Credit Market Daily #70 %author %

19-January-2022

Good Evening!

A weird couple of days.

The bottom line is central bankers cause a lot of “noise” to “signal” and weak economic data may no longer be seen as a reason to cheer by markets.

Soon after we sent out CMD #69 on Tuesday having flagged the ECB’s Lane’s hawkish comments then headlines hit that the ECB is considering a slower pace of hikes and markets rallied.

Then we got the pushback – Knox yesterday and this afternoon, Lagarde, “Inflation is way too high”:

And it’s not just limited to the ECB.

We the Philly Fed president said there were more hikes to come but he thought a slower pace was appropriate.

This contrasted with the Cleveland and St. Louis Fed Presidents Masters and Bullard who said rates would need to rise above 5% to tame inflation.

Given the softer economic data and lower inflation numbers that we have seen in the last 2 days, there is going to be a lot more internal debate at Central Banks about the transition to a pause in hiking.

I think as we get a dispersion in the desired outcomes of Central Bankers, so too, will we get increasing volatility in the markets as their ability to guess what’s coming next is stretched.

After the stellar 2 weeks, risk assets have had at the beginning of the month the first test is coming with the February hikes.

Xover has widened by 17bps on the day to 427 and I still think a swing back to 500 is still on the cards.

Economic data in the US – retail sales, Empire Manufacturing, capacity utilisation and PPI have all been softer and the market, maybe, just maybe beginning to treat bad news as bad news.

Indeed, it could be the catalyst for a gap lower in equities given the recent rip.

It is too early to say and the earnings season is likely to compound the downbeat outlook, and the consensus seems to be such that there is a real possibility that earnings surprise to the upside.

In both UK and Eurozone CPI has declined but core inflation is proving stubborn – see “What Caught Our Eye Below” so realistically expecting anything other than 50bps in Feb is optimistic.

In Summary, inflation has peaked, core inflation remains sticky and multiples of central bank targets.

Economic data is softening, hopes for a shallower dip in growth abounds, and earnings have yet to trough and defaults yet to peak.

It feels like we are at another transition point – Central Bankers, Economies, Investors and Valuations all need to recalibrate to a higher rates world.

Credit

New issuance continues in both IG and HY markets, we knew there was a lot of cash to be put to work and syndication desks had deals they wanted to get out the door.

There has been a slight slowing in the pace of deals alongside the softness in the market.

Last Q1 proved to be a bull trap for investors and it definitely feels like animal spirits are currently running high.

So far, there is no sign of the new issue party stopping, but I suspect it slows next week.

High Yield

GBP, EUR, and USD Index spreads moved -6bps (Z+641 bps),-6bps (Z+453bps), +7bps (Z+437 bps) respectively on Wednesday with high yield outperforming equities in total return terms.

I would expect High yield to be softer today but to have outperformed equities again.

Investment Grade

GBP, EUR, and USD Index spreads moved -2bps (Z+170 bps),-2bps (Z+157 bps), -1bp (Z+124 bps), respectively on Wednesday outperforming high yield and equities in total return terms.

Investment Grade, given Thursday’s rates moves underperformed high yield whilst continuing to outperform equity.

We will know tomorrow.

Rates

Overall rates are generally softer across the globe given the Central Bank speak.

US treasuries are continuing to bear steepen, and bunds and gilts are bear flattening.

The 10-year Gilt, Bund and Treasury yield 331 bps, 205 bps and 340 bps.

Today’s Events

Today’s Reporting

Melrose (GKN)

Premier Foods

What Has Caught Our Eye

RICS Residential Market Survey:

The RICS survey points to slowing sales in the UK alongside lower prices which are expected to decline further in the next 3 months.

The net House price balance of -42% (% of participants seeing house price rises – % of participants seeing house price declines) is the lowest since 2010.

In terms of agreed sales, a headline net balance of -41% of survey participants reported a decline during December, down from an already negative reading of -36% last month. What’s more, the downward momentum behind sales became further entrenched
across virtually all parts of the UK over the month, with respondents in the North West of England, Scotland, Wales and London all citing a particularly subdued month for activity in the latest results
RICS UK Residential Market Survey Jan -19

Rents are expected to increase as demand growth remains positive but slowing and with supply declining.

The survey can be downloaded here

UK CPI

As mentioned – UK CPI YoY came in lower in December vs. November.

Find the ONS release here.

The main drop was driven by Fuel Prices and Clothing and Footwear.

Unfortunately, the main increases came from housing and household services and food and beverages.

So whilst the headline suggests that we are past the peak, core CPI actually increased which makes a 25bp hike less likely from the BoE in February.

Overall the numbers do not make easy reading for consumers and point to a continuation of the cost of living crisis.

We have the UK consumer confidence numbers for December tomorrow.

Eurozone CPI

Similar to the UK – the EU saw a decline in YoY CPI from November to December, with core elements reaching all-time highs – no wonder Lagarde remains aggressive.

source: tradingeconomics.com

Energy prices were the main driver for the decline in the CPI. Whilst Food, Services and industrial goods all increased.

It is worth noting that Food increased at half the pace seen in the UK ( I appreciate we are not comparing apples with apples in terms of baskets, but all consumers eat).

In fact, I just came across this tool on Eurostat’s Website that allows you to compare the cost of food across the Eurozone – have a play!