Markets Begin to Reveal Impact of Credit SqueezeMarketsBegintoRevealImpactofCreditSqueeze

Some of the world’s top central bankers hinted that further interest rate hikes will be needed to reestablish price stability, as they spoke at a conference on Wednesday of resilience in the global economy, tight labor markets, and the slow pace at which inflation has receded. The messages delivered at the summit in Portugal reaffirmed that rates are likely on a higher-for-longer path, creating tougher borrowing conditions for consumers and businesses. The Federal Reserve’s latest survey of senior loan officers found that 46% of US banks tightened lending standards in the first three months of 2023 for a key category of business loans. Credit is also tightening in Europe, reaching levels not seen in a decade. Central banks will be watching for signs that the lending retreat is intensifying in the wake of recent banking stress, especially with underlying inflation proving to be stickier than policymakers may have bargained for when they first began raising rates. Declines in credit availability can occur with a lag after a period of tumult for the banking sector, Fed Chair Jay Powell told conference attendees.

While it likely portends weaker economic activity, the credit squeeze is also driving higher returns in some corners of the markets. Whether in private credit, real estate or the secondaries market, yields are increasing while some assets are trading at substantial discounts. The newest edition of PGIM’s OUTFront series examines the impact of the credit squeeze across asset classes, illustrating how tighter lending is creating a buyer’s market for savvy, specialist investors.