Hidden Cracks in Credit Markets
Market and Economic Commentary
The S&P 500 climbed 1.7% this week despite credit market stress surfacing in unexpected places.
JPMorgan CEO Jamie Dimon captured the moment: "When you see one cockroach, there are probably more." He was referring to September's bankruptcies—Tricolor Holdings, a subprime auto lender that cost JPMorgan $170 million, and First Brands Group, an auto parts manufacturer that collapsed with $11.6 billion in debt. Bankruptcy investigators found $2.3 billion in off-balance-sheet financing that sophisticated investors had completely missed.
Thursday brought the concern to regional banks. Zions disclosed a $50 million charge-off after discovering fraud on two commercial loans. Western Alliance revealed it's suing a borrower over false collateral claims. The regional banking index fell 6%—its worst day since March 2023.
Subprime auto loans are defaulting at record rates above 6%, though prime borrowers maintain 0.37% delinquency rates. Federal Reserve researchers found that larger loan amounts—not interest rates—drove most delinquency increases. Average monthly car payments jumped from $430 in 2020 to $655 by 2024 as vehicle prices surged, and those bigger payments became unsustainable.
The broader concern is private credit markets, which doubled to $1.7 trillion since 2020. These funds borrow from traditional banks to lend to companies, creating interconnections that obscure where losses might surface. When borrowers fail, damage can cascade through multiple layers that aren't visible on bank balance sheets.
What makes these events notable is timing. They're happening with unemployment at 4.3%—during conditions when refinancing should be available. Even JPMorgan got caught for $170 million, which tells you these risks are hard to see even for sophisticated institutions.
Signs of stress are emerging in concentrated pockets: subprime auto lending, certain commercial loans at regional banks, opaque private credit structures. Whether these represent isolated problems or early indicators of broader credit deterioration remains unclear. Markets treated them as one-offs this week. But Dimon's observation matters: the first sign of trouble is rarely the last.
I'm watching how regional banks characterize credit outlooks as third-quarter earnings continue next week.
Looking ahead: The government shutdown continues delaying economic data releases. CPI inflation data arrives next week—our first fresh read on whether price pressures are actually moderating.
Consumer sentiment surveys keep showing pessimism, but spending patterns tell the opposite story. People say they're worried while their wallets say otherwise. That gap between stated anxiety and actual behavior is worth watching as we head into the holiday season.
The credit concerns I mentioned above remain concentrated in specific pockets—subprime auto, certain regional bank loans, opaque private credit structures. There's no reason to believe there's a systemic issue right now, but it's important to remember that every serious problem in financials starts with one company.
Federal Reserve Nowcasting
| Indicator | Current Reading | Fed Bank |
|---|---|---|
| GDP Growth (Q3 2025) | 3.9% | Atlanta (GDPNow) |
| Core PCE Inflation (Q3 2025) | 2.91% | Cleveland (Nowcast) |
| PCE Inflation (Q3 2025) | 2.81% | Cleveland (Nowcast) |
Federal Reserve regional banks produce real-time economic estimates before official data releases. The Atlanta Fed projected third quarter GDP growth at 3.9%—a solid expansion rate—though current nowcast updates are delayed until government financial reports resume.
The Cleveland Fed's quarterly inflation nowcasts for Q3 2025 show core PCE (the Fed's preferred inflation measure, which excludes volatile food and energy prices) running at 2.91%, while headline PCE sits at 2.81%.
Both inflation measures remain above the Fed's 2% target. Core PCE running higher than headline PCE signals that underlying inflation pressures persist even after stripping out volatile categories.
The tension is clear: strong 3.9% growth paired with inflation still running well above target leaves the Fed with limited room to ease without risking renewed price pressures.
Federal Reserve Banks of Atlanta, Cleveland, and Dallas (2025) Economic Nowcasting Indicators. Available at: https://www.atlantafed.org/cqer/research/gdpnow, https://www.clevelandfed.org/indicators-and-data, https://www.dallasfed.org/research/pce (Accessed: October 17, 2025)
CME FedWatch Tool - Federal Reserve Meeting Probabilities
| Meeting Date | 150-175 | 175-200 | 200-225 | 225-250 | 250-275 | 275-300 | 300-325 | 325-350 | 350-375 | 375-400 |
|---|---|---|---|---|---|---|---|---|---|---|
| 10/29/2025 |
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|
|
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0.0% | 0.0% | 0.0% | 1.0% | 99.0% |
| 12/10/2025 | 0.0% | 0.0% | 0.0% | 0.0% | 0.0% | 0.0% | 0.0% | 5.8% | 94.2% | 0.0% |
| 1/28/2026 | 0.0% | 0.0% | 0.0% | 0.0% | 0.0% | 0.0% | 3.1% | 52.8% | 44.1% | 0.0% |
| 3/18/2026 | 0.0% | 0.0% | 0.0% | 0.0% | 0.0% | 1.7% | 30.4% | 48.0% | 19.9% | 0.0% |
| 4/29/2026 | 0.0% | 0.0% | 0.0% | 0.0% | 0.9% | 8.9% | 28.0% | 36.1% | 21.3% | 4.8% |
| 6/17/2026 | 0.0% | 0.0% | 0.0% | 0.4% | 3.5% | 14.4% | 29.5% | 31.1% | 17.1% | 4.0% |
| 7/29/2026 | 0.0% | 0.0% | 0.2% | 1.5% | 7.1% | 19.6% | 30.3% | 27.0% | 11.7% | 2.6% |
| 9/16/2026 | 0.0% | 0.0% | 0.7% | 3.7% | 11.7% | 23.1% | 29.3% | 22.2% | 8.0% | 1.3% |
| 11/4/2026 | 0.0% | 0.3% | 1.8% | 6.9% | 16.3% | 25.8% | 27.9% | 16.6% | 4.0% | 0.4% |
| 12/16/2026 | 0.1% | 0.9% | 4.0% | 11.2% | 20.8% | 27.2% | 24.0% | 10.0% | 1.7% | 0.1% |
| 12/16/2026 | 0.1% | 0.9% | 4.0% | 11.2% | 20.8% | 27.2% | 24.0% | 10.0% | 1.7% | 0.1% |
Understanding This Data:
- This data shows market probabilities for Fed rate decisions
- Probabilities come from federal funds futures pricing
- Each percentage shows likelihood of rates at that level after each meeting
- Blue highlighted cells show highest probability for each meeting
- These are market expectations not Federal Reserve guidance
- Probabilities depend on all previous meeting outcomes
The CME FedWatch Tool tracks market expectations for Federal Reserve interest rate decisions by analyzing federal funds futures contracts (financial agreements that bet on where interest rates will be at specific future dates). As of October 17, 2025, with the current federal funds rate at 4.00-4.25%, markets assign a 99% probability that the Fed will cut rates by 25 basis points to 3.75-4.00% at the October 29 meeting. Markets then expect another 25 basis point cut at the December 10 meeting, with a 94.2% probability of rates falling to 3.50-3.75%. By January 2026, expectations become divided—52.8% probability of a further cut to 3.25-3.50% versus 44.1% odds of holding at 3.50-3.75%. By December 2026, the highest probability (27.2%) centers on the 2.75-3.00% range, though probabilities spread across multiple levels, indicating significant uncertainty about the Fed's path through 2026.
CME Group (2025) CME FedWatch Tool. Available at: https://www.cmegroup.com/markets/interest-rates/cme-fedwatch-tool.html (Accessed: October 17, 2025)
Conference Board Consumer Confidence
Consumer confidence hit its lowest level since April, with the Present Situation Index falling 7 points—its steepest drop in a year. More troubling: the Expectations Index has stayed below 80 since February, a threshold that historically signals recession within 12 months.
Job market confidence declined for the ninth straight month. Price concerns topped the list of economic worries again, though 12-month inflation expectations dipped slightly to 5.8% from 6.1%.
The pattern matters—when consumers feel conditions worsening now while expecting further deterioration ahead, spending contracts. That's particularly concerning heading into the holiday spending season.
The Conference Board (2025) Consumer Confidence Index. Available at: https://www.conference-board.org/topics/consumer-confidence/ (Accessed: October 17, 2025)
S&P Global Services PMI
The Services PMI came in at 54.2 in September, down slightly from 54.5 in August. Any reading above 50 signals expansion—and this marks the 32nd straight month of growth in the services sector.
The modest slowdown still delivered a strong third quarter overall. Business activity decelerated slightly, while selling prices rose at the slowest pace in five months, suggesting inflationary pressures are easing.
This matters because services represent roughly 70% of U.S. economic output. Sustained expansion here, even if moderating, indicates the economy retains momentum despite higher rates and persistent inflation concerns.
S&P Global (2025) S&P Global US Services PMI. Available at: https://www.pmi.spglobal.com/ (Accessed: October 17, 2025)
University of Michigan Consumer Sentiment
Consumer sentiment held at 55 points in October, marking the third consecutive monthly decline. High prices and weakening job prospects remain the primary concerns.
Year-ahead inflation expectations edged down from 4.7% to 4.6%—still more than double the Fed's 2% target. The ongoing federal government shutdown hasn't meaningfully shifted consumer views yet.
More telling: 48% of households expect unemployment to rise over the next year. While down from September's 53%, this level has historically preceded sharp increases in joblessness.
The combination matters—persistent inflation anxiety paired with rising unemployment fears typically signals consumers pulling back on spending, which could become self-fulfilling given consumption drives 70% of economic activity.
University of Michigan (2025) Surveys of Consumers. Available at: https://www.sca.isr.umich.edu/ (Accessed: October 17, 2025)
NAHB Housing Market Index
| Market Challenge | Metric |
|---|---|
| Builders Cutting Prices | 38% (alternating between 37-39% since June) |
| Average Price Reduction | 6% (up from 5% average) |
| Use of Sales Incentives | 65% (unchanged from September) |
| 30-Year Mortgage Rate | Fell from 6.5% to 6.3% (early September to early October) |
Builder confidence jumped five points to 37 in October—the highest reading since April—as mortgage rates declined from 6.5% to 6.3%. All three index components improved, with sales expectations for the next six months surging nine points to 54, the largest monthly gain since January 2024.
The challenges persist, though. Thirty-eight percent of builders cut prices in October, with average reductions rising to 6% from 5%. Another 65% offered sales incentives. Most buyers remain on the sidelines, waiting for rates to drop further.
The takeaway: modest rate relief sparked optimism among builders, but demand hasn't followed yet. Price cuts and incentives signal builders are chasing a market that's still hesitant.
National Association of Home Builders (2025) NAHB/Wells Fargo Housing Market Index. Available at: https://www.nahb.org/news-and-economics/housing-economics/indices/housing-market-index (Accessed: October 17, 2025)
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