Weekly Market Summary

Extra Credit^*

• At face value, July's labor-market data were quite disappointing, with softer numbers on both the establishment and the household side of the report. The pace of increase in nonfarm payroll employment slowed to 114,000 following a June increase that was marked down from 205,000 to 179,000. July's sequential deceleration was spread between government employment (from 43,000 to 17,000) and private services (125,000 to 72,000), with job gains in the goods-producing sector strengthening. On the household side of the report, the unemployment rate was 4.253%, but primarily due to gains in labor supply, with a 420,000 increase in the labor force overwhelming a 67,000 increase in household employment.

• A further selloff in cyclical equities could trigger additional flows into credit by investors. Historically, there has been a relationship between credit and equity, but it becomes     much more pronounced when the cyclical/non-cyclical index is below $95. The R-squared climbs to 38%, and for every $1 move lower, the cyclical spreads decompress by about 3.5 basis points. When the price is above $95, however, we find almost no relationship. Despite the recent selloff, current prices are far above the level at which credit tends to see more correlated effects, which aligns with the lack of movement seen in spreads recently. Should cyclicals continue to underperform in equities, it is reasonable to believe the basis in credit will widen.
• In high-yield bonds, a good portion of the lag in non-cyclicals has been driven by the highly idiosyncratic CCC cohort. The CCC market is highly barbelled, with 40% of the index trading wide of 900 basis points, 50% trading tighter than 700 basis points, and only 10% within 100 basis points of the index average of 800. With a larger portion of CCC market value composed of non-cyclicals than cyclicals, and with CCC non-cyclicals trading nearly 600 basis points wide of CCC cyclicals, this means CCCs are having an outsized effect on the broader cyclical/non-cyclical spread relationship.
• While data seems to be signaling a global slowdown, this has been weighing on the dollar with expectations rising for more aggressive Fed interest-rate cuts. Risk aversion should further benefit low yielders and hurt higher beta currencies, although G10 low yielders screen as tactically stretched. Yen directionality may well have changed as U.S. data amplified the effect of the recent hawkish Bank of Japan delivery. However, the Japanese currency screens as the most overbought in the G10. Accordingly, the bar for yet more outperformance in the near term appears high. 
• Bank-loan and high-yield bond default rates, excluding distressed exchanges, finished the month both at 1.16% for high-yield bonds and 1.40% for bank loans, down and up from 1.17% and 1.09%, respectively, in the month prior. This is also well below the long-term historical default rate of 3% for loans and 3.4% for high yield, and the historical post-GFC default rates of 2.3% and 2.5%, respectively.

Sources: Bloomberg and JP Morgan as of 8/5/24. Bloomberg indices referenced. Portfolio trading involves trading a basket of bonds of variable credit quality and risk as a single, all-or-none transaction, whereby the trade instruction specifies that the entire order must be filled.