4/14/23 – “Large Money Center Banks benefitted from SVB’s collapse” – How will the balance of the US economy hold up?

Following the Federal Reserve-induced banking crisis that gripped the capital markets last month, much debate has focused on the next course of action.  Clearly, the Fed’s sharp and relentless rise in interest rates, and negligence of its regulatory responsibility contributed to the demise of Silicon Valley Bank and Signature Bank.  From that, an argument can be made that they should pause from any additional rate hikes to evaluate their action to date.  If for no reason other than to let any banks that extended duration too soon generate some net interest income.  However, an equally persuasive argument is that the inflation mentality is starting to become entrenched.  From our perspective, there were three big hurdles to overcome to justify raising rates at the next meeting, and all of them have flashed a green light for the Fed.  The employment report, the consumer price index, and the producer price index all portrayed an economy that is slowing, but by no means is falling off a cliff.  That should be enough to give them room for at least another 25-basis point hike.

In addition to this morning’s PPI number, the first of the money center banks released quarterly earnings results.  J.P. Morgan, Citi, and Wells Fargo all reported better than expected earnings for the first quarter.  Investors were fearful that the three would miss expectations or report balance sheet deterioration.  Contrary to that concern, all three reported better than expected results.  That’s not to say that we’re out of the woods with the sector.  Bank of America, Morgan Stanley, Goldman Sachs, TD Bank, and US Bancorp, all report next week, with smaller regionals reporting later this month.

Also released this morning were the University of Michigan surveys.  We like the surveys because they present an unbiased portrayal of consumer sentiment in real time, as opposed to the BLS reports that are massaged and seasonally adjusted to smooth changes.  In reviewing the results, we were surprised that the current conditions index actually rose to 68.6 from 66.0 last month.  While that’s well off the high reached in 2020, given the noticeable deceleration in economic activity we were surprised that it didn’t fall.  The other U of M surprise, and this one is certain to be noticed by the Fed, is the 1 year forward expectations for inflation, which rose to 4.6% from 3.7% last month.  While that’s well off the 5.4% expectation touched last year, that consumers expect inflation to rise further despite the rate hikes to date lead us to conclude that inflation concerns are starting to become ingrained.  Exactly what the Fed had hoped to avoid.

In addition to the cavalcade of earnings to be released next week, we’ll be watching housing starts, released on Tuesday.  That measure bounced off of the low in January but is forecast to tick down by 3.5%.  While the 10-year Treasury note is about 50 basis-points off of the high yield, 30-year mortgage rates continue to hover just below 7%.  That’s going to continue to be a head-wind for the housing market.