Weekly Market Summary

Extra Credit^*

• Federal Reserve Chair Jerome Powell’s speech at the Jackson Hole Economic Symposium last week confirmed continued progress on disinflation and may pave the way for the Fed to join the global easing cycle. However, political uncertainty could still complicate the policy outlook.
• The weaker-dollar trend could continue, but sustained depreciation looks unlikely. The value of the U.S. dollar has been woven into two key narratives: Fed easing and an unwind of a large overweight position in U.S. assets. Markets are now considering the implications of a lower terminal federal funds rate and weaker dollar. But it is hard to imagine a long, flow-driven dollar depreciation trend — unless one assumes the pillars of the global economy for the past 10 years become undermined.
• Investment-grade corporate bonds are on track for a fourth consecutive month of positive returns. Partly because of this, fund flows have been robust, averaging $5.3 billion per week this month. Trading volumes have been surprisingly high in August, averaging $34.6 billion a day, 67% higher than the 4-year average. August supply has been active with $103 billion priced, surpassing the 4-year average of $85 billion, leading to a revised gross issuance forecast of $1.5 trillion for the full year ($400 billion to come over the remaining four months of 2024).
• Relatively muted new-issue supply of asset-backed securities (ABS) this week lent support to the secondary market, allowing dealers to offload some inventory. Instances of positive rating actions for senior tranches, even amidst significant credit underperformance of the pool, demonstrate the key structural strength of amortizing ABS transactions. The tone in the ABS market has improved with spreads settling back down following weeks of volatility. Demand has picked back up after a few weeks of credit-spread widening, particularly in higher yielding segments.
• 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 8/26/24.