Late Credit-Card Payments Stoke Fears for Banks Credit-card losses are rising as more consumers fall behind on their bills, ending a six-year long streak of declining write-offs for card issuers.
The average net charge-off rate for large U.S. card issuers—the percentage of outstanding debt that issuers write off as a loss—increased to 3.29% in the second quarter, its highest level in four years, according to Fitch Ratings. The quarter was also the fifth consecutive period of year-over-year increases in the closely watched rate. All eight large issuers, including J.P. Morgan Chase & Co., Citigroup Inc., Capital One Financial Corp. COF 0.20% and Discover Financial Services , DFS -0.30% had increases for the quarter. (…)
Card balances nationwide rose 6% over the last 12 months through May, a growth rate that is up from about 1% four years ago, according to the Federal Reserve.
Rising balances, however, have also coincided with the recent loan losses and, analysts note, put a dent in what has been one of the healthiest credit-card markets on record.
The missed payments and increase in losses are having knock-on effects on lenders’ earnings. Many posted double-digit percent year-over-year increases in the money they set aside to cover future card losses. (…)
During the first-quarter earnings period, some lenders and analysts pointed to delays in tax refunds as a possible reason for the pickup in card-related losses. But this quarter, charge-offs kept rising for many lenders, giving more credence to worries that consumers are taking on too much debt. (…)
U.S. Employment Costs Decelerated in Second Quarter Wages and salaries, which account for 70% of total compensation, rise 0.5% from the prior quarter
(…) The employment-cost index for civilian workers increased a seasonally adjusted 0.5% in the second quarter, the Labor Department said Friday. Benefits, which includes health coverage, retirement savings and paid leave, advanced 0.6%.
From a year earlier, total compensation rose 2.4%, maintaining a trend in place since early last year. Wages increased 2.3% from a year earlier. (…)
China Factory Activity Loses Momentum A gauge of China’s manufacturing activity fell more than expected in July, offering a sign of an anticipated slowdown in the world’s second-largest economy after a strong start to the year.
China’s official manufacturing purchasing-managers’ index fell to 51.4 in July from 51.7 in June, according to data released by the National Bureau of Statistics on Monday. (…) Zhao Qinghe, an economist with China’s statistics bureau, attributed July’s drop in the official manufacturing PMI chiefly to weaker foreign demand and slower production amid hot weather and floods in southern China. (…)
A possible slowdown in the broader economy was also reflected in the decline of nonmanufacturing PMI. The index fell to 54.5 in July from 54.9 in June, as transportation and property sectors softened. Growth in construction was a bright spot, with the sector’s subindex rising to its highest level since December 2013 due to government-backed infrastructure spending. (…)
EARNINGS WATCH
U.S. Companies Post Profit Growth Not Seen in Six Years
Earnings at S&P 500 companies are expected to rise 11% in the second quarter, according to data from Thomson Reuters, following a 15% increase in the first quarter. Close to 60% of the firms in the index have reported second-quarter results so far. (…)
Several factors are at work, analysts and economists say. A weaker dollar has made it easier to sell U.S.-made goods overseas and has kept borrowing costs low. U.S. wages have improved enough to help bolster consumer spending without raising employer labor costs so much to dent the bottom line.
Companies also continue to reap the fruits of their recent zeal for cutting costs, Mr. Probyn said. “We underestimated some of the cost-cutting and restructuring that has gone on within the various industries; that has permitted earnings to keep doing well.â€
Sales, too, rose in the quarter, by an expected 5%, the second-biggest increase in more than five years, according to data from Thomson Reuters. (…)
More from Factset and Thomson Reuters:
- To date, 57% of the companies in the S&P 500 have reported actual results for Q2 2017. In terms of earnings, more companies (73%) are reporting actual EPS above estimates compared to the 5-year average. In aggregate, companies are reporting earnings that are 6.4% above the estimates. This surprise percentage is above
the 1-year (+4.7%) average and above the 5-year (+4.2%) average. - In terms of sales, more companies (73%) are reporting actual sales above estimates compared to the 5-year average. In aggregate, companies are reporting sales that are 1.2% above estimates. The percentage of companies reporting sales above estimates is well above the 1-year average (56%) and well above the 5-year average (53%).
- The blended (combines actual results for companies that have reported and estimated results for companies that have yet to report) earnings growth rate for the second quarter is 9.1% today, which is higher than the earnings growth rate of 7.1% last week.
- If the Energy sector is excluded, the blended earnings growth rate for the remaining ten sectors would fall to 6.8% from 9.1%.
- The only sector reporting a year-over-year decline in earnings is the Consumer Discretionary sector. Amazon.com is the largest contributor to the earnings decline for the sector. The company reported actual EPS of $0.40 for Q2 2017, compared to actual EPS of $1.78 in the year-ago quarter. If Amazon.com is excluded, the blended earnings growth rate for this sector improves to 1.0% from -1.0%.
- The blended sales growth rate for the second quarter is 5.2% today, which is above the sales growth rate of 4.8% last week.
- If the Energy sector is excluded, the blended revenue growth rate for the index would fall to 4.2% from 5.2%.
- At this point in time, 54 companies in the index have issued EPS guidance for Q3 2017. Of these 54 companies, 28 have issued negative EPS guidance and 26 have issued positive EPS guidance. The percentage of companies issuing negative EPS guidance is 52% (28 out of 54), which is below the 5-year average of 75%.
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Trailing 12-m EPS are now $125.29.
As D.C. Tests New Lows, Markets Keep Soaring
(…) The U.S. economy continues to chug along, steadily if unimpressively, and prices of stocks and other so-called risk assets, such as speculative-grade bonds, continue their ascent. They seem undeterred by the disarray in D.C., which requires no further elaboration here (especially since an adequate description is not fit to print in Barron’s), or by the ongoing threats around the globe. (…)
AT&T (T) last week sold the third-biggest corporate bond offering ever, some $22.5 billion, which was upsized from the originally planned $15 billion and was still nearly three times oversubscribed (…)
Health Bill’s Defeat Roils Republicans, Insurers The abrupt collapse of Republicans’ bid to rework the U.S. health care system opened a new chapter of uncertainty for insurers, medical providers and millions of Americans.
(…) Insurers say the loss of the cost-sharing payments would push up rates and convince more companies to exit from the markets where consumers buy subsidized coverage under the ACA. Already, several insurers have cited the uncertainty in announcing pullbacks for next year, while others have already built extra cushions into their 2018 rate requests.
More insurers have been raising red flags in recent days, including Anthem Inc., which said Wednesday that if it doesn’t quickly get more certainty about the future of the individual insurance market, it will likely further pull back its planned participation for next year.
Some conservatives warned of risks to the Trump administration if it sought to undermine the markets.
“No one with a sense of political realism would think that’s even a good desperation move,†said Tom Miller, a scholar at the right-leaning American Enterprise Institute. “It’s not even leverage for anything, it’s just pure wreckage.â€
The Department of Health and Human Services, meanwhile, could take administrative steps to peel back enforcement of the ACA requirement that most people obtain insurance or pay a penalty, a shift that insurers say would also push up premiums. (…)
This is so unbelievably messy. It can only hurt the economy until settled. Health care costs will rise swiftly and/or consumers will save more to protect themselves.
The WSJ:
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The Republican ObamaCare Crack Up The party had a historic chance to act in the public interest. It failed.
After promising Americans for seven years that it would fix the Affordable Care Act, the Republican Party failed. This is a historic debacle that will echo politically for years.
A divided GOP Senate could not muster a majority even for a simple bill repealing the individual and employer mandates they had long opposed. Nor were they able to repeal the medical-device tax that some 70 Senators had gone on record wanting to repeal in previous Congresses. (…)
Mr. Trump in a tweet blamed the three GOP Senators who voted no, but he was also an architect of his own defeat. Mr. Trump was elected in no small part on his promise to do big deals like this one. In the end he couldn’t close. He never tried to sell the policy to the American public, in part because he knows nothing about health care and couldn’t bother to learn.
His chaos theory of White House management, on morbid public display this week, also means no one on Capitol Hill knows who is in charge. As his approval rating sinks below 40%, few in politics fear him and increasingly few will step forward to defend him. (…)
Mr. Schumer knows that a “bipartisan†Senate insurance bailout will further divide the GOP and put the House on the spot if it fails to go along. With the House majority in jeopardy in 2018, Speaker Ryan could face an excruciating choice: Attempt to save the seats of his party’s moderates by voting with Democrats to bail out the exchanges, or get blamed by Democrats and the press for all of ObamaCare’s ills.
Republicans will now try to salvage what is left of this Congress with tax reform. But the tragedy remains: Republicans in their selfish political and personal interests squandered a once in a generation chance to show that their principles can make life better for Americans.
(…) Republicans have more common ground, ideologically, and they won’t be quite as bedeviled by Senate rules complicating passage of nonfiscal legislation. And the White House has been articulating clearer principles and showing deeper, more consistent interest. (…)
However, not far beneath that newfound unity are some tough realities.
In the coming months Congress may take another stab at a health-care overhaul, and lawmakers will soon confront deadlines on spending and the debt limit that will distract them. Congress hasn’t rewritten the tax code in 31 years because the task is hard, demands unpleasant trade-offs and sows divisions that are often more parochial than partisan. For example, some Republicans oppose tax breaks for renewable energy, but representatives from states with wind and solar energy disagree.
Distrust lingers between senators and House members. And while Republicans may agree on the broad strokes of tax policy—such as lower rates and lighter taxes on U.S. companies’ foreign income—they are bound to divide on the details. (…)
President Donald Trump says he wants to prioritize taxes for middle-class families, but his plan features tax cuts for businesses and high-income households. In an interview this past week, he knocked down speculation of a top ordinary income-tax rate exceeding 40%. “That was not right,†he said. “That was not a correct statement.â€
Republicans don’t agree on whether they are aiming for tax cuts or for a plan that would be revenue-neutral. They probably need an answer to that question before voting on a tax bill, because that decision must be baked into the congressional budget. A budget unlocks the so-called reconciliation procedures that would allow the Senate to pass a tax bill with only Republican votes. (…)
The health-care overhaul was supposed to repeal taxes on health industries and investment income. With those taxes remaining, Republicans must decide whether to include those provisions in the tax bill or set them aside.
Rep. Kevin Brady, chairman of the House Ways and Means Committee, said Friday that he didn’t want to import provisions to repeal the Affordable Care Act’s taxes into the upcoming tax bill because that would make it harder to lower other tax rates.
Republicans also need to find a replacement for border adjustment, which would have raised about $1 trillion over a decade to pay for lower rates and discouraged companies from shifting profits abroad. Thursday’s statement hinted at an emerging “viable†option.
“As I’ve always said, without border adjustment it means you’re going to have a lot higher rates, and I think it makes it complicated to solve the overseas issues,†said Rep. Devin Nunes (R., Calif.).
With border adjustment gone and some other major changes proposed by the House looking less likely, the GOP tax effort may be more concentrated on tax rates and simplification, said Rep. Kenny Marchant (R., Texas). That’s still a tall order, he said. (…)
