Wall Street banks worry about economic storms ahead

Stock images and data are displayed on digital display boards outside Morgan Stanley’s headquarters at 1585 Broadway in New York’s Times Square, September 16, 2015.REUTERS/Mike Segar

NEW YORK, July 14 (Reuters) – Wall Street’s biggest banks were said to be cautious about the coming economic crisis, reducing risk in some areas while assessing the chances and risks of a recession, JPMorgan’s Jamie Dimon comparing the environment to a “storm”.

Banks are facing a financial crisis with consumers worried about rising rates, weak markets that are hurting investment banks and parts of the US Treasury yield curve that are adding to the pressure on investment.

“The environment – if I have to use one word to describe it, it would be difficult,” said Morgan Stanley Chief Executive, James Gorman, referring to the conflict in Ukraine, the increase in interest rates, economic threats and others.

“I think it’s important to say, though, it’s not 2008 that’s difficult. This is another type of financial crisis in the system. And to be honest, the banking sector is much stronger than it was last time.”

Banks began reporting a day later that showed US consumer prices rose 9.1% last month, the fastest pace since May. read more

Morgan Stanley and JPMorgan Chase & Co started the earnings period saying profits had fallen. JPM posted a $1.1 billion charge for bad debts while Morgan Stanley said bad debt for the quarter was $101 million compared to $73 million a year ago. read more

Citigroup and Wells Fargo & Co will report earnings on Friday.

JPMorgan’s Dimon said the bank has “been making visible adjustments” such as reducing bridge loans and avoiding subprime lending. “We’re very careful about how we manage the company’s risk … It’s just going to weather the storm.”

Morgan Stanley’s Gorman said his fixed-income and fixed-income group has been “smart” against its rivals. When pressed as to why the bank was not using more money to grow its revenue business, Mr Gorman said he was comfortable keeping the money, given the volatility.

Although Dimon did not say how hard the economy would be, he said the result was a “slow slide” due to the US Federal Reserve’s interest rate hikes to curb inflation.

Inflation remains a major problem in the US economy which, in the words of one Federal Reserve official, has become “a phenomenon.”

“The labor market continues to be very strong, but the real economy appears to be faltering,” Fed Governor Christopher Waller said in a speech on Thursday. He said he is confident that the economy can withstand strong interest rates.

Dimon was cited as the storm of Fed expansion, volatile markets, the crisis in Ukraine and its impact on food and energy prices.

Even so, JPMorgan’s consumer spending remains healthy and combined debt and equity spending are up 15% from last year, officials said.

Chief Financial Officer Jeremy Barnum said he is starting to see the effects of the increase in spending, however, with more money going to gas and unrestricted spending compared to a year ago.

Spending is growing faster than income, and median savings rates fell for the first time since the pandemic began, Barnum said.

Bank of America Institute economist David Tinsley said when inflation increases the cost of fuel and food, a larger portion of consumer spending goes to those categories, especially among lower-income consumers.

Tinsley said: “High inflation in the US is eroding real spending power. However, Bank of America’s customer data shows, “There’s a lot of backlog left.”

Bank of America (BAC.N) reported earnings on Monday.

Still, consumer spending drives nearly two-thirds of the U.S. economy, and if consumers pull back, it could accelerate the country’s transition from collapse, officials and economists agreed.

There are signs that the Fed’s tightening is causing homebuyers to stop buying. The average rate for a 30-year fixed-rate loan was 5.51%, Freddie Mac said Thursday.

JPMorgan reported a 26%-decline in income from mortgages year-over-year, while mortgage lending was down 45%.

Jan Belens, head of global banking and capital markets at EY, said that if buyers stop buying houses as the recession accelerates, they will have more money later.

“A recession is not good for everyone, but this is a better option than a consumer with debt,” Belllens said. “This could also mean that the recession is less severe and shorter than we have seen in the past.”

Elizabeth Dilts Marshall Reports; additional reporting by Megan Davies, Michelle Price and Daniel Burns; written by Megan Davies

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