The 3Q23 Advance GDP reading of 4.9% annualized growth was in line with the GDPNow projections confirming economic acceleration from 2Q. October Flash PMI data indicated a Manufacturing pickup in activity to start 4Q. Inflation data indicated ongoing price instability. Early 3Q bank reporting trends held after a 2nd full week of results.
U.S. economic data continues to surprise to the upside with above long term trend growth in the 3rd quarter despite 3 months of contracting Manufacturing PMI data. S&P Global Flash PMI for October (October 24) included a Manufacturing reading of 50.0 which was the first reading since April not indicative for sector contraction.
The report included their Chief Business Economist commenting, “Hopes of a soft landing for the US economy will be encouraged by the improved situation seen in October. The S&P Global PMI survey has been among the most downbeat economic indicators in recent months, so the upturn in US output growth signaled at the start of the fourth quarter is good news. Future output expectations have also turned up despite rising geopolitical concerns and domestic political tensions, climbing to the joint highest for nearly one-and-a-half years.”
Inflation data in the week was less positive as September Personal Consumption Expenditures (PCE) Price Index (October 27) surprised to the upside. Focusing on core PCE trends in the nearby table we see the 3-month series of month over month price stability interrupted by the September increase of 0.3%. The 12-month core rate increase remains nearly twice the policy target rate of 2% suggesting the Fed’s higher for longer base case will be the actual policy path.
Finally with bank 3Q results season mostly completed, the early trend of about 75% EPS beats held up with the size of beat growing to a median 4.9%. Median 3Q EPS was -5.5% lower from the 2nd quarter and down -12.5% from the year ago period. Non-performing assets increased just 2.5% and remain well below historical numbers. Industry provision totals are approaching $7B which is significantly lower from 2Q23 and moderately higher from the prior year. Industry Pre-provision net revenue is almost $66B.
In the highly topical Net Interest Margin (NIM) and Net Interest Income (NII) analysis, industry NIM is down about -1.1% or 3 bps from the prior quarter. Median NII is similarly lower by -1.3% from June. NIM expanded sequentially at 30% of banks in the group. With outlook commentary suggesting NIM inflection at many banks in 4Q, the scenario that a majority of banks report NIM expansion next quarter remains a realistic possibility. Rounding out my industry trend analysis, loan growth is muted at just 0.5% in the quarter. Capital levels remain solid with CET1 higher 1.9% from June and almost 5% from a year ago. Reserve coverage is holding steady with Loan Loss Reserves to Total Loans at 1.2%.