Something’s Gotta Give

‍

Will Private Credit Firms Force Banks to Get Sloppy?

‍

Soundbite: Loan demand improved last quarter. According to banks surveyed by the Federal Reserve, Commercial and Industrial (C&I) loan standards have eased for larger firms; however, banks remain conservative in their loan underwriting overall. However, loan departments became more risk-seeking by dropping loan pricing closer to banks’ cost of funds. We believe banks fear more loan write-offs in the aftermath of Tricolor and First Brands. All else being equal, headline-making bank losses tend to make lending more conservative. Normally, that results in tougher loan standards and wider spreads to compensate for the increased risk. If private credit firms view this as an opportunity to make further inroads against commercial banks and offer more aggressive loan terms, it could prompt the banks to abandon prudence in favor of fee income. If private credit firms intensify their competition, markets may need to brace themselves for a classic credit bubble in 2026.

Could commercial banks add to future loan losses if they decide not to tighten lending standards and try to attract more business? Reduced economic visibility and recent loan losses are headwinds for loan officers, but lenders have a history of abandoning sensible due diligence to avoid losing market share.

Loan department managers listed the economic outlook as the primary factor deterring clients. However, the second biggest drain on demand came from “other nonbank credit sources.” Therefore, the option to borrow from non-depository financial institutions (private credit) continues to lure customers away from their traditional lending sources, a fact that has not escaped commercial bank lending departments.

Private credit firms poaching traditional bank clients are why private equity and private credit firms are no longer isolated entities. Commercial banks decided to offer credit to these nonbank lenders to resuscitate declining fee income. By doing so, it created potential systemic risk because banks are now vulnerable to private credit portfolio exposures. If more loans begin to sour, adding to the worry that default risk may be getting out of control, the probability of a systemic risk event increases. We will grow concerned if banks become more aggressive underwriters in Q4 2025 and 2026.

We noted that for the first time since Q1 2022, banks reduced premiums on riskier commercial and industrial (C&I) loans to large and medium-sized firms during Q3. Therefore, as news of loan write-offs surfaced, banks eased loan covenant restrictions. Banks also increased the maximum size of credit lines while decreasing the fees on such lines.

Since the publication of the latest SLOOS report, loans to nondepository financial institutions continued to increase in October, and C&I loans fell slightly. Net Charge Offs (NCOs) rose steadily since 2022 but have plateaued this year. If loan portfolios continue to expand in the face of a renewed uptick in loan losses, conditions are set for a surprise from the banks that will hit all risk assets. For now, we watch.

‍

Washed Out Sentiment Vs. Ominous Sell Signal

‍

Soundbite: A technical indicator with a strong record of predicting tops triggered at the end of October. When the broad indices hit record highs as the month drew to a close, 40% of S&P 500 and Nasdaq constituents were negative on the year. As we have mentioned, narrow breadth at all-time highs can persist, but it makes sustained upward progress more difficult. Against this sell signal, we are seeing fear measures such as the VIX and CNN’s Fear & Greed Index at levels that have coincided with local bottoms. The next bounce will tell us volumes: it can either clear the path to a new peak or set up a better location from which to liquidate holdings.

The sell triggers have frivolous names, such as the Hindenburg Omen and the Nasdaq Titanic Signal, but they are serious indicators. The core logic behind their construction is that a stock market index can reverse its trend from its highs if, at the same time, the number of stocks in that index making new 52-week lows exceeds the number making new 52-week highs. This situation can happen at all-time highs when a narrow selection of market leaders is exploding on the upside, pushing market-capitalization-weighted indices higher, yet masking an overall malaise.

However, we have some signs of a selling climax. As the S&P 500 fell 4% from its October high to last Friday’s lows (before reversing one-third of the entire move Friday afternoon), we observed two bullish developments. Friday morning, the daily VIX chart approached its upper Bollinger Band and reversed hard hours later, and CNN’s Fear & Greed Index dropped to pessimistic levels often seen at or near lows.

Therefore, we have a divergent path: a reliable signal that has a record of identifying stock weakness over the next quarter, colliding with oversold fear and positioning. The likely result is a move higher this week, and then we need to take out a magnifying glass to determine whether it is merely a dead cat bounce leading to further losses, or what might be a final top into Thanksgiving.

‍

Challenger Report: May Need to Pull the Goalie

‍

Soundbite: The Challenger Report is known for timely layoff announcements. However, layoffs are only part of the equation for the labor market, because the rate of hiring drives the unemployment rate. Certainly, the layoff news was unwelcome: U.S. employers announced 150,000 October layoffs, almost triple September’s, and the highest reading for any October in over 20 years. However, we became more concerned after reviewing Hiring Plans. Through October, Challenger posted a 35% drop in planned hires relative to last year and the lowest monthly average since 2011. Specifically, for the seasonal holiday hiring window, 2025 ranks as the worst year since records began in 2012. Barring a stick save, such paltry holiday hiring sends a bleak message about the consumer over the holidays.

Low retailer hiring over the last two months is not surprising after looking at the University of Michigan’s Consumer Sentiment survey. Both readings for their Current Economic Conditions Index and Consumer Expectations were among the most pessimistic going back over sixty years.

As contrarians, we view such washed-out pessimism as ultimately positive, but in the short term, we can understand retailer caution.

The trouble with the lack of hiring this year, especially during the holiday season, is that it sets a weak backdrop for the troublingly high October layoffs. If layoffs continue at an elevated pace, it is difficult to foresee strong consumer demand that would help those recently laid off get rehired.

Over the past decade, seasonal hiring has ranged from 575,000 to 975,000; however, this year’s hiring is a new low, making 2025 a clear outlier. October did see a snapback, but the outlook remains problematic. Target normally hires 100,000 seasonal workers, and they have only reported 4,200. UPS normally hires 125,000, but so far, none have been announced for 2025, and Indeed.com lists fewer than 4,000 seasonal jobs offered by the company. One can hope that November shows surprising strength, although it is typically one of the weakest months for hires.

Perhaps investors find hope that poor sales reports might show up before the FOMC meets December 9-10, prompting them to cut rates and boost stocks. However, in October, employers’ number one reason for layoffs was cost-cutting, because they face rising input costs due to tariff-related supply chain issues. With negligible job creation, consumers will be retrenching , potentially leading to decreased company forward guidance. Therefore, we wonder how much a 25-basis point cut that is already two-thirds priced into the market will help if it is done to prevent a recession.

‍

What to Look for This Week

(All times E.S.T.)

‍

1. Tuesday, November 11, at 6:00 a.m. October National Federation of Independent Business Economic Trends Survey. The Jobs Report from the NFIB was released on October 31, but the full report is released Tuesday. The Jobs Report found 35 percent of owners reported job openings they could not fill in the current period, up one point from September’s lowest reading since January 2021. Construction and transportation sectors have reported critical shortages. A net 31% report raising wages in October, the lowest reading since April 2021.

2. Friday, November 14, at noon, Atlanta Fed GDPNow. Last week’s strength in ISM Manufacturing pushed the GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) for Q3 up to 4.0% and for real gross private domestic investment growth increased from 4.4% to 4.6%. The acceleration of the increase from the low 2% area in early August finally tapered off in October, but it has inched higher to a 4% GDP expectation.

3. Wednesday, November 12 at 7:00 a.m. OPEC Monthly Report. The IEA has quadrupled their oil supply forecast for 2026 based on OPEC+ countries’ rapid reversal of their voluntary production cuts. Positioning among institutional money managers is as bearish as at the $32 WTI lows in August 2008. We will look for any suggestions regarding pulling back on future production and for tone upon any reaction in the futures markets.

FOMC Voters Speaking: Monday, November 10 at 9:45 a.m. St. Louis Fed President Alberto Musalem speaks, followed by Governor Michael Barr, on Tuesday, November 11, at 10:25 a.m. Four speeches on Wednesday, November 12: NY Fed President John Williams at 9:20 a.m., 2026 voter and Philadelphia Fed President Anna Paulsen at 10:00 a.m., Governor Christopher Waller at 10;20 a.m., and Governor Stephen Miran at 12:30 p.m. President Musalem is back on Thursday November 13 at 12:15 p.m. and at 12:20 p.m. another 2026 voter, Cleveland’s Beth Hammack speaks. Friday November 14 at 10:05 a.m. Kansas City President Jeffrey Schmidt speaks at an energy conference.

Earnings: CoreWeave (CRWV) Monday, November 10, after market. Cisco (CSCO) on Wednesday, November 12 after market. Thursday November 13 before market: Brookfield (BN) could discuss private equity and credit landscape, and Applied Materials (AMAT) after market on semiconductor outlook. Before market on Friday November 14 Alibaba (BABA) could touch on AI in China.

By Peter Corey

‍

Risk Disclosure & Disclaimer

Copyright © 2025 Pave Finance, Inc., LLC and Peter Corey. All rights reserved. 

The attached material is provided in partnership with Pave Investment Advisers, LLC (“Pave”), and is the opinion of Pave and Pave’s Chief Markets Strategist, Peter Corey. Distribution is being provided through a licensing agreement, and any further dissemination is strictly prohibited. 
You are receiving this email because you opted in through our product or website

You can update your preferences or unsubscribe from this list.

For Financial Professional Use Only

The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information and should not be considered a solicitation for the purchase or sale of any security. There is no guarantee any investment recommendations will be successful and there is a risk of losing money.

We take protecting your data and privacy very seriously. Please see our privacy policy here.

Pave Investment Advisors, LLC is an SEC Registered Investment Advisor. Such registration does not imply any level of expertise.

Securities offered through Pave Securities, LLC – New York, NY. Member FINRA/SIPC. You can review Pave Securities LLC with FINRA’s BrokerCheck BrokerCheck.

Advisory Services are only offered through Pave Investment Advisors, LLC., an SEC Registered Investment Advisor which is an affiliate of Pave Securities, LLC.

Pave Securities, LLC and Pave Investment Advisors, LLC do not offer tax or legal advice.

The news, resources and articles available on this site are being presented for educational purposes only and should not be considered specific investment or planning advice applicable to each individual.

Please see ADV Part 2A here and Form CRS here.