Corporate Credit Snapshot - October 2024

October 9, 2024

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US

In the US, risk assets gained across the board in September.  Following the Federal Reserve’s (Fed’s) September 18th 50 basis points (bps) cut to US policy rates to combat an “uncertain economic environment,” economic data seems to confirm that disinflation trends have rooted in advanced economies. This could pave the way for a continued period of monetary policy normalization.  US markets received confirmation that the Fed was justified in its "supersized" 50bps rate cut. The central bank’s preferred inflation gauge, the core Personal Consumption Expenditures (PCE) deflator, dropped month-on-month, slightly below market expectations.  Meanwhile, Fed Chair Jerome Powell’s favored measure of "super core" PCE inflation — which excludes housing from core services — fell month-on-month, demonstrating that the US economy is cooling.

EUROPE

In Europe, credit markets gained across the board in September.  After the US Federal Reserve (Fed’s) first rate cut of the cycle mid-month, European and US rates travelled similarly.  Having rallied ahead of the Fed’s move, both US and European rates moved higher in the second half of the month causing rate curves to steepen as the market seemed to interpret the Fed’s willingness to meaningfully cut rates as increasing the likelihood of a soft landing. Throughout the month, the automotive sector was in the spotlight; we saw a wide range of profit warnings from many of the large European auto manufacturers.  Profit warnings highlighted weaker demand from China, competition from Chinese imports, ongoing supply chain issues, high inventory levels, and lower demand for electric vehicles. The auto profit warnings have brought a return of cyclical concerns in Europe, and we believe Q3 earnings will be important to counter investor concerns about consumer weakness in Europe.

EM

Emerging Market (EM) debt generated positive returns this month.  Investment grade assets benefitted from falling US government yields, while high yield was bolstered by a risk-on environment that helped spreads tighten.  The EM sovereign universe benefitted from more distressed regions with El Salvador, Argentina and Pakistan having a strong month.  Within EM investment grade, both Asia and Latin America outperformed, driven by Chinese securities and long-dated commodities, respectively. EM high yield outperformed its peers in developed markets. Latin America was the strongest region, led by companies in Argentina and long-dated energy companies. There was strong supply in September, mostly split between quasi sovereigns, energy, and financial companies.

OUTLOOK

At the end of the month, US Treasury markets are pricing in 8 additional rate cuts by early 2026, with three in 4Q24, and a terminal rate of 2.75%.  We are finding high yield spreads that are tight, but that we believe are justified by the improved quality of the high yield universe, a very modest default outlook, and what we view as compelling yields.  Heavy supply is being easily met by demand as cash is coming off the sidelines and money market rates fall.  China unleashed a historic stimulus package including rate cuts and liquidity facilities to fund share repurchases.  The Politburo affirmed its focus on growth and property market stabilization with its first off-schedule announcement since COVID.  We think that following the first large Fed rates cut, the Fed—and markets—could recalibrate rate cut expectations, especially in light of Chinese stimulus and rising Middle Eastern tensions that could increase oil prices.  

 

Past performance is not a reliable indicator of current or future performance. 

Muzinich views and opinions are for illustrative purposes only and not to be construed as investment advice.

This material is not intended to be relied upon as a forecast, research, or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed by Muzinich & Co. are as of September 2024 and may change without notice.

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