Market 06/11: Increasing pressure on small banks

Successful auction of 40 billion USD 10Y Treasury Bonds

• High Yield: 4.438% (market yield: 4.458%| previous session: 4.483%)

  => Stop-through: 2bps

  • Successful bid ratio at High Yield level: 43.69% (previous session: 0.48%)

• Bid-to-Cover: 2.67 (previous session: 2.31)

Competitive bid components:

• Dealers: 11.59% (previous session: 15.73%)

• Indirect bidders: 74.6% (previous session 65.52%)

Small banks under pressure from commercial real estate (CRE) debt

• Pacific Investment Management Company (PIMCO) forecasts more regional CRE banks will go bankrupt

  • …due to very high ratio of risky CRE loans in asset portfolio.

• Yesterday and today, regional banks ETF continuously declined:

  

• Banks have tightened lending standards for the longest time since 2008.

  • Q1/2024: 20% small banks and 16% medium/large banks tightened credit standards.

→ CRE is the main reason for tighter lending standards.

• Last weekend, Moody's has also placed 6 regional banks on the watchlist for credit downgrade, due to the impact from commercial real estate decline.

  • …especially banks with market cap of 10-100 billion USD at high risk.

Small business survey (NFIB): Sentiment improves but inflation remains a burden

• NFIB small business optimism index improved, rising to 90.5 (> estimate & previously at 89.7).

• Inflation remains the most important issue for small businesses.

• Labor quality is the second biggest concern, followed by taxes and labor costs.

• As of the end of January 2024, 264 companies have defaulted at least 2 times.

  • ~35% of companies defaulted >=2 times in 2023 - highest since the 2008 financial crisis.

→ Prolonged high interest rates are causing difficulties for businesses.

Global GDP growth forecast and Fed rate cut timing

World Bank raises global GDP growth forecast for 2024:

• 2024 growth forecast: up to 2.6% (previously 2.4%).

• 2025, 2026 growth forecasts: reach 2.7%.

• If interest rates remain high longer, global growth could be only around 2.4% next year.

Banks' updated forecasts on first Fed rate cut:

Citi, JPM, Kalsi have pushed back forecasts for when Fed starts cutting rates this year.

Fed's consumer credit survey: consumers starting to be cautious

• Consumer credit in April increased by +6,403 billion USD, reaching record high 5.05 trillion USD.

  • Notably, March data revised down to -1,099 billion USD (from initial +6,274 billion USD).

• Consumer credit remains at historical high ~1.34 trillion USD, up 38% in just 3 years.

• Severe delinquency rate (>90 days) up 6.9%, highest in 13 years.

• Total revolving consumer credit balance fell for the first time since April 2021: -0.4% (annualized basis).

• However, y/y, revolving credit growth remains positive (+6.9%)

  • …but still in a strong downward trend.

• Overall, consumers believe that credit availability has not changed much compared to last year.

  • Number of people who think it's much more difficult: decreased.

  • Number of people who think it's a bit more difficult: increased.

• Delinquency rate: by geography and the lowest/highest 10% income groups

Crypto market: Russia prepares to recognize Bitcoin mining as an economic activity

1. Ionet CEO resigns just 2 days before token launch on Binance Launchpool.

2. China's ICBC (China's largest bank) praises BTC and ETH, saying BTC is a better digital gold than gold.

   • ICBC is largely owned by the Chinese government.

3. Russia prepares to recognize Bitcoin mining as an official economic activity.

   • The bill was submitted to parliament in 2022 and is expected to be approved this year.

• Russia announces that digital currency trading will begin in 2025 with the central banks of the BRICS+ group.

  → Dependence on SWIFT system and USD expected to decrease

Some other news:

1. Apple partners with OpenAI to launch Apple Intelligence - AI system for iPhone, iPad and Mac, integrating ChatGPT.

• Apple stock hits 200 USD for the first time.

• However, Elon Musk says this is a security violation, warning he will ban Apple devices at his company.

2. Eli Lilly's Alzheimer's drug donanemab recognized by FDA as effective.

3. Jury convicts Hunter Biden, son of President Biden, of concealing drug use when buying a gun.