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By

Rank Dawson, CFA, FDP

Long-term Treasury yields made lower highs than prior cycles despite high levels of inflation measures.

Since the start of 2022, the federal funds target range has moved from 0-0.25% to 4.75-5%, and the Consumer Price Index (CPI) year-over-year growth rate made a high of 9.0% in June 2022. While 4.75-5% is a lower absolute level than prior rate hiking cycles, 4.75% is the most that has been added to the...
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Bank lending conditions and borrower demand have reached levels that have historically only existed during prior periods of economic recessions.

The Federal Reserve conducts a quarterly survey with banks to get an update on lending conditions and borrower demand across multiple parts of the economy, referred to as the Senior Loan Officer Opinion Survey (SLOOS).  The fourth quarter survey was released last week and continued the recent trend of tighter conditions and falling demand. There...
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Multiple economic data points decelerated in the fourth quarter and have difficult comparison sets in the first quarter of 2023, increasing the likelihood that the economy continues to decelerate to start 2023.

The last of the major 2022 economic data is being reported in January, including the quarterly GDP report.  It can be helpful to review how the year ended compared to how it started and evaluate the comparison set for the coming quarter.  This can be used as a gauge for how first quarter data is...
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Yield curves are inverted in the U.S. and other major countries.

Historically, curve inversions have been a useful indicator to suggest some unfavorable economic environment likely lies ahead. Today, there are inversions across several curves in the U.S., U.K., Germany, Canada, and elsewhere. The U.S. Treasury 2s10s yield curve has been inverted since July 6, 2022, moving from -4 basis points to -77 basis points as...
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Third quarter earnings highlighted the weakening of corporate profit margins and estimates for future quarters suggest the trend could continue.

The third quarter 2022 earnings season is almost complete and has provided some useful insight into how the corporate sector of the economy is performing and how it is expected to perform in the coming quarters. According to Factset, as of November 11th, the blended y/y earnings growth for S&P 500 companies was 2.2% (with...
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Rising volatility in asset markets can have negative impacts on short-term lending markets which has implications for the broader economy.

A core component of economic growth is liquidity, often measured through the cost and availability of credit. The central starting place for liquidity conditions is the short-term collateralized lending market.  This is often viewed as the safest market since it is short duration and has assets posted to offset any losses or delays in payment....
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Consumer spending levels have slowed, and inflation adjusted spending is already in-line with prior recessionary periods.

We have been noting a deceleration in consumer spending (June 15, 2022; May 25, 2022) and the negative impact this has been having on economic activity (Q1 and Q2 GDP decelerated to start 2022).  Other sources have been noting that consumer spending is still positive and that this could be suggesting that the economy is...
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Consumer debt has been rising as savings and incomes declined, and credit conditions are starting to tighten alongside rising delinquency rates, which can be a sign that the economic cycle has more downside.

We have written about the slowdown in consumer related economic data multiple times, (May 25, 2022; June 15, 2022; April 6, 2022) driven by a deceleration in real earnings (combination of higher consumer prices and the expiration of fiscal support), leading to a decline in savings rates and an acceleration in consumer credit to try...
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Real GDP contracted for the second consecutive quarter in Q2 leading to a debate over whether or not the economy is in a recession. Historical analysis shows that mild recessions can still have a large impact on corporate profitability and the labor market.

The most recent U.S. real GDP release has created a debate over whether or not the U.S. economy is in a recession and the implications this has on future outcomes.  There have been similar periods that were considered shallow or technical recessions that still experienced sizeable negative outcomes for corporate profits which contributed to weaker...
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More market-based signals are pointing towards a slowdown in growth and inflation.

The probability of an economic slowdown is rising, which leads to lower interest rates and a deceleration in inflation. Interest rates and inflation breakevens have been declining since the recent rate hikes. The inversion in the Eurodollar futures curve has deepened over the last few weeks. Commodities have started to decelerate from their prior peaks...
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