Trouble in Small America
- 17 April 2023 (7 min read)
Key points:
- Small US businesses are “feeling the pinch”, even if they still want to hire
- Beyond its general commitment to a restrictive stance for long, the Fed is probably moving to a more cautious approach and the terminal rate is in sight, while the ECB hawks are very vocal
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.
Disclaimer
This website is published by AXA Investment Managers Australia Ltd (ABN 47 107 346 841 AFSL 273320) (“AXA IM Australia”) and is intended only for professional investors, sophisticated investors and wholesale clients as defined in the Corporations Act 2001 (Cth).
This publication is for informational purposes only and does not constitute investment research or financial analysis relating to transactions in financial instruments, nor does it constitute on the part of AXA Investment Managers or its affiliated companies an offer to buy or sell any investments, products or services, and should not be considered as solicitation or investment, legal or tax advice, a recommendation for an investment strategy or a personalized recommendation to buy or sell securities.
Market commentary on the website has been prepared for general informational purposes by the authors, who are part of AXA Investment Managers. This market commentary reflects the views of the authors, and statements in it may differ from the views of others in AXA Investment Managers.
Due to its simplification, this publication is partial and opinions, estimates and forecasts herein are subjective and subject to change without notice. There is no guarantee forecasts made will come to pass. Data, figures, declarations, analysis, predictions and other information in this publication is provided based on our state of knowledge at the time of creation of this publication. Whilst every care is taken, no representation or warranty (including liability towards third parties), express or implied, is made as to the accuracy, reliability or completeness of the information contained herein. Reliance upon information in this material is at the sole discretion of the recipient. This material does not contain sufficient information to support an investment decision.
All investment involves risk , including the loss of capital. The value of investments and the income from them can fluctuate and investors may not get back the amount originally invested.