Credit Card Data Strong in Last Full Month of Taylor Swift Tour Stimulus

What We’re Watching

Sometime this week or next: the FDIC 2Q23 Quarterly Banking Profile, containing useful industry aggregate data and commentary.

Wednesday, August 23: NVIDIA (NVDA) releases earnings after the market close and hosts a call at 5pm. While not a financial, investors in every sector should be watching this. NVIDIA is among the best lenses on how the rise of AI is translating into increased (as well as reallocated) corporate tech spend, very much including in the financial sector. Look for guidance and commentary on their data center segment.

Friday, August 25: Fed Chairman Powell speaks at 10am at the Kansas City Fed’s 2023 Economic Policy Symposium in Jackson Hole.

Friday, September 8: The 2Q23 Flow of Funds will be released at 12pm; among the more timely elements will be fresh data on commercial real estate.

Monday, September 11 – Wednesday, September 13: Barclays Global Financial Services Conference in New York. One of the most important conferences on the financial sector calendar, it provides an important post-Labor Day level-set. JP Morgan Chase CEO Jamie Dimon speaks at 1pm on Monday.

Credit Card Master Trust Data Remains Benign… So Far

NCOs and delinquencies materially worse year-over-year but remain at low absolute levels. Master trust data released on August 15 continued to reflect consumer resilience, albeit with ongoing mean reversion from the unsustainably low levels of charge-offs and delinquencies seen during COVID. Unsurprisingly, the deterioration in charge-offs was worse at private label issuers than at the general-purpose card issuers, although some of the change at Bread Financial was idiosyncratic and not representative of the overall environment. However, there is growing evidence which suggests that many of the factors supporting consumer resilience are winding down.

Figure 1: Credit card master trust net charge-off rates, annualized

Source: FactSet StreetAccount

Figure 2: Credit card master trust delinquency rates

Source: FactSet StreetAccount

Figure 3: American Express master trust net charge-off and delinquency rates

Source: FactSet StreetAccount

Figure 4: Bank of America master trust net charge-off and delinquency rates

Source: FactSet StreetAccount

Figure 5: Citigroup master trust net charge-off and delinquency rates

Source: FactSet StreetAccount

Figure 6: Capital One master trust net charge-off and delinquency rates

Source: FactSet StreetAccount

Figure 7: Discover master trust net charge-off and delinquency rates

Source: FactSet StreetAccount

Figure 8: JP Morgan Chase master trust net charge-off and delinquency rates

Source: FactSet StreetAccount

Consumer Credit Faces Increasing Headwinds

Excess savings dwindling, student loans resuming. While credit card charge-offs and delinquencies remain at historically low levels, and the US consumer generally remains in rude health, various tailwinds are fading, and potentially fierce headwinds loom. Among the fading tailwinds: The San Francisco Fed calculates that the accumulated above-trend personal savings from the COVID era will be fully exhausted by the end of September. That doesn’t auger any imminent collapse, but it leaves less cushion when and if other things go pear-shaped. Similarly, the end of the student loan moratorium is imminent, with interest accrual to resume on September 1 and payments in October. While only a marginal negative for the overall economy, this may hit a slice of households fairly hard. On top of all that, Taylor Swift’s tour has just moved overseas, taking her economic stimulus with it.

Figure 9: SF Fed research suggests the excess savings accumulated under COVID will be dissipated by October

Source: Federal Reserve Bank of San Francisco

Taylor Swift: End of the Eras Era, Economically

Taylor Swift has left the building. Taylor Swift’s tour, Eras, reportedly boasting average ticket prices over $250 and driving a large volume of ancillary spending, has been credited with providing a measurable economic stimulus. There have been much bigger acts, but they have had much cheaper tickets. The tour even earned a mention in the July Beige Book: "Despite the slowing recovery in tourism in the region overall, one contact highlighted that May was the strongest month for hotel revenue in Philadelphia since the onset of the pandemic, in large part due to an influx of guests for the Taylor Swift concerts in the city."

A 14-month desert of Swiftlessness looms. Alas, this is yet another economic support that has run its course for the near future. Miss Swift’s Los Angeles concert on August 9 was the end of the US leg. The tour has moved overseas, and the US economy is now staring at a 14-month desert of Swiftlessness until a weekend of Miami concerts in October 2024. It is left as an exercise for the reader to judge how large a role this plays in the 4Q24 rate cut currently discounted by Fed Funds futures.

Figure 10: There have been much bigger acts, but they have had much cheaper tickets

Source: LedZeppelin.com

This tightening cycle only became restrictive this year, according to the St. Louis Fed. On the face of it, consumer credit is hanging in startlingly well given the increase in rates since 1Q22. However, as illustrated in Figure 11, work by the St. Louis Fed suggests that the FOMC waiting so long in the face of rising inflation to begin tightening, that monetary policy didn’t really turn restrictive until 1Q23. The lion’s share of the lagged effect is yet to be seen.

Figure 11: St. Louis Fed research suggests Fed Funds only became restrictive in 1Q23

Source: Federal Reserve Bank of St. Louis

FOMC minutes indicate inflation risks viewed as skewed to the upside. Last week’s FOMC minutes suggested that both the FOMC and its staff view inflation risks as skewed to the upside, which implies a similar skew for the Fed Funds outlook.

From FOMC minutes: “Risks to the staff's baseline inflation forecast were seen as skewed to the upside, given the possibility that inflation dynamics would prove to be more persistent than expected or that further adverse shocks to supply conditions might occur.

“Participants cited upside risks to inflation, including those associated with scenarios in which recent supply chain improvements and favorable commodity price trends did not continue or in which aggregate demand failed to slow by an amount sufficient to restore price stability over time, possibly leading to more persistent elevated inflation or an unanchoring of inflation expectations.”

Online Savings Rates Flat

No changes to the rates offered by our sample of online savings accounts. Every bank in our sample held their rates flat last week.

Figure 12: Savings account interest rates offered by selected online banks

Source: FactSet, BestCashCow.com

Interest Rates

Bear steepener continues to lessen curve inversion. The bear steepener remained in place last week, with rising long rates continuing to flatten the curve. The 2-year to 10-year spread narrowed by another 7bps to 66bps, driven by a 10bp rise in the 10-year yield. Since the point of maximum inversion (-1.08% on July 3), the inversion has declined by 42bps, due almost entirely to the corresponding 40bp increase in the 10-year yield.

Figure 13: The bear steepener continues to flatten the curve

Source: FactSet

Figure 14: The 2-10 spread narrowed last week to -66bps

Source: FactSet

Fed Funds futures continue to get less dovish. The pace and degree of easing implied by Fed Funds futures continues to moderate, as illustrated in Figure 15; the implied average effective Fed Funds rate for 4Q24 rose to 4.46%, up 11bps on the week (and up 21bps over the past two weeks). Futures currently imply that the first rate cut will come at the May 1 FOMC meeting.

Figure 15: Fed Funds futures continue to turn less dovish

Source: FactSet

Figure 16: Fed Funds Futures imply the first rate cut happens in May 2024

Source: FactSet

Weekly Federal Reserve Balances

Federal Reserve borrowings keep rising. Total bank borrowings (BTFP combined with the Discount Window) rose 0.4% to $109.2 billion, another post-April high. Total borrowings are now up 35% since May 3, though still 34% below the March 15 peak. Money market fund balances rose 72bps to $5.57 trillion, also a new high.

Weak loan growth, while small banks outperform large banks on deposits. Total loans in the banking system fell 4bps and are tracking to 3% annualized growth in 3Q23 Total deposits declined 6bps last week, but the outperformance of small banks continued. Large banks saw a decline of 32bps and are down 0.44% QTD and 5.16% over the past year, while at small banks, deposits rose 4bps, leaving them up 1.55% QTD, though still down 1.64% over the past year.

Figure 17: Federal Reserve balances

Source: FactSet

Figure 18: Bank Term Funding Program usage reached another new peak last week

Source: FactSet

Figure 19: Money Market Fund assets hit a new high last week

Source: FactSet

Figure 20: Deposits fell slightly last week

Source: FactSet

Figure 21: Total loan growth remains very sluggish

Source: FactSet

This blog post is for informational purposes only. The information contained in this blog post is not legal, tax, or investment advice. FactSet does not endorse or recommend any investments and assumes no liability for any consequence relating directly or indirectly to any action or inaction taken based on the information contained in this article.