The credit crunch stemming from the fallout of Silicon Valley Bank has begun. Data is now showing signs that bank lending has tightened dramatically, signaling an economic slowdown in the coming months.
In a note on Sunday, Morgan Stanley’s top stock strategist Mike Wilson said that in the last two weeks we have seen the steepest decline in lending on record.
“The data suggest a credit crunch has started,” Wilson said in the note, adding that $1 trillion in deposits has been withdrawn from US banks since the Federal Reserve began raising rates a year ago.
In March, the Federal Reserve Bank of New York’s Survey of Consumer Expectations found that “Perceptions of credit access compared to a year ago deteriorated in March, with the share of households reporting it is harder to obtain credit than one year ago rising and reaching a series high. Respondents were more pessimistic about future credit availability as well, with the share of households expecting it will be harder to obtain credit a year from now also rising.”
Rob Arnott, the founder of Research Affiliates, told Insider last week that a consequence of the Fed hiking interest rates to the point of yield-curve inversion is a credit crunch.
According to a chart from the Fed’s Survey of Loan Officer, 44.8% of US banks are now tightening lending standards.
Lending tightening proceeded the1991, 2001, 2008, and 2020 recessions.
But doesn’t inflation dropping help?
Inflation has been dropping over the last several months but Mike Wilson is warning not to get too excited about the drop in inflation rescuing the economy.
“To those investors cheering the softer-than-expected inflation data last week, we would say be careful what you wish for,” Wilson said, pointing to the March Consumer Price Index report, which showed inflation climbing less than expected. “If/when revenues begin to disappoint, that margin degradation can be much more sudden, and that’s when the market can suddenly get in front of the earnings decline we are forecasting,” he added.
Wilson warned that that major indexes holding steady should not be taken as a sign that everything is fine, but rather an indicator that stocks are at risk of a sudden drop similar to what has been seen in small caps and bank stocks since March.
Future of rate hikes
The Fed is now hinting that rate hikes are close to their peak, at least for now. Major countries like Russia, China, India, Brazil, Saudi Arabia and many others are publicly claiming that they are planning on moving away from the dollar. France has recently announced it as well, which means the whole European Union may be about to drop the dollar as the world reserve currency in the near future. This would likely mean a severe decline in the value of the dollar, potentially rapidly.
No one knows for sure exactly when the ripple effects from the U.S. losing the world reserve currency will hit the U.S. or how bad it’s going to get, but judging on the current inflation rate and the state of the economy, the Fed may be about to pause rate hikes for now.
Last week, Chicago Fed President Austan Goolsbee became the first official to suggest that the Fed may need to hold off on more hikes and called for “prudence and patience”.
“Given how uncertainty abounds about where these financial headwinds are going, I think we need to be cautious,” Goolsbee said at an event hosted by the Economic Club of Chicago. “We should gather further data and be careful about raising rates too aggressively until we see how much work the headwinds are doing for us in getting down inflation.”
New York Fed President John Williams told Yahoo! Finance, that Fed officials’ median forecast in March is projecting one more interest rate hike this year followed by a pause. Williams called this a “reasonable starting place”.
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