Market Views

GLOBAL CREDIT BULLETS | Monday, 12 June 2023

Fed Preview – On knife’s edge
The Fed is likely to hold rates on pause this week, after raising them 500bps over the past ten consecutive meetings. Fed speakers had recently advocated “skipping” this meeting, so the market now only prices 30% odds for another hike.
Looking ahead, we anticipate the guidance to leave room for potential future hikes, similar to the approach taken by the central banks of Canada and Australia when they also held rates. Furthermore, we will closely monitor the new projections to assess the likelihood of additional hikes.
A significant focus leading up to the meeting will be on the CPI print scheduled for Tuesday, which is projected to decline to 4.1% YoY (headline) and 5.3% YoY (core), reflecting a decrease of 0.7% and 0.2% respectively compared to the previous readings.

ECB Preview – Further ground to cover
The ECB is likely to raise rates by 25bps to 3.5% this week, aligning with market expectations and previous committee guidance. Focus will lie on the new inflation and growth expectations, which may be lowered following recent negative data surprises.
While the hawks have softened their tone, there is still consensus that underlying inflation dynamics remain too high. Therefore, we anticipate guidance for further rate hikes and a projected terminal rate of 3.75%.

Markets – Pivotal week
This week is key for markets, as we may see the potential end to the Feds hiking cycle, with important implications across asset classes.
While individual central banks may continue to diverge for some time (e.g. ECB and BoE), inflation has mostly turned the corner and rates have reached their peak. This creates a constructive environment, especially in credit.
Although most corporations have low leverage and manageable maturity walls, their performance during the global economic slowdown may vary. In emerging markets, central banks have been proactive in hiking rates earlier and to a greater extent than the Fed, affording them more room to implement significant cuts as well.

Algebris Investments’ Global Credit Team

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