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Although stress in the banking sector continues in this rate environment, total borrowing from the Fed’s three emergency lending programs declined from $288.7 billion the week prior to $285.7 billion last week (the figure peaked in March at $343.7 billion in the wake of the Silicon Valley Bank collapse). Borrowing from the Fed’s Bank Term Funding Program rose slightly to $93.6 billion from $91.9 billion in the prior week, while borrowing from the Fed discount window declined to $3.97 billion from $4.2 billion in the prior week, MarketWatch reported. It continues to point to tightening credit and consumers who are expected to pull back.
Meanwhile, the Mortgage Bankers Association (MBA) reported that commercial mortgage delinquency rates increased for every major capital source during the first quarter, “foreshadowing additional strains that are likely to work their way through the system,” MBA said. As we’ve discussed here on a few occasions, and MBA summarizes: “For most capital sources, delinquency rates remain low by historical standards. But with 16 percent of outstanding loan balances facing loan maturities this year, the first edge of properties is just beginning to be pushed to adjust to today’s markets – with higher interest rates, uncertain property values, and questions about some property fundamentals. As they do, delinquency rates are likely to continue to rise.”
The labor market, and the consumer, however, continue to spend during this second quarter. We learned Friday that U.S. employers added 339,000 jobs in May, and the numbers were revised upward for March and April, 52,000 and 41,000 respectively. Mike Fratantoni, Chief Economist at MBA: “Job growth was stronger than anticipated in May, with growth averaging 341,000 per month over the last 12 months, adding to the momentum thus far in 2023.”
“Thus far” might be the operative term, perhaps — as credit tightens, surveys are indicating consumers are beginning to feel increased pressure. A survey conducted by the BMO Financial Group found two-thirds of those looking to buy a home say that current high mortgage rates are keeping them from doing so. The Morgan Stanley US economics team, which predicts a “soft landing” because of the labor picture that should allow the Fed to achieve its 2% inflation target without diving unemployment significantly higher, conducted a survey that found consumers, except in groceries and household products, fully expect to pull back their discretionary spending later this year, and in fact Morgan Stanley sees that pull back already beginning. “Interest rates on new consumer loan products,” Sarah Wolfe of the team noted, “hit 20 to 30-year highs, raising overall debt service costs and forcing consumers to reduce purchases of interest sensitive goods.”
In remarks last week, Fed Governor Philip Jefferson said he believes “the overwhelming majority of banks have strong balance sheets with limited leverage, high levels of loss-absorbing capacity, and healthy liquidity. Moreover, household and business balance sheets are generally strong… While the resilience of the financial sector will limit the spillovers from recent events, I expect those strains to lead to a further tightening in credit supply from banks that will weigh on economic activity.”