So much can happen in just a few short weeks. New conflicts that are taking twists and turns on an almost hourly basis are a disaster no matter how optimistic one may want to be. Diplomacy seems to be failing us, with markets very much in “risk-off” mode. In the midst of all this, we have kicked off earnings season with a mixed bag for Q3 thus far. If one of those canaries in the coalmine, commercial property funds, are anything to go by, the scale of redemptions are having to be halted (due to that old devil in the detail, maturity mismatch). Beware that transformation turning your cash into trash.
As is tradition, the banks have been first to report, giving us colour on how the tail end of 2023 and full year performance will likely shake out. We have collated results from some of those that have already published. There are certainly themes, notably that all important net interest margin (NIM) has been widening for those in stronger positions, able to benefit from passing on higher lending rates whilst keeping a lid on the cost to borrow, which is due in part to sluggish deposit rates and in part to longer-dated raising of liquidity when the money was cheap.
It almost looks like no matter the performance, the market is being punished. This has less to do with how it has been and a lot more about how it might look. Financial institutions are being forced to grapple with more and more, often expensive, regulation, for which the cost of non-compliance or misinterpretation is clear. Banks still fail. We were all reminded of this just a couple of weeks ago with the emergency funding required to keep Metro Bank in the UK on life support. Now at a third of its value from the highs of this year, it limps on, despite significant debt and equity being raised. Certainly a shame for a business model which was refreshing: customer-centric, open every day and with people to speak to and deal with. Now a forced seller of its mortgage books in a market that is not exactly bid, the errors around accounting which we have seen happen repeatedly. Sadly we will have to add them to the list of failures and forced acquisitions, seemingly ever more regular a symptom of higher rates as well as a worrying lack of understanding by those charged with managing it.
We have seen government bond yields across the regions we cover rise, meaning anyone looking to refresh their maturity profiles is finding that the cost to refinance and maintain balances has been adversely affected. Look no further than Mondays’ record rate on 10 year US treasuries, breaching 5% for the first time since 2007 (which ended up being not such a great benchmark) being followed up in short order with financial meltdown. The mantra of “higher for longer” touted by central banks far and wide has become increasingly believable and thus the market has rapidly repriced expectations to suit. Are we at the top of the cycle? Perhaps for risk-free rates, but unlikely so for credit, as the macroeconomic picture remains gloomy.
In the Eurozone, whilst punters are not projecting any further hikes, the outlook for inflation is not so rosy. As with other jurisdictions, and as a net importer of energy, it is hard to see the upward pressure on cost of goods and services declining as we approach the colder months and disruption to global food supply remains strained with geopolitical tensions rising. Some of the largest money managers, including Vanguard and Blackrock, do not believe that the ECB can get away with holding from here, or else the region will fail to stick to the “price stability” mantra. For now though, the market is telling us we will actually see rates being cut over the coming months. If one were to believe this, it is no bad time to be locking in longer-dated maturities before levels potentially drop to stimulate economies needing a lifeline. Time will tell as to who was right.
Whilst the Bank of England did not hike last time around, inflation has risen once again. The latest print for September (annualized) went both against trend and expectation to print 0.1% higher at a still lofty (and more than three times target) 6.7%. At least the employment picture remains strong. Whilst the number of available jobs is in decline, according to some of the leading statistics, an additional headache for policymakers continues to be wage inflation. Households are grappling with the basics continuing their upward trajectory. It is not just mortgage holders that have been impacted, but those seeking to rent are finding reduced stock at higher prices as landlords leave the market with those remaining forced to be compensated for not just higher mortgage rates but increased costs via regulation and red tape. Some good news came from Moody’s where improved policy predictability has taken the rating from ‘negative’ to ‘stable’. The skeptic in me says policy makers will be predictable, in not doing enough soon enough. It is acknowledged though that the role of the policymaker is not an easy one.
It is hard to argue against the strength of the US economy. The consumer is still consuming, jobs are holding up well, inflation is being curtailed, even the housing market has held firm. However, cracks are forming, with subprime (or speculative/junk) auto loan delinquency reaching a new record. For now, prime borrowers are holding in at least. But, as is always the case, the first to fall are not usually the last.
In addition, the printing press remains open for business and the debt ceiling is never seemingly resolved. It is estimated that the cost to service national debt could reach 20% of tax revenue. For now though, and back to where we play, in money markets, over the coming months there is a slightly more than 50% chance we are done with the hikes.
One thing is for certain, being prepared, having robust, safe and always accessible homes for cash, the lifeblood of any organization, has never been more important. The best thing? With the right partner you can even earn a very fair return.