April 6, 2023
An expected collapse in bank credit creation should accelerate the disinflationary cycle. Every bank wants to exit Q1 with more cash on hand than they reported at the end of Q4. And the only organic way for a bank to increase cash on hand is to retain maturing loans. This won’t be a one-quarter phenomenon as banks look to increase reserves to normal levels over the course of 3-4 quarters. Notwithstanding a Fed pivot, the only way for regional banks to increase reserves during this period will be to shrink. We expect next week’s March CPI will undershoot expectations based on lower commodity prices. The impact of a collapse in bank credit creation will likely hit the May CPI report and beyond.
The US Economic Surprise Index (ESI) turned lower this week after every major report missed consensus expectations. The ESI remains in positive territory but has negative momentum after breaking below its 50-day moving average this morning. Thus far, the impact of a declining ESI has mostly led to increased 2H rate cut expectations. An additional 30bp of rate cuts have been priced into the 9-month forward curve this week, but the S&P 500 (SPX) is essentially unchanged. A move of this magnitude six months ago would have generated ~7% upside in the index. The underwhelming equity response may reflect increased concerns for a hard landing. In this cycle, we’d expect that to become the dominant theme once the ESI crosses into negative territory.
The March Jobs Report will be released tomorrow when markets are closed. The labor market appears to be losing steam and we expect non-farm payrolls will miss consensus expectations for +240,000, but remain above the +100,000 level that tends to trigger alarm.