, the Federal Reserve also lowered its projection for core inflation to 1.7% (at its June meeting) from its earlier expectation of 1.9%.

Second, a report from the Commerce Department on U.S. retail sales indicates further trouble ahead. Retail sales for May declined 0.3%, marking the biggest fall in the last 16 months. The fall mainly reflected decrease in auto sales and lower gasoline prices.

Wondering what might be the connection between these two economic data and financial performance of banks? Well, the banks’ performance is directly tied with the economic health of the nation.

Riding on economic growth since the elections, major banks like JPMorgan Chase & Co. (JPM - Free Report) , Bank of America Corporation (BAC - Free Report) , Citigroup Inc. (C - Free Report) and Wells Fargo & Company (WFC - Free Report) have grown 23.6%, 38.5%, 28.4% and 18.4%, respectively.

However, deceleration of core inflation indicates that the U.S. economy is not as robust as it seems. This will eventually lead to lower demand for loans. Also, inflation is the Fed’s one of the key variables for deciding its monetary policy. So, in case the similar trend persists, there are chances that the pace of interest rate rise might not be as expected.

Further, fall in retail sales show that consumers purchased less. Thus, the likely use of debit and credit cards was low. So, the interchange fees that the banks earn every time a person pays through a card will be less. All in all, these are expected to hurt the banks’ top-line growth going forward.

So, it is advisable to keep an eye on the economic data while taking any investment decisions.

JPMorgan, BofA, Citigroup and Wells Fargo currently carry a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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