US Inflation – Moderate relief
US inflation data for April provided some relief. US core inflation printed at 0.3% m/m, 3.6% y/y, in line with consensus. Core PPI printed at 2.4% y/y, slightly above consensus but sticky factors surprised on the soft side. Core PCE, the monetary policy relevant measure of inflation, will likely print at 0.2% m/m and 2.7% y/y as a result. Rates markets relieved as data failed to surprise on the upside, as they have done ytd. Monthly prints relieved but remain too high for the Federal Reserve to consider cuts soon. We disagree with markets on a September cut being in the cards. We believe cuts may start in 4Q and could potentially be delayed further.
Credit spreads – Tight business
Relief on the inflation front brought more excitement in credit markets. Broad credit has outperformed Treasury notably ytd (high yield is up 2-3% vs US treasuries down 2%), leaving spreads at tight levels. In Europe, high yield spreads are below 300bp, the tightest level since 2021. At current levels, investors hardly get remunerated for intrinsic risk in the broad market, especially as higher for longer is starting to bite on a few capital structures. Strong ytd inflows and buoyant primary markets point in the same direction. Recent price action reinforces our view that the broad credit market has limited value. At current levels, 50% of global bond markets, including the majority of IG credit, yields less than central bank cash rates, while 10% of the market pays at least 7.5% in Euros. Opportunities remain abundant, but an active and selective stance is key.
Algebris Investments’ Global Credit Team
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