By Scott Hallermann

U.S. stocks were saved for the first week of the year by a “good news is good news” response to the December Employment Situation report from BLS (January 6). As investor focus shifts from hard money to recession risk, the modestly better +223k net jobs added rallied equities. Although prior months revisions totaling -28k more than offset the upside to expectations. The payroll report followed “bad news is bad news” response to the December final PMIs all showing contraction in the month with the S&P Global Composite PMI (January 5) now below 50 for the last 6-months.

We will shift our focus this week from macro economic news to company specific updates as Bank 4Q22 results are released starting Friday. My primary thesis for the sector has been that the benefits of higher Net Interest Income from higher rates will soon be diminished by higher than expected funding costs and rapidly increasing credit costs. While credit cost has remained at historically low levels, a handful of banks were negatively impacted in 3Q22 by surprisingly higher funding costs. I expect the number of impacted banks to grow in 4Q as inflation and a weakening economy erode into excess savings making deposits more expensive. Less certain is how much of a rise in credit costs we see in the quarter. Asset backed segments such as real estate and auto have now seen several months of falling underlying market values. This trend should begin to flow through to delinquencies.