Economic data from last week generally conformed to the slowing but still growing U.S. economy reference frame. Stocks were left roughly flat over the full week while the longer maturity U.S. Treasuries continued to find new, multi-decade lows. The week was punctuated with the exogenous shock of a new global hot front in the Middle East which seems to have caught much of the West policy establishment off guard.

Starting with September payrolls, the BLS Economic Situation report (October 6) surprised to the upside as 336k net new jobs were reported to be created in September. This followed the downbeat ADP Private Payrolls report (October 4) of 89k new jobs which was the lowest number since January 2021. The NFP report also included positive prior months revisions adding 119k jobs to the earlier numbers. The unemployment rate held unchanged at 3.8% while commentators debated details such as full and part time jobs which are differentiated between the Household and Establishment surveys.

We now have a relatively complete macro view of the 3^rd quarter and will start to receive company specific results at the tail end of the week. Essentially the U.S. economy has surprised to the upside forestalling the long anticipated contraction by at least 1 more quarter. The Atlanta Fed GDPNow projection remains at 4.9% annualized growth in 3Q23. This would be an acceleration from a 1H23 growth rate of 2.15%. Composite and Services PMI surveys also show modest expansion along with positive jobs growth.

Banking industry data from the Fed H.8 Surveys shows actual quarterly loan growth of 0.62% led by growth in Real Estate loans offset by a 3^rd consecutive quarter in C&I contraction. Consumer loans grew in-line with the overall portfolio. The subsegment leaders were closed-end residential loans which grew by 1.7% and C&D loans up 1.6%.

Of course after the funding stress in the first half, investors will be closely watching deposit results. Across all commercial banks, non-seasonal deposit balances grew 0.17% in 3Q as large time deposits increased 8.9% while all other deposits decreased almost -1%. Contrary to conventional wisdom, small domestic banks fared better in terms of quarterly deposit trends. Non-seasonally adjusted totals at small banks show an actual quarterly deposit increase of 1.5% with non-large time deposits growing 0.6%. The overall mix of large time deposits to total deposits increased to 12.1% from 11.2% at the end of 2Q and up from 7.8% at the start of 2023.

With the short end of the Treasury curve relatively stable through the 3^rd quarter, major changes in bank funding costs will likely come through continuing Non-interest bearing deposit shifts. From our mid-quarter updates NIB mix was trending stable at many banks following the rapid shift in the prior 3 quarters. How individual banks managed NIB/IB mix along with asset repricing will be key to Net Interest Income and Net Interest Margin results as well as the forward outlook. Mid-cap bank sector EPS expectations fell further through the quarter following the 2022 cycle peak. Full year 2023 expectations were lowered another -2% while 2024 models were trimmed more than -5% since early July. Consensus expects mid-cap bank EPS to contract -3% in in 2024 with multiple head winds at play.