While it’s highly uncertain as to what is protected and what’s not, hopefully in the short term depositors can take a deep breath and we can shift back to the economic data and measure the business consequences of everything that has happened over the past week rather than worry about more bank runs (I believe the challenge of most banks is with profits from here and not balance sheet, although I get the mark to market issues that many have). Unfortunately the economic data over the coming month won’t reflect that yet. How will bank loan officers tighten lending standards further? We have to assume they will. To what extent will bank deposit rates lift from here? Not sure but they’ll be going up. What loan spread will banks be comfortable with and will borrowers want to pay it? Well, high yield is trading at about 500 bps over Treasuries and the CCC component is a bit over 1000 bps. Thus, assume deposit rates go to 2-3% from here, many small and medium sized businesses are going to be paying double digit interest rates for bank loans. All in, we have to assume that bank lending will slow from here as will the demand for loans.
The NFIB small business optimism index for February, thus pre SVB and the plunge in regional bank equity values, rose .6 pts to 90.9. This is about in line with the 6 month average of 91.1 but as seen in the chart it’s bouncing along the bottom.
Plans to Hire fell 2 pts after rising by 2 pts in January but that matches the lowest since February 2019 not including covid. Compensation was little changed though and job openings ticked up by 2 pts (the NFIB said “Of those hiring or trying to hire, 90% of owners reported few or no qualified applicants for their open positions” as “labor supply problems are widespread”). Those planning to increase capital spending was unchanged m/o/m but at the lowest since March 2021. Plans to increase inventory were little changed and those that said it’s a Good Time to Expand rose 1 pt. Those that Expect a Better Economy weakened by 2 pts to -47% and that is near the record low. Those that Expect Higher Sales though did rise 5 pts. The earnings outlook improved by 3 pts and there was an easing of credit conditions (likely will reverse though). As for the inflation stat, Higher Selling Prices fell by 4 pts to 38%, the lowest since April 2021 as companies now face greater elasticities after an aggressive run of price hikes and implies the possibility of a squeeze in profit margins as costs still remain high, particularly labor.
The NFIB said “Small business owners remain doubtful that business conditions will get better in the coming months. They continue to struggle with historic inflation and labor shortages that are holding back growth. Despite their economic challenges, owners are working hard to create new jobs to strengthen the economy and their firms.”
NFIB
Higher Selling Prices
Expect a Better Economy
US Treasuries continue to trade like meme stocks and the sense of calm today has the 2 yr yield jumping by 24 bps after plunging by 109 bps in the 3 prior days. The LSTA leveraged loan index yesterday had its worst percentage day loss since June 2022 as both credit worries and the drop in interest rates lessen the appeal of owning them as they include low quality credits and are floating rate.
LSTA Leveraged Loan index
The CNN Fear/Greed index yesterday closed at just 19 vs 46 one week ago and 72 one month ago. That is now in the ‘Extreme Fear’ category and from a contrarian standpoint it’s good to see in looking for a bounce in the very short term.
Ahead of the CPI report today, the NY Fed released yesterday its February Survey of Consumer Expectations. One yr inflation expectations fell sharply, by 8 tenths to 4.2% but was unchanged at the 3 yr time frame at 2.7%. Lower price expectations showed up for gasoline, food, medical care, education and rent. The answers to the labor market questions were steady. As for household spending, “growth expectations decreased to 5.6% in February from 5.7% in January. This is the fourth consecutive decline in the series.” The March report should be even more interesting to see.
In the UK, their January jobs data was a bit better than expected with the 3 months ended January saw a job gain of 65k, 12k more than expected and the unemployment rate held at a low 3.7%. Wage growth ex bonuses rose 6.5% y/o/y, still well below the rate of inflation and one tenth less than expected. Jobless claims in February did fall 11.2k, the 3rd month in a row of declines and the labor market in the UK remains tight too. Gilt yields are rising along with all other bonds and the pound is down after yesterday’s jump. The UK economy is still dealing with the challenge of falling real wages but the labor market remains firm and what a relief they got with energy prices this winter. Their stock market is still attractive and very cheap.