Back
23 Mar 2016
US: Mixed signals from the FED to the corporate sector - Wells Fargo
Analysts from Wells Fargo, explained in the weekly interest rate report that despite the softer macroeconomic backdrop, corporations look set to add leverage as the credit cycle matures.
Key Quotes:
“In short, FOMC officials have signaled that they expect a generally softer economic backdrop this year and, as a result, expect a relatively shallower path for short-term interest rates. We now project just two 25 bps rate increases this year, down from our previous forecast for three hikes."
“A cursory analysis suggests the shallower path for the fed funds rate is a boon for corporations as it will keep a lid on their financing costs. However, officials’ reduction in their growth and inflation forecasts imply softer nominal sales growth, which could translate into further downward pressure on the already anemic pace of corporate profits growth.”
“If the path of the fed funds rate is as “gradual” as FOMC officials currently expect, corporations should be able to weather the storm, but a faster-than-expected pace of tightening is a key risk.”
“Moreover, the headwinds that have weighed on profits growth recently— rising labor costs, dollar strength and firms’ lack of pricing power—are unlikely to abate in the coming quarters. Thus, the financing gap is likely to remain in place in the near term, which should underpin loan growth and corporate bond issuance but also put upward pressure on corporate leverage and yield spreads as the credit cycle continues to mature.”
Key Quotes:
“In short, FOMC officials have signaled that they expect a generally softer economic backdrop this year and, as a result, expect a relatively shallower path for short-term interest rates. We now project just two 25 bps rate increases this year, down from our previous forecast for three hikes."
“A cursory analysis suggests the shallower path for the fed funds rate is a boon for corporations as it will keep a lid on their financing costs. However, officials’ reduction in their growth and inflation forecasts imply softer nominal sales growth, which could translate into further downward pressure on the already anemic pace of corporate profits growth.”
“If the path of the fed funds rate is as “gradual” as FOMC officials currently expect, corporations should be able to weather the storm, but a faster-than-expected pace of tightening is a key risk.”
“Moreover, the headwinds that have weighed on profits growth recently— rising labor costs, dollar strength and firms’ lack of pricing power—are unlikely to abate in the coming quarters. Thus, the financing gap is likely to remain in place in the near term, which should underpin loan growth and corporate bond issuance but also put upward pressure on corporate leverage and yield spreads as the credit cycle continues to mature.”