The credit markets are screaming economic weakness. Below are various credit facilities that cannot be ignored.
5 Year Interest Rate Swaps: Simply stated a measure of demand to convert an adjustable rate commercial loan to a fixed rate (nothing to do with home mortgage). The lower the swap rate the less demand to “swap” your adjustable for a fixed rate. In other words lower swap rates means business is less concerned about rising interest rates. Two interesting points to make with this chart.
Notice how preceding the 2001 recession equities turned down at the same time swaps did. Equities were very forward looking peaking about 6 months before the recession.
Notice how the swap rate and SPX diverged into the great recession as equities only peaked two months before economic contraction. A similar pattern has played out further supporting economic contraction in 2011.
Commercial Paper (financial and non financial): A big source of financing working capital and inventory is through the commercial paper markets were short term loans are made based on the credit history of the borrower. Notice how low rates have been. Simply looking at this from a supply and demand side if rates are so low that implies the demand for commercial paper is also low. In other words business is not expanding their operations.
Notice on each chart that compares rates versus GDP. As rates begin to fall economic activity falls quickly as well.
Federal Funds Effective Rate: The Fed targets 0-25 basis points for Federal Funds while the market sets the actual rate, currently 9-10 basis points. A combination of changes to recent FDIC fee assessments, abundance of liquidity resulting from QE and the reality that banks are not lending beyond their deposit base and thus no need for overnight funds to settle.
Eurodollar Deposits: The basis for Libor rates as they are the rates paid on dollar denominated deposits outside the US. In fact rates are currently at 11 year lows (I don’t track beyond that) and half the rate of July 2010. In other words there is no demand for dollar based credit including both consumers and business.
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Credit Markets Signal A Weakening Economy | Macro Story.
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