As we ready ourselves for earnings from big cap tech, among from hundreds others this week, it just seems so obvious to me why the stock market hangs in as well as it does. No one wants to miss the ‘Fed is done’ rally. So yes, the Fed will seemingly hike again next week but we assume, as does the fed funds futures market, that it will be it and who wants to miss that rally. Who cares what the trajectory of earnings is, who cares where bank lending is trending, the Fed is just about done hiking rates is the mentality, so lets buy. As I believe that keeping rates high for a while regardless is a continued form of tightening as is QT, I’m not on board with the markets ‘Fed will save us again’ thought process, at least not yet. We also have to remember that the two bear markets before Covid didn’t end until the Fed was almost done CUTTING rates.
Before I mention the bank loan data seen Friday, in today’s WSJ article titled “Why the Banking Mess Isn’t Over,” they mention some good stats from Goldman. “Economists at Goldman Sachs estimate every 10% decline in bank profitability reduces lending by 2%. If the share of Fed interest rate changes that are passed on to bank deposit rates, sometimes called ‘deposit betas,’ reach levels seen in 2007, that could lead to a 3% to 6% decline in lending in the US. Goldman expects that could reduce economic output by .3 to .5 percentage points this year.”
And the impact on small business? “Businesses with fewer than 100 employees receive nearly 70% of their commercial and industrial loans from banks with less than $250 billion in assets, and 30% of such lending from banks with less than $10 billion, according to Goldman.”
US bank deposits fell by $76.2b for the week ended April 12th after the rebound in the week prior of $60.7b. At $17.2 trillion, that’s the least since July 2021. I’ll add that for every $1 lost in bank deposits is a $1 not being lent out. C&I loans outstanding rose by $8.3b after the $6.8b rise in the week prior which followed a drop of $68b in the two weeks before that. After a sharp drop in the prior two weeks of $5b, real estate loans for construction and development rose by $1.2b. CRE loans outstanding were up $1b after a gain of $720mm in the week before but which followed a decline of $30b in the two weeks before. Credit card loans outstanding rose a touch.
Bank Deposits
C&I Loans Outstanding
Let’s go over some earnings comments from PPG Industries whose paints go into just about everything. They had a record sales quarter “despite the backdrop of macro challenges, including soft global industrial activity, elevated cost inflation, continued geopolitical issues and weakening demand in US construction related end use markets.” They particularly benefited from aerospace, the reopening of China and within its architectural coatings business in Mexico. They also became the “primary paint supplier at Walmart’s 3,800 locations that carry paint products.” Looking ahead from here they are also positive on their auto refinish business.
They referred to “overall demand conditions in Europe” as “difficult.” With respect to the overall outlook, “It is evident that challenges remain to the demand environment, and in some cases, such as US housing and construction, they’re weakening.” While they are benefiting from the China reopening, they did cite the “Slower China opening of manufacturing” specifically. Also, “We’re cautious on global industrial.”
On the inflation front, “we did achieve more pricing in Q1. We were up 8% in total. About 70% of that is carryover. We were able to achieve some additional pricing in the quarter on an incremental basis…So I think as we move forward on price, we’ll comp – we’ll start to comp higher increases as we move through the year from last year, so the increments will be smaller. But we are highly confident that Q2, Q3, Q4, we will print positive price numbers.”
I’ll argue again, inflation is NOT going to magically disappear even if the rate of change further moderates from here.
Shifting to what Coca Cola said, who similar to Proctor and what we’ve heard for many quarters now with consumer product companies who are generating almost all of their revenue growth solely with price and not volume, they saw 11% revenue growth from price/mix of the 12% in total with organic revenues. Taking out FX and a divestiture/restructuring left them with 5% reported net revenues of which 3% was unit case volumes.
Here were some comments from last Thursday’s ‘State of Freight’ webinar done by FreightWaves CEO Craig Fuller. He said “I have heard a lot of arguments about folks that are bullish about the state of freight. I have yet to find a piece of data that actually suggests that there is an argument made for being bullish…I think in a normal year, you would have seen a March build (in terms of tender volumes), a limited drop-off in April – building up until Easter, but we’ve not seen any level of seasonality. It suggests that the produce season isn’t producing, construction is not driving demand, retailers aren’t driving demand. It’s just a really flat year.” They did also say that “flat” is at least better than down.
Germany’s IFO business confidence index for April rose to 93.6 from 93.2 and that was just above the estimate of 93.4. The internals were mixed though as the Current Assessment was down a touch, offset by a rise in Expectations. The IFO said simply, “German business’s worries are abating, but the economy is still lacking dynamism.” Manufacturing improved “somewhat” while for services, “the upward trend in the business climate over recent months came to an end.” Trade fell slightly while construction was up.
German IFO