Market interest in the latest vintage of the Fed’s senior loan officer opinion survey was certainly heightened compared to pre-Fed tightening/pre-SVB levels of anticipation, but after two anticlimactic releases in a row (the April and July editions), it’d be a stretch to suggest anyone was on tenterhooks.

As noted in this week’s macro preview, it was a foregone conclusion that credit conditions would remain weak. It was just a matter of whether the situation would deteriorate at the margins. As it turns out, things actually improved.

The new SLOOS (the survey should win an award for worst-sounding acronym) showed the net share of banks tightening standards for C&I loans to large and middle-market firms dropped to 33.9% from 50.8%.

“Importantly these are incremental changes — we need to remember the 33.9% is over and above the 50.8% of banks tightening in Q2,” ING’s James Knightley was keen to note. Granted, but 33.9% was still the lowest share in over a year.

Banks which tightened standards or terms on C&I loans cited macro uncertainty, lower risk tolerance and, notably, “less aggressive competition.”

The share of banks tightening standards for C&I loans to small firms dove nearly 20ppt.

Obviously (and as is clear from the chart above) these are still elevated levels, indicative of “significant net shares of banks” (to use the survey’s maddeningly repetitive language) tightening standards.

On the demand side, C&I improved for a second straight quarter, and markedly so. The net share of banks reporting stronger demand for C&I loans was -30.5%. It was -51.6% last quarter and -55.6% the month after SVB failed.

Demand for CRE loans, on the other hand, receded after improving in the July vintage of the survey.

Banks cited “decreased customer investment in plant or equipment; decreased financing needs for inventories, accounts receivable, and mergers or acquisitions; and lower precautionary demand for cash and liquidity” while explaining weaker loan demand.

CRE lending standards remained very tight for obvious reasons, although it does look as though we might’ve reached “peak tight,” at least in terms of the prevalence of banks tightening standards further. The CRE apocalypse hasn’t played out in earnest just yet, but it’s a slow-motion train wreck. Parts of that thesis are preordained, even if the fallout doesn’t ultimately result in any sort of panic.

It’s worth noting that the share tightening standards for multifamily projects hit a new high at 65.5%, up from 63.3% in the July survey and 64.5% in April. Demand for multifamily CRE loans worsened (red line in the second chart above).

So far, market-based measures of credit risk are oblivious.

Junk spreads, for example, remain disconnected, even if Monday’s SLOOS helped close the gap in a benign way.

If you’re inclined, you can spend hours with the data and paint pretty much any picture you want to paint, but the updated survey certainly didn’t suggest a marked deterioration consistent with the idea of a rapidly worsening credit crunch in the US. When taken with the FCI easing implied by last week’s “everything rally” (and the accompanying dollar weakness), it’d be fair to suggest the Fed’s running the risk of a premature recovery in credit conditions to the detriment of the inflation fight.

ING’s Knightley offered a different take. “This report makes it all the more likely that the Fed will not need to hike interest rates further since tighter lending conditions and reduced loan demand points to a credit credit contraction that will inevitably take heat out of the economy,” he said.

To be sure, the run of softer data which contributed to last week’s Treasury rally suggested the economy is cooling and that the monetary policy transmission channel, even if severely impaired by the low share of variable rate debt on household balance sheets and the terming out of corporate debt profiles in 2020 and 2021, isn’t entirely broken. Incrementally tighter lending standards should, I suppose, be expected to turn the screws.