Year: 2023

Banks tighten credit terms, see loan demand drop, Fed survey shows

Credit conditions for U.S. business and households continued tightening in the first months of the year, according to a Federal Reserve survey of bank loan officers, but the results seemed to mark the accumulating impact of Fed monetary tightening rather than the cliff-like decline in credit some feared after the March collapse of Silicon Valley Bank.

The Fed’s quarterly Senior Loan Officer Opinion Survey, or SLOOS, among the first measures of sentiment across the banking sector since the recent run of bank failures, showed a net 46.0% of banks tightened terms of credit for a key category of business loans for medium and large businesses compared with 44.8% in the prior survey in January – a modest, stepwise change.

For small firms, conditions were slightly more stringent with a net 46.7% of banks saying credit terms were stiffer now versus 43.8% in the last survey.

Banks reported that firms of all sizes were showing less demand for credit than three months earlier.

Credit access may be just part of the story, with banks also reporting they were capping loans sizes and raising the cost of borrowing.

On the consumer side, banks said soft demand prevailed again for credit card, automobile and other forms of household credit, although not to the degree seen at the end of last year. Banks on balance showed diminished willingness to provide consumer installment loans, and were also limiting the size of auto loans for example.

“It wasn’t a sea change…The tightening in standards probably wasn’t as severe as one might imagine given the banking stress,” wrote J.P. Morgan Chief U.S. Economist Michael Feroli. But the drop in demand, particularly the more than half of banks seeing a drop in small firms wanting to borrow, “appears to paint a grim picture about the outlook.”

The tightening also reflected modestly rising concerns among banks about the need to conserve capital and maintain adequate liquidity amid a weaker economic outlook. Mid-sized banks, the Fed said in reporting the survey results, seemed particularly stretched.

“Banks most frequently cited an expected deterioration in the credit quality of their loan portfolios and in customers’ collateral values, a reduction in risk tolerance, and concerns about bank funding costs, bank liquidity position, and deposit outflows as reasons for expecting to tighten lending standards over the rest of 2023,” the release said. “Mid-sized banks reported concerns about their liquidity positions, deposit outflows, and funding costs more frequently than the largest banks.” (…)

Th drop in corporate demand for credit likely reflects the inventory cycle:

Inventories are not in bad shape given sales levels and trends:

Yesterday I showed lending stats through April 26. W now have the stats through May 1. Looks like business as usual so far 7 weeks after SVB:

Goldman Sachs notes that recent CRE loans were made with much lower leverage:

• The FT: Fed warns of credit crunch risk after US bank turmoil “A sharp contraction in the availability of credit would drive up the cost of funding for businesses and households, potentially resulting in a slowdown in economic activity.”
• Chicago Fed President Austan Goolsbee to Yahoo Finance: “The credit crunch, or at least the credit squeeze, is beginning.”
• Reuters: Fed says banking sector looks set to weather recent turmoil In its semi-annual report on financial stability, the U.S. central bank said overall funding risks for banks remained low and firms still have ample liquidity.

(…) The Fed noted in its report on Monday that more than 45% of bank assets reprice or mature within a year, suggesting there is not heavy exposure to less valuable securities for long periods of time. (…)

• MichaelKantro, Chief Investment Strategist at Piper Sandler, tweeted this chart showing that “#SLOOS has a pretty good track record (100% historically) for determining soft and hard landings after a Fed tightening cycle.”

The odds of a hard landing are ominously high but note that the 1970, 1990 and 2001 recessions were very mild. The odds may really be 62%.

• NYC’s office return stalls (Axios)

Data: REBNY; Chart: Axios Visuals

US debt limit default could hit in early June to early August -think tank

The U.S. government will begin defaulting on its payment obligations between early June and early August without an increase in the federal debt limit, the Bipartisan Policy Center said on Tuesday, flagging pressure from a drop in tax revenue.

The front end of the centrist think tank’s latest estimate for the so-called “X-date” – when the government runs short of cash to pay its obligations – lines up with that of U.S. Treasury Secretary Janet Yellen, who warned last week that a default could come as early as June 1. (…)

But if tax revenues allow Treasury to meet obligations through mid-June, quarterly estimated tax payments due on June 15 can likely float the government through June 30, BPC said in its analysis. (…)

“In such a scenario, the additional room created by these measures would support Treasury’s ability to make good on our obligations through at least early July and perhaps several weeks beyond,” BPC said.

The think tank’s latest estimate roughly agrees with the Congressional Budget Office’s revised assessment that there is now a “significantly greater risk” of an early June default. (…)

• John Authers: Let the Debt-Ceiling Game of Chicken Begin

Chinese Exports Cool in Latest Warning Sign on Global Trade After three years of export-driven growth, Beijing is hoping domestic consumers can drive the next stage of the recovery

Exports rose 8.5% in April from a year earlier, China’s General Administration of Customs said Tuesday, faster than the 6% pace expected by economists polled by The Wall Street Journal but weaker than the 14.8% year-over-year jump recorded in March.

April’s export increase benefited from a comparison with weak figures in the year-earlier period, when Shanghai was locked down in an effort to control an outbreak of the fast-spreading Omicron variant of the coronavirus. When compared with March in month-over-month terms, exports from China to the rest of the world in April shrank 6.4%, to $295 billion. (…)

Overseas sales by other key exporting nations in Asia have also been weak, with April exports from South Korea falling 14% from a year earlier. Exports from Taiwan were down by 13% in April, though that marked an improvement from a 19% drop in March. (…)

Tuesday’s data showed imports falling 7.9% in April from a year earlier, an unexpectedly weak result. Economists said the drop likely reflects subdued appetite for goods as consumers favor spending on services, as well as weak demand for raw materials and components that feed into exports.

That weakness in imports boosted China’s trade surplus in April to more than $90 billion, up from $88 billion in March, despite the slowdown in exports.

Wanda in Talks With Banks on Loan Relief as Challenges Mount

Dalian Wanda Group Co. is in talks with major Chinese banks on a loan relief plan that may allow it to extend principal repayments for some onshore borrowings as the conglomerate faces a liquidity challenge, according to people familiar with the matter. (…)

Wanda’s commercial management unit alone had outstanding loans of 94.4 billion yuan [$13.5B] as of end-2022, including 16.5 billion yuan [$2.3B] due this year, according to its annual report. (…)

• The macro leverage ratio — or total debt as a percentage of gross domestic product — soared to 279.7% in the first quarter, according to central bank and statistics bureau data compiled by Bloomberg. *That was an increase of 7.7 percentage points from the previous quarter, the biggest jump in three years. (@C_Barraud)

GPTZero App Seeks to Thwart AI Plagiarism in Schools, Online Media

(…) Edward Tian, a 22-year-old Princeton University student studying computer science and journalism, developed an app called GPTZero to deter the misuse of the viral chatbot ChatGPT in classrooms. The app has racked up 1.2 million registered users since January.

He’s now launching a new program called Origin aimed at “saving journalism,” by distinguishing AI-generated disinformation from fact in online media. (…)

GPTZero analyzes the randomness of text, known as perplexity, and the uniformity of this randomness within the text — called burstiness — to identify when AI is being used. The tool has an accuracy rate of 99% for human text and 85% on AI text, according to the company. (…)

THE DYNAMIC DUO

Sadly, many forget the influence of Charlie Munger. Also sadly, the game is getting tougher with the size of the portfolio. The price of growth… Still remarkable.

These two guys are 92 and 99 respectively!!

And still working!

Data: OECD, Moody’s Investor Service. Chart: Axios Visuals

BTW, while on aging: When youth fades

There’s a typical age when most Americans start feeling like their youth is slipping away.

• It’s 42.

That’s according to a recent poll reported by The Wall Street Journal.

• The oldest members of the millennial generation are reaching their early 40s and experiencing this very phenomenon.

There’s a gap between the age when Americans stop feeling young — 42 — and the age they start feeling old, which is 52, according to The Journal.

The silver lining: As we’ve reported, with the help of Finish Line readers’ wisdom, there’s a great deal to celebrate about getting older and reaching your 4os, 50s and beyond.

• Happiness actually spikes in our 70s, when there’s more free time and less stress. (Axios)

Robust Hiring in April Shows U.S. Job Market Remains Hot in Cooling Economy Employers added 253,000 jobs last month and unemployment fell to 3.4%

Employers added 253,000 jobs in April, the best gain since January, the Labor Department said Friday. Job growth was revised lower in February and March. The unemployment rate fell to 3.4% last month, matching the lowest reading since 1969.

Low joblessness kept upward pressure on wages, which grew 4.4% in April from a year earlier, up slightly from a 4.3% annual increase in March. Average hourly wages rose 0.5% from a month earlier to $33.36. (…)

On Friday, investors saw just a 7% chance that the Fed would raise rates at its next meeting, and they see rising chances of a cut after that, according to CME Group. Interest-rate futures markets imply a 75% probability that the Fed will have cut rates below current levels by September.

April’s monthly payrolls increase was slightly below the average monthly gain of 290,000 over the prior six months. Employment in February and March was revised down by a total of 149,000. (…)

Friday’s report showed job gains in most industries, even ones such as construction that are particularly sensitive to interest-rate increases. (…)

In April, 83.3% of Americans in their prime working years, ages 25 to 54, were employed or seeking jobs, the highest share since 2008. The influx of job seekers is helping restaurants, bars and hotels snap up workers, after they struggled with acute labor shortages for much of the pandemic.

Pushed by renewed demand to travel and socialize, leisure and hospitality businesses added about 900,000 jobs over the past year, almost a quarter of all jobs gained. (…)

Interestingly, employment among prime-age workers is now exceeding its pre-pandemic level and at its highest level since 2001. Prime-age workers are also enjoying above average wage increases at +6.6% YoY in Q1.

April saw a reacceleration in all variables impacting labor income:

• employment rose 0.16% MoM (+2.0% annualized) following +0.16% and +0.11% in February and March respectively;
• weekly hours were unchanged in April after two months of declines;
• hourly wages jumped 0.5% after +0.3% in each of the previous 3 months; first 4 months: +4.0% a.r., last 2 months +4.5%, last month +6.1%.

Aggregate weekly payrolls thus rose 0.66% MoM (+7.8% a.r.), sharply higher than the +0.1% average gain of the previous 2 months. First 4 months: +8.1% a.r., last 3 months: +3.3%, last 2 months +4.4%.

On a YoY basis, payroll income is up 6.6% in April, higher than +6.2% in March and still positive in real terms with PCE inflation at 4.2% in March. Consumer expenditures should thus remain strong in Q2.

If so, real spending on services will remain buoyant, up 3.0% YoY in Q1, keeping the pressure on services prices, and services wages, which the Fed currently considers its main targets.

The “75% probability that the Fed will have cut rates below current levels by September” looks very high to me, and to Henry McVey, KKR CIO:

(…) the labor market is making it harder for the Fed to accomplish its mission of bringing inflation back to two percent. In the latest data, overall employment is about 3.3 million jobs higher than it was pre-COVID, while the labor force participation rate is still 80 basis points below its pre-pandemic peak.

The combination of limited supply and above trend demand following the pandemic has pushed the unemployment rate back down to 1960s levels, and put upward pressure on wages. So, while labor might not be the biggest driver of inflation on a historical basis, we think it will remain the biggest single driver of ‘sticky’ inflation this cycle.

We maintain our out of consensus view that the Fed will not go into cutting mode anytime soon. We have been highlighting this reality for some time, but the prospect of the Fed cutting 150-175 basis points during the next 12 months (which is what the futures are pricing) seems extremely low to us.

The reacceleration of the economy suggested by recent PMI surveys is supported by labor trends:

• true, the last 3 months has the average payroll gain at 222k vs the 6-month average of 278k. But
• employment growth at service-providers has stabilized above 200,000 per month;
• the long and widely expected goods recession looks more like a very soft landing. Demand for goods remains solid and inventories have been pared down.

Wages have also reaccelerated in both goods and services industries: positive for consumer spending, not so for inflation. As seen last week, productivity (-0.9% YoY) and unit labor costs (+5.8%) data are not encouraging.

Recall what April PMI surveys revealed:

• Service sector input costs rose at the steepest rate for three months, while the increase in selling prices quickened to the fastest since August 2022.
• The rate of manufacturing cost inflation quickened to the sharpest in three months, while the pace of increase in selling prices also accelerated above the series average.

This wage tracker chart (through Q1) from Goldman Sachs is not suggesting any retrenchment in wages across G7 countries:

The new economic worry comes from a possible credit crunch as regional banks are seen tightening lending standards in the wake of SVB. Regional banks supply much of the credit needs of small and medium size businesses which in turn provide 70% of U.S. jobs.

Data: FDIC and FRED; Chart: Rahul Mukherjee/Axios

But 7 weeks after SVB, credit seems to be flowing smoothly, even at smaller banks as this chart of weekly credit flows through April 26 shows. Deposit movements (black and grey bars) also do not suggest a crisis; recent declines typically reflect large outflows from accounts as the annual tax filing season comes to a close:

Canada’s job market stays resilient despite signs of cooling economy Statistics Canada says the economy added 41,400 new jobs in April, more than the 20,000 positions analysts had been forecasting

• Canada: April employment report exceeds consensus, but is not all rosy (NBF)

Full-time employment was down for the first time in eight months, with five provinces reporting a decline – the worst diffusion in 7 months. As a result, hours worked grew at the slowest pace since December 2022.

Moreover, half of the employment gains in April were concentrated among the self‑employed. Excluding this category, the number of people employed increased by 23K in the month, the lowest level since November 2022.

While we have yet to see a contraction in payrolls, the dominance of the self-employed among job creation could signal a change in attitude from Canadian employers and a slower pace of payroll expansion in the months ahead.

In addition, just under a third of new jobs created since the start of 2023 have been in ‘high wage’ sectors, in sharp contrast to 2022. As a result, even with annual wage inflation in the 4-5% range, the impressive job gains seen since the beginning of 2023 are not providing the same boost to household finances than if they had been concentrated in high-paying industries.

All in all, despite a stronger headline number than consensus expectations, April’s employment report does not argue for a change in policy by the Bank of Canada.

EARNINGS WATCH

From Refinitiv/IBES:

Through May. 5, 419 companies in the S&P 500 Index have reported earnings for Q1 2023. Of these companies, 77.1% reported earnings above analyst expectations and 18.4% reported earnings below analyst expectations. In a typical quarter (since 1994), 66% of companies beat estimates and 20% miss estimates. Over the past four quarters, 74% of companies beat the estimates and 22% missed estimates.

In aggregate, companies are reporting earnings that are 7.2% above estimates, which compares to a long-term (since 1994) average surprise factor of 4.1% and the average surprise factor over the prior four quarters of 4.2%.

Of these companies, 74.5% reported revenue above analyst expectations and 25.5% reported revenue below analyst expectations. In a typical quarter (since 2002), 62% of companies beat estimates and 38% miss estimates. Over the past four quarters, 71% of companies beat the estimates and 29% missed estimates.

In aggregate, companies are reporting revenues that are 2.5% above estimates, which compares to a long-term (since 2002) average surprise factor of 1.3% and the average surprise factor over the prior four quarters of 2.3%.

The estimated earnings growth rate for the S&P 500 for 23Q1 is -0.7%. If the energy sector is excluded, the growth rate declines to -2.4%.

The estimated revenue growth rate for the S&P 500 for 23Q1 is 3.5%. If the energy sector is excluded, the growth rate improves to 4.4%.

The estimated earnings growth rate for the S&P 500 for 23Q2 is -4.7%. If the energy sector is excluded, the growth rate improves to 0.5%.

After a poor start, the Q1 earnings season got better when financials reported and went in overdrive when 91% of tech companies beat with a surprise factor of +8.2%. Even Industrials shone with a 84% beat rate and a +10.0% surprise factor.

Conf. calls were generally upbeat: 25 more companies than during the Q4 season provided guidance so far, 21 positive, leading analysts to pump up.

Trailing EPS are now $219.83. Full year: $220.47e and 12-m forward $226.28e.

This “earnings recession” could be over after a mere 2.1% decline in trailing earnings. Q3 and Q4 ex-E estimates are now incorporating rising margins even with revenue growth in the 4% range.

TECHNICALS WATCH

• S&P 500 Large Cap Index – 13/34–Week EMA Trend Chart

Here’s a longer term version of this indicator courtesy of Trade Signals:

Source:  @Marlin_Capital

From The Market Ear

• Buyback announcements have continued to boom…almost $200bn worth in the last 3 weeks.

Deutsche

• Goldman’s PB was net sold for the 3rd week in a row and saw the largest net selling in three months…note short selling was the main driver, not selling of longs…

GS

FYI:

From David Bahnsen (The Bahnsen Group)

• Our GDP per person was basically the same as Europe’s and Japan’s thirty years ago.  Then, for 33 years, we have had booms and busts, good times and bad times, smart decisions and insane ones, and somehow our GDP per person is 33% better than Europe’s and nearly 60% better than Japan’s.

• Our economy has gone from 40% of the GDP of the G7 to 58% – a massive increase in the relative size and power of the economy compared to the rest of the developed world in just thirty years.
• Our income per person is 30% higher than the income per person in Western Europe

• While China has EXPLODED in size and contribution to the global economy over the last three decades, the U.S. was 25% of the global GDP thirty years ago and is still 25% of the global; GDP today.
• Adjusted for inflation, our millennials make 9k more per year than Gen X did when Gen X was the same age and 10k more than baby boomers did when they were the same age (again, adjusting for inflation!).
• American poverty is at an all-time low

Related?

Data from the OECD reveals that while Americans are working ~337 hours a year less than Mexican workers, they’re still notching an extra 75 hours a year compared to the OECD average of 1,716 hours per year. While that may not sound like a lot, at only an extra hour-and-a-half or so a week, it’s a big difference to the hours some other nations are clocking in.
Workers in Germany, for example, put in 1,349 hours on average over 2021 — 367 hours below the OECD average, 442 less than America, and a genuinely staggering 779 hours less than in Mexico.