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Euphoria returns to the markets, but for how long?

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Against the backdrop of slowing inflation and falling oil prices, euphoria returned to the markets. At last, investors seem convinced that the rate hike cycle is over.


Perhaps this will be the case, and the Fed will heed the latest data and return to dovish rhetoric. The issue is that the longer-term outlook for the US economy remains murky.

Let’s start with the claims that there will be no recession. Based on third-quarter GDP data, it looks that way, but it is worth remembering that monetary policy takes time to work.

For example, manufacturing activity and the labour market have only begun slowing down. Another problem is that business failures and bad debts continue to grow.

If the economy were as healthy as official data suggest, liens on credit cards and auto loans in the United States would not skyrocket, nor would corporate defaults.

Regarding prospects, S&P Global Ratings expects the 12-month default rate for speculative-grade U.S. companies to reach 5% or 86 defaults.

The rate stood at 4.1% this September.

Of course, we’re not talking about the magnitude 2008, but as they say, it’s not over yet.

Another critical issue worth analysing is the rapid decline in real estate values and rising interest rates, which make things even more difficult for borrowers.

Keep in mind that there is a lot of debt outstanding.

Commercial and multifamily mortgage debt in the U.S. totals $331 billion and matures in 2023. The government also hints at debt problems.

On a 12-month rolling 12-month basis, the pace of foreign purchases has slowed to about $300 billion in recent months.

This is down from over $400 billion for much of last year. It is not a catastrophe, but the trend is worrisome. Tracking a volume indicator in this regard is essential.

Going forward, this could translate into further supply and demand shocks that would consecutively disrupt markets in general.

All in all, the end of the rate hike cycle does not solve all problems. Therefore, there is still a possibility that something could break on the way ahead.

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