A Market View From Happy Hour - Credit Tightening Coming By Fall

Those that remember the 2007 - 2009 Great Recession brought on by high risk mortgage lending may remember that two of the biggest investment banks, Bear Stearns and Lehman Bros., collapsed in similar fashion roughly 6 months apart. Since the SVB, Signature, and First Republic Bank collapses, there has been plenty of talk about what happened in March as being the Bear Stearns of 2023 and also what the Lehman Bros. of 2023 will look like. Tomorrow begins the era a year ago when the FED Funds Rate was rising 75 basis points at each FOMC meeting. By now those rate raises are being felt throughout the economy as evidenced by the number of rising defaults and delinquencies.

One such sector that has been previously discussed but is becoming more of an increasing concern is commercial real estate. Regional banks, particularly those in the west, have commercial real estate loans making up over 25% of their assets. Much more than national banks' roughly 7% by comparison. While there are a number of other issues that could arise from continuing raising rates, defaults on commercial real estate loans appear to be the most likely with a slowing economy and depreciation fueling it. If we use the same timeframe as the Bear Stearns to Lehman Bros collapse, we have about 4 months left before a similar event may lead to the same kind of Credit Tightening we had in 2008.

Tomorrow's economic data consists mostly of manufacturing, labor unit costs, and productivity. We'll also get jobless claims that could provide a peek into Friday's May Jobs Report, which will certainly affect the expectations for the FED raising rates. Being the first day of the month, there will also be inflows from pension and retirement contributions that could help lift the market. Aside from these events, the focus is still on the Debt Limit Deal becoming a law. Tonight, the House of Representatives will vote on their version of the bill before it gets sent to the Senate where it currently has a decent chance of passing.

Today's candle is a neutral spinning top that can indicate both a reversal or continuation of trend. Whichever way the market takes it tomorrow, the SPY SPY is getting into the time of year where trading becomes choppy. Bears will be looking for a reentry into the Frequent Sideways Area on the provided chart, but the price may find support at the 20 Day SMA. The only market moving catalysts on the short term horizon are a Debt Limit bill being signed into law and the May Jobs report of Friday, setting up some big moves going into this weekend.

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