One of the best — but rarest — leading indicators of the economy is the Fed’s Senior Loan Officer Survey, which is released only four times a year. Fortunately, it is due at 2pm today, just in time to see how much the recent banking stress is likely to spill over into broader economic growth.
And the details of this normally sleepy report can actually be quite market-moving. “We believe it is more important for the markets this week than the CPI,” Natalliance’s Andrew Brenner wrote in a note to clients this morning. “It’s forward looking… CPI is backward looking and doesn’t predict the future.”
Brenner and his team anticipate a jump of about 15 points in the deal, leading to a tension of over 60 and leaving us just below the peaks We met in 2008 during the Great Financial Crisis and in 2020 when the pandemic hit. And it’s worth noting that the Fed only surveys about 88 banks, mostly the largest in each district, so that doesn’t even capture the likely worsening conditions at the smaller banks right now.
In other words, credit conditions in the US are now probably one of them the tightest we’ve seen in all but the worst recessions of the past thirty years. Which makes sense — we just had a shock that resulted in three of the four biggest bank failures in US history, and big profitability issues are hanging over the rest of the system right now. Regional bank ETF “KRE,” while higher in recent sessions, is still down 35% year-to-date.
Interestingly, this data is timed to prepare the Fed for its May policy meeting, so Chairman Powell should have had the numbers last week when the committee went up another quarter point. Perhaps this means that the report will surprise us with better than expected results; or maybe, I wonder, this Fed just doesn’t give much credence to the leading economic indicators.
But investors do. “This data has always been an integral part of our cyclical framework, like it is one of the three harbingers of a recession‘ wrote Piper Sandler’s Michael Kantrowitz yesterday of the Loan Officer Survey. The data “has historically helped determine whether a Fed tightening cycle results in a hard or soft landing.”
One insight that Kantrowitz drew from the data: a soft landing may occur when banks ease lending standards into a downturn, which happened in 2019, 1994 and the mid-1980s. But today, the hard landing seems already sealed With the January report, both consumer and business standards have been tightened dramatically.
And with nine different Fed officials scheduled this week, it would be nice to hear why at least one of them relies so much on lagging data like inflation and employment, as opposed to the grim message in leading indicators like its own Loan Officer Survey the fed
See you at 1 p.m.!
Kelly
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