Earnings Cool As Inflation Heats Up

Last Update: 15-Apr-11 08:58 ET

U.S. equity futures were trading modestly lower ahead of a slew of key economic data points this morning after participants digested Bank of America's (BAC) earnings where mortgage losses continued and Google's (GOOG) cool results that were pressured by higher expenses.

Inflation seems to be on everyone's mind this morning.  Both Asian and European trading suffered from concerns that a pickup in inflation will forestall global economic growth.  The target of their concern is mainly China.  The government officially released the CPI data, which showed prices rose 5.4% in March.  In addition, there was a bevy of other economic data points, all of which came in stronger than expected, further stoking inflation fears as the Chinese economy continues to grow too fast.

Eyes then turned to the U.S. with the release of CPI -- and later industrial production (9:15 ET).  Also out is April Empire Manufacturing, February Net Long-Term TIC flows (9:00 a.m. ET), and April Michigan Sentiment (9:55 a.m. ET) 

The CPI numbers did not befit the interest.  Despite the market's concerns (or infatuation), inflation remains moderate in the U.S.

March core CPI came in at 0.5%, on target with expectations.  Energy prices rose 3.5% led by a 5.6% spike in gas prices.  Food prices increased 0.8%.  The offset was a large decline in apparel prices (good news for shoppers).  Excluding food and energy costs, core prices rose 0.1% in March, down from 0.2% growth in February.

Global inflationary concerns are being manifested in the precious metals space, where gold and silver hit new record highs this morning.  However, the dollar spiked following the inflation data, causing gold and silver to pull back. Meanwhile, commodities that trade in tandem with economic growth expectations, including copper and oil, are ticking lower.

"A Tale of Two Cities" is how Bank of America's CEO characterized the company.  We could not have said it better.  There is really no better way to sum up what is going on at BofA.  While reporting the first profit in three quarters, the banks' earnings results disappointed after investors peel back the numbers and see mortgage losses continuing and expenses escalating.  If not for a $2.2 bln reserve release, the company would have reported a loss this quarter.  The mortgage business remains a severe weight, overshadowing broad-based improvements across the rest of its business from cards to wealth management. 

Per share earnings came in at $0.17, a dime short of expectations even with the reserve release.  Revenue did manage to top estimates, rising 16% y/y to $26.8 bln.  But the expenses are rising as the bank continues to pay out fees, litigation costs, and claims for mortgages.  Mortgage losses totaled $2.4 bln, compared to $2.1 bln last year.  Essentially the bank is moving money from one pot to another.  Real-estate losses are likely to continue for several more quarters.

Outside earnings, Libya, the Fukushima nuclear disaster, and the European sovereign debt crisis are still within the markets sights.

Europe's debt monster claimed its third victim last week (that would be Portugal) and Greece is scrambling to hold out from a restructuring.  It is sort of like the final scene of a horror movie where the last of the victims are running around the house trying to hide from the inevitable.  Ireland is now back in the fray after Moody's cut its rating by two notches to the lowest investment grade. The saga continues...