Here is an updated chart for Commercial & Industrial loans for the week ended March 22nd and you can see we just about gave back all of the previous week’s gains. I’ve now seen/heard two explanations for the recent decline which puts the outstanding balance at the lowest level since September. One is from a Goldman Sachs analyst recently who believes that its related to the energy sector and the tapping of bank credit lines. We saw a rise in C&I loans in the early part of last year just when the market had its hissy fit and now just as the markets have reached a euphoria phase, we’re seeing the opposite. Thus, Goldman is concluding that distressed energy companies were tapping their lines last year and now with the rebound in oil prices are paying them back.
The other reason I’ve heard but have not confirmed is with the sharp decline in refis, banks are cutting their warehouse mortgage loan lines to mortgage originators. These warehouse lines show up in C&I loans because they are considered a loan to a company. Maybe.
I’m going to throw out another reason that MAYBE is a factor, although, I’d rather hear from banks themselves to see whether there is something here or off base. Chime in if you have an opinion. On December 18th 2008, the Federal Reserve initiated the payment of interest paid on excess bank reserves parked at the Fed. At the time the rate was just 25 bps and of course sat there until December 2015. Well, as of two weeks ago banks are now getting 100 bps on those $2.2 Trillion of reserves and that is essentially free money for them, totaling $22b. Let’s compare that to different aspects of the current yield curve. The spread between the effective fed funds rate of .91% and the 5 yr US Treasury is 102 bps and 148 bps out 10 years. The spread between 3 month LIBOR and the 5 yr Treasury is 77 bps. It’s just 124 bps out 10 years. The 2s/10s spread is just 113 bps and the 5s/30s spread is only 111 bps. Now of course banks are lending out at a spread above LIBOR and/or above Treasury yields but the point is the rising IOER that the Fed is paying banks is providing competition for bank capital and thus could end up being a double form of tightening with a rising cost of capital and less lending.
The Japanese Tankan business confidence indices improved q/o/q but were mostly below expectations. The headline manufacturing index for Q1 rose 2 pts to 12 but expectations were for a print of 14. At the peak of Abenomics enthusiasm it touched 17 in Q1 2014. The outlook was higher by 3 pts to vs the estimate of 13. On the services side the index was up by 2 pts to 20 and that was 1 pt above the forecast but the outlook was unchanged instead of rising by 3 pts as was expected. For small companies we saw improvements in all major categories but were mixed too relative to expectations. Overall capital spending plans were a bit above expectations for Q1 with a .6% gain vs the estimate of down .3% but this compares with an increase of 5.5% in Q4. Bottom line, I’ll say again that the Japanese recovery remains in place but is still lumpy with manufacturing and exports doing pretty well while the consumer remains a drag. The market response with the data somewhat below estimates was mixed as the yen is basically unchanged, JGB yields were as well while the Nikkei rallied by .4% but is the only major stock market that is down on the year.
Here is a quick snapshot of all the manufacturing PMI’s from Asia. South Korea’s fell to 48.4 from 49.2, Japan’s final read was 52.4 vs 53.3 and down from 52.6 initially, Indonesia’s rose to 50.5 from 49.3, Thailand’s fell .4 pts to 50.2 while Malaysia’s was little changed at 49.5 and Vietnam’s was higher by .4 pts to 54.6. Bottom line, most of the major countries have manufacturing PMI’s still hovering around the flat line of 50. As India gets out from underneath its bungled cash swap plan, its manufacturing PMI rose to 52.5 from 50.7 in February. It bottomed at 49.6 in December. The best news out of India recently was the passage of the new tax system which is hugely positive and I remain bullish on Modi and their markets.
In Europe, the final look at March manufacturing PMI was no different than the first one at 56.2 which is what was expected and is at multi year highs. The unemployment rate for the euro area ticked down by one tenth to 9.5% also as expected and puts it at the lowest level since April 2009 as it continues its slow crawl lower. Pre recession it got as low as 7.3% and peaked at 12.1% in April 2013. The European economy is definitely seeing a cyclical upturn and with the beginning of the ECB taper beginning today, I expect another taper to be announced sometime by September. While European bourses are mixed, the bank stock index is down by 1.7%, its worst day since late February. These banks need help in the form of eliminating negative interest rates.
The manufacturing PMI in the UK in March fell to 54.2 from 54.5 last month. The estimate was for a rise to 55. This is the 3rd month in a row of declines and is basically no different than it was 6 months ago which implies the benefit to exporters from a weaker pound may already have run its course. In fact, Markit said “the domestic market remained the primary source of new business wins for manufacturers.” Markit also said the survey “shows that high costs and weak wage growth are sapping the strength of consumers, with rates of expansion in output and new orders for these products slowing further.” Price pressures were mixed m/o/m with input prices down while output prices were up but overall with price gains, “it remained among the steepest recorded in the 25 yr survey history.” The pound is lower with the data miss. The figure captures the dilemma that the BoE has in that its facing serious inflation pressures at the same time they are panicked over what Brexit will do to the UK economy. I say, deal with the inflation aspect as its in their purview which can help REAL wages for consumers and have faith that UK industry will manage its side just fine.
Peter is the Chief Investment Officer at Bleakley Advisory Group and is a CNBC contributor.