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Monthly Macro & Markets: April 2023
Another major bank collapses as data keeps pointing to a weakening US economy
Deposits & the M2 money supply continue to fall
April saw a continued decline in both commercial bank deposits (which on 19 April, were down 4.4% YoY) and the M2 money supply (which at the end of March, was down 4.0% YoY).
While the steep declines in both deposits and the M2 money supply may lead some to believe that the worst of the decline could be over, the opposite is true — on a 3-month annualised basis, the M2 money supply has seen an enormous decline, and is now down 8.1%.
The Fed’s BTFP treats the symptom, not the disease: First Republic Bank is the case in point
While the Fed implemented its Bank Term Funding Program (BTFP) in an attempt to help banks shore up their liquidity without having to sell bonds at a loss, the problem with this program is that it treats the symptom, not the disease — which is falling deposits. First Republic Bank has provided a case in point, whereby despite borrowing $13.8bn from the BTFP, it failed anyway, as it saw an enormous deposit outflow.
US economic data continues to broadly weaken
While Q1 GDP growth fell to 1.1%, a deeper look at its underlying components suggested stronger underlying strength, as PCEs rose by 3.7% in Q1. Though an even deeper look suggests that this “strong” growth in PCEs was due to seasonal noise in January, with PCEs and retail sales both seeing MoM declines in February and March. Furthermore:
Fed surveys of manufacturing and services activity continued to weaken in April;
Employment growth is being significantly supported by government job growth, with private payrolls showing a significant moderation;
Manufacturing and temporary help services employment have seen a significant weakening, with declines in these industries historically being good signals of a future recession;
The rate of quits and hires are both moderating, whilst layoffs and jobless claims are rising (albeit from low levels); and
Loans and leases have stagnated since December, with YoY growth beginning to materially moderate, putting further pressure on the M2 money supply.
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