GLOBAL CREDIT BULLETS | Monday, 17 April 2023

US – One and Done
The Fed is likely to hike one last time in May, and then go on hold for the remainder of the year. We expect a 25bp hike on May 3rd to a terminal rate of 5.0-5.25%, and last week’s data and Fed speak strengthened our view. Inflation came in at or below expectations, with headline CPI YoY at 5%, 10bps below survey and a full 1% lower than last month’s print. Core YoY strengthened by 10bps to 5.6%, in line with expectations. The data reflects a combination of strong base effects from energy prices, which are materially lower than a year ago and fell 3.5% in the CPI measure, and easing of price pressures across goods and services. Most importantly, shelter prices finally showed signs of easing, even if this was partially offset by rises in transportation and travel. Wednesday’s Fed minutes confirmed that that upside risks to inflation are weighed against downside risks to the economy, including a now formally mentioned expectation for a “mild recession” later this year.  The NFIB survey for small businesses held stable at an optimism reading of 90.1, in line with the 6 months but well below the neutral reading of 100. The breakdown showed one of the biggest drops in credit availability, reflecting the tightening of lending standards by regional banks to small firms. The most notable Fed speak remarks came from Goolsbee, who recently joined the committee to replace Brainard, emphasizing tighter lending standards and warning against overtightening. On the other side of the spectrum, Waller commented following Friday’s weak retail sales that monetary policy should tighten further as inflation remains persistently too high, and financial conditions remain too easy.Market pricing stands at about 80% odds for a 25bp hike in May, and 60bp of cuts from peak to trough by year end. We think pricing the upcoming meeting as the last is appropriate, but the pricing for cuts is still exaggerated.

Global Central Banks – Who keeps going and who cuts first?
With the Fed hiking cycle nearing an end, only few DM central banks are expected to continue hiking from here. For EM instead, it’s a question of who cuts first.
The ECB gives the most hawkish flavour among DM, with central bankers openly keeping 50bp on the table for the May meeting and markets accordingly pricing 25% odds for such move. With continued momentum in core inflation, and an uncertain outlook for energy prices later this year when storages will have to be replenished, there is little data to support a slowdown. We therefore think the market pricing for 75bp of further hikes and a terminal rate of 3.75% is realistic. Among the remaining G10 economies, we have seen the RBA and BOC pause already amid slowing inflation and in the case of the RBA a higher tolerance for inflation overshoots. The other extreme remains the BoJ, which is yet to deviate from their ultra-loose monetary policy stance. Governor Ueda has recently entered office but is not expected to change policy at the end of April just yet. However, wage growth momentum around the Shunto wage negotiations stays strong and is likely to force the BoJ’s hand eventually.
Among EM, the BCB of Brazil and Banxico of Mexico are the two strongest candidates for a policy pivot and therefore cuts. In Brazil, the policy rate is at 13.75% despite inflation at “only” 4.7%, resulting in a real policy rate of 9.1%. Brazilian inflation fell by almost 1% MoM last week and now stands below the 5-year average. In Mexico, the policy rate stands at 11.25%, compared to inflation of 6.9%. We expect Banxico to hold rates at their upcoming meeting in May, amid their recent willingness to end the cycle.

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Algebris Investments’ Global Credit Team