That’s the message from Barclays, which advises that last week’s eye-popping 500K initial jobless claims print doesn’t necessarily mean it’s all over:
The sky is not falling
— Jobless claims were disappointing, but incoming data continue to support a rebound in activity in the third quarter.
— Record low mortgage rates are stimulating refinancing activity, although tepid housing starts indicate that home builders remain cautious.
— The Fed’s Senior Loan Officer Opinion Survey points to a slowly improving lending market as banks continue to ease standards and terms gradually.
As we wrote last week (Market Strategy Americas: The FOMC gets worried, August 12, 2010), the second estimate of Q2 GDP is likely to be much softer than the first release of 2.4% q/q (saar); we estimate 1% q/q (saar). The composition of Q2 GDP is hard to square with the backdrop of healthy growth in manufacturing output during the quarter. In particular, soft consumer demand coinciding with strong imports should have indicated a ramping up in inventory accumulation, but this does not appear to have been the case, according to the data. This composition is unlikely to persist and hints at either further revisions to Q2 results or a possible rebound of GDP in the current quarter, via some combination of inventories, stronger consumer demand, or weaker imports.
Incoming data, while mixed, remain supportive of our forecast for a stronger Q3. On one hand, housing continues to search for a bottom after the removal of government stimulus, despite record lows in mortgage rates. Single-family housing starts for July reveal ongoing caution on the part of homebuilders, and although mortgage applications surged 13% in the week ending August 13, refinancings accounted for the entire increase, while applications for purchases fell 3.4% (Figure 1). Refinancings have surged from 52% to 81% of total loans since the expiration of the homebuyer tax credit. Elsewhere, core retail sales were soft in July, falling 0.1%, and trends in jobless claims suggest the pace of layoffs may have increased. On the other hand, the data flow is not uniformly negative: the sky is not falling. Industrial production rose strongly in July, and, as we expected, the auto sector provided a boost, with vehicle output up 9.9%. This was partly related to the fact that General Motors maintained production at 9 of 11 plants it routinely closes for model changeovers during July.
Manufacturing production excluding autos was up a healthy 0.6% m/m, more than reversing the 0.3% decline in June (Figure 2). Overall, the data flow supports the view that business spending on equipment and software remains strong; we continue to expect 2.5% (saar) growth in Q3.
Giving credit where credit is due: Awaiting the rebound in bank lending
The results of the Federal Reserve’s July Senior Loan Officer Opinion Survey are indicative of a slowly improving lending market. The survey, which covers the three months through the end of July, indicates that banks eased standards on C&I loans, continuing the gradual unwinding of the tight standards put in place in recent years. As shown in Figure 3, 9% of net respondents indicated that they loosened standards on C&I loans to large and middle-market firms; this was the third consecutive survey to indicate such a move. Perhaps more noteworthy, a similar amount indicated they loosened standard to small firms, the first such easing since the end of 2006. A significant net fraction of respondents also indicated that they were much more aggressive in the pricing of C&I loans, regardless of firm size. 49% of respondents reduced the spreads of loan rates over the internal cost of funds for loans made to large and middle market firms; 33% did the same for loans to smaller firms (Figure 4). Increased competition from other bank and nonbank lenders was cited as the most important reason behind the easing standards and terms, although a more favourable/less uncertain economic outlook and improvements in industry-specific problems were also important.
The easing of standards and terms on C&I loans took place against a backdrop of unchanged loan demand. Of the 57 respondents in the survey that provided information on demand, 32 reported that loan demand was “about the same,” 13 reported demand as “moderately stronger,” and 12 indicated that demand was “moderately weaker.” This suggests that the more aggressive pricing by banks has not yet had much effect in stimulating loan demand. Nevertheless, this behaviour may indicate that some banks, especially large ones, are willing to increase the amount of C&I loans on their balance sheet by competing for additional market share. As we pointed out recently (“The Re-entry strategy: no clear option,” Market Strategy Americas, July 15, 2010), banks have so far been content to let the growth of Treasury and agency securities on their balance sheets outpace the growth of bank credit. The results of the July Senior Loan Officer Opinion Survey suggest that this preference may be changing. We continue to expect a modest recovery in bank credit to begin this year, which should be supportive of the recovery in activity.
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