A favorable economic reading out of China, the Fed Chairwoman’s testimony to Congress, and another positive looking bank earnings report provide the backdrop for today’s session. All of this should help the major indexes build on their recent momentum.
Chairwoman Janet Yellen’s Congressional testimony will remain in the spotlight, though her views on the state of the economy are well known and she is unlikely to offer anything new on the timing of the first rate hike. The one area of interest will be her views on the state of the global backdrop since this issue appeared to have become material in the minutes of the last FOMC meeting and became even more urgent following subsequent developments in Greece and China.
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Things appear to have started stabilizing on both fronts: the Greeks finally have a deal from their creditors and the Chinese seem to have gained control over the stock market sell-off. Even the outlook for the Chinese economy appears to have improved, as today’s better-than-expected Q2 GDP growth numbers show. Any perceived moderation in the Fed’s concerns about these international hotspots will likely be read by market participants as indicative of the FOMC’s growing comfort level with a September rate lift-off.
On the earnings front, we got a better-than-expected report from Bank of America (BAC). The company’s Q2 earnings are a material improvement over the year-earlier period, as fewer legal expenses helped increase net income by +49.7% on essentially flat revenues.
As we saw with J.P. Morgan (JPM) and Wells Fargo (WFC), revenue gains have been held down by continued net interest margin pressures as a result of the historically low interest rates. This has forced them to look for cost cuts as the major means to improve profitability – and that’s what we saw in spades today from Bank of America and Tuesday from J.P. Morgan. Bank of America has been a laggard among its peers and this has been showing up in its stock price performance; today’s report will likely raise hopes that it will finally start closing the performance gap.
