The Fed raised rates, as expected, for the fourth time in 2018. The committee reduced its expectations of rate hikes in 2019 to two from three. The perceived tightening in financial conditions has created volatility in equity and credit markets leaving many asset classes in red for the year.
In regulatory news, Square will refile its Industrial Loan Charter application with the FDIC. The FDIC, under new leadership from Chair Jelena McWilliams, is encouraging de-novo bank applications as we noted previously, and is especially receptive to innovative fintech companies.
Credit card master trust data showed that net charge-offs dropped by 8 bps YoY, decreasing for the second month in a row.
Banks, meanwhile, continue to pull back from higher risk loans as they prepare for a recession and the onset of Current Expected Credit Loss (CECL) regulation. Banks rejected nearly half of the applications from customers with low credit scores in the four months ending in October, and closed 7% of existing accounts, particularly among subprime borrowers.
In this week’s newsletter, we will look at equity market performance through the lens of recent Fed actions and preview our latest Marketplace Loan Performance Monitor.
Fed Raises Rates and Equities Sell-off
In an op-ed in the WSJ, Stanley Drunckenmiller and former Fed member Kevin Warsh cautioned the Fed against raising interest rates further. They argued that a reduction in liquidity from Quantitative Tightening and rising rates creates the risk of a severe policy mistake. They argue that given various market leading indicators – rather than lagging indicators (employment, GDP) – the Fed should cease its “double-barreled” blitz. Druckenmiller also laid out his views on the US economy in an interview here.
One of the indicators Drunckenmiller cites is the relative performance of cyclical sectors in the stock market vs defensives – we share that analysis below. Defensive sectors like utilities and telecom have significantly outperformed energy, financials and consumer discretionary stocks.
The heatmap below shows how various sectors of the S&P 500 have performed since the index reached its high of 2,931. It also compares the sector returns to those seen in 2007 when the S&P 500 retreated from its then high in October to the middle of December 2007. In 2007, the S&P 500 dropped by 7.2% from its high to the middle of December, compared to 17.1% from its high in September 2018 to date.
We are keeping an eye on credit and equity markets and monitoring how these developments will track the impact to pricing on new securitizations and issuers’ all-in costs.
Drunckenmiller Equity Sector Analysis
Source: Bloomberg, PeerIQ
PeerIQ’s Loan Performance Monitor
We are releasing our latest Loan Performance Monitor with data as of September 2018. Our MPL Loan Performance Monitor tracks the delinquency rates, cumulative losses, cumulative prepays and transition matrices using public marketplace lending data that comprises unsecured consumer loans originated by Marketplace Lenders. Some highlights from the report are:
- Delinquencies on the 2017 vintage in the first 20 months are the highest that we have seen across vintages. The 2016 vintage is a close second. DQs at month 20 on the 2015 – 2017 vintages are 5.5%, 5.6%, and 6.2% respectively.
- Cumulative loss rates continue to edge higher. Cumulative loss rates on 2013 (9.8%) and 2014 (9.6%) vintages were below 10%, but newer vintages are trending much higher with the 2015 (12.6%) and 2016 (12.2%) vintages significantly outpacing the older vintages. The 2017 (7.5%) vintage has lower cumulative losses than both these vintages so far (at month 20).
- Cumulative prepayments have picked up, with the 2017 vintage paying significantly faster. Cumulative Prepayments at month 20 on the 2015 – 2017 vintages are 19.2%, 21.7%, and 24.0% respectively.
Excerpts from Loan Performance Monitor
Consumer Credit Digest – Get an Edge on US Consumer Credit
Looking for insight into how consumer credit has performed during prior periods of market volatility? How are US consumers performing today across asset classes? How are prepayments and losses trending in the personal loan and subprime auto space?
The Digest, powered by the TransUnion credit file, is a detailed market report and summary data that allows the reader to track trends in consumer credit with the following features:
- Robust data & coverage, representing the full credit file back to 2000
- Custom metrics and charts, including refinance and attribute migration
- Key stratifications, including risk, age, originator type (e.g. Fintech)
Download a free trial version of the report or contact firstname.lastname@example.org to learn more.
- Fed Raises Rates, Turns More Cautious on Outlook for 2019 Hikes (Bloomberg, 12/19/18) The Fed raised rates for the fourth time in 2018 and reduced its expectations of rate hikes in 2019 to two from three.
- Fed Tightening? Not Now (WSJ, 12/16/18) In an op-ed in the WSJ, Stanley Druckenmiller and former Fed member Kevin Warsh cautioned the Fed against raising interest rates further. Druckenmiller also laid out his views on the US economy in an interview here.
- Square to make another bid for bank charter (American Banker, 12/19/18) Square will refile its Industrial Loan Charter application with the FDIC, as it encourages de-novo bank applications.
- Banks pitch refis to generation buried in student debt (American Banker, 12/20/18) Citizens Financial, First Republic and Fifth Third are offering student loan refinancings as they target millennial customers.
- Credit Card Trends Aren’t Signaling a Recession, Analysts Say (Bloomberg, 12/18/18) Credit card master trust data showed that net charge-offs dropped by 8 bps YoY, decreasing for the second month in a row.
- U.S. banks quietly pull back from riskiest loans amid recession fears (Reuters, 12/17/18) Banks rejected nearly half of the applications from customers with low credit scores in the four months ending in October.
- OnDeck (ONDK) to Enter Equipment Financing Market (StreetInsider.com, 12/19/18) OnDeck is expanding its small business lending to equipment financing. The loans will range from $5 k to $100 k, have terms from 24 to 60 months, and will be secured by new and used equipment.
- Ex-NASA engineer creates glitter bomb trap for package thieves (CNN, 12/18/18) Revenge best-served with a bowl of glitter.