The regional banking crisis is far away, but raising your arms and claiming victory too quickly may be frivolous considering the current scheme. Some experts are reluctant to think that there are still no scares on the way between now and the end of the year for two reasons: the rates continue to tighten the screws on the financial system, and the flight of deposits that has occurred to date may still create certain upheavals such as those that occurred in March.
The credit market in the United States always gives clues. If you read the ins and outs of this sector, the US economy appears to be, by some measures, in the midst of another credit crunch. An example of this is that the demand for loans from bank credit surveys in both the United States and the euro zone has fallen the fastest in the last year since the global financial crisis of 2008, or when the dotcom bubble burst. a decade earlier.
However, the US stock market, fueled by the hype of artificial intelligence, continues to rise. How much longer can fundamentals be ignored? That is the question that many Wall Street pundits are asking of late. “Wall Street is celebrating that disinflation is accelerating and that the worst of the upward price spiral may be over,” JP Morgan describes in a recent report distributed to clients.
Will this go on for a long time? Some point in the opposite direction. “This is not forever… Our feeling now is that the pressures that seemed about to explode earlier this year are proving substantially longer,” said Aditya Khowala, portfolio manager and Patrick Graham, investment analyst at Fidelity International. .
The US regional banking crisis this year added to broader financial sector stress, and spring bank managers may be bracing for a period of real stress around liquidity, deposits and credit. A situation that would not arrive until after the summer or, even, after the quarterly closing of September.
The seams are coming undone
US banks have significant funding problems as a result of last year’s deposit run (which led to the regional crisis in March), and Eurozone banks have also seen their funding cut through the short-term loan program ECB term.
James C. Leonard, Chief Financial Officer of one of the largest regional banks in the United States, Fifth Third Bancorp, noted last month that liquidity conditions are going to get tough in the second half of 2023, when the Treasury releases more than 1 $1 trillion in Treasury sales following the June debt ceiling resolution.
“This, together with the 80,000 million dollars of quantitative adjustment (QT) that the Federal Reserve carries out each month, should significantly tighten monetary conditions and leave banks competing hard for the remaining available deposits”, warn the experts of the manager .
Against this backdrop, credit is likely to weaken substantially as higher rates ripple through the economy, and we can see that especially in the US commercial real estate market. “Company bankruptcies have skyrocketed recently, and banks are afraid to throw the good (money) after the bad (loans),” Khowala and Graham comment. Their clients are also noticing and, therefore, the demand for credit has plunged.
The big unknown is, of course, the flexibility and adaptability of households and businesses, demonstrated time and time again since the start of the pandemic. Even if a small rebound in unemployment does start to show, according to these experts, it would be unclear how long it would take for the stress to manifest itself into a full-blown recession.
“However, it seems more evident than ever that the arrival of the problems in the credit market with the consequent economic recession is on the way, and most likely it will be in the next two or three quarters,” they analyze. The data is there, but the results are yet to be seen.
