Weekly Market Summary

Extra Credit^*

• Strong economic data from the U.S. suggests discussion of deteriorating aggregate demand might be premature. The first Fed cut is still expected to come in September, along with a second from the European Central Bank. Meanwhile, markets seem to be getting set for a second Trump presidency, which would potentially imply high nominal growth, elevated rates and a strong dollar.
• China is grappling with big challenges to avoid a “Japanification.” The country’s current situation – slowing growth, stagnating/falling prices, declining asset prices and rising unemployment – bears comparison to Japan in the early 1990s. However, the metrics of China’s slowdown, particularly regarding the housing bubble and demographics, could be more extreme, as all of this is happening with a backdrop of increased geopolitical tensions.
• Option-adjusted spreads in investment-grade corporate bonds have been range-bound despite volatility in other markets. This is in part due to positioning, but also to the expectation that the economy will remain on a good path, while credit fundamentals and supply/demand dynamics continue to be positive. That said, spread dispersion has increased, which is creating opportunities.
• Corporate-credit indices are moving sideways despite equity and Treasury volatility. Credit indices continue to trade in a narrow range: six basis points in investment-grade corporate bonds and 12 basis points in high-yield bonds over the past month. This stability has been quite remarkable compared with the elevated volatility in other asset classes over the same period, including Treasuries (30 bps range at the 10-year point) and equities (4% range for the S&P500 and 12% for the Russell). All of this might indicate that sentiment and positioning are more favorable in credit than in some other markets.
• Bank-loan and high-yield bond default rates, excluding distressed exchanges, finished June both at 1.17% for high-yield bonds and 1.09% for bank loans, both down from 1.25% in May. 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 7/22/24.