Weekly Market Summary

Extra Credit^*

• Recent data showed that the ISM Services Index jumped 2.9 points to 52.7, returning to a range consistent with solid expansion after having slowed in December. In particular, the employment component of the index, which had unexpectedly plunged in December, rebounded in January and was accompanied by increases in new orders. The improvement in the ISM Services Composite Index mirrors that of the ISM Manufacturing Index, which also strengthened in January and moved to the upper end of the range seen since early 2023, which is consistent with the continued job gains in January. 
• The latest Senior Loan Officer Opinion Survey on Bank Lending Practices showed, on net, banks tightened lending standards for most business and household loans in Q4 2023. However, the net share of banks tightening has fallen considerably after peaking in the aftermath of last spring's regional bank failures. At the same time, banks continue to report weakening demand for most types of loans, though the pace of contraction appears to be slowing across all borrower types. Past episodes showing bank lending standards as tight and demand for loans as low, which we have seen over the past year, have typically been followed by a recessionary period. However, the normalization in the net percentage of banks tightening lending conditions and reporting weaker demand for loans provides more support for a soft landing.
• As long as a recession is avoided, the way in which the Treasury curve steepens does not seem to affect spreads. When looking back at 19 curve uninversions, 12 have been the result of bull steepening, compared to seven on the back of a bear steepening. Although different factors and environments led to these moves, without a recession in the following 12 months, the type of steepening has only had a marginal impact on credit spreads. Among these scenarios, most of the widening in spreads was seen prior to the uninversion, rather than after. There are multiple examples of spreads widening more than 40 basis points in the 12 weeks lead up to the Treasury curve move, but outside of 1980, the average BBB-AAA basis decompressed only six basis points in the 12 weeks following normalization. Spread widening has corresponded more so with instances of bull steepening, compared with the negligible effect of the type of curve steepening when a recession doesn't occur. 
• Bank-loan and high-yield bond default rates, excluding distressed exchanges, finished the month at 1.95% and 2.04%, respectively, down from 2.10% and 2.08% in December. The 25-year historical default rate for loans and high-yield bonds is 3.0% and3.4%, respectively.

Sources: Bloomberg and JP Morgan as of 2/12/24.