Inflation data was confirmed as running hot in January while February economic data provided mixed readings. Broader equity markets made new all time highs and bank stocks spun their wheels.

BEA released the January Personal Income and Outlays report (February 29) showing a similar month over month increase in consumer price inflation as the earlier January CPI report. Personal Consumption Expenditures (PCE) price increased 0.3% in January with a full year increase of 2.4%. Core PCE increased 0.4% which lowered the full year increase to 2.8%. The nearby chart shows the 6-month annualized trends for both core consumer inflation series with a visible upturn to begin the year. I assume the timing of a Fed policy rate cut will need to see these inflation upturns abated.

S&P Global February US Manufacturing PMI (March 1) final reading was higher from the already promising flash number leading to the report headline that “Manufacturing conditions improve at fastest pace since July 2022.” Strangely the ISM Manufacturing PMI does not find similar sector expansion. Instead the ISM report finds continued Manufacturing sector contraction which both surveys found to have initially started back in November 2022. This is the largest surveys delta since 4Q2019. The Atlanta Fed GDPNow model uses the ISM survey which led to a drop in their 1Q24 annualized growth projection to 2.0% from 2.9% a week prior.

To summarize, U.S. equity markets began to rally last November. Bank equities took the lead with back to back monthly increases that ranked in the top 10 months of the last 26 years. Broader equities steadily followed and eventually caught up with banks as 2024 bank outlook guidance generally dissappointed. Then sector credit risks came back into focus with the NYCB report taking the whole sector negative for the year. The Nasdaq BANK Index is higher by just 3% from early December while the KBW Regional Bank Index is down -2% over the same period. In my opinion, bank stock prices currently reflect more credit risks than we are likely to see materialize in the sector over the first half of the year at least. Simply moving forward in the calendar without a major bank funding event may be all that is needed to close the gap with the broader equity market.