Welcome back at the weekly recap, as usual at the end of the week after one week of rest due to Easter holidays. As always if you like my job/analysis please subscribe below and share it and I remember you that I am also on twitter at @Credit_Junk.
Before going ahead I want to suggest you the read of the substack of a friend of mine (Heard on the Trading Floor). Inside you can find a lot of relative value idea regarding equity and credit (especially USD based).
And now let’s see what happened this week.
MACRO/NARRATIVE: this week, from a data point of view, we had some very important print regarding inflation in the USA.
The CPI release partially confirm that US economy is slowing and that inflation is on a downward trend, with the impact of the FED hikes starts to pass into the economy. The MoM index increased 0.1% while the core was up 0.4% (both slightly lower than estimates). The energy contibution is now finally negative, while there was some decrease in services. The core YoY remain high and sticky with:
Core goods +0.2% MoM (+1.5% YoY)
Core services +0.4% MoM (+7.1% YoY)
Core services ex-housing +5.8% YoY
Interesting the fact that despite being the major contributor to core, the shelter component start to decrease and probably will see more in the next months.
We had also the PPI for March, that surprised on the downside both on headline (-0.5% MoM and +2.7% YoY) and core component (-0.1% MoM and 3.4% YoY) with index returning near more “normal” levels (below the YoY index).
An other weak indicator is the data on the weekly initial jobless claims, growing for the third consecutive week and above consensus. Despite unemployment remain low historically and job market remains tight some indicators start to be on the negative side, and remember that job market is one of the most laggish indicator. Have a look at the job surprise index falling from a cliff.
MARKETS: Starting from the rates, market after the CPI/PPI data started to look at the FED stopping their hiking cycle. Investors removed hikes from the front end, with great swing down during the CPI day (2Y US collapsed from 4.10% to 3.90%, partially returing at the beginning point at end of the week. Long term rates in the US moved higher due the the risk-on enviroment, with 10Y US up 7bp on the week.
In Europe the ECB battle against inflation is still lagging that one of the FED, like the hiking cycle too. For this reason ECB speaker remain hawkish, with a lot of bankers for another 50bp hike in May. Germany 10Y ended the week 20bp higher. This divergence in central banks approach is easy to undestand looking at yield curves, with US curve steepening strongly (also on the short term tenors) while the flattening of the german curve continue.
The credit market performed well during the week with CSD outperforming cash (due to the increase in rates). Cash HY tightened 23bp on the index and 12bp on the ETF, while cash IG was more mixed (being flat on index and widening on ETF).
A support for credit market comes from a fall in rates volatility (below the MOVE index vs CDS IG Main) due to what we said above regarding market seeing the near top of FED hikes (maybe an other 25bp next month and stop).
An other supportive factor, especially for eur HY is that uncertaintly last year and this year reduced the supply, with a lot of bond to loan switch from the issuer. The HY market shrinked bt 50bn since the start of 2022, forcing investor to buy the bonds oustanding on the seconndary market. You can see it looking at the premium to NAV of HY ETF (the second chart below).
Passing now on equity, this week I analized the correlation of surprise index with SPX performance to undesttand better in which scenario we are in the “Bad news is good news or bad news is bad news”. Correlation is negative at the moment, so when there is negative surprise market think that central bank will support the economy stopping to hike and eventually to cut. So we are now in the “Bad news is good news” environment. This period are usually associated by the inversion of the yield curve that come before a recession. Just a note, not everything that glitters is gold: equity performance could be very negative during recessions.
For equity there is also a good technical support coming from the net negative positioning of levered investors.
Beyong the softening in the macro data a look at the “internal of the market” continue to say to pay attention ahead. In fact discretionary vs staples and cyclical vs defensive are weak and not confirming the bounce in the index, while now also the semiconductors vs index corrected from their high level. The same divergence is evident also looking “intermarket” the credit to govt ratio.
Passing now on commodities, we talked yet of oil some weeks ago after the OPEC+ cuts (here or on twitter too) but as my friend Lukas say, there is always a bull market somewhere.. Look at the rally in softs YTD as coffe, sugar and cocoa. Your breakfast will be more expensive next weeks.
MICRO: The best performers of the week are:
DMREGR (Demire): nothing name specific on the name, it seems to me just rebound from the record drop of last week
GTKIM(Gamma Bondco - ex Lottomatica): company announced listing of shares (IPO) starting from April. Togethere they expect to redeems with proceed some portion of senior secured notes due 2025 and the PIK note in full. S&P placed the name on creditwatch positive.
The worst performer are:
VIVION, ADJGR, CPIPGR (basically all real estate related). I have no specific information on these name but the sentiment remain weak.
For today it’s all. If you liked reading it and want to support my job, please share this piece to friends and colleague and subscribe to the newsletter using the link below.
Have a great weekend,
Credit_Junk
Weekly Market Review - 14 Apr
Excellent summary of a busy macro news filled week. thanks!
great as always, thanks, appreciate!