Market Bites

GLOBAL CREDIT BULLETS | Monday, 20th September 2021

US Inflation – half a year of “transitory”
US CPI increased 0.3% MoM (5.3% YoY) in August, slightly missing consensus estimates. Most of the miss was explained by re-opening sectors, such as transportation and hospitality. Rates markets slightly relieved on the print, but we don’t think the weaker read change the trajectory of US inflation too much. The composition of the print clearly points to a temporary weakening driven by delta variant concerns in summer, and most of it may subside once mobility picks up in September. Underlying inflation remains very strong, with August having been the 5th print in a row above 4% and core components showing marked signs of strength. Shorter term, gas shortages may boost the energy component helping a quick recovery in headline measures. Stickier inflation is gradually feeding into consumers’ expectations, while markets and the Fed still foresee medium term levels around 2% (see Chart below).

Fed – waiting game
The upcoming Fed meeting should be a non-event. Since the dovish turn at Jackson Hole in late August, the ECB sounded patient and US inflation came weaker than anticipated. As such, there is little reason for the Fed to change guidance at the current meeting, especially as Covid cases just peaked but are still relatively elevated. More visibility on 2022 monetary policy is postponed to the November meeting, when the Fed is likely to start tapering, presumably at a shallow rate initially ($10-15bn initially). The rates market remains very complacent to inflation risk, with the 10 year Treasury trading 4% below the run CPI rate and well below the Fed inflation target. Breakevens continue to price a very transitory inflation dynamics, and carry trades came back in high demand. Rates peaked in February, and are now 30bp off the highs. A sudden increase in inflation employment may take place in 4Q, especially as consequences of the delta variant wave fade. The combination of better jobs and persistent inflation will inevitably trigger a Fed reaction, which the market has now largely priced out. We continue to think a sudden “inflation awake” is in the cards in the next 3-6 months, with the potential for a good amount of vol in rates and credit markets.

German Elections – turning left?
German Federal elections will take place on September 26th, after almost 16 years of CDU ruling and Angela Merkel leadership. While polls displayed a pretty balance picture until early summer, the SPD (moderate-left party) is showing a big gain in the past few weeks. Polls from Politico taken on September 14th show the SPD leading the CDU by a decently wide margin, 25% vs 21%. The CDU polls below 20% according to a few pollsters, the lowest level of the past 20 years. Greens are also doing well, hovering around 15-16% in polls. While a grand-coalition is probably still the base case, chances of a government without CDU are now higher. Two possibilities are a “traffic-light coalition” between the SPD, Greens, and FDP or a “red-red-green” coalition between the SPD, Linke, and Greens. A government without CDU would mark a big turn in Germany, as some of the hardest position on fiscal and monetary policy could soften after almost 20 years. EU rates markets have started moving since summer, but real and nominal yields remain largely in negative territory. European equities and banks have rallied in 2021 but display valuations which are much more attractive than tech-heavy counterparts in US and Asia. If a “left turn” in Germany adds to higher inflation and potential ECB tapering in 2022, higher rates and higher equities will remain the trade in Europe.

This document is issued by Algebris (UK) Limited. The information contained herein may not be reproduced, distributed or published by any recipient for any purpose without the prior written consent of Algebris (UK) Limited.

Algebris (UK) Limited is authorised and Regulated in the UK by the Financial Conduct Authority. The information and opinions contained in this document are for background purposes only, do not purport to be full or complete and do not constitute investment advice. Under no circumstances should any part of this document be construed as an offering or solicitation of any offer of any fund managed by Algebris (UK) Limited. Any investment in the products referred to in this document should only be made on the basis of the relevant prospectus. This information does not constitute Investment Research, nor a Research Recommendation. Algebris (UK) Limited is not hereby arranging or agreeing to arrange any transaction in any investment whatsoever or otherwise undertaking any activity requiring authorisation under the Financial Services and Markets Act 2000.

No reliance may be placed for any purpose on the information and opinions contained in this document or their accuracy or completeness. No representation, warranty or undertaking, express or implied, is given as to the accuracy or completeness of the information or opinions contained in this document by any of Algebris (UK) Limited , its members, employees or affiliates and no liability is accepted by such persons for the accuracy or completeness of any such information or opinions.

The distribution of this document may be restricted in certain jurisdictions. The above information is for general guidance only, and it is the responsibility of any person or persons in possession of this document to inform themselves of, and to observe, all applicable laws and regulations of any relevant jurisdiction. This document is for private circulation to professional investors only.

© 2021 Algebris (UK) Limited. All Rights Reserved. 4th Floor, 1 St James’s Market, SW1Y 4AH.