Central banks – Pushing cuts further out
Fed speakers acknowledged but mostly looked through January’s strong data. They agreed on having to wait a couple more months before becoming comfortable with easy policy, making Fed cuts in May look unlikely. In the absence of material US data before ISM prints in early March and NFPs on March 8th, we think the path of least resistance remains higher US yields tactically. In Europe, Lagarde said Q4 negotiated wages falling from 4.7% to 4.5% last Tuesday was encouraging and pointed to upcoming Q1 figures published on May 25th as crucial for the ECBs next steps. European PMIs were better on the services side, and showed particular improvement in France, while Germany was dragged down by its structurally weaker manufacturing sector. The ECB’s Stournaras is one of the more dovish council members and pointed to a first cut in June, which is fully priced by the market.

Markets – Euphoria full on
Nvidia earnings beat consensus and sparked the next leg in the rally of risk assets, lifting the S&P500 to new highs of 5100. Bank of America showed that cyclical equity markets like US homebuilders or semiconductors already imply US ISM manufacturing levels of 60, despite the latest index reading having been only 49. The euphoria in risk markets comes as investors eye a soft landing, supported by better growth and likely falling rates later this year. Credit markets rallied too, and high-yield spreads tightened to 335bp in the US, and 300bp in Europe. Despite tight spreads, allocators remain keen to invest in credit given attractive absolute yield levels. As we wrote in our latest Algebris Bullet, we believe opportunities in credit should be chosen carefully, amid risks of rising rates as central banks postpone their easing cycles.

Algebris Investments’ Global Credit Team