Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
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Chart of the Week: Strong U.S. credit growth
Christopher Dembik
Head of Macroeconomic Research
Summary: In today's edition, we focus on the pace of U.S. credit growth and whether or not it indicates an imminent risk of a U.S. recession. To put it simply, credit growth is stabilizing at a very right level which is not normally consistent with a recession. Other credit aggregates we monitor, such as the credit impulse, are oriented north too. It is currently running at 4.5 % of GDP - this is the highest level since 2011.
Click to download this week's full edition of Macro Chartmania composed of more than 100 charts to track the latest macroeconomic and market developments. All the data are collected from Macrobond and updated each week.
A majority of market participants believe a soft landing in the United States is an unlikely scenario. Based on the latest credit data, this is still possible though. In the below chart, we show the evolution of commercial and industrial loans and leases. This is an important category of assets that commercial banks report on their balance sheets. This has been published on a quarterly basis by the U.S. Federal Reserve (Fed) since 1947. The latest data for the third quarter was out a few days ago. Commercial and industrial loans and leases are still growing at a strong pace, running at 17.3 % year-over-year in Q3. The last peak was in Q2 2020 – immediately in the aftermath of the outbreak. Growth was without any historical precedent at 88.3 % year-over-year. But the circumstances were out of the ordinary. At Saxo Bank, we also measure the growth of credit using credit impulse. This is a larger aggregate which measures the flow of new credit issued by the private sector as a percentage of GDP (see the chart in today’s Macro Chartmania). It is heading north at 4.5 % of GDP. Both indicators (commercial and industrial loans and leases and credit impulse) are used to predict a recession. When both are in a contraction, this usually ends up in a recession. As you can see, the current credit growth is not consistent with an imminent recession. We believe that the release of the first estimate of the Q3 U.S. GDP on 27 October will confirm the U.S. economy is rather resilient, despite growing concerns about inflationary pressures (the economist consensus expects GDP growth to reach 2.4 %). In our view, the resilient U.S. economic outlook (especially if we compare with the eurozone) and the continued strong inflow of credit in the economy should give the U.S. Federal Reserve enough room for maneuver to hike interest rates in November and beyond. We believe that the central bank will hike rates by 0.75-point next month. Fed officials could also start debating whether and how to slow the pace of increases after that, but more to take into consideration hidden financial risks (notably on the U.S. bond market) rather due to concerns about an imminent recession.
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