Week of March 11, 2024
Dec Mullarkey, CFA , Managing Director, Investment Strategy and Asset Allocation
The resilience of U.S. growth and the nation’s labor market are enviable to most other developed countries. However, it is also an economic puzzle. As the U.S. posts a long string of strong job growth, in what seems to be a tight labor market, inflation continues to be well behaved and to slowly recede.?
New research provides some answers. Two Brookings Institute economists, Wendy Edelberg and Tara Watson, conclude that a post pandemic surge and catch up in immigration over the last few years is helping fortify the workforce, contain wages and power economic growth.
These researchers estimate that net immigration last year was over three times the pre-pandemic forecast. And updates from the official forecaster, the Congressional Budget Office (CBO), suggest that immigration is boosting sustainable employment growth from its established estimate of between 60,000 and 100,000 new jobs a month to double that for now. The CBO also estimates that the unexpected rise in immigration has added to consumer spending and GDP growth.
Meanwhile, most major economies continue to face demographic challenges, from lower births to an aging population. It is already becoming acute for rapidly aging countries like Japan and China, which are seeing their workforce drop as retirements rise, while births and immigration remain low. Fortunately, the U.S. has been a desirable destination for immigrants for decades, which seems to be continuing to pay an important productivity and growth dividend.?
Sources: Brookings Institute and The Hamilton Project, Wall Street Journal, 2024.
Linda Kong Ting, CFA , Senior Director and Credit Analyst, Asset Management
As rate expectations have now evolved into a consensus of “higher for longer,” we have seen an accelerating embrace of the long end by the corporate treasurers. After a fairly barren 2023 for 20-plus year issuance, at just 13% of that year’s total according to Morgan Stanley, long credit issuance is back with a vengeance in 2024 as it has now surpassed 20% of total issuance. This is comparable to the proportion last seen in the stimulus-driven low yield environment in 2021.
The increase in long-end credit supply has been met by voracious demand, with several instances in the past week of long bonds tightening a full point or even more within the first day, as well as some books as much as 10-times oversubscribed with very low allocations. With relatively minimal credit premium on offer for the maturity extension, we expect the increased long issuance trend to continue, particularly if merger-and-acquisition transactions pick up and fuel more jumbo transactions. While real money demand from insurance companies and pension funds is also expected to remain robust, we will be keeping an eye out for any reduction in book sizes in the coming weeks given relatively rich valuations in this part of the curve compared to shorter paper.
Source: Morgan Stanley, 2024.
Kevin Quinlan, MBA , Senior Director, Climate and Client Strategy
The Securities and Exchange Commission’s long-awaited climate disclosure rule was approved last week, almost two years after a draft was released.
In an effort to reduce compliance costs for public companies, the final rule was scaled back. The draft included a requirement for reporting material Scope 3 greenhouse gas emissions, which includes indirect emissions from end-use of products. For many sectors, Scope 3 represents the majority of their emissions; it’s upwards of 85% for agriculture, oil and gas, or metals and mining. Investors advocating for the inclusion of Scope 3 argued it’s a necessary step for getting a complete picture of transition risk. Opponents argued Scope 3 would be an unrealistic reporting burden for most filers.
The SEC went with a scaled down rule, scrapping Scope 3. But investors looking for useful climate disclosures didn’t leave empty handed. For example, financial statements now require inclusion of a note of expenses, charges and losses incurred as a result of severe weather events – relevant given the U.S. saw a record 28 weather disaster events in 2023 that caused US$1 billion-plus in damages.
For global public companies, the Scope 3 debate was likely met with a shrug. That’s because an estimated 3,000 U.S. companies are expected to be captured under the E.U.’s new Corporate Sustainability Reporting Directive, which includes a requirement for Scope 3 reporting.
Sources: SEC, Financial Times, National Oceanic and Atmospheric Administration, CDP, 2024.
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