GLOBAL CREDIT BULLETS | Monday, 24th January 2022

China – Little easing is better than nothing.
Concerns on the economy slowdown finally triggered easing by the Chinese authorities. High frequency trade and industrial output indicators worsened notably in 4Q21, and most forecasters now see China growth for 2022 in the 4-5% range, close to the bottom of the past 15 year range. Potential for economic weakness is also reflected in low inflation and slowing credit creation. After muddling through for most of last year, authorities responded with some moderate easing. Over the past week, the PBOC cut the main policy rates by 10bp. This follows two moderate required reserve requirements cuts in 2H21. The PBOC opened to the possibility of more easing later in 1Q22. Moreover, the PBOC took steps to ease credit stress for the troubled developers, allowing pre-sales collateralization in arm’s length credit lines. The easing move signals some discomfort of authorities with the current economy. Growth is slowing down quickly and the credit crunch in the real estate sector does not seem close to an end. Still, the amount of stimulus is relatively low, especially in light of intermittent restrictions amid the diffusion of Omicron variant. We remain wary on China growth in 1H22, and believe more stimuli will be needed to withstand the multiple shocks coming from Covid and real estate developers. China choppiness adds to the case for a strong USD, cautious emerging markets view in the current market phase.  

Italy – Presidential week.
Starting on January 24^th, the Italian Parliament will vote for the next President. Incumbent President Sergio Mattarella is likely to leave office after his 7-year long tenure. The market is swinging between two possibilities: an election of Mario Draghi as President or a party-led election of a high rank former politician. The former would be a long-term positive for Italy, as it would mean Draghi would serve Italy governance and reputation for another seven years, instead of the one year remaining under his PM mandate. Still, it could open to some short-end volatility, as the PM job would be vacant opening room for early elections. A high-rank politician would avoid short-term risk but open more long-term uncertainties, especially as in this case 2023 elections may be coupled with ECB tightening. We see Draghi as the path of least resistance for the current Parliament, though we recognize that the game is quite open. If Draghi was elected, though, we believe it may come with a political deal over a technical “caretaker government”, aimed at leading the country to 2023 elections. As such, we see the risk of early elections relatively low. Volatility in BTP spreads is thus likely to remain subdued for the time being, though we may see some 20-30bp of widening over the next week, given the tight initial levels and the direction of rates. We keep advocating a poor risk/reward in Italian BTPs, as tight spreads benefit from the 35% ECB ownership in the asset, and may quickly U-turn once tightening signals meet elections noise in late 2022.

Fed – Hawkish meeting ahead.
On Wednesday, the Fed will hold its first monetary policy meeting of the year. At the meeting, the tone is likely to be tilted on the hawkish side. Since the Fed accelerated tapering in November, inflation has increased to 7%, and more MPC members turned vocal about the amount and pace of hikes for 2022. This includes some members historically leaning on the dovish side. The US job market remains very strong and consumer prices are now more driven by permanent factors, such as services. Moreover, inflation is turning more into a political theme, with the White House now putting it high in its economic priorities for 2022. At the meeting, the Fed is likely to provide more guidance about the number of hikes, which the market now expects to be 4, starting with 25bp in March. Furthermore, Powell will need to clarify the amount and sequencing of quantitative tightening, which has recently been discussed as a tightening tool the Fed is ready to use. Markets now price well the extent of 2022 hikes, but less so the amount of balance sheet reduction. 30y USTs still yield 2.1%, way below inflation, and 5s30s spreads are now 50bp, close to 5y lows. The market thus expects hikes, but expects these to work relatively quickly to reduce inflation, and does not factor in balance sheet reduction at all. The Fed meeting may thus turn into a wake-up call for the long-end of the curve, with potentially strong impact on credit markets and bond outflows.