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Darkening Macro Picture, Soaring Bank Loan Losses

By Ashraf LaidiMarket OverviewApr 16, 2020 01:34AM ET
Darkening Macro Picture, Soaring Bank Loan Losses
By Ashraf Laidi   |  Apr 16, 2020 01:34AM ET
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By Adam Button

A shocking fall in the Empire Fed and some of the details of the U.S. Retail Sales report illustrated the speed of the economic slowdown. The U.S. dollar was the top performer yesterday, while the Australian dollar lagged.

U.S. banks' loan loss provisions soared, with the Bank of America (NYSE:BAC), Citigroup (NYSE:C) and Goldman Sachs (NYSE:GS) taking $12.8bn of charges in Q1. These figures should imply a sharp blow to the once-solid consumer sector (more below).

Oil and indices futures took a fresh dip after the release of newly-reported U.S figures on coronavirus, with deaths hitting 2,492 on Wednesday from Tuesday's 2,299 and 1,901 one week ago. Australian jobs and U.S. Initial Jobless Claims are due up next. 

The Empire Fed report was expected to sink. It's an indicator that's close to real-time and it surveys manufacturing in the New York area, which is the current epicenter of the global outbreak. Yet no one thought it would be this bad.

The consensus estimate was for a fall to -35 from 21 in March. That would have been narrowly lower than the -34.3 bottom during the financial crisis. There were 43 estimates in the Bloomberg survey of economists and the worst was -60. Only two were below -45. The result was -78.2. It's a massive miss and it could harken a broader transition in the market where the focus moves to the economic crisis, rather than the financial one.

With regard to those bank loan loss provisions, not only have they slashed U.S. bank profits in half, but would also imply a lasting recession well into 2021. The blow to the U.S. consumer is too great, Not to mention additional loan losses in Q2 and Q3.

More evidence appeared in the March retail sales report. The headline at -8.7% compared to -8.0% expected was much closer to the consensus, but it was still the worst monthly drop on record. It's within the data where there are hints on the state of the consumer. Spending on clothing was down 50.7%, vehicles 25.6% and electronics 15%. The economy wasn't closed until halfway through the month.

As for market moves, the U.S. dollar rebounded sharply, particularly against the commodity currencies. AUD/USD fell more than 2% after seven days of gains. The Canadian dollar also gave back much of its recent strength. That was helped by a surprise announcement of more QE from the Bank of Canada and another decline in oil prices.

In the day ahead, economic data will continue to be top-of-mind. The Australian March employment report is ahead. Later today it's U.S. weekly jobless claims with another 5.5m job losses expected. That report will be a good test of the market's sensitivity to data, good or bad.

Darkening Macro Picture, Soaring Bank Loan Losses

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Darkening Macro Picture, Soaring Bank Loan Losses

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