Week of September 18, 2023
Dec Mullarkey, CFA , Managing Director, Investment Strategy and Asset Allocation
Another meeting, another rate pause. But there was more, as the U.S. Federal Reserve refreshed its outlook for the economy, inflation and rates. The accompanying Summary of Economic Projections (SEP) upgraded the Fed’s GDP growth forecast and was more optimistic about where the unemployment rate would peak.
However, all of that good news resulted in Fed expectations that rates need to remain higher for longer. In his press conference Fed chairman Jerome Powell stressed there was considerable uncertainty in the outlook. The Fed continues to seem puzzled by the economy’s resilience and Powell mentioned several times of the need to be careful. Ultimately, the Fed is saying the economy is still strong, inflation remains high and lagged effects are still working through the economy.
All that seems credible to markets as bond yields rose and equity markets dropped after the press conference. The market still thinks rates will be lower at the end of next year compared to what the Fed has penciled in. But the difference between both is shrinking, and is helping affirm the Fed’s credibility.??
Source: Bloomberg, Financial Times, 2023.
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Andrew Kleeman , Senior Managing Director, Head of Corporate Private Placements
We typically measure a market by volume of issuance. By that yardstick, the 2023 investment grade private credit market (IG private credit) will likely be smaller than that of 2022. The typical post-Labor Day wave of deals seemed more like a ripple, although more deals seem to be launching now that we are in the third week of September. While we are seeing increased activity over a slow summer, September has not produced the immediate rush of deals that was expected.
Borrowers are still expected to come to market if they have to get something done, either to refinance debt, finance capital expenditures or fund an acquisition. However, stubbornly high interest rates continue to dampen “opportunistic” issuance as issuers seem reluctant to lock in long-term fixed rate financing at current coupons. Combined with less issuance from certain sectors (real estate and financials) that have slowed after a couple of years of robust volume, it feels like the rest of the year will be slower than the last few years.
Is this bad news? Not necessarily. Despite lower overall volume this year, we have found the IG private credit market rational with attractive pricing and solid allocations.
Source: Private Placement Monitor, 2023.
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Linda Kong Ting, CFA , Senior Director and Credit Analyst, Asset Management
Prior to the pandemic, U.S. quit rates were very highly correlated to consumer confidence. However, the post-COVID period brought a significant divergence as quits skyrocketed to never-before-seen levels in late 2021 to early 2022, while consumer confidence bottomed in June 2022. As both extremes correct, it appears that the famous “vibecession” coined by Kyla Scanlon is on the wane. ?
However, as the debate on a possible economic soft landing continues, it is notable that despite recent declines in quits, we are still only at the levels seen in the effervescent 2005–2007 period. Therefore, it feels premature to say that the market has fully normalized at this point, whether from a positive or negative standpoint. At the same time, reports continue to roll in from goods retailers about consumer trimming at the edges, such as with smaller home renovations and increased interest in (usually cheaper) private label brands, plus trims in “revenge spending” beneficiaries in the service sector. For example, Darden Restaurants reports that customers are opting for cheaper wine with upscale steak dinners, and McDonald’s is seeing trading down and fewer items per customer. As a result, we would prefer to see stabilization in the quit rate at or above current levels before taking recession possibilities off the table, even if consumer confidence continues to rise.
Sources: Bloomberg, Barclays, Marketplace, 2023.
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