US Credit creaking?
This week we saw the release of the Senior Loan Officer Survey (SLO). This highlights credit conditions in the US banking system and lending conditions in the wider US economy. It measures the changes through the past three months. The recent SLO survey points to an increased level of tightening with a net balance of over 46% of banks tightening lending standards through changing covenants and borrowing terms.
One notable change in this survey is the sharply lower appetite for borrowing. A net balance of 55.6% of lenders saw a decline in loan demand. Whilst this is grim for lending conditions and typically results in slower economic activity, there was a pick-up in demand for residential mortgages. If the US housing market stabilises then this will be a bulwark against a deep recession.
Tighter lending standards typically lead to slower economic growth
Source: Bloomberg, Artorius
The combination of elevated inflation and a credit system that appears to be signalling a recession is at odds with the complacency seen in the equity market.
UK: profits fueling inflation?
With Liverpool blessed with a weekend of sunny weather and successfully hosting Eurovision, no excuse was needed to glam up and drive into the great city.
On the drive in, a petrol station, (Goforecourt) was advertising petrol and diesel for the same price of £1.30. In comparison, a local supermarket (typically the cheapest fuel retail option) was priced at £1.38 for unleaded and £1.47 for diesel.
This got me wondering about the state of ‘rip-off’ Britain. Imagine my delight when the Competition and Markets Authority (CMA) released an interim report this week on the profitability of fuel retailers over the past few years.
Evidence gathered by the CMA indicates that fuel margins have increased across the retail market, but in particular for supermarkets over the past 4 years. As a result of these increasing margins, average 2022 supermarket pump prices appear to be around 5 pence per litre (ppl) more expensive than they would have been had their average percentage margins remained at 2019 levels.
Following the high levels of volatility of 2022, we have seen a stable wholesale price for petrol, and a falling one for diesel since the start of 2023. While petrol retail margins have since fallen to the 5ppl to 10ppl range, diesel retail margins have remained elevated since the start of 2023. As of 27 March 2023, average diesel retail margins are more than 3 times the size of average petrol profit margins.
Average annual supermarket fuel profit margins (pence per litre) 2017-2022
Source: CMA, Artorius
The sharply higher profit margin in fuel retailing is also being seen in other sectors of the economy. Wages may be rising, but in some sectors profits appear to a key driver of inflation.
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