A Disconnect between some of Credit indicators and US HY credit spreads – this gap will likely close soon
The NACM “Credit Managers’ Index” or CMI is the often forgotten indicator which, similar to its cousin the PMI (Purchasing Managers’ Index), tracks credit conditions based on a survey of credit managers. Its definitely an indicator to keep an eye on because it can provide critical and timely insights on credit conditions as well as broader economic conditions. It also comes out slightly earlier than the PMIs.
The March data showed a slight down-tick, with the headline combined manufacturing & services index off -0.9pts to 55.6 with the “unfavorable” index only off -0.3pts to 50.6 and the “favorable” index down -1.7pts to 63.2. The manufacturing CMI was down -1pt to 55.2 and the services CMI was down -0.7pts to 56.1. Clearly these are all fairly decent levels, albeit the tick down is something to watch if we get another tick down in April too.
Broadly speaking, the trend has been for solid credit demand, and generally decent credit conditions, and the improving trend seen in the CMI across 2017 was largely consistent with that seen in the ISM PMI. One thing I would point out however has been the so-far disappointing reaction to the tax-cuts. There really hasn’t been a pickup to speak of as yet and the more volatile readings of late (especially the sharp dip down in December) mean that investors should keep the CMI on their radar.
The key takeaways from the latest monthly Credit Managers survey are:
-Despite a slight dip down in March, the CMI remains at solid levels.
-The new credit applications and credit extended sub-indexes continue to point to robust levels of credit demand.
-Yet there remains a disconnect between some of the indicators and US HY credit spreads, and this gap will likely close soon.
1. Favorable vs Unfavorable Index: Both the “favorable” (tracks factors such as sales, credit applications, credit extended) and “unfavorable” (includes filings for bankruptcy, disputes, credit application rejections, accounts placed for collection) ticked down in March, yet on both counts the trend (3-month average shown) remains positive. At 50.6 the “unfavorable index” remains on the good side of 50 (readings below 50 would indicate deterioration). What I would be on watch for in this one is a more persistent or sharp deterioration, which we are not seeing at this stage. Yet the disconnect between the two seen in the chart is interesting and unusual.
2. Credit Demand Indicators: The “New credit applications” and “Amount of credit extended” sub-indices likewise both ticked down on the month, but remain at solid levels – consistent with still robust demand for credit. It certainly stands in contrast to the period of stagnant demand during 2016, which saw a swift turnaround in late 2016 following the US elections. But I would note that so far there appears to be little positive influence on these indicators as a result of the tax cuts or expectations around infrastructure investment.
3. The CMI vs US HY Credit: Finally, bringing it back to markets, there seems to be a decent link between the “Accounts placed for collection” and “Filings for bankruptcies” sub-indexes and US High Yield Credit Spreads. This makes sense intuitively in that credit stress showing up in the CMI would surely be representative of broader stress in credit markets. Curiously, in the last year or so there has been a disconnect between the two, and I think at this stage the CMI indicator has done about as much as it can in terms of ‘catching down’ and that the more likely outcome is that credit spreads ‘catch up’.
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