Weekly Market Summary

Extra Credit^*

• Recent macro data have been mostly positive with the recent PMI reports looking quite good. In particular, at 49.0, manufacturing is barely contracting now. Furthermore, the September job report showed employment re-accelerating, with limited wage pressure. The Atlanta Fed wage tracker confirmed that as well: it implies a slight deceleration of wage growth. Finally, the NFIB reported that small companies' sales and hiring plans are improving. However, they remain relatively pessimistic and are reporting tighter credit conditions.
• The Federal Reserve is becoming more optimistic about achieving a soft landing. The Fed minutes revealed that it thinks that inflation will decline, with little labor damage. Furthermore, Fed speakers recently were signaling that they might not need to do more hikes, given the rapid rise in nominal and real rates. 
• After the average interest coverage ratio for the investment grade corporate bond index reached all-time highs following COVID stimulus and zero interest rate policies, it has had a steady and steep decline since the Fed began raising rates. As more companies issue debt in this new environment, the pass-through effects of these rate hikes will be most clearly felt in rising interest costs. If interest coverage continues to follow the current trend, it could potentially fall to the post-GFC low of 10.7x vs. 12.6x now and 15.7x at the peak in 2Q22. More companies will therefore be tested in their ability to meet their debt obligations. 
• The amount of debt coming due in the next two years is at all-time highs for both bonds and loans. This looming wall will pose challenges, particularly to bond issuers, as refinancing costs will be much higher, though the imminent maturities skew up in quality for bonds.
• The trailing 12-month default rates for bank loans and high-yield bonds, excluding distressed exchanges, finished the month at 1.90% and 1.32%, respectively, down from 2.24% and marginally higher from 1.29% from August. The long-term historical default rate for loans and high yield bonds is 3.1% and 3.2%, respectively.

Sources: Bloomberg and JP Morgan as of 10/17/23.