Over the years, one of my favorite mantras has been “the bond market it the smartest animal on the planet”.  Historically, ignoring the message the bond market gives us, tends to lead to financial pain of some sort for someone.  So, needless to say, I always feel better when my leading indicators/models seem validated by the bond market’s message.

At the 2018 ALMEdge conference held in April, I made the case that my long leading indicators were signaling potential trouble for the U.S. economy in late 2019.  In my June newsletter to subscribers, I narrowed that window down.  I stated that the likely start date of a recession would be December 2019 (18 months out from that publication).  I received several phone calls on how I got to that date.  I got to that date by applying some math to the bond market’s current message.  Specifically, the message transmitted through the spread between the 10-year Treasury and the 2-year Treasury (Spread).

In the chart below, I regressed roughly the last 2 years of data on the spread and then forecast that trend into the future.  IF that trend continues, the most likely yield curve inversion will take place in January 2019.  Based on average lead times of an inversion vs. a recession start date, the most likely recession start date is December 2019.  The good news is that is more than one year out, the bad news is, if the curve does invert, the message from my leading models will likely be vindicated.  Your ALCO committee should start formulating a plan on how to respond with asset and liability duration strategies if the yield curve actually inverts.  This is only a forecast but risk management would deem that you stay tuned!

Fads come and go.  Trends remain until they don’t.   It is amazing how quickly we forget them once they are gone.  Funny thing is, they tend to re-emerge without us even noticing.   I think we are in the midst of this very circumstance in community banking today.  I think it has been so long since we have had “pricing power” on our loans, we may have failed to notice a new trend emerging.
 
The National Federation of Independent Business (NFIB) claims to be America’s leading small business association, with upwards of 325,000 business owners.  I don’t doubt that claim.  To me, this is a huge resource pool for gathering information about the reality of life for America’s small businesses.  Better yet, the NFIB seems to agree with me.  Each month, they release a detailed survey to their members on everything from earnings and hiring, to regulatory headwinds and banking.   That’s right, banking!  The NFIB takes the survey results and creates its Small Business Optimism Index.  There are many useful data nuggets in this survey, but the one I wanted to highlight to you today is contained in the “Small Business Credit Conditions” section of the survey results; “RELATIVE INTEREST RATE PAID BY REGULAR BORROWERS."  It looks at the net percent, compared to three months ago, of respondants paying higher interest rates on new borrowings.  In the chart below, you can clearly see the re-emergence of a long forgotten friend of ours, loan-pricing power.



 
This index now stands at the highest level seen in 11 years.  It indicates that regular borrowers are paying higher interest rates on new borrowing.  In general, bankers I have talked with recently are still saying that the lending environment is still too competitive, and if you want new deals, you have to offer the lowest yield.  The trend in the chart above clearly shows SOMEONE is raising loan yields, and businesses seem happy to borrow at those higher rates.  I hope this re-emerging trend doesn’t pass you by.

It is that time of year again and I must admit, I find myself in a bit of a panic!  But as always, I am excited to see all of you.  The ALMEdge conference is scheduled for Friday, April 6th and you can find all the details HERE as well as the opportunity to register for the event.