Last week the majority of macro-economic updates supported the scenario of a growing economy comprised of a weak manufacturing sector, strong services sector and ongoing elevated price increases. November will close this week with shortened Thanksgiving holiday trading as risk assets follow post-election momentum higher while Treasuries probe for support. In banks, there has been a noticeable pickup in insider sales and large capital raises over recent weeks.
Key among last week’s data was the S&P Global Flash November PMI surveys (November 22). The composite PMI signaled accelerating overall expansion as the Services PMI reached a multi-year high while the Manufacturing PMI remained below 50. The report noted, “The business mood has brightened in November, with confidence about the year ahead hitting a two-and-a-half year high.”
The report further noted, “A concern is that growth remains heavily reliant on the services economy, with manufacturing production declining at an increased rate. However, the promise of greater protectionism and tariffs has helped lift confidence in the US good producing sector, which is already feeding through to higher factory employment. Factories are meanwhile stepping up their purchases of imported inputs as they seek to front-run tariffs.”
In the University of Michigan Surveys of Consumers (November 22) consumer confidence rose but less than expected. As would be anticipated post-election sentiment swung hard depending on political affiliation. Important to the Federal Reserve’s articulated monetary policy considerations, the survey’s measure of long-run inflation expectations rose to 3.2% from 3.0%. FOMC committee members have repeatedly professed their happiness that long-run consumer inflation expectations “remain well anchored.” A steady creep higher in this measure should elicit future caution in loosening monetary policy.
Finally, while rate hikes and cuts grab more headlines, use of the Fed balance sheet in monetary policy should not be ignored. The FOMC introduced Quantitative Easing to the main stream financial lexicon in the Great Financial Crisis period as QE, QE2, et cetera were implemented to stimulate economic activity after interest rates were already dropped to zero. The Fed balance sheet increased from $900B to more than $4T. The balance sheet made a quantum step higher again during the pandemic lockdowns.
More recently Fed policy has been Quantitative Tightening which shrinks the balance sheet primarily through asset run-off as securities mature each month. After tipping $9T at its peak, the balance sheet has shrunk to its May 2020 level.
Historically economic text taught the money multiplier effect which tied an increased Fed balance sheet to a multiple increase in bank deposits. Interestingly the concept of the money multiplier is less in vogue these days, e.g.Teaching the Linkage Between Banks and Fed: RIP Money Multiplier. I am less ready to disregard this concept and think QT should be viewed as an ongoing headwind to bank funding.
The next Weekly Review & Outlook will be December 9 – Happy Thanksgiving!
Mid-Cap Banks
The mid-cap bank group gained 2.90% on average last week. The median group 2025 P/E is now 13.54x which is a 14.05% premium to the recent comparable period average P/E of 11.64x. The earnings yield spread (a modified version of equity risk premium) closed at a 33.55% premium to my assessment of neutral. The valuation estimate equates to a price premium of 16.41%.