Monday Musings: April 11, 2022

Apr 11, 2022

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Public Trust Credit Team
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Annual bank deposits are expected to drop for the first time in 75 years

As reported in the Wall Street Journal, bank analysts have reduced their deposit level expectations for the 24 banks that make up the benchmark KBW Nasdaq Bank Index. The expected decline results from both an increase in the Federal Reserve’s core interest rate and banks’ extremely high deposit levels. In an increasing rate environment, businesses and consumers are expected to seek out opportunities that offer a superior return relative to the paltry interest rates provided on checking and savings accounts (which averaged approximately .06% in April 2022 according to BankRate).  Despite the expected decline in deposits, banks are unlikely to be pressured. During the pandemic, total deposits ballooned by 35% (according to FDIC data) as businesses grew cash balances to address increasing operational pressures, and consumers deposited their stimulus checks. As a result, many large banks have been nearing their regulatory limits on their capital and are now attempting to dissuade depositors as the increasing level of deposits has outpaced the demand for loans. As banks begin to turn away deposits, money market funds will be left to take the excess as they can offer a higher yield and consistently accept assets.

Consumers are borrowing, but investors are beginning to worry

U.S. consumer lending (ex-mortgages) increased by a record amount in February, marking the fastest increase in borrowing on record. Consumer borrowing was up $41.8 billion or 11.3% in February, crushing consensus estimates as Americans paid down less debt and rushed to borrow before the Fed hikes rates further in May. Non-revolving credit, primarily auto and student loans, was up 8.4%, suggesting that consumers are rushing to purchase vehicles before additional interest rate hikes occur this year and continue to boost car prices/inflation. Revolving credit, primarily credit cards, is a little more difficult to read. On the surface, revolving credit increased 20.7% on a seasonally adjusted basis; but when factoring out the seasonal adjustment, total revolvers outstanding was down, just not down nearly as much as it normally is in February. This signals that consumers are not paying down credit card debt from the holidays as quickly as they normally would and are bringing higher balances into the second quarter.

At the same time that consumers are rushing to borrow, investors are beginning to sour on investment products tied to this lending. Spreads on consumer-linked products have increased materially since the beginning of the year, and buyers have been selling the securities in broad-based fixed-income selling. Delinquencies in products linked to subprime auto loans have already increased ~1.00% from a year earlier and could see higher levels as interest rates continue to rise. An investor pullback during record consumer borrowing is unlikely to be positive for the economy but the consumer remains strong, benefitting from a hot labor market, rising wages, and pandemic savings. The heightened level of borrowing will be a key due diligence item for both investors and the Fed as they continue with planned rate increases this year.

Mortgage rates are on the rise, but people are not slowing down

Two years into the ongoing pandemic housing boom, mortgage rates climbed in March at the quickest pace in almost three decades. As mortgage rates are projected to keep climbing, people are rushing out into the market to secure a deal before it is too late. The affordability window is quickly closing amidst the historically busiest U.S. home sales season. The soaring mortgage rates are making a formidable pair with the elevated inflation figures, signaling to investors to get in now or miss the bus entirely. The current market competition is getting even more intense, and many people are getting outbid on houses by deep-pocketed investors and wealthy out-of-state buyers who are submitting cash offers. As people desperately flock to find homes, it is cranking the home prices higher nationwide, adding fuel to the already hot fire of inflation.  

This movement is working against the efforts of both the Federal Reserve and the U.S. government which seek to curb inflation with higher interest rates. Overall housing inventory has been flirting with record lows for the past three months, and current homeowners are reluctant to sell as it would result in a new and more expensive loan. In the month of February, home prices jumped 20%, twice as fast as a year earlier and the fastest annual pace on record since the metric has been recorded dating back to 1976. Last week, the applications to purchase homes with Federal Housing Administration mortgages plummeted 20% from a year earlier, signaling that if rates do not come back down soon, we could see an overall freezing of the entire market. People are looking to buy a home and fast, but this is under the assumption that home prices will continue at the pace at which they are appreciating, and the Dallas Fed said last week that buyers should proceed with caution.

All comments and discussion presented are purely based on opinion and assumptions, not fact. These assumptions may or may not be correct based on foreseen and unforeseen events. The information presented should not be used in making any investment decisions. This material is not a recommendation to buy, sell, implement, or change any securities or investment strategy, function, or process. Any financial and/or investment decision should be made only after considerable research, consideration, and involvement with an experienced professional engaged for the specific purpose. Past performance is not an indication of future performance. Any financial and/or investment decision may incur losses.

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