### Summary
Investors are looking to put their cash into junk assets as fears of a severe US recession recede, leading to increased demand for high-yield markets and borrowers taking advantage of refinancing and amend-and-extend transactions.
### Facts
- There is an excess demand for high-yield markets due to limited issuance, resulting in borrowers having more flexibility through refinancing and amend-and-extend transactions.
- The amount of high-yield credit due in 2025 has decreased by almost 12% since the start of 2023.
- US GDP growth is expected to increase, leading to Morgan Stanley lowering its base case for US junk and loan spreads.
- Safer companies are holding back from taking advantage of the rally, anticipating lower borrowing costs in the future.
- Risk appetite has softened due to concerns over higher interest rates, leading to a two-speed economy and potential challenges for companies with high levels of leverage.
- The private credit market set a record with the largest loan in its history, and several other notable financial transactions have taken place in the week.
- There have been personnel changes in various financial institutions, including Credit Suisse, Canada's Bank of Nova Scotia, and Santander.
The U.S. economy is forecasted to be growing rapidly, which is causing concern for the Federal Reserve and those hoping for low interest rates.
Late payments on credit card balances are surging, potentially signaling a recession, as delinquencies hit an all-time high among commercial banks outside of the top 100, according to Wells Fargo.
Consumer spending growth is slowing as the economy stabilizes, with consumers prioritizing essential purchases and adjusting their spending habits in response to rising interest rates and financial pressures.
Despite reaching record levels of total credit card debt and household debt, Americans are actually managing their debt better than in the past due to inflation masking the impact on balances and lower debt-to-deposit levels, according to an analysis by WalletHub. However, the rising trajectory of credit card debt and the increasing number of households carrying balances raise concerns, especially considering the high interest rates, which can take more than 17 years to pay off and cost thousands of dollars in interest. Meanwhile, savers have the opportunity to earn higher returns on cash due to higher inflation and interest rates.
US consumer spending is showing resilience and robust growth, although signs of a slowdown are emerging, potentially related to the public's perception of a deteriorating financial situation due to high inflation and rising interest rates, despite the fact that households still have higher deposits compared to pre-pandemic levels.
Canada's biggest bank is warning investors of an economic slowdown as preliminary estimates show a sharp deceleration in GDP growth and weakening consumption and investment, raising the question of whether this slowdown will prevent further rate hikes.
The US economy is expected to slow in the coming months due to the Federal Reserve's efforts to combat inflation, which could lead to softer consumer spending and a decrease in stock market returns. Additionally, the resumption of student loan payments in October and the American consumer's credit card addiction pose further uncertainties for the economy. Meanwhile, Germany's economy is facing a contraction and a prolonged recession, which is a stark contrast to its past economic outperformance.
Gross domestic product (GDP) grew at a rate of 2.1% in the second quarter of 2023, driven by consumer spending, while the Federal Reserve is considering raising interest rates again despite a drop in GDP growth; Americans are increasingly turning to credit cards in a high-interest rate environment, leading to rising credit card debt.
The U.S. is currently experiencing a prolonged high inflation cycle that is causing significant damage to the purchasing power of the currency, and the recent lower inflation rate is misleading as it ignores the accumulated harm; in order to combat this cycle, the Federal Reserve needs to raise interest rates higher than the inflation rate and reverse its bond purchases.
American consumers' worries about access to credit have increased due to higher interest rates and stricter standards at banks, according to a New York Federal Reserve survey.
The Wall Street Journal reports a notable shift in the stance of Federal Reserve officials regarding interest rates, with some officials now seeing risks as more balanced due to easing inflation and a less overheated labor market, which could impact the timing of future rate hikes. In other news, consumer credit growth slows in July, China and Japan reduce holdings of U.S. Treasury securities to record lows, and Russia's annual inflation rate reached 5.2% in August 2023.
Consumer spending in the US has supported the economy despite concerns of a recession, but rising interest rates, the resumption of student loan payments, and dwindling savings are predicted to put pressure on consumers and potentially lead to a shrinking of personal consumption.
The Federal Reserve is expected to hold off on raising interest rates, but consumers are still feeling the impact of previous hikes, with credit card rates topping 20%, mortgage rates above 7%, and auto loan rates exceeding 7%.
The regional banking crisis in the U.S. during March of this year has had lasting effects on the industry and the economy, with tightened credit conditions and a risk of over-correction in interest rates, according to interviews with regional bank executives and economists.
The Federal Reserve is expected to keep interest rates steady as it waits for more data to gauge the impact of previous rate hikes on the US economy, with factors such as inflation, the job market, and rising energy prices adding uncertainty.
The Federal Reserve's decision to hold interest rates and the possibility of rates remaining higher for longer may have triggered a sell-off in the US equities and cryptocurrency markets, with risk assets typically underperforming in a high-interest-rate environment.
Corporate America is not being deterred by the potential for another interest rate hike from the Federal Reserve, as companies like Cisco and General Mills continue to pursue deals and investments, indicating confidence in the economy's resilience and suggesting a potential soft landing in the market.
Despite expectations of higher interest rates causing a spike in unemployment and a recession, the Federal Reserve's rate hikes have managed to slow inflation without dire consequences, thanks to factors such as replenished supplies, changes in the job market, and continued consumer and business spending.
A government shutdown in the US may cause the Federal Reserve to delay an interest rate hike and could impact the recent strength of the dollar, analysts have warned. The shutdown could also lead to a delay in key inflation data, which would affect Fed policy decisions, and may put pressure on consumer spending.
Bank of America CEO Brian Moynihan believes that the Federal Reserve has successfully tamed inflation but warns that factors like the strength of US consumers may lead to higher interest rates; however, Moynihan expects the US to avoid a recession and experience slow GDP growth in the coming quarters.
The current state of the consumer is concerning as wages are not keeping up with inflation, excess savings from the pandemic have been depleted, and increasing levels of credit card debt are making it difficult to maintain spending levels, leading to potential economic headwinds.
The US consumer is showing signs of strain due to rising gas prices, high credit card delinquency rates, and the impending restart of student loan payments, leading to concerns about weaker consumer spending and potential credit trouble for heavily indebted companies.
Rising interest rates, rather than inflation, are now a major concern for the US economy, as the bond market indicates that rates may stay high for an extended period of time, potentially posing significant challenges for the sustainability of government debt.
Bill Ackman warns that the U.S. economy is slowing down due to aggressive rate hikes and high real interest rates, which could lead to a challenging period for investors in the commercial real estate market.
The Federal Reserve's shift towards higher interest rates is causing significant turmoil in financial markets, with major averages falling and Treasury yields reaching their highest levels in 16 years, resulting in increased costs of capital for companies and potential challenges for banks and consumers.
Despite efforts by Federal Reserve Chair Jerome Powell to curb borrowing and spending habits, many American companies, both investment-grade and sub-investment grade, have continued to borrow more money, potentially indicating that interest rates may need to be raised even higher to effectively break the cycle. Increased borrowing has raised concerns about the financial health and stability of businesses, with indicators of companies' ability to make payments deteriorating. The borrowing spree is primarily a North American phenomenon, as European and Asian companies have added far less debt or decreased their borrowing.
US banks face the challenge of an extended period of high interest rates, which will pressure their profitability by increasing deposit costs, deepening bond losses, and making it harder for borrowers to repay loans.
Major U.S. banks reported higher profits due to higher interest rates, but expressed caution about consumer behavior and a slowing economy.
Major U.S. banks reported higher profits due to increased interest rates, although they also noted signs of caution in consumer behavior and a slowing economy.
The Federal Reserve will continue with its 'higher-for-longer' interest rate narrative unless there are signs of a slowdown in the consumer sector.
Higher interest rates have boosted the earnings of big banks like JPMorgan Chase, Citigroup, and Wells Fargo, but an increase in loan write-offs and signs of consumer spending cutbacks indicate that customers are struggling.
The decline in interest rates over the last few decades, which few people consider, has had a profound impact on the financial world, distorting investments, clouding judgment, and now potentially leading to a shakeout as the era of ultra-low borrowing costs comes to an end.
Consumers are showing signs of slowing down their spending, with growth rates dropping and lower-income households depleting their savings, signaling a low growth, low inflation economy, according to Bank of America CEO Brian Moynihan. Despite the Fed's efforts to tackle inflation, economists remain cautious about the future economic uncertainty.
Bank of America's CEO Brian Moynihan predicts that rising interest rates and tightening lending conditions will lead to a slowdown in the U.S. economy, impacting consumer behavior and business decisions.
Rise in long-term Treasury yields may put an end to historic interest rate hikes that were meant to lower inflation, as 10-year Treasury yields approach 5% and 30-year fixed rate mortgages inch towards 8%. This could result in economic pain for American consumers who will face higher car loans, credit card rates, and student debt. However, it could also help bring down prices and lower inflation towards the Federal Reserve's target goal.
The cost of borrowing in the United States is expected to remain high for the foreseeable future, impacting businesses, homeowners, and public officials who may have to postpone big purchases and investments. This credit crunch is also affecting small banks and businesses, such as Liz Field's Cheesecakery, which are struggling to keep up with rising monthly loan payments and are being forced to make difficult financial decisions.
U.S. inflation slowdown is a trend, not a temporary blip, according to Chicago Federal Reserve President Austan Goolsbee, who believes the downward trend will continue and hopes that it does, while also expressing concern over rising oil prices and possible economic disruptions in the Middle East; Mortgage Bankers Association Chief Economist Mike Fratantoni suggests the Fed is likely done with interest rate hikes and may reach its 2% inflation target by early 2025, with a low probability of rate hikes in November or December; Philadelphia Fed Reserve President Patrick Harker believes interest rates can remain untouched if economic conditions continue on their current path, as disinflation is taking shape and the Fed's interest rate policy is filtering into the economy; Mortgage rates have been affected by the federal government's increasing spending and smaller revenues, leading to a heavier impact on mortgage rates this fall.
Canada is experiencing an economic slowdown, with flat growth, rising unemployment, sluggish retail sales, and slowing inflation, leading economists to predict that the Bank of Canada will keep interest rates unchanged at 5% and end its rate increase campaign.
Americans are already feeling the impact of higher bond yields, with mortgage rates topping 8%, personal loan rates at their highest level since 2007, credit card interest rates soaring, and delinquencies on credit cards and personal loans on the rise.
The tightening of financial conditions in the US economy, driven by rising borrowing costs, is starting to have an impact on small and regional banks, potentially leading to a contraction in credit availability and a recession.
The US economy experienced strong growth in the third quarter of 2023, fueled by consumer spending, but there are warning signs of a possible recession due to the impact of rate hikes on auto loans, credit cards, and student debt, as well as higher borrowing costs and the potential for deeper recession if the Federal Reserve continues to raise interest rates.
Small businesses and investors are feeling the impact of the Federal Reserve's interest rate hikes, with the typical mortgage rate surpassing 8% and credit cards charging record-high interest rates, making it difficult for home buyers to enter the real estate market and leading to a slowdown in housing turnover.