Market Views

GLOBAL CREDIT BULLETS | Monday, 6 March 2023

ECB – Next stop 4%
Last week’s Eurozone CPI prints surprised to the upside and led markets to price in a 4% terminal rate for the ECB. Headline CPI YoY fell to 8.5% from 8.6% in January but bet estimates by 0.2%. Most alarming was the acceleration of core to 5.6%, up from 5.3% previously and 0.3% above expectations. While energy inflation continued to fall, both goods and services inflation rose to 6.8% and 4.8% respectively. In addition, hawkish comments by Wunsch, Vasle, Muller and Villeroy emphasised that the ECB is nowhere near slowing down. Several investment banks have now revised their terminal rate forecasts higher to 4% – roughly matching market pricing. It’s clear that the ECB will deliver their “intent” to hike by 0.5% on March 16th, and we think beyond that further 0.5% increases must be expected, assuming inflation stays this high. Despite the market pricing a lot already, we continue to stay cautious on European duration.

US – Risks more balanced
After strong data in February, last week’s data came on a more balanced note. Durable goods orders fell by more than expected to -4.5% YoY, the Dallas Fed manufacturing survey fell to -13.5, the MNI Chicago PMI undershot at 43.6, Conference Board consumer confidence fell by 5 points to 102.9 and the Richmond Fed manufacturing index fell to -16. ISM manufacturing and services printed in line, but prices paid surprised to the upside. We believe the bar for continued data upside surprises is higher, as economist revise their forecasts. From here, data realising in line or to the downside means the balance of risks of US duration lies to the upside (rally). However, this week features key new labour market data, including challenger job cuts, JOLTS job openings, ADP employment and most importantly Non-Farm Payrolls on Friday, which will determine if we go higher or lower, first. The next Fed meeting is on March 22nd, and the market is currently pricing a 25% chance of a reacceleration to 50bps. We think the bar of this is high, but strong labour market prints this week can accelerate the case.

Credit – Bonds at a crossroad
Global Fixed Income stands at a crossroad given the uncertainty in economic data, where active views on duration, issuers and securities are required to generate performance. It is possible for investors to find bonds with yields above inflation, but amid continued tightening monetary policy we do not recommend to compromise on quality. In duration, we stay cautious but prefer US over European duration, as we believe the Fed is further ahead in the cycle. In credit, we prefer HY over IG, but only with short durations to reduce volatility. In sectors, we like financials which offer the best risk reward amid strong fundamentals, and defensive sectors like telecommunication, who can pass on rising costs from inflation to their customers.

Algebris Investments’ Global Credit Team

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