It’s FOMC meeting day but before we learn what the Fed has in store for us (which we’ll talk more about below), we did get the August retail sales numbers and they reflect a note of caution that if fiscal stimulus continues to fade into the fall, does that risk a W-shaped bounce rather than the hoped-for V-shaped recovery?  That seems to be the tone of most August reports in that activity continued moving forward but with less momentum than July which, in turn,  had less momentum than June save the tech and housing sectors.  For the month, overall sales rose 0.6% versus 1.2% in July and off the 1.2% forecast.  Sales ex-autos and gas were up 0.7% versus the 1.5% gain in July. Sales from the Control Group—a direct GDP feed—waa down –0.1% versus 0.9% in July and the 0.3% forecast. The decline was the first since April.  The question becomes will that slowing continue or is it just a pause? We think it’s the former and not the latter. Finally, in this week’s podcast, we talk with Brady Gailey, Managing Director of Equity Research at KBW. He joined us on the podcast to discuss the state of mergers and acquisitions in the age of COVID and CECL, along with the future outlook for M&A and valuation trends. The itunes link can be found here and the Spotify link here.


newspaper icon  Economic News


It’s not likely the Fed will announce any new initiatives later today like quantifiable targets to guide forward guidance, or longer duration quantitative easing purchases, still there will be plenty for the market to digest. Today’s meeting will come with fresh economic and rate forecasts, and with unemployment already below the level that the June forecast had for year-end it will be interesting to see if the Fed’s somewhat pessimistic tone in June becomes a more glass half-full outlook rather than half-empty.


Recall too the Fed’s June forecast had no rate hikes through 2022 so the market will focus on whether that changes as well. Given the new Monetary Policy Framework that Chair Powell unveiled at Jackson Hole, it would seem unlikely that after talking about allowing the economy to run a little hot they would move forward rate hiking expectations, that’s the market’s forecast anyway. The graph below is the fed funds rate forecast from the June meeting. The market expects today’s forecast to look very much the same.


Implied Fed Funds Target Rate



line graph icon  Loan Loss Reserves Approach Great Recession Highs


An article in yesterday’s S&P Global Market Intelligence caught our attention with the headline that loan loss reserves are approaching levels last seen during the height of the financial crisis more than a decade ago now. During the second quarter banks had total loan loss reserves of $242.79 billion, slightly trailing the high-water mark of $263.11 billion in the first quarter of 2010. Provisions for loan losses, the actual expense taken, for the second quarter reached $61.73 billion for credit losses compared to a peak of $71.63 billion in the fourth quarter of 2008.


The good news, so far, is that charge-off levels remain muted such that provisions and loan loss reserves could be allowed to shrink in future quarters if the credit crunch fails to appear in all its Great Financial Crisis fury.  To be sure there are sectors that are getting hit notably hotels and other businesses in the travel and hospitality field, and banks that have focused on those sectors are feeling the pinch. With fiscal stimulus measures fading from the scene we’re likely to see some increases in charge-offs and additional defaults but the industry appears well-positioned to weather a pretty strong storm in that regard.


 2020 Reserves


bar graph iconAgency Indications — FNMA / FHLMC Callable Rates

Maturity (yrs) 2 Year 3 Year 4 Year 5 Year 10 Year 15 Year
0.25 0.20 0.31 0.46 0.62 1.43 1.90
0.50 0.20 0.32 0.47 0.62 1.31 1.77
1.00 0.20 0.31 0.45 0.60 1.27 1.71
2.00 0.27 0.40 0.54 1.16 NA
3.00 1.10 NA
4.00 1.02 NA
5.00 0.96 NA
10.00 NA

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Published: 09/16/20 Author: Thomas R. Fitzgerald