Encouraging (early) signal

Key takeaways

• After three consecutive months of upside surprises (vs. Bloomberg consensus), the April U.S. CPI data (released May 15^th) showed early signs of moving in the preferred direction of the Federal Reserve: lower (Exhibits 2-5). But the “start-stop” nature of the inflation fight (i.e., progress in 2H2023, but a lack of further declines in 1Q2024), suggests a few more months of consistently improving data will be required for the Federal Reserve to begin a rate cutting cycle.
• We continue to expect a shallow rate cutting cycle to begin in 2H2024, with the risks of timing balanced within that timeframe (and highly dependent on the incoming inflation data). But as we have highlighted previously, the reason for rate cuts (i.e., improved inflation or weakness in the labor market) is much more important than the timing. Similarly, the reason behind any delay of rate cuts (i.e., stronger than expected growth or a sustained reacceleration in inflation) will determine how the corporate credit market responds.
• One of the notable developments in USD corporate credit in recent months has been the robust primary market backdrop (Exhibits 1 and 8). These elevated new issue volumes have (1) occurred despite persistently high interest rates, and (2) been largely well absorbed, based on a variety of metrics. Perhaps most notable for corporate credit investors, however, has been the “bondholder friendly” nature of the supply. For example, 77% of the year-to-date USD HY issuance has been earmarked for debt repayment or refinancing, per Dealogic (Exhibit 9). This ranks as the largest such share in the post-financial crisis era. It also explains why the market has so easily absorbed the supply (as very little “new money” has joined the USD HY universe).
• Finally, given the prevailing expectation for a “high for longer” cost of capital, in this Global Credit Weekly, we provide an update on the fundamentals of two alternative asset classes using recently released 1Q2024 data: U.S. private debt, and commercial real estate.

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Exhibit 1: The strong pace of USD IG supply continues in 2Q2024
Cumulative USD IG gross issuance by week, 2010 through 2024

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Past commentaries

• Week of May 9th
• Week of May 2nd
• Week of April 25th
• Week of April 18th
• Week of April 11th
• Week of April 4th
• Week of March 21th
• Week of March 14th
• Week of March 7th
• Week of February 29th
• Week of February 22nd
• Week of February 15th