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Financial Update from Brewin Dolphin - 14 April 2023

The Weekly Round-up

Friday 14 April 2023

In his latest weekly round-up, Guy Foster, our Chief Strategist, explores the latest US employment figures and availability of credit and loans.

The first quarter of 2023 was a rollercoaster for bond investors. In January, they were enjoying the easing of inflationary pressures; in February, the economy seemed unusually strong and underlying inflationary pressure remained frustratingly persistent; and in March, Silicon Valley Bank failed as a direct consequence of the sharp increase in interest rates, causing bonds to rally once more.

April initially saw bonds continuing their strong run from March, but this week they have backed up a bit. That could be a natural reaction to them having become quite overbought, but it also coincides with an upturn in the San Francisco Federal Reserve’s index of news sentiment. Recent discussion has been around the resilience of the US economy rather than its collapse.

Just the job…

That was probably broadly underpinned by the US employment data released on Good Friday, which showed jobs growth continues to slow but is still at a very healthy level historically. Encouragingly the growth in jobs coincided with an increase in people looking for work, particularly amongst the older cohorts who had left the workforce as Covid hit. Many doubted that these workers would return and yet they seem to have done so, lured in by the promise of higher wages and perhaps encouraged as well by the increase in living costs. 

Despite the increase in participation and a fall in the unemployment rate, there were some unnerving features of the report. Job losers as a share of the labour force increased in a sign of some companies cutting costs, even as others increase their headcounts. The number of average hours worked declined too, which can been seen as another way of companies reducing their wage bill. 

The National Federation of Independent Businesses (NFIB) recorded its lowest share of respondents who planned to increase hiring since May 2020, and other series continue to suggest that hiring and retaining staff is a challenge.

Not getting the credit…

Perhaps some of the most intriguing series in that NFIB survey asked about access to credit and loans. The failure of Silicon Valley Bank (SVB) could result in greater risk aversion amongst banks, restricting credit to the economy and ushering forth a recession. This was one of the biggest sources of uncertainty for the Federal Reserve at their 22 March meeting, as discussed in the minutes of that meeting (that were released Wednesday). Despite the uncertainty, the Fed had the courage to raise interest rates by a quarter of a percentage point, but since then a succession of Fed speakers has seemed quite split on how to think about the impact of banking turmoil on the real economy.

Janet Yellen also weighed in saying she sees no signs of a scarcity of credit availability but the evidence of one, for now at least, seems pretty clear. Since the mini-crisis we have seen falls in bank lending and deposits held with banks. These data are released weekly and subject to revision, but it seems uncontroversial to observe that, for the time being at least, bank lending has been reduced. What we don’t know is how long that reluctance to lend is likely to last. Perhaps the current reduction in lending should be seen in the context of a trend of decreasing willingness to extend loans, which was well established prior to the failure of SVB.

Not worth their while…

Banks’ willingness to make loans corresponds to the margins they can make on such lending and their loans tend to be made for longer terms than their borrowing (by deposits). So while it is assumed that they should be more willing to lend as interest rates rise, they are also more conservative in their lending as the yield curve flattens, and even more so as it inverts. Although the yield curve is often measured as the difference between two-year and ten-year yields, in this context the difference between three-month interest rates (reflecting deposit rates) and five-year yields (reflecting loan rates) seems a better reflection of banks’ lending dilemma.

Respondents to the NFIB’s survey on credit conditions who were positive on credit conditions were at the same level they had been in December, but this was the lowest since January 2013. Respondents reporting good availability of loans to small businesses fell to their lowest since November 2012. The banking turmoil really began around the middle of March.

Not as bad as before, but not good enough…

The slight back up in bond yields continued despite an impressive fall in headline inflation from 6.0% to 5.0%. Most of this had been anticipated, reflecting base effects. Price rises of 1.3% for the month of March 2022 alone fell out of the year-on-year rate. March 2023 saw very modest price increases, but this was mainly due to low energy prices. Core inflation (stripping out volatile energy and food prices) rose 0.4% in line with expectations, at a rate which would be too high to meet the Federal Reserve’s target inflation rate but which is currently inflated by high rents and owner-equivalent rents. The most watched measure at the moment, so-called super-core inflation (core services excluding housing) rose 0.4%, which is lower than last month but still too high to be consistent with the Federal Reserve’s target.

Standing still…

In the UK, monthly GDP data revealed that the economy stagnated during February. This means that the economy has still failed to exceed its pre-covid size. Services were flat while construction remains the strongest performing part of the economy, unfortunately this represents a much smaller part than services. According to last week’s PMIs, we know that UK construction is seeing expanding civil engineering and commercial real estate construction, but a contraction in house building. Also announced this week was an improvement in the RICS house price balance, which continues to imply that house prices will fall in the UK. The implied decline is around 5.0% nationwide. However, in the context of lower supply and a recent decline in mortgage rates, it seems unlikely that declines will be that bad.

The value of investments can fall and you may get back less than you invested. Neither simulated nor actual past performance are reliable indicators of future performance. Performance is quoted before charges which will reduce illustrated performance. Investment values may increase or decrease as a result of currency fluctuations. Information is provided only as an example and is not a recommendation to pursue a particular strategy. Information contained in this document is believed to be reliable and accurate, but without further investigation cannot be warranted as to accuracy or completeness. Forecasts are not a reliable indicator of future performance. 


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