June consumer inflation cooled from May. The first handful of banks reporting 2^nd quarter results showed continued evidence of system stability.

The June Consumer Price Index (CPI) report (July 11) from BLS showed headline monthly inflation falling -0.1% from May in a continuing positive trend following the inflation surge in 1Q24. Core CPI lessened to a 0.1% monthly increase. The 6-month annualized core consumer inflation peaked in April and has receded over the past 2 months. With the next 3 roll months equal to 0.4% monthly increases, I see a high likelihood that this rate falls steadily through the 3^rd quarter. My expectation is for the 6-month annualized core CPI rate to fall below the November 2023 level with the August report. This should set the context for the first Fed policy cut in September.

The CPI report may be the catalyst to move the bank indices above their 8-month resistance levels. Examining a 3-year chart for the Nasdaq BANK index, we see the prior July 2023 high had been serving as a support level over the past several months. Resistance was holding at the earlier period lows around 3800. From a simple technical review, I sense that we may finally be breaking higher which should allow the sector to test levels closer to BANK 4300.

I place the technical chart in the context of sector valuation with my primary measure being the Equity Risk Premium for the mid-cap bank group. This is the group of just under 100 publicly traded banks with assets between $10B and $100B. In looking at the 6-year chart for mid-cap bank ERP, we see the measure falling towards 4%. Forward adjustment in the ERP, in my opinion, is needed to support the technical breakout of higher sector prices.

I think some combination of post 2^nd quarter earnings adjustments needs to occur for bank equity prices to be sustained higher. Remaining 2024 earnings estimates may be revised higher, 2025 EPS growth of 9% may be maintained or revised higher, and the risk-free yield may fall. A combination of these items could be sufficient to maintain EPR spread generous enough to support higher bank equity prices.

Finally, from Friday’s earnings calls, I share a few passages describing the perceived state of the Consumer based on credit card payments in the quarter at 2 of the largest card providers.

JPM CFO Jeremy Barnum noted,

“I still feel like when it comes to Card charge-offs and delinquencies, there’s just not much to see there. It’s still — it’s normalization, not deterioration. It’s in line with expectations. As I say, we always look quite closely inside the cohort, inside the income cohorts. And when you look in there, specifically, for example, on spend patterns, you can see a little bit of evidence of behavior that’s consistent with a little bit of weakness in the lower-income segments, where you see a little bit of rotation of the spend out of discretionary into nondiscretionary.

But the effects are really quite subtle, and in my mind, definitely entirely consistent with the type of economic environment that we’re seeing, which, while very strong and certainly a lot stronger than anyone would have thought given the tightness of monetary conditions, say, like they’ve been predicting it a couple of years ago or whatever, you are seeing slightly higher unemployment, you are seeing moderating GDP growth. And so it’s not entirely surprising that you’re seeing a tiny bit of weakness in some pockets of spend. So it all kind of hangs together in what is sometimes actually not a very interesting story.â€

Similarly Citi CFO Mark Mason highlighted in his script,

“Across our card portfolios, approximately 86% of our card loans are to consumers with FICO scores of 660 or higher. And while we continue to see an overall resilient U.S. consumer, we also continue to see a divergence in performance and behavior across FICO and income band. When we look across our consumer clients, only a highest income quartile has more savings than they did at the beginning of 2019, and it is the over 740 FICO score customers that are driving the spend growth and maintaining high payment rates.

Lower FICO band customers are seeing sharper drops in payment rates and borrowing more as they are more acutely impacted by high inflation and interest rates. That said, as we will discuss later, we’re seeing signs of stabilization and delinquency performance across our cards portfolio. and we’ve taken this all into account in our reserving, and we remain well reserved with a reserve to funded loan ratio of 8.1% for our total card portfolio.†Both observations fit with my frame that those who are renters are experiencing the greater impact of inflation and restrictive monetary policy. Consumers who were able to secure low interest longer term debt to cover housing cost have sterilized a large portion of their budget from both inflation and the higher interest rate regime. I see a similar dynamic at play in the Commercial customer set with a segment of corporations having been able to insulate their balance sheets ahead of the rate hike cycle to push out some parts of the negative impact of highly restrictive monetary policy.