The Rate-Rise Roller-Coaster: Bank Earnings and Inflation Data Are Key.

The solid number, in light of weaker employment data earlier in the week, has tipped the scales in favor of another 25 basis-point hike in May–potentially the last of the rate-hike cycle. But the Fed’s May meeting is a long way off and there are several factors, this week alone, that could shift expectations again.

The first of those is the U.S. inflation data due to be released Wednesday. The core consumer price index, which excludes food and energy, is expected to tick up—which would be a blow in the Fed’s battle against inflation and further entrench rate-hike expectations. A surprise drop could reinvigorate hopes for a pause in rate increases.

The minutes from the Fed’s late-March meeting will be released on the same day, providing more insight into the central bank’s thinking.

But the biggest potential catalyst for markets could be lying in wait at the end of the week as earnings season gets going, with several big banks reporting Friday. The regional banking turmoil of last month heightens their significance as investors eagerly wait to digest the impact.

Any evidence of tighter lending standards ahead could do the work of rate hikes and therefore alter the Fed’s view of how many more are needed.

It’s likely to be a rough earnings season in general for corporate America and the S&P 500’s 7% gains so far in 2023 are on the line.

—Callum Keown

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Big Bank Earnings Could Set the Tone for First Quarter

Big banks will help kick off first-quarter earnings season this Friday after two of the biggest bank failures in U.S. history in March. Results from bellwethers such as
JPMorgan Chase,

Citigroup,
and
Wells Fargo
could set the tone for the rest of the S&P 500 companies that are set to report.

• Revenue from lending, deal making and consumer banking are likely to take a back seat to the state of the banking industry’s balance sheets and their bondholdings, which were the culprits behind the failures of Silicon Valley Bank and Signature Bank.
• Analysts at Keefe, Bruyette & Woods are trimming an average of 8% from forecasts for 2023 and 11% for 2024, expecting to see narrowing net interest margins—the difference in what banks make on interest from loans and what they pay out to depositors.
• Tighter lending standards could drive up net charge-offs as banks brace for unpaid debts. They could set aside more money to cover loans that go bad as the economy cools, as bank managers grow more conservative and try to gauge what exposure they have to different types of borrowers.
• Wall Street expects bank merger activity to pick up as small banks face stricter regulation. With the
  SPDR S&P Regional Banking
  exchange-traded fund down 27% this year, many bank stocks are looking like bargains.

What’s Next: First-quarter earnings are expected to decline 6.8% for S&P 500 index stocks overall, according to FactSet. That would be the steepest decline since the second quarter of 2020, when the Covid-19 pandemic slammed the economy.

—Liz Moyer and Carleton English

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After Friday’s Job Report, This Week Brings Fed Fresh Data

Friday’s employment report for March didn’t do much to settle expectations on the Federal Reserve’s next interest rate move, though it has signaled another increase to its benchmark rate this year to end up at 5.1% by the end of the year. This week’s economic data will give the Fed more to consider.

• Futures markets are betting on a 68% chance the Fed will raise rates by a quarter of a percentage point at its next meeting in May, according to the CME FedWatch tool as of Monday morning. Another one-third of traders are factoring in a pause to the Fed’s rate increases.
• The Bureau of Labor Statistics will release the consumer price index for March on Wednesday. The consensus forecast is for an increase of 5.2% from a year ago, versus February’s 6% annual increase.
• Core CPI, which excludes food and energy components of the index, is expected to show a 5.6% annual jump, up from February’s 5.5% gain. On Thursday, the BLS will release the producer price index for March. Overall PPI and core are predicted to slow from February.
• On Wednesday, the FOMC will release the minutes from its late-March monetary policy meeting, and investors will likely want to get more details on what policy members are debating heading into their May meeting amid signs of an economic slowdown.

What’s Next: In addition to the latest reading on consumer sentiment from the University of Michigan, the Census Bureau will report retail sales data for March on Friday. The forecast is for a 0.3% decline from February.

—Liz Moyer and Nicholas Jasinski

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Expected EPA Emissions Rules Could Accelerate EV Sales

The Environmental Protection Agency is slated to announce new limits on vehicle tailpipe emissions that could be the strictest-ever curbs on auto pollution, The Wall Street Journal reported. Auto makers could be prodded to boost the market share of electric vehicles faster than the Biden Administration’s own timetable.

• The White House wants to see EVs become half of new autos sold by 2030, and the EPA’s new standards aim to accelerate the transition, the Journal reported. They could ensure EVs make up 67% of new vehicles sold by 2032, the New York Times first reported.
• The standards could set up a clash with the auto industry, which has committed to EV sales, but not necessarily as quickly. The expected EPA rules limit the emissions each car maker’s fleet of sold vehicles can produce, so complying with them would force the industry to make more EVs.
• Ford Motor
  plans to sell two million battery electric vehicles a year by the end of 2026, and for EVs to be 50% of its sales by 2027.
  General Motors
  hopes to sell one million EVs a year, or 33% of North American vehicles, by 2025, and it wants all sales globally to be electric by 2035.
• By 2030, California wants about 68% of all its new passenger vehicles sold to be all-electric, fuel cell-powered, or plug-in hybrid. By 2032, California is aiming for EV sales to be 82% of new vehicle sales.

What’s Next:
Tesla
will build a new battery factory in Shanghai, announcing it at a signing ceremony this weekend, when CEO Elon Musk was in the country, Bloomberg reported. Musk tweeted confirmation of the plan, saying the new factory is aiming to make 10,000 Megapack batteries a year.

—Al Root and Janet H. Cho

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Tesla Boosts Investment in China With New Battery Factory

Tesla is planning to build a new factory in Shanghai to boost production of its Megapack batteries, the company confirmed Sunday.

• The electric-vehicle maker’s CEO Elon Musk said the Shanghai plant would supplement the output of its Megapack factory in California, in a tweet Sunday.
• Tesla made the announcement at a signing ceremony for the project in Shanghai. “Our next Megafactory will be in Shanghai–capable of producing 10,000 Megapacks per year,” Tesla said in a post on Twitter.
• The company’s Megapacks are battery-storage products it sells to utilities. The batteries can store power from renewable sources, such as solar and wind, to be used when needed to support the grid’s peak loads.
• The factory could break ground in the third quarter of 2023, with production beginning in the second quarter of 2024, according to reports from Chinese state-run Xinhua News Agency and state television.

What’s Next: The new plant strengthens Tesla’s presence and boosts its investment in China, where it already has an EV factory. Tesla is progressively increasing its capacity in the country and company watchers expect further moves to bolster its business there.

—Callum Keown

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Super Mario Bros. Smashes Its Way to No. 1

Nintendo
and Universal Pictures’ The Super Mario Bros. Movie notched an unexpectedly strong weekend as the top opening of all time for an animated film, with worldwide box office sales of $377 million. In the U.S. it drew 74% of moviegoers, the biggest opening weekend this year, according to EntTelligence.

• SMBM raked in $204.6 million at the domestic box office, according to ComScore.
  Walt Disney’s
  Avatar: The Way of Water still leads 2023 with $281.3 million, followed by Disney’s Ant-Man and the Wasp: Quatumania, at $212.6 million, BoxOfficeMojo said.
• Moviegoers paid an average of $12.69 for adult tickets and $10.68 for children, and 21% paid another $4 per ticket to see it in a premium format. Sixty percent of the audience was between the ages of 18 and 34, the Hollywood Reporter said.
• Amazon’s
  Hollywood studio debuted the Ben Affleck-directed drama Air in a traditional theatrical release over the weekend, too, drawing a better-than-expected $20.2 million for the five-day period, BoxOfficeMojo reported.
• Nintendo’s American depositary receipts have dropped 22% in the past 12 months, and are down 4% this year, but Jefferies analyst Atul Goyal wrote last week that SMBM could help drive shares higher. “A big enough hit may impact” profit in the current fiscal year, he wrote.

What’s Next: Nintendo is working with Universal’s parent
Comcast
to open a Mario section at the Universal Studios Hollywood theme park. Goyal said the videogame The Legend of Zelda: Tears of the Kingdom launching May 12 and a potential successor to Nintendo’s Switch could also boost the stock.

—Connor Smith and Janet H. Cho

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MarketWatch Wants to Hear From You

“How is inflation impacting my tax return?”

A MarketWatch correspondent will answer this question soon. Meanwhile, send any questions you would like answered to thebarronsdaily@barrons.com.

***

—Newsletter edited by Liz Moyer, Patrick O’Donnell, Callum Keown