Credit where credit is due, or maybe not

We reviewed the unemployment data on Wednesday, and it was largely in line with expectations; the latest GDP report also met expectations. What more can anyone say to add value? The UK economy is limping along at best, with everyone remaining somewhat in limbo until late November. At that point, we will see whether the government has a clear plan to reduce spending or if it continues to implement a series of incremental tax rises that will not plug any gaps, potentially further hindering growth, and hoping the bond market does not pick up on this.

Last Friday’s wobble seems to have done the job of knocking some of the greed out of investor sentiment; indeed, the CNN sentiment survey is now back into fear. The weekly AAII investor survey reports a cooling of retail investor bullish sentiment.

After its trade war wobble last Friday, the US equity market appeared to settle down, helped by a cooling of rhetoric between China and America, and a decent start to the earnings season. Aside from the banks, US chip manufacturers ASML and TSMC reported strong earnings, once again underpinning investors’ faith in tech as an investment. Also, this week, we had Powell almost certainly give the green light to another rate cut this month. Yet the Vix index fear gauge, which one would have expected to drift back towards its recent trading range, remained elevated, suggesting someone somewhere was not convinced the correction, short-lived as it was, was over. Last night, the Vix index rose to 25, up over 20% from its previous close, quite a jump relative to a modestly weaker US equity market.

The government shutdown continues to create a vacuum for economic data. Perhaps this prolonged shutdown, with the US Senate vote failing for the tenth time, is beginning to affect sentiment. This, along with Jamie Dimon’s comments this week when discussing his bank’s results, referred to cockroaches in the US economy after the collapse of First Brands.

These concerns were heightened further, and regional banks took a considerable hit last night after Zions Banc Assurance on Wednesday announced a $50 million charge-off — a measure of unpaid debt written off as a loss — for two business loans extended through its California Bank & Trust division. There are increasing concerns that credit among commercial customers is weakening, and prolonged higher interest rates are impacting the leveraged loan market. This, along with not enough due diligence on what’s being lent to whom, is a concern. History always reminds us that problems in the broader economy always start with problems in the credit markets.