Monday 30 March 2020

US Commercial and Industrial loans signal huge cash crunch and looming recession

As of February Bank Commercial and Industrial loans had fallen to +1.2% YoY. Whenever they have gone negative YoY, late cycle, there has been a recession, often they have lagged the start of the recession by the time they go negative.

Last week Commercial and Industrial loans grew $176bn, or 7.4%. That was companies drawing credit facilities in the face of a cash crunch. 

I had had the view that the slowdown in Q1 would either lead to a market sell off/ recession scare or an actual shallow recession followed by a recovery in H2.

The combination of Corona disruption and the oil patch bust is going to drive a typical recession where corporate margin pressure leads to inventory liquidation, then credit crunch and job losses. Corona and oil were the final catalysts to turn a slow down into a recession. 

But this takes a few months to play out, so while markets are rallying for now on hope and huge liquidity injection and can probably do OK into May or even June, a recession is likely to hit in Q3.

We will see new equity/ HY lows later in the year. Question is what bubbles have been built up in this cycle that are now destined to burst?

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