Hosted by: James Hotchkiss Director, Member Strategy and … · 2019-08-15 · loans. A small...

Hosted by: James Hotchkiss Director, Member Strategy and Solutions Date: August 15, 2019

Contacts

Federal Home Loan Bank of Chicago | Member owned. Member focused. 2

James Hotchkiss Director, Member Strategy and Solutions [email protected] 312-565-5691 Twitter: @econ_james_

Melissa Deven Director, Member Strategy and Solutions [email protected] 312-552-2717 Twitter: @econ_melissa_

Discussion Topics


• Weekly Interest Rate Comparisons

• Economic Data Releases

• Small Business Lending Survey

• Senior Loan Officer Survey

• Preview of the Coming Week

• Q and A

Weekly Interest Rate Movements For the Week Ending 8/15/2019


U.S. Treasury Yields

8/15/19 8/8/19

3mo 1.91% 2.02%

2yr 1.57% 1.61%

5yr 1.49% 1.57%

10yr 1.58% 1.76%

FHLBank Chicago Advance Rates

8/15/19 8/8/19

3mo 2.17% 2.23%

2yr 1.76% 1.81%

5yr 1.70% 1.76%

10yr 2.05% 2.23%

Source: U.S. Treasury, FHLBank Chicago

Federal Reserve Interest Rate Probability For the Week Ending 8/15/2019

There is a 0.00% probability of a rate hike in 2019. Following the rate cut in July, the market implied probability of an additional rate cut of at least 25 bps occurring in September 2019 is 100%. The probability of a third rate cut in December 2019 is 91.88% as of this week.

Federal Home Loan Bank of Chicago | Member owned. Member focused.

Source: Bloomberg

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100% 91.88%

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Aug-19Jul-19Jun-19May-19Apr-19Mar-19Mar-19Feb-19Jan-19

Federal Reserve Interest Rate Probability Probability of a 25 Basis Point Cut

Second Cut: September 2019 Third Cut: December 2019

U.S. Economic Data Releases For the Week Ending 8/15/2019


Consumer Price Index (CPI) July: 0.3% vs. June: 0.1%

• Rose 0.3% in July, in line with expectations. The indexes for gasoline and shelter accounted for the majority of the growth. The gasoline index rose 2.5% while the shelter index increased 0.3%. Energy rose 1.3% while food prices remained unchanged at 0.0%. On a year-over-year basis, CPI is up 1.8%.

Core CPI July: 0.3% vs. June: 0.3%

• Excluding food and energy, the index rose 0.3%. Supporting the increase, shelter prices rose 0.3%, and airline fares increased 2.3%. On a year-over-year basis, core CPI increased 2.2%. Source: Bureau of Labor Statistics



Import Price Index July: 0.2% vs. June: -1.1%

• Increased 0.2% in July, beating expectations of a 0.1% decrease. Rising fuel prices more than offset lower nonfuel prices. Fuel imports increased 1.8% while non-fuel imports fell 0.1%. From one year earlier, prices are down 1.8%.

Export Price Index July: 0.2% vs. June: -0.6%

• Rose 0.2% in July, beating expectations of a 0.1% decrease. The prior month was upwardly revised by 0.1 percentage point to -0.6%. Both agricultural and nonagricultural exports rose by 0.4% and 0.2%, respectively. Year-over-year, the index is down 0.9%.

Source: Bureau of Labor Statistics



Small Business Optimism July: 104.7 vs. June: 103.3

• Rose 1.4 points to 104.7 in July. Seven of the ten components that make up the index increased month-over-month. The share of firms with plans to increase employment grew three percentage points to 21%. The share of firms that believe now is a good time to expand rose two percentage points to 26%.

Business Inventories June: 0.0% vs. May: 0.3%

• Remained flat at 0.0% in June. Inventories at manufacturers were up 0.2%, while inventories at retailers fell 0.3%. Wholesalers’ inventories remained relatively flat. Overall, the index is up 5.2% from one year ago.

Source: National Federation of Independent Business (NFIB), U.S. Census Bureau

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-2.5

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Business Inventories



Retail Sales July: 0.7% vs. June: 0.4%

• Increased 0.7% in July, beating expectations of a 0.3% increase. The increase was supported by sales at non-store (online) retailers and gasoline stations, which increased 2.8% and 1.8% month-over-month.

Retail Sales Control Group July: 1.0% vs. June: 0.7%

• Increased 1.0% in July, beating expectations of a 0.4% increase. This marks the third month that the index has surpassed expectations. In June, the index increased 0.7% compared to expectations of 0.3%. Year-over-year, the index is up 3.7%.

Source: U.S. Census Bureau

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2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019Retail Sales (MoM) Retail Sales (YoY)

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2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Retail Sales "Control" (MoM) Retail Sales "Control" (YoY)



Initial Jobless Claims August 10: 220K vs. August 3: 209K

• Increased by 11K to 220K in the week ending August 10. The previous week was upwardly revised to 211K. The 4-week moving average increased by 1K to 213.75K.

Continuing Claims August 3: 1,726K vs. July 27: 1,684K

• Increased by 42K to 1,726K in the week ending August 3. The prior week was revised higher by 3K to 1,687K. The 4-week moving average increased by 9.25K to 1,697.25K. The insured unemployment rate remained unchanged at 1.2%.

Source: Department of Labor

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2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Initial Claims

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2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Continuing Claims

The Small Business Lending Survey is a quarterly collection of quantitative and qualitative information around credit market conditions for banks lending to small businesses.

The survey includes about 400 domestically chartered commercial banks with 100 – 200 respondents each quarter.

The survey includes data collected around commercial & industrial (C&I) loans. A small business loan is defined as a loan made to a firm with $5M or less in annual gross revenue.

In Q1 2019, small business C&I lending decreased, with the decline driven by a decrease in new small business credit lines. Credit standards remained stable with respondents indicating a tightening of lending terms.

Small Business Lending Survey

Source: Kansas City Federal Reserve


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Small Business Lending Survey C&I Loan Balances



Loan balances include fixed- and variable-rate loans, as well as, outstanding loans under commitment (such as lines of credit). Commercial and industrial loan balances increased 3.94% in Q1 2019, compared to rising 0.26% the prior quarter. Fixed-rate loans and variable-rate commitments make up the largest outstanding amounts of C&I loans.

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Small Business Lending Survey New C&I Loans



New C&I credit lines have fallen since Q4 2018, decreasing 26% quarter-over-quarter. Loan amounts also declined, falling 8% over the same time period.

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Small Business Lending Survey Credit Line Usage



Credit line usage was basically unchanged in Q1 2019. Fewer banks reported a decrease in credit line usage and more respondents reported an increase in usage. Total credit line usage by customers remain mainly unchanged at 41.0%.

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Small Business Lending Survey Reasons for Increasing Credit Line Usage



A change in a borrower’s business revenue was the number one reason for an increase in credit line usage. A change in economic conditions was next, followed by a change in pricing. A change in terms of lending was not rated as “very important” by many respondents in Q1 2019.

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Small Business Lending Survey C&I Loan Demand



C&I loan demand weakened modestly in the first quarter. Overall, about 71% of respondents indicated no change in demand for small business C&I loans. The percent of respondents reporting weaker demand declined from 11.6% in Q4 to 7.5% in Q1, while the percent of respondents reporting stronger demand rose from 14.8% to 21.8% quarter-over-quarter.

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Small Business Lending Survey Banks Tighten Most Credit Terms



As overall credit standards tightened modestly in Q1 2019, components showed tightening among most loan terms and conditions. Premiums charged on loan covenants and the level of interest rate floors showed the most tightening.

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The Federal Reserve’s Senior Loan Officer Survey reports the changes in the standards and terms on, and demand for, banks’ loans to businesses and households over the last three months.

The survey is a collection of data from 74 domestic banks and 22 U.S. branches and agencies of foreign banks.

In Q2 2019, lending standards for commercial and industrial (C&I) loans eased and remained relatively unchanged.

Banks reported unchanged demand in Q2 2019. The survey this quarter included a set of special questions inquiring about the

current level of lending standards relative to a midpoint of the range over which banks’ standards have varied since 2005.

Senior Loan Officer Survey

Source: Federal Reserve Board of Governors


Actual C&I loans grew 3.4% in Q2 2019 from one year ago. This compares to 8.0% annual growth in the first quarter of 2019. Meanwhile, the net percentage of banks reporting strong demand for C&I loans increased from -16.9% in Q1 2019 to -1.4% in Q2 2019.

Senior Loan Officer Survey C&I Demand vs. Actual Loans



Net demand for C&I loans from large and medium businesses increased, while about the same net share of banks reported weakened demand from small firms. A majority of the banks that reported weaker demand indicated that loans for construction and land development decreased, while demand for CRE loan types was relatively unchanged.

Senior Loan Officer Survey C&I Loan Demand



Standards on C&I loans eased from Q1 2019 to Q2 2019. The percentage of banks easing standards for large- and medium-sized businesses increased from -4.2% to -2.9%. Similarly, the percentage of banks tightening standards for small businesses fell from 0.0% to -5.9%.

Senior Loan Officer Survey C&I Loan Standards



The number one reason banks cited for easing loan standards was “more aggressive competition from other banks or nonbank lenders,” with 90.4% of respondents citing this as “somewhat” or “very important.” The dominant reason for tightening standards was a “less favorable or more uncertain economic outlook” and “reduced tolerance for risk.”

Senior Loan Officer Survey Easing C&I Loan Standards



By looking at both the Small Business Lending Survey and the Senior Loan Officer Survey, we can see an overall picture of commercial and industrial lending by banks.

In Q1 2019, small business C&I loan demand declined. Credit standards remained relatively unchanged with respondents indicating a tightening of lending terms.

The Senior Loan Officer Survey reported relatively unchanged loan demand in Q2 2019 for all businesses. Credit standards tightened modestly over the quarter with a less favorable or more uncertain economic outlook as the most cited reason for tightening.

Banks expected standards to tighten, demand to weaken, and credit standards to remain unchanged or stable.

Summary




This and That

Source: American Bankers Association

The American Bankers Association (ABA) reported on the signing of the Family Farmer Relief Act last week. The bill, which would allow more farmers with higher levels of debt to file for Chapter 12 bankruptcy, has pitted farming trade groups against their lenders. The bill would specifically raise the maximum amount of debt a farm can carry into Chapter 12 from $4.3 million to $10 million. In regards to an environment of chronic overproduction, an ongoing international trade war, and extreme weather events, National Farmers Union President Roger Johnson said. “Farm debt is at a record high, and too many operations have been pushed to the brink financially.”

Bankers and bankruptcy attorneys in farm country feel that there could be a spike in bankruptcy filings this winter after this year’s crops have sold off and before planting season in the spring. This could have a big impact on small and midsize banks that do the bulk of lending to farmers. The ABA wrote a letter on July 25 explaining that raising the debt limits on Chapter 12 would lead to tighter credit terms and higher borrowing costs.

The bill passed through the Senate last week and was presented to President Trump on Tuesday, August 13.


Prior to the weekend, economic data will be released on Housing Starts and Consumer Sentiment. Next week economic data will be released on Existing Home Sales and New Home Sales. All eyes will be focused on the FOMC Meeting Minutes to be released on Wednesday.

Economic Data Release Calendar August 2019

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Notes: 1 2

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August 2019Monday Tuesday Wednesday Thursday Friday

Total Vehicle Sales Employment Jobless Claims Consumer Sentiment ISM Manufacturing Index Factory Orders Construction Spending

ISM Non-Manufacturing JOLTS MBA Mortgage Applications Jobless Claims Producer Price Index Final Wholesale Trade

Small Business Optimism MBA Mortgage Applications Jobless Claims Housing StartsConsumer Price Index Import Price Index Philadelphia Fed Outlook Consumer Sentiment

Retail Sales Business Inventories NAHB Housing Market

MBA Mortgage Applications Jobless Claims New Home Sales Existing Home Sales FOMC Meeting Minutes

Durable Goods Orders S&P Case-Shiller HPI MBA Mortgage Applications GDP Personal IncomeChicago Fed Natl Activity FHFA House Price Index Jobless Claims Chicago PMI

Dallas Fed Manufacturing Pending Home Sales Consumer Sentiment


Certain information included in this presentation speaks only as of a particular date or dates included in this presentation. The information in the presentation may have become out of date. The Federal Home Loan Bank of Chicago (FHLBC) does not undertake an obligation, and disclaims any duty, to update any of the information in this presentation. “Mortgage Partnership Finance®”, “MPF®”, “MPF Xtra®”, “Downpayment Plus®”, “DPP®”, “Downpayment Plus Advantage®”, “DPP Advantage®”, and “Community First®” are registered trademarks of the Federal Home Loan Bank of Chicago . The “MPF Mortgage Partnership Finance” logo is a trademark of the Federal Home Loan Bank of Chicago. The data, scenarios and valuations provided to you in this presentation are for information purposes only and are provided as an accommodation and without charge and are not intended for further distribution. The data, scenarios and valuations are estimates only and may not represent the actual or indicative terms at which new (or economically equivalent) transactions could be entered into or the actual or indicative terms at which existing (or economically equivalent) transactions could be prepaid, terminated, liquidated, assigned or unwound. The scenarios and valuations were derived using proprietary pricing models and estimates and assumptions about relevant future market conditions and other matters, all of which are subject to change without notice. The scenarios and valuations were prepared without specific information about your institution’s balance sheet composition, hedging strategies or financial assumptions and plans, any of which may affect the relevance of these valuations to your own analysis. The Federal Home Loan Bank of Chicago makes no representations or warranties about the accuracy or suitability of any information in this presentation, and no representation of non-infringement. This presentation is not intended to constitute legal, accounting, investment or financial advice or the rendering of legal, accounting, consulting, or other professional services of any kind. You should consult with your accountants, counsel, financial representatives, consultants and/or other advisors regarding the extent these scenarios and valuations may be useful to you and with respect to any legal, tax, business and/or financial matters or questions. This presentation may contain forward-looking statements which are based upon the FHLBC’s current expectations and speak only as of the date hereof. These forward-looking statements involve risks and uncertainties including, but not limited to, the risk factors set forth in the FHLBC’s periodic filings with the Securities and Exchange Commission, which are available on its website at www.fhlbc.com

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