Tuesday, May 9, 2023

Morning Note: Banks Bracing For, and Bolstering, Recession

While apparently many anticipated worse, yesterday's release of the Fed's Senior Loan Officer Opinion Survey offered little to feel relieved over.

Here's from the report (HT Peter Boockvar).

With regard to commercial real estate:

“Over the first quarter, major net shares of banks reported tightening standards for all types of CRE loans. Such tightening was more widely reported by mid-sized banks than by either the largest or other banks. Meanwhile, major net shares of banks reported weaker demand for loans secured by nonfarm nonresidential properties, construction and land development loans, and loans secured by multifamily properties.”

As for households:

“For loans to households, banks reported that lending standards tightened across all categories of residential real estate (RRE) loans other than GSE eligible and government residential mortgages, which remained basically unchanged. Meanwhile, demand weakened for all RRE loan categories. In addition, banks reported tighter standards and weaker demand for home equity lines of credit (HELOCs). Standards tightened for all consumer loan categories; demand weakened for auto and other consumer loans, while it remained basically unchanged for credit cards.”

To sum it up:

"...banks reported expecting to tighten standards across all loan categories. Banks most frequently cited an expected deterioration in the credit quality of their loan portfolios and in customers’ collateral values, a reduction in risk tolerance, and concerns about bank funding costs, bank liquidity position, and deposit outflows as reasons for expecting to tighten lending standards over the rest of 2023.”

According to Piper Sandler's Michael Kantrowitz, this bodes poorly for economic prospects going forward (HT Bloomberg):

"Tightening lending standards preceded by a Fed tightening cycle have a 100% hit rate in signaling recession ahead," Michael Kantrowitz, chief investment strategist at Piper Sandler & Co., said in a note. In contrast, the last four so-called soft landings were preceded by easier lending standards (see chart below).

"Hard to argue with a historically 100% hit rate of SLOOS," he wrote, referring to the survey's acronym. "This confirmation of tighter lending standards pushes recession odds even higher. Nothing is a guarantee, but these odds are hard to argue against."

Stay tuned... 

Asian stocks were mostly red overnight, with 10 of the 16 markets we track closing lower.

European markets aren't feeling it either, with 13 of the 19 bourses we follow in the red so far this morning.

US equity averages are lower to start the session: Dow by 19 points (0.06%), SP500 down 0.39%, SP500 Equal Weight down 0.51%, Nasdaq 100 down 0.50%, Nasdaq Comp down 0.54%, Russell 2000 down 0.74%.

As for yesterday's session, US equity averages were essentially flat: Dow down 56 points (0.2%), SP500 down 0.1%, SP500 Equal Weight down 0.3%, Nasdaq 100 up 0.3%, Nasdaq Comp down 0.2%, Russell 2000 down 0.3%.

This morning the VIX sits at 17.65, up 3.89%.

Oil futures are down 1.34%, gold's up 0.25%, silver's down 0.08%, copper futures are down 1.02% and the ag complex (DBA) is down 0.41%.

The 10-year treasury is up (yield down) and the dollar is up 0.32%.

Among our 37 core positions (excluding options hedges, cash and money market funds), 7 -- Albemarle, MP Materials, ITA (defense stocks), EWZ (Brazil equities), GLD (gold), AMD and Hack (cyber security stocks)  -- are in the green so far this morning... The losers are being led lower by EZA (So African equities), XLB (materials stocks), FEZ (Eurozone equities), AT&T and Dutch Bros.


"Most of us take for granted the ease with which we can fill up our cars, buy a new smartphone or order a cup of Colombian coffee. But underpinning almost all of our consumption is a frenetic international trade in natural resources."

--Blas, Javier; Farchy, Jack. The World for Sale

Have a great day!


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