Global Credit Outlook: 4Q2024

Key takeaways

• In 3Q2024, the focus among many market participants in the U.S., Europe and the U.K. largely shifted from upside risks to inflation to downside risks to growth. Looking ahead to 4Q2024 (and beyond), our focus will be on the depth and drivers of the rate cutting cycles in these regions.
• The distinction between monetary policy “normalization” and “easing” is important for corporate credit investors to monitor, in liquid and private markets. Near-term policy easing in response to a sharp growth downturn or labor market deterioration would likely be accompanied by meaningful credit spread widening. By contrast, policy rate normalization in response to improved inflation is a more supportive backdrop for credit (and largely what is priced into spreads, currently).
• The trend of “dispersion but not widespread market disruption” – which we have been flagging over the past few quarters – should also remain firmly in place in 4Q2024. We see opportunities for performance and fundamental differentiation across asset classes, sectors, and issuers. We also see scope for some fundamental improvement, as rate relief flows through to borrowing costs. Sponsor M&A should also benefit.
• In general, our base case of supportive growth (especially in the U.S), reduced monetary policy restriction, and technical tailwinds (such as yield based demand) suggest spreads can likely remain in their narrow (and tight) ranges over the medium term. That said, we do expect some near-term volatility around the U.S. election, given the various potential paths that will impact corporate issuers: namely, tariffs/trade and taxes.

Normalizing vs. easing 

In 3Q2024, the focus among many market participants in the U.S., Europe and the U.K. largely shifted from upside risks to inflation to downside risks to growth. This was underscored by central bank actions: the Federal Reserve (Fed), European Central Bank (ECB) and the Bank of England (BoE) each took steps to normalize policy rates from their respective cycle peaks (Exhibit 1).

Among the most notable actions of 3Q2024 was the Fed’s 50bps rate cut in September. Chair Powell repeatedly referenced a “recalibration” of monetary policy as recent weakening in the labor market brought both sides of the Fed’s dual mandate (price stability and maximum employment) into balance.

Looking ahead to 4Q2024 (and beyond), our focus will be on the depth and drivers of these rate cutting cycles. The distinction between monetary policy “normalization” and “easing” is important for corporate credit investors. Near-term policy easing in response to a sharp growth downturn or labor market deterioration would likely be accompanied by meaningful credit spread widening. By contrast, policy rate normalization in response to improved inflation is a more supportive backdrop for credit (and largely what is priced into spreads, currently).

We also expect growth differentials to feature more prominently in 4Q2024 – across and within regions. For example, in late September policymakers in China announced a range of stimulus and policy measures to boost consumption and address property market declines. And within Europe, the weakness in the German manufacturing sector became more apparent in 3Q2024 – especially when contrasted to strength elsewhere (in the periphery, for example). Meanwhile, U.S. growth was tracking at an above trend pace of +3.1% as of late September.

Exhibit 1:The drivers and depth of future rate cuts will be important to monitor
Monetary policy rates for the European Central Bank, Federal Reserve, and Bank of England

The growth backdrop is key

One of our key investing themes over the past few quarters has been “dispersion but not widespread disruption.” This phrase reflects our view that, while the higher cost of capital environment of the past two years has been a headwind for subsets of the corporate credit universe, by and large, most corporations found ways to adapt. But the resilience of credit spreads despite higher interest rates can also be attributed to a supportive growth backdrop. For example, above trend GDP in the U.S. was a powerful mitigant to higher debt servicing costs. Looking ahead to 4Q2024, we expect the growth backdrop will continue to be important for investors’ sentiment towards corporate credit risk – especially for the high yield (HY), leveraged loan, and private debt universes – which tend to be more economically sensitive relative to their investment grade (IG) peers.

We are most focused on (1) whether the momentum in U.S. economic activity can be sustained, and (2) whether the recent deterioration in parts of the Euro Area worsens and/or spreads. We are constructive on the U.S. outlook, which has been buoyed by a resilient consumer and should benefit from easing in the level of monetary policy restriction. While we have a slightly more cautious approach toward Europe, we believe the recent stimulus in China trims some of the “left tail” downside risks to European growth.

Exhibit 2:Supportive growth is key for continued credit spread resilience, in our view
Quarter-on-quarter real GDP growth (%), seasonally adjusted at an annualized rate

Past commentary

• 3Q2024
• 2Q2024
• 1Q2024