by Mish

Odds of at least one hike hit 69.2% today, up from 65.1% yesterday. Is something on the Fed’s mind?

Fed Officials Concerned by Rising Corporate Leverage

The Wall Street Journal reports Fed Officials Concerned by Rising Corporate Leverage

According to the minutes from the late September policy meeting, released Wednesday, some members of the Federal Open Market Committee worried that some corporations are using ultralow rates to do more than their usual borrowing.
“A few participants expressed concern that the protracted period of very low interest rates might be encouraging excessive borrowing and increased leverage in the nonfinancial corporate sector,” the minutes say.
Leverage carried by companies rated investment grade and below investment grade has hit record levels, far exceeding the highs reached around the time of the financial crisis, according to statistics from Moody’s Investors Service.
Median debt at junk-rated companies is five times earnings before interest, taxes, depreciation and amortization, or Ebitda, according to Moody’s data. That compares with 4.2 times in 2008. The debt ratio for investment-grade companies is 2.6 times Ebitda, compared with 2.2 times in 2009, Moody’s data show.
Leverage can amplify gains as strategies perform well on the way up but magnify losses on the way down. In the last crisis, investors were forced to sell securities to cover losses and companies chose to forgo needed expenditures to cover interest payments.

Record Borrowing Surge

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Falling GDP Estimates

  • Atlanta Fed GDPNow: 1.9% -Down from peak of 3.8%
  • Markit 3rd Quarter Estimate: 1.0%
  • FRBNY Nowcast 3rd Quarter: 2.3% – Down from peak of 2.7%
  • FRBNY Nowcast 4rd Quarter: 1.6% – Down from peak of 2.1%


Too Late to Worry

By the time the Fed starts worrying about something, it’s far too late. The damage has already been done.

The Fed could have and should have been hiking years ago (assuming there was a Fed).

Instead, it appears the Fed just may be hiking right as recession hits, or potentially after one has already started. At best, the economy is merely weakening from an already borderline state.

Related Economic Reports

Finally, please take a look at what I have been doing with Real Gross Domestic Income (RGDI) and Real Gross Private Domestic Investment (RGPDI): Real GDI, GPDI Recession Indicators Take II.

Those indicators have a huge recession warning flashing right now.

Mike “Mish” Shedlock

Consumer Spending Flat, PCE Inflation Weakest Showing In 16 Years, Rate Hike Odds Rising

The market is increasingly convinced the Fed will hike in June, even as the economic data sinks.

Rate Hike Odds 99 Percent for June: Then What? Fed Hike Cycle Over?

CME Fedwatch places a 99.6% possibility of a quarter point rate hike on June 14.

Treasury Yields and Rate Hike Odds Sink: Investigating the Yield Curve

The futures market is starting to question the June rate hike thesis. For its part, the bond market is behaving as if the Fed is hiking the economy into a recession. Here are some pictures.

Too Late to Worry: Fed Way Late to Rate Hike Party

Golden Opportunity to Hike in 2014. The Fed had a golden opportunity to hike in 2014.

Kansas City Fed says Rate Hikes “Necessary” as Weakness is “Transient”: June Rate Hike Odds Sink

Esther George, president and chief executive officer of the Kansas City Fed says Continuing With Rate Rises Is ‘Necessary’.

December Rate Hike Odds Drop to 35.9%, Rate Cut Odds 2.6%: No Hike Until June 2018?

For the first time in a long time, CME Fedwatch shows the odds of a rate cut in December rose considerably above zero. Considerable means 2.6%.

Fed Like a “Cowardly Scarecrow” as Corporate Debt Bubble Expands

Thanks to massive stimulus that the Fed can never seem to unwind despite promising to do so for years, the Corporate Bond Deluge Rolls and Leverage Soars to New Heights.

Interesting Rate Hike Odds: March favors Hikes, December Favors Cuts

Fed fund futures show a hike in March is more likely than a cut. In December, the opposite is true.

Rate Hike Cycles vs. the US Dollar: Rate Hikes Bad for Gold?

Here are two different looks at Fed rate hikes since Volcker. The charts are the same, but one presentation is a lot funnier than the other.