Macroeconomic data in the week continues to show a slowing economy and in-line inflation data. A “bad news is good news” market response took shape with equities and Treasuries both rallying higher as September Fed rate hike odds decreased to the lowest probability since May.
The BLS August Employment Situation report (September 1) indicated 187k net new jobs were added last month while the headline unemployment rate rose 30 bps to 3.8%. Truck Transportation showed a large decline of -36.7k jobs leaving the segment down -2.1% from a year ago. Prior months numbers were revised lower by -110k. June payrolls which were initially reported as a beat have now been revised lower by -104k which would have been a significant miss to the original expectations 60 days ago.
While the Labor sector shows signs of weakening, inflation data remains elevated. BEA reported core personal consumption expenditures (PCE) (August 31) up 0.2% in July and 4.2% from the prior year. The good news is, similar to core CPI, core PCE has registered increases of just 0.2% in each of the last 2 months. Both core inflation measures have high roll months in August and September. Continued core monthly inflation of 0.2% would lower 1-year core inflation rates for core PCE and core CPI to 3.5% and 4.0%, respectively at the end of September2023.
Separate from the Fed’s focus on lowering core inflation to their long term 2% target, I note that prices for gasoline which impact headline inflation, consumer sentiment and discretionary spending reached their 2023 high in August. U.S. EIA data shows that retail gasoline prices increased 6.5% in August and are up 18.95% in 2023. While not very instructive when thinking about the monetary policy path, higher fuel prices will be another stress for increasingly burdened consumers.
Finally, as part of my deeper research on forward risks to bank earnings and valuations, I spent time looking at selected historical credit measures from the mid-cap bank group. An up front caveat is that the data will have survivor bias.
The nearby chart presents more than 20 years of quarterly data to help think about prior credit cycles and the industry’s current positioning. First consider the dark and light blue lines which are both measures of bank credit that is either non-performing or early delinquent. The historically low levels support a multi-year refrain from banks that they have been “over earning” on credit. Now review the green line which shows relative reserve levels (LLR/L). The yellow line calculates LLR less non-performing and early delinquent ratios. My net take away is that the industry has very healthy credit ratios which are even more solid when capital ratios are included. When you read that “early delinquencies are up 16% from a year ago,” remember this is just an increase from 0.19% to 0.22%.