Credit Market Daily #57 %author %

13-Dec-2022

Welcome to CPI day with the US numbers being front and centre this afternoon.

Pundits are calling for a modest equity rally on a print of 7% – 7.2% and some even going further to say a +5% rally is possible if CPI comes in with a 6 handle.

Good luck to them – headlines never talk of the downside.

Expectations are for a slowing in the pace of growth +0.3% vs. 0.4%. 7.3% is the YoY survey figure.

As always the devil will be in the detail and there will be a lot of focus on the numbers ex-food and energy, as well as the pace of rollover in rents and any signs that inflation is moving into stickier parts of the economy.

Germany has printed its CPI numbers for November.

Looking at the headline number CPI is declining -0.5% MoM, but looking at the detail there is not a lot to cheer about:

“Compared with October 2022, the consumer price index declined by 0.5% in November 2022. The decrease was largely attributable to the seasonally lower prices of package holidays (-25.3%). The prices of energy (total) were also down slightly in November 2022 compared with the previous month (-1.2%). Price decreases were recorded especially for mineral oil products (-6.1%; of which heating oil: -13.6%; motor fuels: -3.5%). The prices of natural gas, in contrast, rose again (+2.9%), and price increases were observed also for district heating (+2.0%) and electricity (+1.4%). In addition, households again paid more for food (+1.2%), in particular for dairy products (+4.9%).”
Federal Statistical Office,13-Dec

Consumers are being well and truly squeezed.

Energy is up 38.7% YoY in November, an improvement from +43% in October but nowhere near normalising, and unlikely to be helped by the bitter weather that is currently gripping Europe.

Food is also a concern with a continued increase in prices of +1.2% in November and up 21.1% YoY.

Inflation is making its way through the system at different speeds(as you would expect). Inflation in services was +3.6%, YoY. Within this the inflation experienced by different sectors is varied.

Household rents (ex-energy) for example rose 1.9%, whilst restaurants and services were up +9.8% and personal care was +7.5% YoY.

Overall today’s figures are unlikely to give the ECB cause for celebration, calling a peak in inflation in Germany may be premature given the main driver in the headline number was a decline in the cost of package holidays.

Long story short – look beyond the headline.

German CPI – is the peak in? +10% YoY, -0.5% MoM

Food inflation continued to increase, +1.2% MoM, and Household Energy was -0.1% MoM driven by Heating Oil

Credit

High Yield

High Yield looks to have outperformed equities to the downside yesterday in Europe and the UK and underperformed on the upside vs. equities in the US.

The asset class also outperformed Investment Grade on the day. Overall the market remains quiet.

It is worth pointing out that that primary is not quite dead in the HY space.

House of HR is in the market – this is a€7NC3 Senior Secured B2/B rated issue with price talk 10.75% – 11%.

The use of proceeds is to refinance the bridge loan associated with Bain Capital’s acquisition of a majority stake in the company.

For reference, its 2026 senior secured bonds were issued with a 4.375% coupon, and its 2027 sub notes a 7.5% coupon.

Looking at spread performance, GBP, EUR and USD High Yield moved, -4bps (Z+709 bps), -3bps (Z+521) and -9bps (Z+459 bps) respectively.

Leaders and Laggers

Investment Grade

New issuance in the IG market remains non-existent and will likely remain so until the new year.

Their performance will be driven by rates over the next few weeks, with market participants taking stock of the rally that has happened into year-end (see “what caught our eye” below)

Yesterday saw GBP and EUR Investment-Grade underperform their US counterparts on a total return basis given the relative move in benchmark yields.

In spread terms GBP, EUR and USD Investment Grade spreads moved -1bp (Z+199 bps), +1bp (Z+177), and +0bps (Z+131 bps) respectively.

Rates

Rates were generally higher across the board yesterday with market participants looking to the CPI and Central bank data that is due over the next few days.

Gilts continued to see yield curves flatten.

Rates in the US bucked the trend despite new issuance initially seeing yields move higher.

This morning looks like more of the same with 10-year benchmarks in Europe and the UK opening 1-2bps higher in yield and the US down c.2bps

The 10-Year US, GBP and Eur benchmarks yield 359bps, 319bps and 194bps respectively.

Equities

Equities opened cautiously yesterday and Europe and the UK closed in the red whilst the US staged a rally which some attributed to short covering ahead of today’s cpi data.

This morning futures are opening higher across all regions – the initial moves ook relatively muted +20bps or so and I think we likely see this soften ahead of the US CPI release at 13.30

Today’s Events

Eco Data

Today’s Reporting

David Llyod

Lowen Play

Ocado

What Has Caught Our Eye

ECB insight from Bloomberg Intelligence

Below are some charts from “ECB INSIGHT: Five Bloomberg Economics Tools to Track Rates Pain” published this morning by the Economics team at Bloomberg Intelligence.

The charts below show how the ECB’s monetary tightening is passing through the economy and will likely impact GDP growth.

Broader Financial Conditions are Tighter

Bloomberg: ‘Too Far, Too Soon’: Credit Rebound Came Quicker Than Predicted

This piece from Bloomberg’s Tasos Vossos reports that the market rally in European Investment Grade is giving investors pause for thought, given the pull forward of next year’s expected positive performance as rates normalise and then we move to a cutting cycle.

Key Quotes:

“Long positions in credit “can absolutely become a crowded trade, and we’ve seen some of this happen in recent weeks,” said Brian Kloss, a portfolio manager at Brandywine Global Investment Management. “This risks limiting returns too fast, so you have to be careful about your allocations,” said Kloss, who helps oversee $40.8 billion of fixed income assets.”
Bloomberg

“Our impression is that the speed of the rally has taken many investors by surprise, leading them to question whether this move is sustainable,” JPMorgan Chase & Co. strategists led by Matthew Bailey wrote earlier this month. They see the European high-grade corporate bond rally going further in the near term as cash comes off the sidelines.
Bloomberg

“The entry point will be better in the second half” of 2023, said Martin Hasse, a fixed income analyst and portfolio manager at MM Warburg & Co., which oversees €79 billion ($83 billion). “The market does not price in risks related to recession and we see a widening of spreads in the first half,” he said.
Bloomberg

Credit Market Daily #57