Watch this clip below.
In a clip of this morning’s macro show, we revisit #thecycle theme from our Q2 themes deck by highlighting reflation reversal risk as it pertains to credit markets:
- Higher low in spreads? The MOVE Index has been smashed to lows not seen since 2014 and high yield OAS has retreated to 2015 avg. levels on the whole. However, the market remains well off the 2014 cycle lows in volatility and credit spreads, and historical evidence suggests we won’t be returning in the current cycle.
- Sentiment: Real-Time indication of consensus positioning for a continuation in the reflation trade is visible in commodity leveraged credit spreads, global macro futures and options positioning, and forward-looking volatility expectations (MOVE and implieds in commodity markets)
- Pushing on a string?: Corporate credit as a % of GDP remains at cycle highs, capital markets activity has dried up significantly, and credit extension is decidedly tightening nationwide – there is no evidence of a mini-refinancing cycle despite the 3-mth move in credit markets.
- Consumption cycle: We won’t argue that a revaluation in “ability to pay” increases with higher commodity prices, but we expect that 2016’s wave of bankruptcies will matter for creditors, the labor market, and thus the broader consumption economy. As we’ve highlighted on a daily basis, consumption growth and labor markets peaked in Q1 2015 and are slowing into a continued corporate profit slowdown. This mix smells like incremental deflation on the margin with global macro positioning and expectations where they are currently.
CLICK HERE to access the associated slides.
