.jpeg)
An important second order effect resulting from the collapse of Silicon Valley Bank (SVB) ...
An important second order effect resulting from the collapse of Silicon Valley Bank (SVB) together with fears of further bank contagion is the degree to which these concerns impact broader economic confidence. There is some concern that recent high frequency economic data releases are pointing to a rapid loss of momentum. The debate about the risk of a recession is once again on the agenda.
The beginning of 2023 saw a strong recovery in US labour market and other key economic lead indicators. This created some anxiety in the Fed that this recovery was too rapid, and this saw a tightening of their reaction function. However, since the SVB collapse economic data has subsequently weakened at a rapid rate resulting in a significant lowering in year end rate forecasts.
Chart 1: After a strong start to 2023 US data has started to rapidly deteriorate.
Chart 2 shows the status of bank lending standard surveys for both large and small firms. Lending standards have spiked and are at levels that have only been exceeded three times this century. Given that US non-financial corporates have accumulated corporate debt at a 7.7% CAGR since 2011 taking the total from c. $6tn to $13tna tightening in lending standards marks an important inflection point in this trend. Weaning corporates off debt accumulation and financial engineering would constitute a major paradigm shift.
Chart 2: Bank lending standards have soared – a paradigm shift?
Despite lending standards tightening and real M2 money supply remaining deeply negative our US composite Financial Conditions Indicator has continued to move from restrictive to neutral. This has been driven partly by declines in both bond yields and real yields. In addition, the dramatic decline in US interest rate expectations has seen US interest rate differentials (versus other G7 economies) narrow. This has contributed to the decline in the dollar as can be seen in Chart 3.
Chart 3: Narrowing US interest rate differentials have contributed to the decline in the dollar
Source: Wilshire, Refinitiv, Factset and Federal Reserve. Data as of April 13, 2023
MM-375799 E0523
Important Information
Wilshire is a global financial services firm providing diverse services to various types of investors and intermediaries. Wilshire’s products, services, investment approach and advice may differ between clients and all of Wilshire’s products and services may not be available to all clients. For more information regarding Wilshire’s services, please see Wilshire’s ADV Part 2 available at www.wilshire.com/ADV.
This material is intended for informational purposes only and should not be construed as legal, accounting, tax, investment, or other professional advice.
This material contains proprietary information of Wilshire. It may not be disclosed, reproduced, or otherwise distributed, in whole or in part, to any other person or entity without prior written permission from Wilshire.
This material represents the current opinion of Wilshire and is subject to change without notice. Wilshire assumes no duty to update any such opinions. Wilshire believes that the information obtained from third party sources contained herein is reliable, but has not undertaken to verify such information. Wilshire gives no representations or warranties as to the accuracy of such information, and accepts no responsibility or liability (including for indirect, consequential or incidental damages) for any error,omission or inaccuracy in such information and for results obtained from its use.
This material may include estimates, projections, assumptions and other "forward-looking statements". Forward-looking statements represent Wilshire's current beliefs and opinions in respect of potentialfuture events. These statements are not guarantees of future performance and undue reliance should not be placed on them. Such forward-looking statements necessarily involve known and unknown risks and uncertainties, which may cause actual events, performance and financial results to differ materially from any projections. Forward-looking statements speak only as of the date on which they are made and are subject to change without notice. Wilshire undertakes no obligation to update or revise any forward-looking statements.
Wilshire Advisors LLC (Wilshire) is an investment advisor registered with the SEC. Wilshire® is a registered service mark. All other trade names, trademarks, and/or service marks are the property of their respective holders.
Copyright © 2023 Wilshire. All rights reserved.
Wilshire has been applying highly tested theories and approaches to our client solutions since 1981.
Our clients rely on us to improve investment outcomes for a better future.
