An important second order effect resulting from the collapse of Silicon Valley Bank (SVB) together with fears of further bank contagion is the degree to which these concerns impact broader economic confidence. There is some concern that recent high frequency economic data releases are pointing to a rapid loss of momentum. The debate about the risk of a recession is once again on the agenda.
A rollercoaster in US economic data releases over the course of 2023
The beginning of 2023 saw a strong recovery in US labour market and other key economic lead indicators. This created some anxiety in the Fed that this recovery was too rapid, and this saw a tightening of their reaction function. However, since the SVB collapse economic data has subsequently weakened at a rapid rate resulting in a significant lowering in year end rate forecasts.
Chart 1: After a strong start to 2023 US data has started to rapidly deteriorate.
A key area of concern is the degree of tightening in lending standards
Chart 2 shows the status of bank lending standard surveys for both large and small firms. Lending standards have spiked and are at levels that have only been exceeded three times this century. Given that US non-financial corporates have accumulated corporate debt at a 7.7% CAGR since 2011 taking the total from c. $6tn to $13tna tightening in lending standards marks an important inflection point in this trend. Weaning corporates off debt accumulation and financial engineering would constitute a major paradigm shift.
Chart 2: Bank lending standards have soared – a paradigm shift?
However, risk appetite remains buoyed by easing financial conditions and a weakening dollar
Despite lending standards tightening and real M2 money supply remaining deeply negative our US composite Financial Conditions Indicator has continued to move from restrictive to neutral. This has been driven partly by declines in both bond yields and real yields. In addition, the dramatic decline in US interest rate expectations has seen US interest rate differentials (versus other G7 economies) narrow. This has contributed to the decline in the dollar as can be seen in Chart 3.
Chart 3: Narrowing US interest rate differentials have contributed to the decline in the dollar
Source: Wilshire, Refinitiv, Factset and Federal Reserve. Data as of April 13, 2023
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