So when the Department of Labor released its disappointing January jobs report earlier this month, market observers quickly pointed to the bitter cold and inclement weather as the problem.
One surprising victim: the financial sector. The cold weather weakened the U.S. economy, at least for a time, indirectly creating headwinds for the financial sector’s ability to generate profits.
Yield Curve Profits
One way financial institutions produce earnings is by borrowing from other banks at lower rates than the rates they charge retail customers. For example, if a bank borrows at two-year rates and lends to a customer for their mortgage at 10-year rates they can theoretically capture the difference between the two rates.
A proxy for the profit margin that financials achieve can be measured by subtracting the 10-year yield from the two-year yield. The so-called “10-2 Spread” can be seen in the chart below. Theoretically, as the spread increases, profits increase. The reverse is true if the spread narrows.
So how would banking profits have declined because of the weather? From