Is “Triumph” the New “Transitory”?

Rates mixed as the BOJ surprises again. Swap rates and Treasury yields were mixed after the BOJ announced an unscheduled $2 billion bond-purchasing operation to lower rates, reversing some of Friday’s dramatic move. The move to buy bonds suggests that the BOJ will intervene to stem upside volatility in rates as they lift their yield curve control policy. At home, the U.S. Treasury announced an increase of bond issuances to (likely) stretch into next year, spurred by a declining budget deficit and soaring interest rates. The 2-year and 10-year yields stayed nearly flat at 4.88% and 3.96%.

The Fed’s Senior Loan Officer Opinion Survey (SLOOS) reported that banks continued to tighten credit standards and face weak loan demand in Q2. The proportion of banks tightening standards on C&I loans to medium and large businesses rose from 46% in Q1 to 50.8% in Q2. Slightly fewer banks reported weaker C&I demand from medium and large businesses QoQ, from 55.6% to 51.6%, but lending challenges persisted. Overall, bankers expect to further tighten standards on loans of all types due to an unfavorable economic outlook and expected credit quality deterioration. In particular, they remain concerned about CRE loan quality. JPMorgan economist Daniel Silver said in a report that the data, “are not a guarantee of a recession to come, but the tightening evident as of late suggests that the economy should slow.” 

Central bank voters relay optimistic outlook. Austan Goolsbee and Neel Kashkari offered hope that the Fed could pull off a “historic triumph,” signaling that the Fed may be on a “golden path” where an imminent slowdown will stop short of a recession. Though we all want to follow the yellow-brick road, both noted that they are open to future rate hikes, putting a “soft-landing” in further jeopardy. Kashkari commented on Sunday, saying “We don’t want to declare victory… If we need to raise rates further from here, we will do so,” while Goolsbee added “I’m open to reading the data. If there’s a major change of conditions, I haven’t made up my mind for what should happen in September.”