As just a follow up to my comments yesterday on the CCC bucket of high yield where I just mentioned the absolute yield rise. Here is a chart of the index option adjusted spread. It is now above the late December/early January spike at over 1000 bps. It certainly remains well below its energy led jump in late 2015 but we need to differentiate this move from that late 2018 move. Then, it was just fears of the economic repercussions of an aggressive Fed as we know stocks sold off too. Fears that were not immediately realized and the Fed ‘came to the rescue’ again. Now, it can only be actual worries about deteriorating cash flows relative to an excessive debt burden for these credits while stocks, at least the large caps, sing a completely different tune.
CCC spread to Treasuries
For now, the concern about this area of high yield is contained to the CCC area as the B category, right below BB and above CCC, option adjusted spread remains low.
The other index to watch is the S&P/LSTA leveraged loan index, another area with junky credits that are senior secured (but nowadays with little that is junior). As seen, it is just above its early January lows.
S&P/LSTA LEVERAGED LOAN INDEX
Moving on. The November Australia manufacturing and services composite index is now below 50 at 49.5 vs 50 in October. Both components are less than 50. Markit said “Where output decreased, panelists reported challenging economic conditions and relatively weak customer demand.”
Japan’s combined PMI rose to 49.9 from 49.1 with manufacturing at 48.6 while services got back above 50 at 50.4. Either way, they are around the flat line. They are dealing with the aftermath of the VAT increase and the typhoon which cloudy’s the analysis but “we can now deduce from the November PMI data that there is a strong possibility of Japan’s economy contracting in the fourth quarter” according to Markit.
An aside, the BoJ has basically ended QE this year as they’ve basically stopped buy JGB’s and stock ETF’s. Owning more than 40% of the former and about 80% of the latter I guess is enough nationalization for any one central bank.
Japan also reported its October CPI figure and the BoJ got some more inflation. Ex food and energy, the CPI rose .7% y/o/y vs .5% in September, one tenth more than expected and the quickest pace since April 2016. It took a VAT hike to get even this. Now imagine if they actually got to 2% on a sustainable basis. Consumers would revolt and their bond market would blow a gasket. Not to be wished for.
Shifting to Europe, its manufacturing and services PMI for November fell to 50.3 from 50.6. Manufacturing improved slightly, although is still contracting, to 46.6 from 45.9 and vs the estimate of 46.4. Services weakened to 51.5 from 52.2 and below the forecast of 52.4. Markit said “Manufacturing remains in its deepest downturn for 6 years amid ongoing trade woes, and November saw further signs of the weakness spilling over to services, notably via slower employment growth…Business remains concerned by trade wars, Brexit and a general slowdown in demand, with heightened uncertainty about the economic and political outlook driving further risk aversion.” The euro is little changed but most bond yields in the region are falling while stocks are slightly higher. Weakness in Europe now is not new so just how long this goes on for is the question.
The situation worsened in the UK as its composite index fell below 50 at 48.5 from exactly 50. Manufacturing slipped further to 48.3 while services are down to 48.6. This would imply a contraction in Q4 GDP but hopefully this is the worst it will get as Q1 should see an end to this Brexit mess. It better happen because Markit said notwithstanding this uncertainty, “the PMI surveys are not only warning that the underlying trend in the economy is deteriorating markedly, but also that the labor market is cooling.” The pound is lower on the number and gilt yields are falling.
New ECB President Christine Lagarde gave her first real speech today since becoming the new head. She said nothing really new but did again push responsibility for fresh stimulus to the governments which we expect her to continue to push for as monetary policy is fully exhausted.
Finally, I have to include this quote from Janet Yellen from a piece written by Jeff Cox at CNBC. This comes from a former Fed member who as Governor and Chair presided over and voted for putting rates to zero, keeping them there for 7 years and embarking on multiple rounds of QE. “Some of the most disturbing notes came from people who said, ‘I work and I played by the rules and I save for retirement and I have money in the bank, and you know, I’m getting absolutely nothing. Savers are getting penalized. It’s true.” Certainly the Fed hung savers out to dry and Jay Powell and Co seem intent on doing it again if needed.