Leader January in Review
Economic Data Releases:
· ISM for December came in lower than expected at 55.5, although still firmly in expansion territory
· At first report, December added 252,000 jobs but was later revised higher to 329,000
· Average Hourly Earnings dropped 0.2% in December to 1.7% year-over-year (YoY)
· Consumer inflation for December showed a slight slowdown, with Core CPI dropping to 1.6% YoY and Core PCE dropping to 1.3% YoY
· Conversely, Core PPI increased to 2.1% YoY
· Investment Grade Corporate Issuance: year-to-date issuance was $103 billion, compared to $130 billion and $117 billion over the same time period in 2013 and 2014, respectfully
Monthly Market Action:
With the holidays over, the markets picked right back up where they left off – with oil prices and Treasury yields dropping and credit spreads increasing. While somewhat expected, weaker economic data from December filtered in, highlighting a slowdown to trend growth in Q4 from the very strong 5% growth rate in Q3.
Major surprises from central banks across the globe shocked financial markets – the un-pegging of the Swiss Franc from the Euro, the European Central Bank announcing a €1 trillion purchase program, the Bank of Canada cutting interest rates, and, in the first week of February, the People’s Bank of China cutting the reserve requirement. At the end of the month, the easy monetary policy from central banks around the world resulted in “risk” assets rallying and Non-USD currencies depreciating.
The drop in treasury yields on the long end of the curve drove outperformance for both the U.S. Treasury Index and the higher quality U.S. Investment Grade Index (see table below), while lower quality underperformed. MBS also underperformed as the drop in long term rates resulted in a spike in refinancing and therefore prepayments.
Within credit, energy has severely underperformed the rest of the credit market over the past year (see chart 1). With U.S. rig counts already having dropped roughly half of the total decline we saw in in 2008, oil prices have seen some stabilization (see chart 2). With these types of yields, there comes good opportunity for those willing to do the leg work.