12/07/23 01:07 PM EST

A Hard Landing Is On The Table

Below is a chart and brief excerpt from today’s Market Situation Report written by Tier 1 Alpha. If you’re interested in learning more about the Hedgeye-Tier 1 Alpha partnership, there’s more information here.

Today's bonus chart shows the historical trend of loans and leases in bank credit from all commercial banks. Based on the provided data, there has been a year-over-year decline of 1.5% in bank lending, marking the first such downturn since 2011. Yet another coincidental recession indicator to discuss with your relatives at the Christmas dinner table. This recent contraction comes after bank lending grew at a rate of 10% per year before the current Fed rate hiking cycle began.

Note that there has yet to be a positive impact on the loan demand, even with expectations of potential Fed cuts, which would usually be anticipated to stimulate borrowing and economic activity. This implies that other factors are influencing demand beyond the anticipation of rate cuts, such as economic uncertainty, shifts in consumer confidence, or structural changes in the credit market. Anticipation of rate cuts is stimulative to the Magnificent 7 but not stimulative to the real economy.

If we focus solely on the bullish signals from Bitcoin, stocks, and stable credit spreads, the market is signaling an all-clear for a soaring trajectory. However, bond and currency markets present a more intricate narrative. Rate cut forecasts for 2024 suggest the Fed and ECB may lower rates by 5 to 6 quarter-points.

With a potential reduction to a 5% upper bound for the fed funds rate, a 3% inflation rate would yield a real interest rate of 2%, which is tight. Yet, reducing it further to 3.75% after five cuts would ease the monetary stance significantly. More cuts could be on the table if the U.S. economy worsens, reflecting market indecision between moderate and significant economic deceleration, in other words, a hard landing. Cutting through the word soup, recessions equal bad for asset prices.

Learn more about the Market Situation Report written by Tier 1 Alpha.