Bank results trends for 4Q23 generally maintained those seen in the early reports. PMI readings for January showed economic acceleration to begin the year while 4Q23 growth topped expectations. The core PCE increase for December showed that sometimes just 0.1% difference can be a big deal.

With most publicly traded banks of $10B assets or greater reported, 57% beat consensus EPS expectations by a median 1.2%. Essentially results were in-line from a net income perspective. Other key metrics show a group that is clearly in a defensive posture with loans higher by less than 1% and net interest measures continuing to contract. Loan reserves and capital ratios continue to build.

For me, the most disappointing aspect of the quarter is a worsening dispersion in net interest measures with a greater number of banks experiencing contraction than the prior quarter. The combination of further deposit mix bleed into interest bearing and slower asset yield pick up were frequently noted. Ironically, banks with what I believe to have the strongest deposit franchises were often most impacted in the quarter as later stage deposit beta increases finally hit while more wholesale funded banks benefited sequentially from continued short duration rate stability.

In terms of the current year outlook, most banks are modeling flat balance sheets noting tepid loan demand. Some banks are re-engaging their buybacks, but the overall trend seems more focused on reducing higher cost funding and building capital in case the soft landing scenario does not materialize. Net interest measures are expected to inflect with a clear majority of management teams expressing net interest growth and positive operating leverage in the 2^nd half of the year.

Macro data showed strong results as S&P Global January Flash PMI (January 24) topped expectations and the BEA GDP reading (January 25) also surprised positively. The January Composite PMI reading of 52.3 indicated the sharpest expansion since June. The 50.3 Manufacturing reading was the highest since October 2022.

BEA estimated 4Q annualized real GDP growth at 3.3% which was a decrease from the lower revised estimate of 3Q annualized growth of 4.9% but well above the final GDP Now projection of 2.4%. Top contribution segments in the 4^th quarter were Government +0.56 bps, Net exports +0.43 bps, Food services +0.37 bps and Health care +0.36 bps. I continue to focus on the impact of fiscal stimulus in the macro data. For 2023 the non-seasonally adjusted nominal dollar increase in GDP was $1,613B while the 12-month deficit reported in the monthly Treasury statements was -$1,784B. Based on the 2023 data the desired Keynesian fiscal multiplier is not being achieved with a growth to deficit spending ratio of 0.9.

Finally as we approach the first Fed meeting of the post-hiking cycle era, BEA reported (January 26) the December core PCE increase was 0.2%. The reading left trailing 6-months annualized core PCE unchanged at 2.2% tracking closely to the Fed’s 2% target rate. By contrast the December core CPI increase reported earlier this month by BLS increase 0.3%. The subtle difference between the two monthly increases when annualized relative to the Fed’s inflation target can be quite pronounced. A 3.6% annualized inflation rate may seem “stubbornly elevated” while a 2.4% rate “approaches the long run target.” Despite the helpful PCE data I expect the Fed to leave the policy rate unchanged with an upper bound of 5.5%. Most interesting to me will be any new discussion on tapering in the balance sheet reduction rate. I think the current rate of Quantitative Tightening is a major focus of banks as they try to understand deposit flows through the year.