When Data Overrules: Why the Bank of England's Rate Hike Pause Might Be Just A Dream
The Unavoidable Impact
Big bank earnings are taking center stage this week and, so far, they haven’t disappointed. The results have essentially confirmed a couple of themes that we expected to play out. First, strong earnings and revenues demonstrate that the major financial institutions are doing just fine and the biggest potential liquidity hotspots are being contained to smaller regional banks. Second, the banks have made big improvements on net interest margins. The average bank savings account rate is still only at around 0.35% at a time when the Fed Funds rate will have increased by 500 basis points. That should keep lenders generating big revenues as long as any broad slowdown can be pushed forward. Apple’s decision to launch a savings account with a 4.15% rate could be interesting. Its worldwide presence in just about everything could be legitimate competition to the big banks and force them to finally offer a bit more competitive rate to savers.
While equity investors will have you believe that conditions are more positive than they likely are, one of the data points worth watching closely here is jobless claims. The headline unemployment rate gets all the attention, but jobless claims is, historically at least, a leading indicator of recession. Continuing jobless claims have gone up from 1.31 million in May 2022 to 1.81 million today (and the increase has been steady). If you look back at nearly every recession over the past 60 years, continuing jobless claims bottomed about 6-12 months ahead of the recession’s official start date. We’re about 11 months from when they bottomed this time around, so you could argue that a recession could come sooner than expected. It’s not a guarantee, of course, and the timing of any single individual data point could be different, but it’s another case of conditions lining up for an adverse event.
If you need another indication that the housing market drives the economy, the other data point I’ve been looking at recently is single-family housing starts. Same situation as with jobless claims, single-family housing starts have experienced a meaningful slowdown ahead of a recession (the notable exception being the 2020 COVID recession because it came on so quickly). Where do we stand now? This number went from 1.19 million a year ago to 860,000 today. You know my position on the housing market being the straw that stirs the drink. This data point has had strong predictive power in moving south ahead of recessions and it’s happening again.
As I noted in yesterday’s piece, retail sales continue to show that the consumer remains quite sluggish here even as inflation continues to cool. The April month-over-month reading is expected to show another decline of 0.7%, which would mark the 7th time in the previous 10 months that retail sales in the U.S. have slowed. Consumer discretionary stocks have trailed consumer staples consistently since the beginning of February, which has historically been a negative signal for the broader market. I know I usually focus on lumber/gold, utilities and Treasuries as my primary market signals, but I want to emphasize that the high level weakness in the economy, even as the S&P 500 is up 8-9% year-to-date, is very real and could be signaling something could break sooner rather than later.
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