Market Views

GLOBAL CREDIT BULLETS | Monday, 19 February 2024

Markets – The land of doves
In our latest Algebris Bullet, we argue that market pricing is too dovish. Market’s view on 2024 Fed funds switched from 5% to 4% in just three months, with little change in fundamentals. Chances of a soft landing are now priced at 60%, vs 30% just three months ago. As markets are priced for perfection, asset prices are at risk, particularly in rates. The US economy is trailing 3% growth, and the budget deficit is close to 7%, with upside risks stemming from upcoming elections. We see limited value in duration and market beta and recommend bond investors focus on spread and credit selection (alpha).

US CPI – Uptick makes Fed nervous
In US, January CPI inflation came in hotter than expected. Core and headline rose respectively, 0.4% and 0.3% m/m, beating consensus. US core inflation is still running at 3.9% y/y. The beat was driven by stronger than expected housing prices. Some volatile categories printed very negative growth, raising fears genuine inflation may head even higher. We don’t see the January print as a game changer for the Federal Reserve, but it certainly adds to economic upside risks, after labor markets and growth both surprised on the upside in January. We think the current market pricing of five cuts at on a twelve-months horizon is still excessive.

Algebris Investments’ Global Credit Team

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