GLOBAL CREDIT BULLETS | Monday, 13th December 2021

Central banks week – Tentative hawkish
This week, a flurry of central banks will give some hawkish signs, and the divergence between the Fed and ECB will accelerate. On Wednesday, the Fed could accelerate the pace of tapering. As Omicron risks fade, the focus of the FOMC will be mostly on inflation data, which remain strong. On Friday, USA CPI for November came just shy of 7% annual. Underlying components point to a broad-based increase: in November, core components, food and services kept up with energy and industrial items, as opposed to summer months, when inflation was driven by the latter. The inflation trend is now very worrying, as the level is high and the direction is higher. Both Chairman Powell and President Biden pointed to these concerns in recent remarks. Our base case for Wednesday is thus an acceleration of tapering, though Omicron uncertainty may push this decision to January. Hikes are most likely a story for 2H22, though persistent inflation may persuade the Fed to hike at least once by Spring. On Thursday, the ECB will need to communicate a twist of the current purchases program. As PEPP expires in March, the central bank will likely move purchases to the APP program. This way, the whole purchase program moves to the APP envelope but the overall amount of purchases tapers off. In Europe, Omicron fears are more concrete and inflation data weaker. The message will thus come across substantially less hawkish than the Fed. President Lagarde will likely continue to push back on 2022 hikes, and new forecasts won’t allow hawkish extrapolations. On Thursday, the BoE will likely remain on hold and won’t turn hawkish, especially given the new Covid measures just announced by the Government.

Omicron – Milder fears
Recent news continue to calm worries about the Omicron variant. First, evidence on symptoms is now more solid, and points to milder symptoms. In both Africa and Europe, hospitalizations are not picking up (despite an increase in contagions), and the fraction of severe cases among the hospitalized remains substantially lower than in previous waves. Moreover, Austria and Germany are seeing a peak in cases after temporary and relatively mild lockdowns, suggesting the economic cost from Omicron may not be as high as feared. Evidence on vaccine coverage is still not fully available, but preliminary declarations point to a certain degree of coverage, though not as complete as with other variants. Both Pfizer and Moderna pointed to strong coverage with three doses vis-à-vis milder coverage with two. Comprehensive studies on vaccine effectiveness on Omicron will be available in the next 1-2 weeks. Overall, milder symptoms, milder restrictions, and limited vaccine escape point to a scenario much better than feared initially. Many reopening trades remain stuck at pre-vaccine levels, especially among European travel and leisure names. We continue to find the level of valuations depressed vis-à-vis the base case that seems likely given initial data. We thus continue to see European re-opening as one of the few clean trades in a tight market.

China – Finally easing
In China, the government finally took more steps towards policy easing. Last Monday, the PBOC cut the required reserves requirement for local banks by 0.5%, releasing almost $200bn in liquidity. Moreover, on Wednesday the PBOC hiked the RRR for banks on FX operations, effectively weakening the currency and providing more support. The measures arrive coincidentally to the formalization of Evergrande default, pointing to support to properties and the banking system. Macro easing complements micro measures, such as relaxation of mortgage quotas and loans to the real estate sector, taken a few weeks after the Evergrande fallout in September. More proactive PBOC removes tail risk on China growth for next year, and signals more support to credit markets. Overall, we believe the worst has passed for China HY credit and the property sector. With 70% of the sector trading at distressed levels and credit events already happened for the worse issuers, more monetary support should be a tailwind for the sector into 2022.