Credit Market Daily #72


Good Afternoon!

Friday ended with equities up in Europe, Government Bonds Lower and Credit Indices flat. US stocks rallied on FED Governor Waller said he thought a 25bp hike at the next Fed meeting was appropriate.

Waller, being an inflation hawk, buoyed equity markets.

This may have been because we are closer to a pause, closer to the Fed cutting, or that the fabled soft landing was viewed as more probable.

Whatever the reason – there is no such thing as a “dovish hike”. Any rate cuts, anywhere would be on the back of weaker growth, likely recessionary.

I think we are transitioning from “BaD NEwS iS GoOD nEWs” to “Bad news is bad news” and with that transition an unwind of year to date performance.

The good news, is that we are now in the FED’s blackout period and there will be less noise for a week at least.

The ECB and BoE should go silent from tomorrow onward.

We have had the UK and European PMI’s this morning with the former pointing to softer growth and the latter causing pundits to call for little or no recession in Europe. (See Eco Data below).

Equities and Futures are currently small down on the day and rates are rallying pointing to some normalization in behavior.

Additionally, in the US the leading Economic Indicator in the US came in at -1% yesterday vs. -0.7% expected.

Overall the drop points to a recession in the US.

The Nasdaq ended the day 2% high whilst govvie yields declined.

Looking at Powell’s preferred Yield curve we have bounced off the lows but are still at extremes of inversion.

So it all looks a bit recessionary – the question is will central banks hike higher to say they have slain inflation or will they ease and we continue to see the creep into services as per El Erian’s comments below.

In Friday’s newsletter, I said I said I thought that the closing tone Friday would likely set the tone for this week. I really wasn’t expecting such a strong finish in the US either then or yesterday.

I still believe Xover should be heading to 500, but with less than one week to go it may be more likely to happen once we have had the central bank meetings.

Powell’s preffered yield curve measure is still screaming recession
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Hike wise – the ECB are continuing to guide for a 50bp increase and we will likely see the same at the Bank of England.

25 bps is baked in now with the FED. See this video with Mohammed El Erian – I think he has a point in that the Fed could/ should do 50 bps to tighten financial conditions (which the FED have flagged as being a concern in the last set of minutes and have in fact loosened since then) start at 1:23:

Looking at last weeks performance credit outperformed on the week, then rates and lastly equity. Equities were very clearly playing catch up yesterday and credit is pretty much flat to small down over yesterday and today.

Total Returns Week 16th -20th Jan
High Yield+14 bps+4 bps-31 bps
Investment Grade+37 bps+20 bps+9 bps
Equity*-55 bps-120 bps-103 bps
Rates**+ 2 bps+10 bps+13 bps
* Euro Stoxx 600, FTSE All Share, Russell 2000. **S&P U.S. Treasury Bond Current 10-Year Total Return Index

In credit specifically we have seen the new issue premium for disappear and in some cases turn negative – a sign of froth and also usually the point at which investors start pushing back on deals.

Given the rally in equities, and despite the skinny, non existent premium, high yield deals continue to come to the market and the investment grade market remains busy.

Headlines around defaults, restructurings and layoffs are increasing with the latter acting as anec-data that cost cutting is no longer just a tech industry thing.

The tightness of developed labour markets suggests we are some way to go in terms of a material impact, CEO’s were talking of maintaining head count in the last PWC survey.

But perhaps the tide is turning.


Xover is 6 Wider on the day at 419 this is 10 tighter than Friday’s close and far from our 500 target.

Bloomberg published an article “Global Corporate Bond Rally Is Too Much, Too Soon for Some Funds” so its not just me:

“New issue premiums appear to have almost entirely evaporated. Deals are being tightened aggressively and not leaving value,” said Gordon Shannon, a portfolio manager at TwentyFour Asset Management, who’s bought only one of the more than 180 bonds offered in Europe so far this year.

“The spreads some deals are coming at, particularly hybrids — are pricing in zero volatility this year and that’s too rich for me,” Shannon said. “While recent data suggests the chances of a soft landing have improved, recession remains my base case and that needs a prudent approach.”

Bloomberg, “Global Corporate Bond Rally Is Too Much, Too Soon for Some Funds”, 24th Jan

Its also interesting to see elsewhere in the article reference to the 10 year average for valuation metrics which is something regular readers will recognize.

Certainly we have been pointing out that Credit has been getting more expensive, but break-evens still offer some protection.


UK rates are moving lower, with a marginal bull steepening whilst US and German rates are edging higher on the back of the PMI numbers.

10 year Gilts, Bunds and Treasuries Yield 335 bps, 221 bps and 354 bps.

Today’s Events

Eco Data

RegionService PMIManufacturing PMI
UK48 (49.5 exp)46.7 (45.5 exp)
Europe50.7 (50.1 exp)48.8 (48.5 exp)
US46.6 (45 exp)46.8 (46 exp)

On the European composite:

“The start of 2023 saw eurozone business activity rise marginally, according to flash PMI data from S&P Global, showing a tentative return to growth after six successive months of decline. Business confidence jumped higher to hint at markedly improving prospects for the year ahead, with order books meanwhile showing reduced rates of contraction. Employment growth also picked up momentum as firms prepared for a better than previously expected year ahead. Input cost inflation meanwhile cooled further thanks to alleviating supply chain stress, but average selling price inflation for both goods and services ticked higher, reflecting still-elevated cost growth and upward wage pressures.”

S&P Eurozone Flash PMI

On the UK composite:

“January data highlighted a sustained downturn in UK private sector business activity. Although only modest, the overall rate of decline accelerated to its fastest for two years. Service providers experienced a marked loss of momentum since December, with survey respondents citing higher interest rates and low consumer confidence as key factors that held back business activity. Despite falling output volumes and weak demand, optimism regarding the year ahead outlook for business activity picked up in January and was the strongest since May 2022. This improvement appeared to reflect hopes of a turnaround in global economic conditions and a further slowdown in cost pressures over the course of 2023″

S&P UK Flash PMI

On the US composite:

“Private sector firms in the US registered a further decline in output at the start of 2023, according to latest ‘flash’ PMI™ data from S&P Global. The fall in business activity softened to the slowest in three months, however, as manufacturers and service providers signalled moderations in their respective downturns. The headline Flash US PMI Composite Output Index registered 46.6 in January, up from 45.0 at the end of 2022. The contraction in activity was solid overall, but the slowest since last October. Goods producers and service providers recorded similar rates of decline, with service sector firms indicating a notable slowdown in the pace of decrease since December. Nonetheless, companies continued to highlight subdued customer demand and the impact of high inflation on client spending.”

S&P US composite

What Has Caught Our Eye

Aswath Damodaran : “Data Update 2 for 2023: A Rocky Year for Equities!”

This piece from Aswath Damodaran breaks down the equity returns for 2022 and ends with his scenarios for US equities given inflation (bond) and earnings expectations.

His website is an amazing resource and usually has all his workings in Excel for download.

“The market consensus can be wrong, and as the last year has shown, markets can change their minds, and especially so on two variables. The first is inflation, and whether it will recede to pre-pandemic levels or stay elevated, with consequences for both interest rates, nominal earnings growth in the long term and reinvestment. The second is the economy, where talk of recession fills the air but where a whole range of outcomes is possible from no recession to a steep drop off in economic indicators.”

Aswath Damodaran

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High Yield

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Investment Grade

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