We have updated our estimates of how much excess savings households have left using the Fed’s methodology, and the conclusion is that consumers are almost out of pandemic savings, see chart below.
IG and HY issuance are higher in September, and this is a technical headwind to credit markets over the coming weeks, see charts below.
Markets think the inflation problem has been solved. But that is the wrong conclusion.
The chart below shows that supercore inflation, which is the Fed’s preferred measure of inflation because it excludes housing, is sticky at 4.5% and not showing any signs of moving down to the Fed’s 2% inflation target. In fact, supercore inflation increased in July because of strong inflation in financial services, transportation, food services, amusement parks, and sports.
The bottom line is that inflation is still a problem, and equity markets, credit markets, and rates markets are underestimating how much additional slowing is still needed in the service sector to get inflation under control.
Since the Fed started raising rates in March 2022, deposits in the banking sector have declined by $862 billion, see the first chart.
Over the same period, almost the same amount, $896 billion, has gone into money market accounts, see the second chart.
Our banking sector chart book is available here. It shows that credit growth continues to slow, and bank lending conditions continue to tighten, see the third, fourth, and fifth charts.
