Tighter Lending = Looser Labor

By Alex Barrow of Macro-Ops

Monday, March 20, 2023 8:50 AM EDT

In this week’s Dirty Dozen [CHART PACK], we look at tightening lending standards, cooling labor markets, falling Fed expectations, recessionary EPS leads, contrarian outflows, and a setup in gold and bitcoin, plus more…

Flow Show summary… tighter bank lending standers = small business credit crunch = higher unemployment.

Balance sheet repair… via Apollo, “A financial accident has happened, and we are going from no landing to a hard landing driven by tighter credit conditions. ..”

“Small banks account for 30% of all loans in the US economy, and .. are likely to now spend several quarters repairing their balance sheets. This likely means much tighter lending standards for firms and households even if the Fed would start cutting rates later this year.” (h/t @carlquintanilla)

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Pricing cuts… The eurodollar market is now pricing in two rate cuts in the second half of this year, after one of its largest weekly repricings in history.

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Between a rock and a hot place… Supercore CPI (core services – housing) picked up again, coming in last month at 0.5% (h/t @CameronDawson). The sticky inflation environment makes it near impossible for Powell to ease up too much. We expect 25bps this week with lots of talk about growing “concerns” over spreading financial risks. Our second half recessionary hard landing scenario is looking more and more likely.

Deep earnings recession… Morgan Stanley’s non-PMI leading earnings indicator (YoY%) is predicting a steep drop in EPS over the next 9-months.

Tightening Fincon, loosening labor… Temporary Help Payrolls (green line) are a dependable lead on unemployment and have been trending up for months. Job postings on Indeed paint a similar picture, showing a material slowdown in postings since the start of the year (h/t @GavinSBaker).

Credit crunch = recession… via BofA “banking crises are followed by tighter lending standards and lower risk appetite… small businesses most negatively affected as most reliant on regional banking lending (tighter credit + lower small business optimism – chart 4); US small businesses create ⅔ jobs in America so lower availability of credit causes a surge in unemployment (chart 5); note banks with under $250bn of assets make up 80% of commercial real estate lending & with v high US office vacancy rates (18.7% in 4Q22)… commercial real estate widely seen as next shoe to drop.”

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Short-term it’s a coin toss… Our base case since the start of 22’ is that we’re in a cyclical bear market. In October of last year, we called for an intermediate bottom and a multi-month counter-trend rally. This has since played out and going forward we have less conviction on the sustainability of this bullish counter-trend rally.

With that said, there continue to be some short-term positives such as our aggregate fund flow indicator falling below its 3yr 20th %tile last week. This often marks intermediate bottoms (red dots), though its signal becomes less useful in a bear market.

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Seasonably good… And we’re also kicking off on one of the strongest periods of seasonality for US equity markets. This is especially true when you account for additional Presidential cycle tailwinds.

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Watch the Russell… The chart below is a monthly showing small caps. They’ve so far failed to regain the midline of their Bollinger Band, which is typical of cyclical bear markets. How this month closes will be a big tell. And it’ll largely be dependent on coming actions and signaling from our Game Masters (Fed).

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Gold nearing a breakout… Gold is within a hair’s breadth of breaking out to new all-time highs. Positioning remains very light and the macro backdrop is extremely supportive. PMs are quite overbought over the short term, so they’re susceptible to some mean reversion. It’ll be interesting to see how they respond to this week’s FOMC.

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Bitcoin bottom… Bitcoin (chart below is a weekly) has completed a large inverted H&S bottom. This could be a signal of more rally left in risk-on assets or a last-ditch speculative response to the recent trouble in the financial sector. I don’t have an opinion there but will play this one purely by the chart.

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