Market Views

GLOBAL CREDIT BULLETS | Monday, 10th October 2022

US labour market – Slowing at a slow pace
September payrolls rose 263k, down from August’s 315k, albeit still on the high side. The unemployment rate fell to 3.5% from 3.7% and average hourly earnings rose by 0.3%. Increases in payroll were quite broad, with the continued strength in construction being surprising given the housing market stress. Job growth seems to be slowing down, but still remains high in absolute terms, presumably still driven by post-Covid catch-up hiring.

The report did not bring particular news, as wage inflation and job creation remain in line with expectations, and lower unemployment is still driven by lower participation rate. The Fed still seems on track for a 75bp hike in early November. The Fed and market focus will now shift on the September CPI print on the upcoming Thursday.

US CPI – Closer to the peak
This week, the September US CPI report should give more comfort about the inflation peak having been reached. We expect headline inflation to come at 8.1% y-o-y on Thursday. On a month-on-month basis, we expect headline CPI to rise at a higher pace as compared to the 0.1% seen in August, driven by a slower fall in gasoline prices. High frequency data also shows food prices increased notably compared to August’s more subdued pace.

Core CPI will likely grow at a slower pace compared to August, driven by a fall in used vehicle prices. Rent inflation is also expected to increase at a slower pace versus the August reading. We expect core y-o-y inflation to come at 6.5%.

Overall, the report should give more confidence to the Fed about being able to conclude the hiking cycle at its stated terminal rate (4.6%) and not higher. This will be especially true if the main drivers (commodities, supply bottlenecks, rent) point to an easy direction. Shorter term, however, the Fed rhetoric regarding the importance of the fight to inflation is unlikely to change.

OPEC – Supporting oil (and Russia)
Last week, OPEC+ announced a 2 million barrels per day cut, the largest since 2020.

The cut is large, especially since demand remain overall solid at global level, and it is thus affecting oil markets strongly. Also, with inventories broadly still building up, the move is premature compared to past oil crises or recessions.

However, the ongoing slowdown in global demand will arguably start affecting crude demand soon. In typical recessions, 2-3mn bpd demand destruction is common, suggesting the OPEC+ move has just anticipated the impact of the global slowdown. A sustained impact on the market is thus unlikely unless the economy remains booming.

The meaning of the cut is more political. With the move, Saudi signals a clear support to Russia vs the US, which is surprising especially after the recent Middle East visit by President Biden.

Saudi’s fiscal breakeven is reached around $75/bbl in Brent, and the crown is keen to keep oil prices in the $80-100/bbl area, at least based on current verbal intervention.

Algebris Investments’ Global Credit Team

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