Des problèmes dans la petite Amérique

The IMF lowered its forecasts for the world economy in 2023 and 2024 and the consensus among economists – which we share – is that recession risks have notably risen given the pressure on bank lending, but the equity market still looks remarkably resilient. There is however a strong compositional effect. In the US the equity market is supported by the strong performance of the biggest names, with a particular concentration in Tech. Further down the “belly” of the equity index, the deterioration in valuations has been significant. This size effect can also be seen in economic confidence indicators. The NFIB small firms survey has moved in below-trend territory earlier and more deeply than the better-known, “generalist” ISM surveys. This is not a habitual feature of US cyclical downturns, and we are tempted to ascribe the current size effect to the better capacity of large companies to deal with the inflation shock. Looking ahead, small businesses are going to be particularly sensitive to the tightening in lending standards which we think is going to be a lasting consequence of the banking turmoil.

“Small America” is thus already feeling the pinch. Yet, the resilience of job creation is also visible in small businesses, with the “hiring plans” component of the NFIB survey still above trend. This adds to the sense that the labour market will be the “last shoe to drop”, with an even longer lag than usual, postponing inflation landing and keeping the Fed in a “restrictive mood” for longer than the market is currently pricing, even if the terminal rate is now in sight.

At the ECB, the hawks have been very vocal lately, pushing for the continuation of “jumbo hikes” as they are frustrated by the continuing acceleration of core inflation. Our expectation is that the coming data flow - in particular the Bank Lending Survey and actual credit origination for March - will show that enough of the monetary tightening has already moved the dial to keep the May hike at 25 bps, but the general mood in Frankfurt looks uncompromising.