US Data – Slowdown in sight
Last week’s October CPI surprised by 0.1% to the downside at 3.2% YoY headline and 4.0% core, triggering a strong 30bps in US rates and paving the way to a soft landing. Retail sales fell from the previous months strong reading from +0.7% to -0.1% MoM but beat consensus forecasts of -0.3%. Thursday’s jobless claims rose to 231k, painting a picture of a loosening labour market. Ever since the strong data in Q3, Q4 data so far has confirmed the expected slowdown. GDP Nowcast trackers are still very dispersed as we only started to collect data, ranging between -0.2% from Bloomberg’s model and +2.5% from the NY Fed’s model – still indicating a significant slowdown from Q3’s 4.9%.
Markets – Pricing some landing
US 10Y treasury yields finished 20bps lower and below 4.5%, after having been at 5.0% just one month ago. Markets are pricing close to 100bps of cuts for both the US and the Eurozone until December 2024, reflecting a scenario similar to a soft landing. By December 2025, markets expect Fed rates at 3.8% and ECB rates at 2.6%, closer to their respective neutral rates but nowhere near easing territory. With European HY CDS index spreads below 400bps, cumulative default rates around 25% for the next 5 years look in line with a slowdown in economic activity and a rise in defaults, but by no means a crash landing.
Algebris Investments’ Global Credit Team
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