April 13, 2023
The ISM new orders/inventory ratio has been signaling accelerated PPI disinflation for the last several months. Producer prices tend to lead consumer prices by a similar amount of time, and the widening spread between CPI and PPI is also a sign of accelerating disinflation. Unfortunately, inflation is a measure of future growth expectations, and accelerated disinflation often precedes a recession.
Current economic conditions suggest that any near-term recession would be relatively mild. US consumer savings, checking and money market balances remain ~$5.4T above 2019 levels. That number comes from the Fed’s most recent Z.1 report that was released before the recent banking crisis. There are signs of rising consumer credit levels, but household debt payments as a percentage of disposable income have just returned to pre-pandemic levels. Total credit card debt at the end of Q4 expanded to a record high of $986B with 53% of card users carrying a balance of some kind during the quarter. Credit card delinquencies of 2.25% at the end of Q4 remained below pre-pandemic levels of 2.6% and below a ~6.8% high seen during the GFC.
Three large cap US banks report earnings tomorrow with investor interest in the recent banking crisis and its impact on credit creation. No bank CEO wants to exit Q1 showing a sequential decline in cash on hand. The only organic way to increase cash on hand is to retain it from the payoff and paydown of loans. Regional banks are showing some signs of stabilization, but banks of all sizes face considerable headwinds from peaking Net Interest Margins (NIMs) to the uncertainty of expected regulatory changes. All line items on a bank’s income statement are expected to decline with the possible exceptions of wealth management and trading. Large cap banks are currently trading at a discount to their historic average on a P/E and P/TBV basis but remain value traps. Over the last five years, an equal weighting of the three banks reporting tomorrow have an annualized return of -2% including reinvested dividends vs. +11% for the SPX.