Monday Musings: August 9, 2021

Aug 09, 2021

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Public Trust Credit Team
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Friends, bankers, member of the FOMC, lend me your survey responses

Last week, the Fed released the Q2 2021 Senior Loan Officer Survey that broadly reflected the strengthening economy with some clear indications that high-quality borrowers are finding favor unlike those at the lower end of the credit spectrum. The Senior Loan Officer Survey is a quarterly survey the Fed circulates to approximately 100 banks, specifically “up to eighty large domestic banks and twenty four U.S. branches and agencies of foreign banks.” The survey gauges banks appetite for lending and provides more insight for Federal Open Market Committee meetings. This quarter’s survey reported easier standards and greater demand for commercial and industrial loans. Commercial real estate lending standards also eased alongside increased demand. Jumbo and conforming single-family mortgages reportedly experienced modestly less restrictive underwriting and demand increased. However, subprime borrowers’ lending standards are “relatively tighter levels” than the prior year, and loan origination declined. The survey ultimately suggests that the economy is continuing to strengthen and banks’ lending standards remain prudently conservative.

A year later, U.S. corporates roar back with exceptional financial performance in the second quarter

For most companies in the U.S., Q2 of 2020 was the trough when it came to earnings, setting companies up for a strong second quarter in 2021. As of Friday, 92% of companies had finished reporting with earnings up about 79% on average year-over-year according to research from Bank of America. More economically sensitive sectors such as consumer and industrials performed extremely well while sectors that fared well during the pandemic had excellent but more muted performance. Technology remained strong but performed mostly in line with analysts’ expectations aside from a notable miss from Amazon. With a strong second-quarter earnings performance, U.S. companies appear to be well on their way towards recovery and should see strong growth through the rest of the year.

The Delta variant poses the possibility of uneven recoveries across geographies and economies

According to data from Bloomberg, more than 4.45 billion COVID-19 vaccine doses have been given throughout 181 countries with a current rate of approximately 42.5 million doses per day as of August 8, 2021. The U.S. has administered roughly 351 million doses with last week averaging over 706k doses per day. That said, the Delta variant has primarily been responsible for new COVID-19 cases. According to the Centers for Disease Control and Prevention (CDC), the Delta variant is highly contagious (nearly twice as contagious as prior variants) and spreads faster than earlier forms of SARS-CoV-2. The current list of vaccines for emergency use authorization, which includes Pfizer-BioNTech, Moderna, and Johnson & Johnson, has shown effectiveness against the Delta variant, but daily cases are up in the U.S. For example, data provided by BofA Securities reveals that the number of new COVID-19 cases (7-day average) has increased from about 11k to roughly 99k over the past one and a half months.

Additionally, Goldman Sachs published a report this morning regarding the possible economic impact given the significant uptick in the Delta variant and the expectation for recoveries in the U.S. and Europe compared to Asia-Pacific countries. Due to the strong supply of vaccines and eased COVID-19 mandates in the U.S. and Europe, Goldman Sachs does not anticipate a significant economic impact because of the new variant. Roughly half the American population has been fully vaccinated, so most vaccinated Americans can essentially return to their daily lives. Those who have been reluctant to vaccinate do not appear as concerned about modifying their behavior given the uptick in outbreaks. However, countries in the Asia-Pacific look entirely different regarding the Delta variant because of low vaccination rates (compared to the U.S. and Europe) and very formidable COVID-19 goals (in some instances, zero-transmission goals). Given the development of the Delta variant and disparity in vaccination rates (and supply) geographically, the potential for an uneven recovery remains. 

All comments and discussion presented are purely based on opinion and assumptions, not fact. These assumptions may or may not be correct based on foreseen and unforeseen events. The information presented should not be used in making any investment decisions. This material is not a recommendation to buy, sell, implement, or change any securities or investment strategy, function, or process. Any financial and/or investment decision should be made only after considerable research, consideration, and involvement with an experienced professional engaged for the specific purpose. Past performance is not an indication of future performance. Any financial and/or investment decision may incur losses.

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