We don't know exactly what's going on in the first world.
Let's assume it does go into receivership as reports right now say it
will. What does that mean for the markets as a
practical matter? I think what it means is that the market
will continue to search for the next weakest link.
And so First Republic has been very much in the market in the past month or so.
So it's not a complete and utter surprise.
But the markets are really looking to suss out the weak players to see whether
it's systemic or not. But I think the real issue on the table
is how broad is the pullback in lending on the regional community banks side and
what influence does that have on on the market and the economy?
And that contraction of credit is really meaningful because it goes to the small
and medium sized businesses, which, quite frankly, are the lifeblood of the
economy and the labor market. So when what does it mean potentially
for equities if in fact, we continue to contract on the credit side because the
banks are under control, under undue stress and they get more and more
conservative as a practical matter. Yeah.
You know, certainly has been interesting on equities.
Of course, financials have had some difficulty this year and in fact, still
down year to date, one of the worst performing sectors on the S&P 500.
And part of that, of course, is the banking turmoil we've seen over the last
month. And now with First Republic coming back
to the forefront. Really the question to Greg's point is,
is there another shoe to drop after first Republican?
And market uncertainty, of course, is never welcomed by investors.
But what we would say is, one, the bank tightening of credit and that has
actually had started even prior to the March turmoil, we started to see metrics
like the senior loan officer survey starting to show a meaningful
tightening. So what that means is banks will make it
harder for consumers and corporations to get loans.
Now, that has that's a double edged sword.
On one side. Yes, economic activity will cool and the
economic growth prospects look worse. But on the other hand, get inflationary
story we've been talking about could see, you know, a marginally less
pressure on inflation, inflation moderating even further because banks
are pulling back and consumption and corporate spending may thus pullback as
well. So really we're watching both edges of
that story on both sides of that story. But more broadly, we'd say the
volatility that we've seen in the financial sector we think probably has
some room to run here. But one final point there.
We don't yet see any systemic disruption or any scope for a systemic disruption
to the US or global banking system. We do think large cap banks here in the
U.S. are still sound and much better in much
better shape than they were back in 2008, 2009.
So that that provides a bit of comfort at this time around.
Greg Monroe makes an interesting point here.
To what extent might the disruption the banks, which we don't wish on anyone.
Goodness knows. But could that actually do part of the
Fed's work for it? There was a piece actually that
Bloomberg this week that said that what we're seeing already on the credit side
is a mining to one or even two rate hikes.
No, absolutely. The inflation growth dynamic is
reflexive. Right.
And the Fed knows that. And so if you hit growth hard enough, if
you just take it to extremists, if you really hit growth hard, inflation will
follow lower. Right.
So the stagflation fears, I think, are a little overblown.
I mean, we do have a 50 percent probability of it.
But ultimately, if you really hurt the economy or the economy really starts
rollover, inflation will likely follow thus far.
Mona, I think the consumer is really carried us through here.
What do you see in the consumer and can they keep doing it?
Yeah, it's a great point. And really, the resilience of the
consumer has been remarkable through a few very tough quarters.
And in fact, the GDP print we got this quarter for the first quarter of to 2023
showed the same trend. Yes, GDP growth was at one point one
percent, but consumption and personal consumption three point seven percent.
So still, you know, above trend levels, the consumer is spending.
What we've been hearing throughout earnings season, though, is that towards
the end of the quarter, perhaps we did start to see a little bit of pullback in
consumption. And in fact, we're facing an environment
where yields are continuing to move higher.
We are seeing a bit of volatility in the housing market and of course, the all
important figure which will get next Friday as well.
That jobs number, you know, unemployment in the US still at historically low
levels, three and a half percent, multi decade lows.
But we're what we're watching is some of the real time indicators of labor as
well. We are seeing jobless claims, you know,
weekly jobless claims tick higher, job openings tick lower, all kind of
precursors to a little bit of softening in the labor market.
We don't expect a dramatic softening, but the Fed is hoping that the labor
market cools to some extent so they can see that wage growth figure cool as
well. So, you know, all in consumer resilient,
but probably seeing incremental weakening in the weeks and months ahead.
One last thought we couldn't finish discussion, credit the time of
commercial real estate. Greg, where are we in commercial real
estate? I think we're in early stages still, so,
you know, the work that we have looked at and evaluate is that we're in.
You know, we're calling it the fourth inning or the third inning.
So so, you know, this is a long tenured process.
So I think we're very much in the first stages.
No, the the higher rate environment has pretty meaningful implications for
commercial real estate. But actually, most most borrowers.
So, you know, this story has yet to unfold.