GLOBAL CREDIT BULLETS | Monday, 17th October 2022

US – Inflation keeps rising
The CPI reading for September came in stronger than market expectations. Headline CPI came in at 0.39% on the month, while the core CPI rose 0.58% on the month. On a YoY basis, headline inflation fell to 8.2% from last month’s 8.3%, while core inflation came in at 6.6%YoY, up from 6.3% in August, with the pickup in core being driven by services sector as core goods prices remained stable.

The print failed to give a broad sense of turnaround in inflation dynamics, as headline came higher than consensus. Still, most components in the index are running at moderate levels and show signs of deceleration. Absent any pick-up in energy inflation, October data may display a deeper slowdown. The Fed will likely remain hawkish, delivering a 75bp hike in November and continuing to aim for high terminal rates. A more marked drop over the next few months is needed for the rhetoric to turn more accommodative.

UK – Big U-Turn
In the UK, Prime Minister Liz Truss has removed Chancellor Kwasi Kwarteng after less than six weeks in his role, to replace him with Jeremy Hunt. The change marks a big U-turn in fiscal policy. In fact, Mr Hunt changed his tenure with stating that most of the measures presented two weeks ago will be reversed. Even the energy package, the cornerstone of the first fiscal package, will be reduced in size. The changes will be formalized in the upcoming mid-term budget, due for publication on October 31^st.

The move arguably marks an end to the recent fiscal saga, as the tax cuts that sparked public and market outrage have been reverted. However, the credibility of the government has been permanently damaged, and markets will monitor UK closer. With confidence in PM Truss mandate having taken a big hit. With the energy package still to be implemented and inflation remaining at high levels, the pressure on the government is likely to remain high.

Last week, Prime Minister Liz Truss sacked finance minister Kwasi Kwarteng after less than six weeks because his unfunded tax cuts roiled markets. She will now attempt a more fiscally sound approach. But her party may decide it needs another leader, while voters may prefer a change of government. As well as firing Kwarteng, Prime Minister Liz Truss on Friday tore up plans to freeze corporation tax and promised cuts in public spending as she sought to avoid another damaging selloff. 

In the UK, inflation is likely to remain high, with the BOE currently projecting 11% peak in the next few months. The pound also remains volatile, meaning the Bank of England will need to deliver a strong policy response anyways after recent volatility. We expect the BOE to hike 100bp on November 3^rd and to resume the QT program temporarily abandoned during the last week market crisis.

IMF meetings – Dispatch from Washington
We spent one week in DC to attend the October 2022 IMF meetings. Overall, worries on the global outlook continue to be very high. Policymakers continue to be worried about the cocktail of slowing growth and higher inflation, and by the consequence of the energy crisis in Europe. For now, central banks will keep favoring inflation. Global growth will slow in 2023 but we won’t enter a global recession, and inflation expectations remain too high. The Fed will continue to lead the effort in global monetary tightening, and global policy coordination on currencies remain unlikely. Financial stability starts being a concern, but not enough for the Fed and ECB to move on the back of it. Concerns on the war also remain strong, as Ukraine is stepping up military effort and a peace deal continues to look far off. US policy will continue to remain focused around domestic issues. On energy, a EU-level policy on gas seems harder and harder, especially after unilateral fiscal action from Germany. The mood remains overall very negative, with outflows remaining elevated and cash levels high.

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Algebris Investments’ Global Credit Team