GLOBAL CREDIT BULLETS | Monday, 21st June 2021

Fed – Expecting inflation to remain above 2% until 2023.
The Fed surprised markets by bringing forward its guidance for rate hikes, now signaling 2 hikes in 2023 instead of a lift-off in 2024. The assessments on growth, reopening and the labour market were more bullish than before, with inflation forecasted to remain above 2% over the next three years. While rates initially widened during the press-conference, they have since almost entirely retraced, and the rates curves have also flattened. The US 10y yield retraced almost 20bp after the meeting to 1.4%, the lowest level since February. While a more hawkish dot plot naturally leads to a flatter curve, outright compression in the long-end is a bit overdone in our view, as real yields remain negative and tapering will come before hikes. The risk premium in the 10y+ segment seems now too low and makes the long-end vulnerable to stronger inflation/growth prints.
Our dove-o-meter confirms that while Wednesday’s press conference was slightly more hawkish than previous Fed communication, this is still far below what economic data would justify.
Key to the Fed’s tapering talks – which will likely be discussed at the Jackson Hole meeting in August – is the employment data over the coming months. If jobs gain and inflation remains strong, a hawkish Fed stance would be justified, and the recent rates rally may have been pre-mature. As FOMC member Bullard stated on Friday, inflation had come higher than the Fed had expected and hence the tilt to a hawkish stance was ‘natural’.

Commodities – China’s action may lower metals prices, but only temporarily.
China is trying to temper high commodity prices, by pledging to release state reserves into the market. Low inventories and strong demand amid the green transition have caused a sharp rally in commodity prices this year. This led to higher producer prices (PPI) in China, which in return lowered profit margins of the Chinese manufacturing industry. However, China’s measures can only help to ease pressure temporarily. For instance, China’s copper reserves are estimated at around 1.5-2 million MT of copper, which are significant relative to the potential deficits this year and next of around 300-400k MT, but insufficient if the deficits continue to widen. Therefore, while China’s action may constrain prices in the short-term, in the long-term more metals supply or tighter-policy to temper demand remain key to control prices and eventually inflation.

Covid-19 – How effective are our vaccines against the Delta variant?
Medical evidence from the UK suggests that while 1-dose vaccinations are less than 50% effective against the Delta variant, 2-dose vaccinations are still more than 90% effective in preventing hospitalizations. Also, the Delta variant is around 60% more transmissible than the Alpha variant. This means that while there is a risk that the Delta-variant continues to spread, as the vaccination roll out continues and with it the percentage of the population double-vaccinated, this risk should subside over time. In the UK and US, around 45% of the population is double vaccinated, while in Europe it’s around 26%.  So far in Europe, the daily rollouts have stayed at quite robust levels, i.e. ~0.9-1% of population per day. It seems supply is no longer a constraint for the EU, as it remains on track with its Q2 monthly delivery targets. In the UK, daily rollouts seem to be trending down recently, but at 0.67% of population per day the rate is still quite high. Only in the US has the recent trend been slightly worrying as vaccination rates dropped from >1% in March to around 0.4%.

To read more on our latest views, please see our Silver Bullet | Dog Money or visit our Insights section.