RESILIENT: The US economy has dodged long standing calls for its slowdown and a recession so far. Consumers still have pandemic savings. Corporate profits been resilient. PMI’s at expansionary 54. But the slowdown is delayed not cancelled. From the lagged impact of 5% interest rates. The smoldering banks scare. And the debt ceiling spending cuts. A double whammy of tighter lending standards and high interest rates at the same time is unprecedented (see below). This could drive market volatility up from current low levels. But comes with a silver lining of lower inflation and early rate cuts. The long duration heavy stock market is more sensitive to this than the macro slowdown.
WHAMMY: The US small and mid-banks scare may be off the front pages but is still smoldering. Deposit outflows to money market funds continue. Demand for the Fed’s new Bank Term Funding Program is still rising. More regulatory oversight is coming. This will have a particular impact on small cap and commercial real estate lending. Whilst the broad tightening of bank credit conditions continues on both sides of the Atlantic. A net 42% of US banks are tightening lending standards, the highest since the 2020 pandemic and 2009 GFC. Whilst a net 27% of Euro area banks are, and loan demand fell there by a net 38%. This comes at the same time as higher US Fed interest rates, without the traditional delay. This is a unique double whammy.
LAGS: The full impact of the unprecedented large and fast 5% hike in the Fed funds rate likely remains to be fully felt. The rate hikes started only 15 months ago in March 2022 and the average ‘long and variable’ lag is traditionally assumed to take 18-24 months. Economic weakness is clearly visible in the recessionary manufacturing sector. Whilst services sector momentum and employment growth is strong but now likely peaked. Recession sensitive market assets, from small caps to transports, have been lagging but not collapsed.
All data, figures & charts are valid as of 23/05/2023