In the early months of 2016, global markets have demonstrated greater worry about a wide number of issues, from a weak U.S. economy, the narrow leadership of the equity market, geopolitical tensions in several parts of the world, and the timing of the Federal Reserve’s interest rate-tightening cycle.
While all of the worries merit attention, Putnam’s global macro research is focused on one particularly pressing concern: the inextricable link — and negative feedback loop — between commodity prices and credit markets. We have become increasingly worried about the possibility that the balance-sheet impact of lower energy prices, which started out mainly as a problem for below-investment-grade energy companies, now appears capable of infecting the broader credit markets.
Economists refer to the rate of change of credit growth (i.e., acceleration and deceleration) as the credit impulse. It is important as a leading indicator for domestic demand. Every quarter, the Fed polls senior loan officers and tracks the net percentage of them that are easing or tightening the lending standards.
The credit impulse in the United States has now started to roll over after expanding strongly since 2010. The most recent survey highlighted the first tightening of credit conditions for commercial and industrial loans since late 2011. This tightening, combined with the situation for high-yield bonds and levered loans in the energy and materials sectors, has the potential to spread, and to constrain credit conditions for the corporate sector and the economy as a whole.
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