October inflation data provided relief to both equity and bond markets as confidence that the Fed has reached the terminal rate in the hiking cycle increased. In the upcoming holiday shortened week we will receive the updated Conference Board Leading Economic Index and the S&P Global Flash November PMI for the latest indicators of 4Q economic growth.
October Consumer Price Inflation (CPI) data from BLS (November 14) was cool to expectations with a 0.0% monthly headline reading influenced by lower energy prices and a 0.2% monthly core increase. From a trend analysis, the trailing 6-month annualized core CPI rate is 3.2%. My expectation is the +2% spread between the Fed target rate and core inflation rate will leave the Fed hiking cycle on pause in December despite the higher Summary of Economic Projections Fed Funds median rate in the September survey.
While an upper range of 5.5% in the target rate could very well be the “higher” in “higher for longer,” the “longer” remains difficult to call. Interest rate futures markets are again projecting a ¼ point cut in March 2024 and a full point cut by 2024 year end. In my opinion this path requires core CPI and PCE over the intervening months to trend to an annualize 2%. Reaccelerating inflation would change policy path as would an accelerated breakdown in economic activity.
Focusing how rates are possibly impacting 4Q bank operations, the quarter to date shift in yield curve is very modest with basically a -10 bps downward parallel shift with just slightly greater strengthening in the 4-month to 1-year constant maturity durations. The stable short end rates are positive for funding; however the continued steep inversion remains 1 of several factors that will keep banks hesitant to extend balance sheet access.
With a more stable funding environment, the associated risk discounts should continue to gradually lessen in equity prices. Risks from a slowing economy will remain until the lagging and variable impacts of restrictive monetary policy have fully saturated down to all economic participants.
For banks, I am closely watching early delinquency trends as well as balance sheet strength relative to credit quality. 3Q23 10-q filings are now available to update credit measures across the mid-cap bank group. Median 30-89 day past due loans totaled 0.22% of loans for the group which is unchanged from June and up from 0.18% a year ago. Median Non-performing Assets & +90 day past due/Assets increased to 0.42% from 0.35% in June and 0.31% a year ago. While Loan Loss Reserves/Loans increased sequentially, the coverage ratio to delinquencies fell. Credit developments will likely be the lead theme to 2024 bank equity prices.
Happy Thanksgiving! The next Weekly Review & Outlook will be December 4