As December brought to a close a brutal year for risk assets, not least for sovereign rates and credit markets as a whole, we saw a continuation of the rally in credit spreads that started after the darkest moments of September and October.
Inflation rates now appear to have peaked in major developed economies as the biggest contributors to the spike that we suffered, energy prices, have fallen back to levels not seen since the start of the year or the back end of 2021. It might be fair to say that a mild winter has enabled Europe to dodge a bullet and over - reliance on the wrong sources of energy has been corrected remarkably quickly with new supply lines in place, although the UK still has the least, almost negligible, ability to store gas. China’s unexpected relaxation of covid restrictions has potential for upward pressure on crude prices and therefore inflation, but is also positive for global growth.
The Federal Reserve remains determined to hike until inflation is firmly under control but with the target rate now at 4.5% amidst all the chatter and counter chatter from different voting and non-voting members it does look as though the terminal rate is within a 100bp but is also likely to stay at the level for longer rather than see a pivot that many expect. Inflation rates continue to fall back, recent CPI numbers were in line but still down to 6.5% (disappointing for some), markets might have to get used to the rate remaining above target for an extended period. QT continues but in the context of the Fed’s balance sheet being sub $1Tn in 2008, peaking at $9Tn in March 22 and now at $8.5Tn they have hardly started.
The ECB we all know left it too late to start their hiking cycle and despite reducing their last hike from 75bp to 50bp look to continue at this rate for the foreseeable future. Inflation did fall back more than forecast due to the aforementioned reduction in energy prices but the ECB has to work hard to regain credibility. The last member of the negative yielding debt index has left, a period that remains baffling to many, especially me.
The Bank has regained some collective credibility (although the Governor is still capable of putting his foot in his mouth) and they managed to unwind their long end support facility at a profit. The surreal events of the muppet show are thankfully fading into the past from a Sterling perspective and UK CDS have halved from their end September wides and we are likely on course for a terminal rate of 4.5%. Sterling credit spreads continue their rally but still offer value. Recent GDP numbers show the UK economy escaped recession in 2022 much to the chagrin of some commentators.
The primary market exploded into life this year with total issuance eclipsing any previous start, Euro denominated debt in particular, with EUR77Bn printing in the first week and over EUR100bn in the second.
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