Week in review
- U.S Fed raises rates 25bps
- Bank of England raises rates 25bps
- Eurozone consumer confidence dips to -19.2
Week ahead
- Australia retail sales
- China PMI manufacturing and non-manufacturing
- Eurozone inflation
Thought of the week
This week’s chart shows the inverted relationship between rising (or tighter) lending standards and the change in real GDP in the U.S. Last week the Fed noted that tighter credit conditions may be akin to higher interest rates, implying that the rise in lending conditions by banks was doing the Fed’s work for them. This is not quite true, by raising rates the Fed is pressuring banks to tighten those standards as they adjust to the prospect of weaker growth. Lending standards have been rising since the Fed’s hiking cycle began a year ago. Credit is like oxygen for the economy. Restrict its flow and economic growth will start to be choked off. The increase in lending standards certainly adds to the risk that the U.S. will suffocate and fall into recession this year. The Fed’s forecast for 0.4% growth for 2023 suggests a meaningful drop-in activity in the coming quarters given the strength so far this year. Another rate hike is not guaranteed, and perhaps not needed, but the Fed’s commitment to bringing inflation down should not be underestimated.
Tighter credit conditions go hand-in-hand with weaker growth
Year-on-year
Source: BEA, Conference Board, Factset, J.P. Morgan Asset Management.
Data reflect most recently available as of 24/03/23.
All returns in local currency unless otherwise stated.
Equity price levels and returns: Levels are prices and returns represent total returns for stated period.
Bond yields and returns: Yields are yield to maturity for government bonds and yield to worst for corporate bonds. All returns represent total returns. AusBond Comp is the AusBond Composite 0+ Yr, AusBond IG is the AusBond Credit 0+ Yr both provided by Bloomberg.
Currencies: All cross rates are against the Australian dollar. An appreciation of the foreign currency against the Australian dollar would be positive and a depreciation of the foreign currency against the Australian dollar would be negative.
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