After a dizzying week of economic and
market activity, our Head of Corporate Credit Research breaks
down the three top stories.
----- Transcript -----
It’s been a whirlwind week of economic activity in the markets as
we enter the dog days of summer. Our Head of Corporate Credits
Research breaks down three top stories.
Welcome to Thoughts on the Market. I'm Andrew Sheets, Head of
Corporate Credit Research at Morgan Stanley. Along with my
colleagues bringing you a variety of perspectives, today I'll be
discussing what we’ve taken away from this eventful week.
It's Friday, August 2nd at 2pm in London.
For all its sophistication, financial activity is still seasonal.
This is a business driven by people, and people like to take time
off in the summer to rest and recharge. There’s a reason that
volumes in August tend to be low.
And so this week felt like that pre-vacation rush to pack, find
your keys, and remember your ticket before running out the door.
Important earnings releases, central bank meetings and employment
numbers all hit with quick succession. Some thoughts on all that
whirlwind.
The first story was earnings and continued equity rotation.
Equity markets are seeing big shifts between which stocks are
doing well and poorly, particularly in larger technology names.
These shifts are a big deal for equity investors, but we think
they remain much less material for credit.
Technology is a much smaller sector of the bond market than the
stock market, as these tech companies have generally issued
relatively little debt – relative to their size. Credit actually
tends to overlap much more with the average stock, which at the
moment continues to do well. And while the Technology sector has
been volatile, stocks in the US financial sector – the largest
segment for credit – have been seeing much better, steadier
gains.
Next up this week was the Bank of Japan, which raised policy
rates, a notable shift from many other central banks, which are
starting to lower them. For credit, the worry from such a move
was somewhat roundabout: that higher rates in Japan would
strengthen its currency, the yen. That such strength would be
painful for foreign exchange investors, who had positioned
themselves the other way around – for yen weakness. And that
losses from these investors in foreign exchange could lead them
to lower exposure in other areas, potentially credit.
But so far, things look manageable. While the yen did strengthen
this week, it hasn’t had the sort of knock-on impact to other
markets that some had feared. We think that might be evidence
that investor positioning in credit was not nearly as
concentrated, or as large, as in certain foreign exchange
strategies, and we think that remains the case.
But the biggest story this week was the Federal Reserve on
Wednesday, followed by the US Jobs number today. These two events
need to be taken together.
On Wednesday, the Fed chose to maintain its high current policy
rate, while also hinting it’s open to a cut. But with inflation
falling rapidly in recent months, and already at the Fed’s target
on market-based measures, the question is whether the Fed should
already be cutting rates to even out that policy. After all,
lowering rates too late has often been a problem for the Fed in
the past.
Today’s weak jobs report brings these fears front-and-center, as
highly restrictive monetary policy may start to look out-of-line
with labor market weakness. And not cutting this week makes it
more awkward for the Fed to now adjust. If they move at the next
meeting, later in September; well, that means waiting more than a
month and a half. But acting before that time, in an unusual
intra-bank meeting cut; well, that could look reactive. The
market will understandably worry that the Fed, once again, may be
reacting too late. That is a bad outcome for the balance of
economic risks and for credit.
Thanks for listening. If you enjoy the show, please leave us a
review wherever you listen and share Thoughts on the Market with
a friend or colleague today.
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