Market Views

GLOBAL CREDIT BULLETS | Monday, 15 May 2023

US debt ceiling – Showtime.
The deadline for an agreement on the US debt ceiling approaches, with Republicans and Democrats in need to find an agreement by early June. The political tone has softened over the past week, suggesting a desire to find a middle ground. An increase of the borrowing limit looks more likely than a postponement of the discussion to September, and it is the most bullish scenario, as it would put the discussion on hold for a relatively long time. US CDS is now at 160bp, in line with some high quality emerging markets. Investors are thus giving a relatively high chance to a technical accident, and hence we scope for a relief rally in risk assets over the next couple weeks, shall the discussions between parties continue on the right track.

Turkey – Wind of change fading down.
The first round of Turkey Presidential elections concluded with a strong affirmation of President Erdogan, with c.50% of the votes, against 44% of the main opposition candidate. The result came as a surprise, as polls suggested an opposition victory. While vote counting is still going on, Mr Erdogan looks unlikely to win at first round. Presidency will thus be determined via the runoff round on May 28th. The stance of the third candidate, Sinan Ogan, will be key in determine the outcome. However, first round numbers suggest an incumbent win is now the base case. Turkish assets are selling off aggressively on Monday morning, with protection against the country’s failure up 100bp, and the stock market down 10%. We believe regime continuity means a continuation of the unorthodox policies which characterized the past few years, with the difference that the starting point in terms of fundamentals is now weaker than three years ago. We thus see relatively high chances of a balance of payment crisis over the next few years, and remain negative on the country’s economic trajectory.

US inflation – Cooling down.
US CPI for April rose 0.4% on the month and 4.9% on the year. Core inflation remains elevated, at 5.5%. Data were in line with consensus, with headline inflation a touch softer. Used cars displayed an unusually strong month, meaning the remaining components came in soft. Shelter inflation continues to slow, and is now running at 0.4% on the month, half of what it was in late 2022. The print is overall soft, and legitimates the new neutral stance by the Federal Reserve. Following April data, the bar for a hike in summer is higher. We expect that inflation will continue to fall in 2023, but will remain at elevated levels, with core inflation not falling below 3% over the next 12 months. As a result, the cuts the market is pricing starting in summer look excessive to us.

Algebris Investments’ Global Credit Team

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