On occasion I have half-heartedly joked that when I was young, I read books. As I aged, I focused more on periodicals. With the introduction of smart phones and social media, scanning headlines became more frequent. Now I mostly look at pictures. After the heavy flow of company specific information that comes with several weeks of bank quarterly earnings results, I decided to zoom out in my analysis by reviewing the latest, selected macro observations to help orient my view to our current location with a heavily graphical presentation.

Starting with the Consumer, July Employment Situation data (August 4) was mostly in-line with +187k new jobs added. Prior months’ revisions lowered previous findings by -49k. The 12-month trend shows positive but slowing labor growth. I am interested to see if the preliminary annual benchmarking to be released August 23 includes major revisions. Consumer confidence has rebounded from the June 2022 trough but remains at historically low levels. Higher income consumer sentiment seems to have rebounded more sharply along with higher stock prices while lower income sentiment has languished. Retail gas price highs corresponded with the 2022 bottom in consumer sentiment and have been slowly creeping higher from the December 2022 lows.

Monetary policy remains on a restrictive path. The yield curve inversion that began July 2022 persists with all maturities greater than 1 year having yields below Fed Funds. The June SEP projected a 5.75% terminal rate in 2023. A bear steepening path to positive slope remains a possibility as longer maturity yields move above 4%. Less discussed Quantitative Tightening is on track to drop the Fed Balance Sheet below $8T in early 4Q.

1H23 economic growth has been measured at 2.2% annualized and the most recent GDPNow 3Q projection accelerates to 3.9% annualized. Despite recent growth trends, forward looking measures such as the Leading Economic Index and PMIs suggest elevated recession risks over the next 12-months.

For Banks, the environment has evolved from extreme liquidity risk in the Spring to cautious optimism. Uncertainty regarding the Fed’s monetary policy path and economic implications have most banks on a defensive footing. For Bank Investors, the sector has rebounded 30% from the early May lows. Equity Risk Premiums of 10% which made ownership of risk assets compelling have fallen to less than 6% as risk free rates and equity prices rise and earnings estimates fall. In my opinion the intermediate term bank equity path and risk/reward analysis is much more symmetric awaiting recession risks development.