Let's Talk Loans - Vol. 54

An abbreviated, vacation written, Let's Talk Loans. Some heavy topics, but limited minutes to type. Forgive the shortened pretense, let's get after it. Thank you for reading, following, liking and sharing.

Rewind if you will to June of 2022. We were in transitory inflation land. In March we hiked 25bps. May came with 50bps. Then Nick Timiraos from the WSJ dropped a bomb on us. That we were going 1980's Volcker style on inflation. A surprise 75bps hike. Impossible we thought at the time. Inflation was just transitory but it was the beginning of the steepest, most aggressive rate hike cycle this generation has seen. It seems only prudent that Mr. Timiraos is fortunate enough to announce the "skip". Many pundits will tell you a skip does not mean a pause. That we might not be done with this rate cycle. They could still hike in July (or later) as the Fed is data dependent. The pivot hopeful would tell you the credibility of the Fed gives no hope for future hikes. We've reached the end of this cycle. I remain unsure and feel that higher for longer remains the narrative, though I do welcome a chance to catch our breath and see what damage has been done by this breakneck pace. While I had believed that we would see a hike in June and then a pause in July, perhaps we see the skip in June and the hike in July. Though I admit, once they stop, it will be politically difficult for them to start again. Short term rates have plummeted this week, erasing a portion of the last several weeks of increases in the face of the debt ceiling crisis (thankfully, and predictably averted). By May 4th we had dropped 3.79% on the 2 year prior to the debt ceiling runup. By May 26th we peaked at 4.56%. Quite the move. As of this writing we are at 4.33% and I suspect the trend is your friend. Most readers will rejoice on this news. Bankers are desperate for the soft landing, the pivot and a return to lower rates. I conducted a poll earlier this week. Before the Fed "leak", for the record, my vote would have been for a rate hike in June. The majority of you voted for the pause, but it was a narrow majority.

Today's jobs number throws a big question mark into the conversation. Jobs remain very strong. If anything, this likely doesn't change the Fed announcement that June is a "skip" but it does increase the likelihood of a hike in July. I still think that will be politically difficult, once you put that pause into the system the market is going to believe we are done.

"U.S. employers added a seasonally adjusted 339,000 jobs last month and March and April’s totals were both revised upward for a net gain of 93,000 jobs, the Labor Department said Friday. The unemployment rate rose to 3.7%, still near historic lows but an uptick from April’s 3.4%."

"Strong hiring and low unemployment have put upward pressure on wages. Average hourly earnings grew a solid 4.3% in May over the prior year, similar to annual gains in March and April."

Let's spend a moment on the FDIC Q1 review. I know we want to believe we are out of the woods here folks but perhaps the data tells us we have some room to worry. Per the FDIC:

"Total deposits were $18.7 trillion, down 2.5 percent from the level reported in the fourth quarter, the largest reduction reported in the QBP since data collection began in 1984"

This continues to point to what most clients bring up to me on calls. Funding costs, liquidity, and a lack of cash on hand being their major concern. Not credit.

I mentioned a quarter ago that I thought we might have reached peak loan growth. As liquidity was becoming difficult, many said that credit was tightening. I still believe it's more deposit driven and a lack of cash (not credit) but my read three months ago seems to be on point at the moment. Loan growth may have peaked last quarter.

I remain astounded by the following graph. Credit in lending is still better than expected. Yes, there are cracks. Yes, I believe this continues to worsen. Particularly, I'm focused on August when student lending turns back on. However, those predicting the rapid deterioration of the economy and credit have been left wanting.

"The noncurrent and net charge-off rates increased modestly in the first quarter but remained below pre-pandemic averages. The noncurrent rate increased two basis points from the fourth quarter to 0.75 percent, driven by increases in nonfarm, nonresidential commercial real estate loan balances. Seasonal increases in credit card net charge-offs drove a five basis point increase in the industry’s net charge-off rate from one quarter ago to 0.41 percent."

However, lenders are starting to pull back. Tighten credit. I asked earlier in the week, with banks pulling back on lending, how might we find growth in the coming quarters? Lending is the engine that creates opportunity for small business and consumers. Presently, that's being constricted and is a good predictor of a historical economic slow down. If this persists, might we see the recession so many are certain of?

That's it. Happy Summer. I hope you enjoy a few rays of sun. A few moments of peace. Until next week.

M22-212195