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Investors in credit markets pay close attention to the latest economic data. Our head of Corporate Credit Research explains why they should be less focused on the newest numbers and more focused on whether and how those numbers are changing.

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Welcome to Thoughts on the Market. I'm Andrew Sheets, head of Corporate Credit Research at Morgan Stanley. Along with my colleagues bringing you a variety of perspectives, I'll be talking about trends across the global investment landscape, and how we put those ideas together. It's Friday, February 9th at 2pm in London.

Almost every week, investors are confronted with a host of economic data. A perennial question hovers over each release: should we focus more on the level of that particular economic indicator; or its rate of change. In many cases, we find that the rate of change is more important for credit. If so, recent data has brought some encouraging developments with surveys of US Manufacturing, as well as bank lending.

I\\u2019m mindful that the concept of \\u201ceconomic data\\u201d is about as abstract as you can get. So let\\u2019s dig into those specific manufacturing and lending releases. Every quarter, the Federal Reserve conducts what is known as their Senior Loan Officer [Opinion] Survey, where they ask senior loan officers \\u2013 at banks \\u2013 about how they\\u2019re doing their lending. The most recent release showed that more officers are tightening their lending standards than easing them. But the balance between the two is actually getting a little better, or looser, than last quarter. So, should we care more about the fact that lending standards are tight? Or that they\\u2019re getting a little less tight than before?

Or consider the Purchasing Managers Index, or PMI, from the Institute of Supply Management. This is a survey of purchasing managers at American manufacturers, asking them about business conditions. The latest readings show conditions are still weaker than normal. But things are getting better, and have improved over the last six months.

In both cases, if we look back at history, the rate of change of the indicator has mattered more. As a credit investor, you\\u2019ve preferred tight credit conditions that are getting better versus easy credit that\\u2019s getting worse. You\\u2019ve preferred weaker manufacturing activity that\\u2019s inflecting higher instead of strong conditions that are softening. In that sense, at least for credit, recent readings of both of these indicators are a good thing \\u2013 all else equal.

But why do we get this result? Why, in many cases, does the rate of change matter more than the level?

There are many different possibilities, and we\\u2019d stress this is far from an iron rule. But one explanation could be that markets tend to be quite aware of conditions and forward looking. In that sense, the level of the data at any given point in time is more widely expected; less of a surprise, and less likely to move the market.

But the rate of change can \\u2013 and we\\u2019d stress can \\u2013 offer some insight into where the data might be headed. That future is less known. And thus anything that gives a hint of where things are headed is more likely to not already be reflected in current prices. No rule applies in all situations. But for credit, when in doubt, root for a positive rate of change.

Thanks for listening. Subscribe to Thoughts on the Market on Apple Podcasts, or wherever you listen, and leave us a review. We\\u2019d love to hear from you.