Hard landing chances increasing as tighter lending threatens growth & jobs - MS

Ellen Zentner, Morgan Stanley’s chief U.S. economist, believes the Fed will decide to increase its benchmark rate by 25 basis points next Wednesday as it continues to fight consistent inflationary pressures and a robust labor market.

“The Fed has little incentive to surprise markets in this volatile environment, and we think it will stand ready to adjust the rates and balance sheet paths should conditions warrant,” Zentner told clients in a note.

Morgan Stanley’s top economist also highlighted comments from the broker’s banks analysts, who see “a meaningful increase in funding costs ahead, which will lead to tighter lending standards, slower loan growth, and wider loan spreads.”

“We were already expecting a meaningful slowdown in growth and job gains over the coming months, and the prospect of substantial tightening in credit conditions raises the risk that a soft landing turns into a harder one,” Zentner added.

Morgan Stanley’s analysis shows that a permanent +10pt tightening in lending standards for C&I loans leads to a 35bp rise in the unemployment rate over the next two years.

“Despite recent hot prints, job gains could slow quickly as a result.”

She urged investors to monitor weekly initial claims for evidence, but warns that it will take time for tighter lending conditions to show up in the macro data.

“Recessions have arrived more than half a year after jobless claims begin a sustained rise,” Zentner concludes.

By Senad Karaahmetovic

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