Market Views

GLOBAL CREDIT BULLETS | Monday, 20 February 2023

US – Hawkish momentum continues
A week of hawkish data in the US led markets to continue fading rate-cut expectations, while hawkish speakers fuelled speculations for a higher terminal rate.
US CPI and PPI continued to decline, but beat expectations, with headline CPI at 6.4%, core CPI at 5.6% and PPI at 6% YoY. Retail sales were strong at 3% MoM versus 2% expected. The NY Empire Manufacturing survey reading improved to from -32.9 to -5.8, contradicting the decline from the Philadelphia Fed Business Outlook which fell from -8.9 to -24.3.
While the inflation beats were mostly driven by higher energy prices in January, the stronger retail and Empire manufacturing data added to the strong economic momentum since the NFP beat. In reaction, two hawkish speakers Mester and Bullard reintroduced thoughts on larger rate hikes, causing markets to now price a terminal rate of 5.3%, including a 15% chance of a 50bp rise at the upcoming March meeting. While both aren’t voters this year, Mester could become one if Goolsbee is announced as new Fed Vice Chair, following Brainard’s move to the White House. In addition, Brainard was seen as an influential dove among the current committee, and her departure risks tilting the narrative in a more hawkish direction. Last week, we noticed a strong-cross market effect, as US fixed income led European markets to reprice too. We think terminal rate pricing looks fair here, but we do not exclude further upside as hawkish momentum continues.
This week, we’re looking forward to the Fed’s preferred inflation measure PCE, which is likely to print to the upside too, following the CPI and PPI releases.

UK – BoE on knife’s edge
Last week’s data in the UK delivered arguments for hawks and doves, as labour markets continued to be tight, CPI undershot expectations and retail sales came in strong.
Weekly earnings excluding bonus rose from 6.4% to 6.7%, driven by particularly strong wage growth in the public sector. However, higher frequency data showed that wage growth is slowing, and the closely watched ratio of vacancies to unemployed fell from 1.1x to 0.9x, indicating a loosening of the labour market.
CPI fell by more than had been anticipated by markets and the BoE itself, as core CPI dropped from 6.3% to 5.8%, against a survey of 6.2%. However, this decline was mostly led by volatile airfares, which in turn has declined amid weaker UK energy prices in January. Rising retail sales excl. car fuels by 0.4% MoM followed a nearly continuous period of monthly declining prints, and the outlook for the UK consumer remains bleak as real spending suffers under still-double-digit inflation.
The BoE’s Pill, who we see as centrist within the council, delivered a fairly dovish speech in our view. He described mostly how much tightening is yet to be felt from previous hikes, and interpreted the latest wage report as showing a loosening of the labour market – unlike the market, which had sold off as a first reaction. This narrative adds to the BoE’s most hawkish member, Catherine Mann, who recently mentioned being open to pausing rate hikes in her latest speech. Markets assign an 85% chance of a 25bp rate hike at the upcoming March meeting, and a terminal rate of 4.45% – both which we perceive as too high.
Nonetheless, we’ll see another CPI and labour market print before the meeting, which will confirm the direction of travel, but it’s likely that the end for the BoE is near.

Algebris Investments’ Global Credit Team

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