February 2, 2022
Covid-related economic disruptions should fade as we move deeper into the year, which may result in a fundamentally different macro environment than we’ve seen during other recoveries over the past 12+ years. We expect core inflation rates to decelerate over the next two quarters, but remain elevated at levels above the Fed’s ~2.5% target. Fed funds futures markets are currently priced for four hikes in ’22, taking Fed funds lower bound to 1%. But the Fed would find it difficult to fight elevated inflation with a 1% Fed funds rate that is considered highly accommodative by historical standards. US banks have more than $7T worth of excess deposits, so we should expect deposit rates to remain depressed for years. Resetting short-term loans higher with Fed rate hikes and holding deposit rates anchored, creates a very favorable profit outlook for banks. Normally, banks require a steeper yield curve to show improving Net Interest Income, but ~$7T in excess deposits make rate hikes the more dominant contributor to improving Net Interest Margins (NIMs). Bank loan growth is up +16.5% thus far in Q4’21 with Commercial loan growth up +24% annualized with management teams sounding bullish on the outlook for loan growth during conference calls. And the January correction has made banks the least expensive among value industries, including most in the Energy sector.