Market Views

GLOBAL CREDIT BULLETS | Monday, 17 July 2023

US inflation – All the way down
US CPI for June was recorded at 0.2% m/m and 3% y/y, the lowest level since March 2021, and only a third of the peak reached in summer 2022. Core inflation came out at 0.15% on the month and 4.8% for the year.
Amongst core components, shelter inflation remains the only one displaying sustained growth although at a slower pace compared to the monthly increments displayed in the first quarter of 2023.
Excluding shelter costs, core inflation was flat for the month. The data are decently soft and show that the disinflation picture in US is rosy both looking at levels and components. The data will help a relief in rates and bonds, especially after last week’s strong increase in real rates. Additionally, considering that labor market data also came in weaker than expected last week, the Fed will hike in July but will have a hard time in providing the hawkish guidance that the market expects. The print has triggered a turn in US rates, with 10y now down to 3.8% from the peak of 4% reached last week.  We believe there is further potential for the move, especially leading up to the July Fed meeting.

China – Stimulus mode
Chinese authorities are increasing economic stimulus measures as the macro deteriorates.
Latest economic data continues to worsen: exports for June were down 8% from one year earlier after having been flat in May. The trade data corroborate the evidence coming from retail sales and the housing market over the past six weeks. The country is now on track for 4.5-5% growth vs 6-7% expected earlier this year, and deflation continues. The authorities are becoming increasingly concerned and have begun implementing stimulus initiatives: measures supporting the housing market have been extended for another year, and interest rates have been cut in June and may be cut again in summer. The currency started weakening, but authorities are leaning against it via controlling rates on dollar deposits. The data deterioration is profound and will affect the global economy, as things stand. Authorities’ recognition and stimulus are encouraging signs. However, there is a need for them to be accelerated and intensified in order to have a more lasting effect on global markets.

Algebris Investments’ Global Credit Team

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