March came in like a lion and went out like an angrier lion. Here in central Minnesota, we still have at least 9 inches of snow cover. Our consecutive days of one inch or more has broken a record. We have had snow coverage since just before Thanksgiving. I doubt anyone here will be sad to see winter pass. The sad part is that we can already count the days to the end of Summer in 2023, and it isn’t that far away.
About a year ago, at one of my senior management presentations, a participant commented that with the level of liquidity they had, he did not foresee raising interest rates on deposits again in his career. Please note, he was much younger than me. As I have stated before, on April 13 of 2022 deposits in the US Banking system peaked. While they were slowly sifting away until October, the last four months through March 15, the dribble has turned into a gusher.
While the level of inflation has caused many consumers to spend down their cushion that had been created by the stimulus payments, that would likely just shift funds from one bank to another. The real issue has been alternative investments. If my deposit account is earning negative interest due to the level of inflation, I am going to be looking at Money Market or like investments to move my hard-earned savings. That is the crux of what is happening. I can make 4 or 5% on my liquid assets outside the bank.
In order to right the ship, bank leaders have to move aggressively right now to attract the deposits back with realistic deposit pricing based on the current market factors. This is not the first time this has occurred, we regularly had periods of disintermediation where deposits moved to higher earning options. Of course, the Bankers are going to complain that their Net Interest Margins will fall, and yes, if they do not get realistic with proper loan pricing, the margins will tighten. Over the past twelve years loan pricing has not matched the true risk embedded in the loan transactions. Bankers will have to begin talking pigs into ham sandwiches on loan pricing as well as setting proper expectations for their clients. Not an easy task when you have trained your borrowers to expect low rates on loans.
Inflation numbers continue to abate, not down to 2% but moderating down with each passing month. Part of the assistance in keeping some prices low has been the strength of the US Dollar. Since last Fall the dollar has been at sustained levels not seen since 2002. In the past week this began to change. The dollar has weakened by about 3% in the past month. This makes any foreign product purchased roughly 3% more expensive. This also impacts the oil market since most transactions are completed in dollars. Those selling oil will typically move prices up to account for any weakness in the dollar. In the end this will make it more difficult to bring inflation down.
Why did the dollar weaken? With the current banking crisis, the anticipation is that the US will be in a recession by the end of the third quarter. The most recent economic numbers in manufacturing and services, as well as the Michigan Economic Sentiment report last week, combined with the banking crisis, all point to a lower economy coming up. This is setting expectations that the interest rate increases are done from the Fed. As Europe and other economies may be healthier and their Central Banks will continue to increase rates, funds will flow to areas of better return. It will not be long until the US may have the lowest interest rates for investments. This will push investors to sell dollars to purchase Euros or other currencies to put in investment accounts overseas. This will weaken the Dollar even further.
On the flip side, if other economies are doing well and our dollar is weak, it makes our manufactured products and other exports cheaper, pushing up demand. This would assist in either limiting the bottom in our economy or assisting in increasing our GDP.
Have a great week.