GLOBAL CREDIT BULLETS | Monday, 15th November 2021

Inflation – No gravity
US inflation data continue to accelerate. In October, the CPI basket increased 0.9% on a monthly basis and 6.2% on an annual basis. While energy was the main driver of the print, on the back of the October rally in crude and gas prices, core component were also strong, with services and shelter showing a marked increase vs September. With inflation above 4% since March, the “transitory” party prevailing in major central banks weaken by the day. Real rates are now running at -4%, despite employment and consumers point to a healthy economy. As we argue in our recent Silver Bullet, underlying drivers of inflation suggest a turnaround is not close. We continue to think 2022 will see more pressure on central banks, and inflation finally impacting nominal rates and credit.

Covid – Lockdown spectres
As winter approaches, Covid cases are on the rise across the West. Global cases are on the rise after the bottom reached in late August, with US, UK and Europe driving the uptick. In Europe, Germany has seen a dramatic acceleration, while France and Italy a decent uptick. Fatality remains low, but some concerns are emerging among authorities. In Netherlands and Austria, governments are discussing more restrictions. In UK and US, aversion to restrictions is generally higher but hospitalizations and fatalities are on the rise. We continue to think full fledge lockdowns are unlikely, but selective restrictions are a possibility, particularly in Europe. We maintain a bullish view on re-opening sectors but concentrate conviction where downside is lower, ie in less impacted re-opening sectors (energy) or in issuers where valuations are more stretched.

China – Signs of easing
In China, the PBOC is giving more signs of easing, in an attempt to further stabilize the real estate market after the stress experienced by developers in September and October. First, M&A loans have been excluded by regulatory limits on developers leverage. Under the new rules, consolidation of distressed entities become easier. Second, banks have been reportedly allowed to resume considering mortgage applications, which have been held back for almost 6 months. Finally, banks have been allowed to concentrate lending to property developers again, after strong limitations over the past 12 months. The regulatory moves are likely to ease financial pressure on the property sector, and thus gives China some macroeconomic relief. We continue to think that proper monetary easing via RRR cut is probably a stronger weapon, but the recent changes arguably remove some downside to Chinese growth into 2022.