A top Wall Street economist on Wednesday changed his view on the U.S. economic outlook from a recession-averting “no landing” scenario to a “hard landing” that he said means the Federal Reserve has likely delivered its last interest rate hike.
“When the facts change, my view changes. A financial accident has happened, and we are going from no landing to a hard landing driven by tighter credit conditions,” said Torsten Slok, chief economist at Apollo Global Management, in a note.
Slok had previously warned of a no-landing scenario, in which a resilient U.S. economy avoids a recession despite the Federal Reserve’s aggressive series of rate increases since March of last year. That wasn’t a long-term positive for stocks, in Slok’s view, as it meant the Fed would have to be even more aggressive, re-creating the backdrop that led to 2022’s simultaneous rout for bonds and equities.
Slok said small banks account for 30% of all loans in the U.S. economy, and regional and community banks are likely to now spend several quarters repairing their balance sheets (see chart above). “This likely means much tighter lending standards for firms and households even if the Fed would start cutting rates later this year,” he wrote.
“With the regional banks playing a key role in U.S. credit extension, the Fed will not raise interest rates next week, and we have likely seen the peak in both short and long rates during this cycle,” Slok said.
U.S. stocks were sharply lower Wednesday, with the Dow Jones Industrial Average
DJIA,
down around 505 points, or 1.6%, while the S&P 500
SPX,
slumped 1.4%.
MarketWatch Live: Stock indexes move sharply lower as bank worries intensify with Credit Suisse woes
Silicon Valley Bank was closed by California’s bank regulator on Friday, while New York’s Signature Bank was shut down on Sunday, following the earlier closure of Silvergate Capital. Federal regulators late Sunday announced that SVB depositors, including those with deposits above the Federal Deposit Insurance Corp. cap of $250,000, would be made whole. The Fed also announced measures to ensure deposits at other institutions remain safe.
Concerns remain around U.S. regional banks, with shares across the industry plunging. Swiss banking giant Credit Suisse
CS,
CS,
on Wednesday saw its shares fall to a record low, pressuring the broader market and the rest of the European banking sector days after two lenders collapsed in the U.S.