GLOBAL CREDIT BULLETS | Monday, 11th October 2021

Global growth – clouds at the horizon
A few clouds darken the horizon for global growth. On the supply side, bottlenecks are starting impacting growth. The Citi economic surprise index has been in negative territory since July, both for the US and globally. Worsening factory orders and increased prices paid are the starkest components, pointing to supply side disruptions. Recent labour market data also display a slowdown in job creation (despite healthy unemployment rate and wage growth), a sign that supply bottlenecks are hurting labour markets too. The massive energy rally in September doesn’t help, even if recent opening from Russia to flow more gas into Europe removes the worst case scenario. On the demand side, concerns on China keep mounting. First, the number of property developers is increasing, making a real estate driven slowdown more likely. Second, the reaction from authorities is lagging, corroborating the idea that the government is rebalancing the economy taking the cost of a small slowdown. Overall, we still think the global economy is in decent shape, with strong growth and spare capacity in the re-opening sector, and the global economy on track to deliver 5-6% annual growth over the next 12 months. Still, markets are pricing a relatively robust recovery, and sell side forecasts did not budge much despite an eventful September, leaving room for revisions. So some growth fears add to the reasons to remain cautious.

US – bottlenecks bite the job market
The September US jobs report was solid but opens some room for Fed concerns. Non-farm payrolls were 194k, vs the 500k expected and below the August print. Still, revisions were strong, 366k in August, mostly in the private sector. Leisure and re-opening sectors continue to show gains, albeit more moderate than in July. The unemployment rate ticked below 5%, and wage growth remains above 4.5%. The picture is thus one of strong underlying demand, but progressively more binding supply bottlenecks. Overall, the job report was weaker than expected but not as much as headline figures suggest, and mostly driven by supply effects. On balance, we think the Fed should be able to start tapering with this set of numbers, especially in light or rising inflation and recent hawkish communication. Still, we recognize some risks around a November announcement, especially shall market volatility add to a weakish job report. We continue to think tapering could be faster than market is currently pricing, and potentially some hiking discussion could start mid-2022. US Treasury currently hover around 1.60, with the recent selloff losing some steam in recent weeks. We continue to think rates are structurally underpricing inflation and the Fed reaction function, and stay short rates as a hedge for longs in credit.

Energy crisis – temporary (political) relief
Gas markets found some stability this week after the massive rally of the past month. UK natural gas futures are down 25%, after a 130% increase in September. Over the week, in fact, headlines suggest a deal between Russia and Germany has been found, with the Kremlin reassuring markets that European gas supply will be boosted in the coming weeks. The reason for the supply squeeze remains largely unclear, and it’s likely a combination of various factors. Still, flow data show a reduction in EU imports from Russia, and Russia is still responsible for 40% of European consumption. As such, a political solution with Russia is an important step for market stabilization. Longer term, the supply picture remains challenging, with confirmed energy disruptions in Brazil, Norway, Russia shrinking supply at a time where demand is recovering and winter about to start in the West. Pressures can thus be managed by governments, but not fully removed. Considering Euro Area indexation system, the shortage may cost 50bp in annual inflation (provided it doesn’t worsen), leading 2022 inflation closer to 2.4%.