For me, the month of January was filled with coast-to-coast travel, industry conferences, presentations, meetings and surprise economic announcements. From the Federal Reserve’s announcement of the wind-down of the Bank Term Funding Program to exceptional employment data to conversations with colleagues on “the Street,” the month has been filled with mixed economic signals that are difficult to process. The question in my mind is, are we heading for brighter days, or is this the calm before the storm?
I’ll be the first to admit I didn’t see the bullish employment report coming on Feb. 2. Though maybe I should have, as it was the same robust Groundhog Day report we have been seeing for more than a year. The U.S. economy added more than 353,000 jobs in January, handily beating expectations of 185,000. Even with that, this report was exceptional for two reasons: First, new job additions of less than 200,000 generally result in an increase in the unemployment rate, which was expected to increase to 3.8%. That didn’t happen. Second, December’s employment data was actually revised up by more than 115,000 jobs, the first positive prior month revision since 2022. This reaffirms the exceptional resilience of the U.S. job market—and likely will mean continued tightness in Fed monetary policy.
Contrary to the rosy employment data, large-scale layoffs escalated in January. Citigroup announced a plan to cut 20,000 jobs, Deutsche Bank will cut 3,500, and UPS announced 12,000 cuts after missing quarterly revenue forecasts. In total, job cut announcements totaled just under 100,000 for the month, well ahead of the pace set in early 2021 and 2022. The actual cuts will take several weeks or months to complete, adding headwinds to future employment reports.
To better understand the corporate picture as it relates to these layoffs, I spent some time this week talking with a few hedge fund contacts. Surprisingly, they drew my attention to the thaw of corporate credit since the start of the year, with many large companies able to refinance their balance sheet debt at rates 50 to 100 basis points (0.5% to 1.0%) lower than what had been in place. The loosening of corporate credit is a very bullish indicator, contrary to layoffs, and has the potential to start the IPO and corporate merger engine for the year. Evidence of this can be seen in the current battle for DocuSign.
At the opposite end of the liquidity spectrum remain community banks. To wrap up January, New York Community Bancorp (NYCB) announced it is cutting its dividend payout by 70% to preserve cash and bolster its balance sheet. NYCB was a buyer of several assets from failed Signature Bank in late 2023. It’s difficult to know if the desire to stockpile cash is driven by potential expected losses related to that portfolio, or simply prudent risk management to combat economic headwinds that may develop in the future. Regardless, the company’s share price dropped more than 40% on that day and pulled down the value of most regional banks, especially those with exposure to real estate.
NYCB Stock Price, 2/8/23 to 2/8/24
Source: Yahoo Finance
The Bank Term Funding Program (BTFP) was created in the aftermath of the regional banking crisis in March 2023 to add stability to the banking sector. The program had a one-year lifespan and gave reassurance to market participants that there was plenty of liquidity in the system. However, even with the year-end drop in 10-year U.S. Treasury yields, lenders are continuing to tap BTFP. It currently has a balance of more than $165 billion, near its peak of $167 billion at the end of January. Because of the overwhelming adoption, many market participants, including yours truly, assumed the Fed would extend the program. On Jan. 24, I was proven wrong when the Fed announced the BTFP would cease making new loans after March 11. This means that by March 2025, $165 billion in federal loans will need to be repaid, potentially removing $165 billion of liquidity from the banking system and increasing the potential for another bank failure.
Bank Term Funding Program Assets, 3/2023-Present
Source: Federal Reserve Bank of St. Louis
Exceptional employment data, corporate layoffs, improving liquidity, weak bank balance sheets and the end of a Federal Reserve safety net program all point to one thing: an uncertain future. The system is filled with mixed signals, but that shouldn’t stop progress. It’s always a good time to invest, but we must proceed with caution, and make sure we’re prepared for a rainy day.