5/12/23 – The SLOOS is Loose

All eyes were on the release of the most recent inflation data this week.  Both the CPI and PPI came in better than expected as inflation continues to cool.  Consumer prices rose 4.9% year-over-year, the smallest rise in two years, but still well above the Fed’s target of 2%.  The Producer Price index was much better than expected with year-over-year final demand inflation registering 2.3%.  Be forewarned though; producer prices have a low predictability of the direction of consumer prices.

Since the commencement of the banking crisis in March, a heightened focus has been on banking behavior, especially their ability and willingness to make loans.  With that, what was once the domain of bank analysts, the Senior Loan Officer Opinion on Bank Lending Practices, colloquially known as the SLOOS report, has suddenly become a heavily watched measure.  The most recent SLOOS was released on Tuesday and on the whole showed an incremental tightening on the part of loan officers.  However, the component of the report that referenced commercial real estate CRE was a different story.  CRE leading standards have tightened considerably with more than two thirds of respondents saying that standards have tightened materially.  Simultaneously with the tightening, the demand for CRE loans has also dropped with more than two thirds of banks confirming the drop.  The SLOOS only confirms what we’ve been seeing in the home sales numbers.  Interest rates are high, and buyers don’t want to lock in a high interest mortgage.

Separately, the monthly budget report painted a troubling picture of the fiscal situation in the U.S.  The current fiscal year-to-date deficit is $924 billion, up significantly from the $360 billion from the prior period, as the U.S. government continues its spendthrift ways.  The Congressional Budget Office estimates that the fiscal year 2023 deficit will reach $1.539 trillion.  Keep in mind that the deficit is financed by debt that the Fed has made more expensive with each successive rate hike.  And in case you haven’t been paying attention, that debt limit is about to hit its legal limit sometime in the next several weeks, which is causing agita to investors and policymakers alike.

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