Market Views

GLOBAL CREDIT BULLETS | Monday, 22 January 2024

Central banks – Cut it deep but not that soon
The central theme of 2024 is the amount and timing of central banks cuts. Global curves are pricing 5-6 cuts in 2024, and a deep 2-year cycle, ending with policy rates 2% lower than current levels in US and Europe. The overall amount of cuts priced by markets look reasonable to us, but we find the timing on the early side. Core inflation will stabilise below 3% in summer, making a Fed (or ECB) March cut premature. The frequency of cuts currently priced could be justified by a deep recession, at odds with current macro data, pointing to growth trailing 0-2% in most developed markets. Slow (but not tanking) growth and falling inflation mean 2024 will be a year of normalisation in rates, rather than insurance cuts. We expect 3-4 cuts in both Europe and US, starting in 2Q. 

ECB – Placeholder meeting 
The ECB will likely hold rates this week, but market focus is on guidance for the timing and magnitude of forthcoming cuts. The meeting offers no new projections, but questions will focus on the committees current assessment of recent data, which saw inflation and gas prices falling further. Tuesday’s Bank Lending Survey and Wednesdays’ PMIs will give key insights into the direction of travel. Going into this week, markets only see 16% odds for a March cut.

Red Sea – Escalation threatens supply chains
US and UK attacks on Houthi militants did little to stop attacks on cargo freighters, resulting in further declines in shipping rates and spreading fears for global supply chains. Ships transporting food and energy face higher insurance cost and longer travel times, affecting almost €70bn of European food imports and exports. UK supermarkets have already warned that disruptions can lead to higher food prices. Estimates for the impact on inflation are moderate for now, in the order of 0.3 pp per quarter. Estimates could change dramatically where persisting blockades are going to affect physical supply of oil and gas, driving commodity prices up. The impact on oil and gas prices remain the key risk to future developments in the region.

Algebris Investments’ Global Credit Team

This document is issued by Algebris (UK) Limited. The information contained herein may not be reproduced, distributed or published by any recipient for any purpose without the prior written consent of Algebris (UK) Limited.

Algebris (UK) Limited is authorised and Regulated in the UK by the Financial Conduct Authority. The information and opinions contained in this document are for background purposes only, do not purport to be full or complete and do not constitute investment advice. Under no circumstances should any part of this document be construed as an offering or solicitation of any offer of any fund managed by Algebris (UK) Limited. Any investment in the products referred to in this document should only be made on the basis of the relevant prospectus. This information does not constitute Investment Research, nor a Research Recommendation. Algebris (UK) Limited is not hereby arranging or agreeing to arrange any transaction in any investment whatsoever or otherwise undertaking any activity requiring authorisation under the Financial Services and Markets Act 2000.

No reliance may be placed for any purpose on the information and opinions contained in this document or their accuracy or completeness. No representation, warranty or undertaking, express or implied, is given as to the accuracy or completeness of the information or opinions contained in this document by any of Algebris (UK) Limited , its members, employees or affiliates and no liability is accepted by such persons for the accuracy or completeness of any such information or opinions.

The distribution of this document may be restricted in certain jurisdictions. The above information is for general guidance only, and it is the responsibility of any person or persons in possession of this document to inform themselves of, and to observe, all applicable laws and regulations of any relevant jurisdiction. This document is for private circulation to professional investors only.

© 2024 Algebris (UK) Limited. All Rights Reserved. 4th Floor, 1 St James’s Market, SW1Y 4AH.