Here you’ll find:

Macro: Delincuency Rates and Charge-Offs

A deep dive into consumer lending.Why we use it as a proxy for the state of the economy

1 An analysis of the sector’s loan portfolio—both large and small banks

2 A breakdown of each to assess the quality of these loans

3 Why consumer loan rates have surged, both for credit cards and auto loans

4 How this impacts the banking industry—and who gets hit

Intermarket

We turn to the interest rate futures market to quantify what changed after a disastrous Non-Farm Payroll report.

Technical Analysis

A quick scan of the financial sector.In the upcoming episodes, we’ll go through the health of bank loan portfolios—credit type by credit type. A deeper and more robust technical analysis will emerge—or not—as we dive into other types of credit: Real Estate, CRE, C&I, etc. Too soon to tell just know

Delincuency Rates: Consumer Credit, a closer look

An economy built on credit is inherently exposed to risk. Just like any leveraged company, taking on debt means taking on risk .

This decision opens up a spectrum of possible outcomes. On one end of the spectrum, we find accelerated growth, higher margins, and increased production volume. On the other, personal or corporate insolvency.

The outcome generally depends on the relationship between cash flow, existing liquidity, the speed of growth (interest rates), and the size of the debt. This rule, dictated by the capital structure of any economic agent, doesn’t apply in the same way to countries. Ultimately, their ability to borrow or simply print money exempts them from traditional bankruptcy. Still, they face a similar range of outcomes—just in different forms.

On the positive side, this might mean faster growth in GDP—nominal, real, and per capita. On the other extreme, inflation and currency devaluation emerge, along with other less tangible consequences. Once that breaking point is reached, inflation and currency loss begin to erode the very gains that private agents in the economy may have achieved.

This is why individuals, companies, or countries that are excessively indebted become highly vulnerable. Even small shifts in liquidity, cash flow, or borrowing costs—or any internal or external shock—can push them toward either end of the spectrum.

Analyzing an economy simply means aggregating the economic agents that make it up. Given that consumption accounts for 70% of GDP, a good proxy for gauging the health of the economy is to examine the consumer credit portfolio—how it’s structured, the forms it takes, and the types of lenders involved.

Delincuency rates: Loans via Credit Cards

Many of you have probably seen this chart that’s been circulating on X for a while now.

The delinquency rate on these types of credit—among small banks—is, in historical terms, above GFC levels.

Before going any further, it’s worth taking a look at the different delinquency levels used to classify a loan.

Charge-Off Loans at Small Banks

They may look like the same chart, but they’re not. The first one captures delinquency across its various stages, while the second one shows the portion that has been formally written off as a loss. The takeaway is straightforward: once a loan becomes delinquent, it almost entirely ends up as a charge-off.

Consumer Credit: Loans and Large Banks

Looking at the chart, delinquency is rising—but from a historical perspective, it doesn’t seem particularly severe, relatively speaking.

Consumer Loans Big Banks: Analyzing the Portfolio of Large Banks

30 Days Past Due

60 Days Past Due – Notice how the charts are virtually identical.

90 Days Past Due – A carbon copy of the previous ones

The most sobering takeaway from analyzing the different stages of delinquency is realizing that no one gets out. Once loans fall into these buckets, they’re essentially losses. Looking at the charts, one could record them as write-offs on the spot—but of course, banks will stretch the accounting timeline.

Consumer Loans: The Percentage of Accounts Making Only the Minimum Payment

Anyone with a bit of common sense knows that making only the minimum payment on a credit card is a one-way ticket to hell. The penalties and compounding interest that come with it create a near-irrecoverable situation.

Charge-Offs and Consumer Loans: The First Real Consequence

The rise in credit card loan interest rates is the first consequence of the current situation—but it also makes the challenges ahead even worse. In economics, this situation is known as a spiraling effect.

Naturally, this has consequences for aggregate consumption that go far beyond a 25 or 50 basis point cut in the policy rate. Historically, it has already surpassed the last three recessions: the Dot-com bust, the GFC, and Covid

Delincuency and Charge-Offs at Large Banks

Further more, accounting in these cases turns into a slow-moving turtle.

Delincuency rates on Consumer Loans: Interest Rate on New Auto Loans

We see the same dynamic in 48-month new auto loans. Rising delinquency pushes rates higher, making it even harder for creditworthy consumers to purchase a new car. There’s no need to repeat the analysis—these cases are simply analogous.

Consumer Loans: The magnitude of the problem and the speed at which it’s growing

Consumer Loans: Zooming In

This chart focuses on the short-term trend in rising delinquency rates across different types of consumer loans.

Consumer Loans: Conclusions and Key Data

• Delinquency in consumer loans is affecting all types of banks.

• This eliminates any differentiated behavior between large and small institutions, despite disparities in staffing and technological capabilities.

• The trend reflects the underlying condition of the American consumer and will inevitably impact both aggregate consumption and bank earnings.

• These effects are not limited to borrowers already in default—the rise in delinquencies has pushed consumer lending rates to historic highs, directly affecting the next wave of borrowers.What economists refer to as economic spiraling.

The Consumer Lending Industry: A Brief Overview to Understand the Bigger Picture

• Only six big banks hold about 50% of all consumer loans in the U.S. These loans represent roughly 15%–16% of their total loan portfolios.

• Small/community banks (thousands of them combined) hold around 10% or less.

• Big banks dominate in credit card issuance and unsecured lending.

Intermarket: 

Probability of a Rate Cut at the Next Meeting

We’ve talked about this before—the emergence of a new macro narrative in the market.

Today, it might seem like that tension has faded. The S&P 500 hitting new all-time highs week after week tends to give that impression.

But the stock market is not the economy. An 80% chance of a rate cut speaks directly to this disconnect.

The labor data reported on Friday—and especially the backward revisions—catalyzed this shift, which had already been building, as we discussed in the previous article.

Technical Analysis 

Sp500 and the Financial Sector

Why should the financial sector be this correlated with the S&P 500, which—as we all know—is led by tech?

This ETF is Financials -3x. It’s been drawing attention for a while—there’s movement.

Since April 25, the On-Balance Volume shows an increase in position closing. However, starting in June, even with continued position unwinding, the price stopped falling.

Below, we can see that although the number of closing positions remains deeply negative, it’s starting to rise.

There are buyers stepping into an asset that still shows strong outflows.

What we can conclude is that those entering are larger in volume—because price has stopped declining.

Well, that’s all for today. The technical setups we’re studying are in the next blog article. For the 10,000th time, this is what we’re seeing and sharing for marketing purposes. THESE ARE NOT TRADING RECOMMENDATIONS.

You can find us at intermarketflow.com and on X @intermarketflow. You can subscribe here for a 4 week free trail

See you soon, 

Martin