Credit Market Daily #56

12-December-2022

Good Morning!

A busy week for data.

This morning there is continued Weakness in UK housing this morning with the Right Move Price index down -2.1% vs -1.1% prior.

UK House prices are still up 5.6% YoY with the average house price costing £359,137. that’s c. 10.8x times the median UK wage as of April 22.

The UK also reported a better-than-expected GDP of +0.5% MoM vs. 0.4% expected and up from -0.6% prior.

Additionally, UK Industrial and Manufacturing production came in better than expected -2.4% vs. -2.5% and -4.6% vs.-5.6% expected, YoY, respectively.

The positive GDP and Production data however will be overshadowed by CPI and BoE action over the next few days.

Given a large part of the market is in wind-down mode ahead of Christmas any reaction to the data and commentary provided by Central Banks may result in outsized moves.

As mentioned on Thursday, markets are pricing a move in the US from hikes to cuts without any pause in rates at their higher terminal level, any talk of a delay in cuts in 2023 will be taken poorly by markets.

Expectations are for 50bp hikes by all Central Banks with their meetings coming after the latest CPI prints on Tuesday for the US and Europe and the UK on Wednesday.

Core inflation will be closely monitored by market participants to see if inflation is taking hold in wages and the pace of increase in rents.

Is inflation truly rolling over and are Central banks willing to look ahead or continue to be data dependent on historic data?

Any hike above 50bps will cause consternation.

50bps is the New 75bps..

Bank	Meeting Date	Hike Being Priced
BoE	15-Dec-22	+55 bps
FED	14-Dec-22	+52 bps
ECB	15-Dec-22	+54bps

Last Week’s Performance:

Overall last week saw most risk assets in the red except for the US where rates and credit held up relatively well.

We will continue to be in a holding pattern until the 14th when we get CPI data in the US and Europe along with the FED meeting.

This morning the risk-off tone is continuing with European equities opening lower and US futures are also in the red.

Asset Class	GBP	EUR	USD
High Yield	-6bps	-42 bps	+5bps
Investment Grade	-27bps	-11 bps	+45 bps
Equity*	-205 bps	-50 bps	-234bps
Rates**	-57 bps	-44bps	18bps

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Credit

High Yield

Friday saw GBP, EUR and USD High Yield spreads move -1bp (Z+714), +7bps (Z+516bps) and +14bps (Z+468bps) respectively.

Xover was -12bps tighter outperforming cash and is opening 4bps wider this morning at 462bps

Leaders and Laggers

Investment Grade

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

Total returns were negative given rates.

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Rates

Gilts moved wider on Friday driven by the BoE sales.

European and UK rates are opening flat this morning whilst US rates are -3bps tighter.

The 10 year Treasury, Gilt and Bund yield 354bps, 315bps and 193bps respectively.

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Equities

Equity looks to be underperfoiimg credit and rates this morning.

Europe is opening down c.- 60bps

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Today’s Events

Eco Data

UK Construction Output in addition to production and GDP data came in higher than expected at +0.8% MoM. No other material data today.

Aside from this week’s CPI and Central Bank Data, we have German and UK consumer sentiment which we will be watching for signs that recent bottoming has occurred.

Today’s Reporting

Progest

What Has Caught Our Eye

Macro Alf – “how much of a recession is priced in”

A good analysis of what is priced in and what is not by Equity and Bond markets.

Currently Alf sees a mild recession being priced by the market with a “proper” recession likely to require a greater repricing of risk, especially in equities.

In an average recession, the Fed cuts 300-400 bps in 12-24 months and earnings decline for 5+ consecutive quarters and by around 30%.

That’s a ‘‘proper recession’’ that requires a proper Fed pivot.

Today, bond and equity markets are pricing roughly a 20% chance of a ‘‘proper recession’’ – and while macro investing is a probability game and we’ll never see markets pricing in a 100% probability of an exceptional event like a proper recession, 20% isn’t an incredibly high number.

Alfonso Peccatiello

Performance

High Yield

Investment Grade

Rates

Equities