CREFC Capital Markets Update : Week of 6/13
June 13, 2022
May Inflation Reading Ahead of Estimates; Sets New Four-Decade High
On Friday, the Labor Department said the Consumer Price Index (CPI) accelerated at an annual pace of 8.6% in May, the highest since December 1981 and dashing hopes that inflation had already peaked. The reading was above economists' estimate of 8.3%, the level reached in the month prior. The core price index, excluding the volatile food and energy categories, climbed 6.0% in May from a year earlier, exceeding estimates.
Prices for necessities continued to climb at double-digit paces, further straining consumers. Grocery prices rose 11.9% annually, the most since 1979, and electricity rose 12%, the most since August 2006. Energy prices climbed 34.6% from a year earlier, the most since 2005, including a 49% jump in gasoline costs. Gas prices so far in June have reached new highs, signaling more upward pressure in future CPI reports. Also concerning economists was a 0.6% increase in housing costs, the largest monthly rise since March 2004. Housing costs increased 5.2% yearly, the most since 1987.
The surging price growth will likely push the Federal Reserve to extend its already aggressive series of interest rate hikes. The Federal Open Market Committee (FOMC) will meet on June 14 and 15, when it is widely expected to announce an interest rate increase of 50 basis points (bps). This would follow increases totaling 75 bps since March from the near-zero levels in place for two years.
Fed Chair Powell effectively pre-announced half-point increases for this month and July. However, continued evidence that inflation is becoming more entrenched could compel the Fed to increase interest rates even higher than markets expect. Traders are now pricing in even odds of the Fed raising rates by 75 bps in July, while economists at Barclays changed their rate call to expect a hike as soon as this week.
"The US central bank now has good reason to surprise markets by hiking more aggressively than expected in June," said Barclays economists led by Jonathan Millar. "We realize it is a close call and that it could play out in either June or July. But we are changing our forecast to call for a 75bp hike on June 15."
Following the CPI announcement, stocks sold off sharply, with the S&P 500 down 2.9% and the NASDAQ dropping 3.5%. Investors also discarded short-dated Treasuries, which are most sensitive to monetary policy changes. The yield on the 2-Year Treasury climbed 25 basis points on Friday to 3.06%, the highest since 2008.
ECB Announces First Rate Increase Since 2011
On June 9, Christine Lagarde, European Central Bank (ECB) President, announced plans to lift interest rates above zero by September and for the first time in a decade. Combatting concerns the ECB is doing little to fight surging inflation, the ECB signaled a half-point increase in September, in addition to a higher-than-expected 25 basis point increase in July.
"If the medium-term inflation outlook persists or deteriorates, a larger increment will be appropriate at the September meeting," the ECB said. Combined with the expected 25-basis point increase in July, the increases bring the deposit rate to at least zero by the end of the third quarter, from -0.5% at present. The move, as projected, would include eight years of negative borrowing costs.
Critics have accused the ECB of being too slow to react to rising inflation, which reached 8.1% in May. The new path of rate increases will bring European policymakers closer in line with the Federal Reserve and the Bank of England, which have already raised rates multiple times this year. After September, only Japan and Switzerland will remain as the last two major monetary authorities with negative interest rates.
Issuance Resumes Following Holiday-Shortened Week
- Private-Label CMBS and CRE CLOs. Five private-label transactions totaling $3.8 billion priced last week, including:
- Two conduit ($1.7 billion);
- Two CRE CLO ($1.8 billion); and,
- One SASB ($0.3 billion).
- As of June 10, CMBS and CRE CLO issuance stood at $70.6 billion, 30% higher than the same period in 2021 ($54.3 billion).
- According to BofA Global Research, there are 28 private-label transactions totaling ~$16 billion in the current pipeline consisting of six conduit, 11 SASB CMBS, and 11 CRE CLO transactions. However, if market volatility continues, pricing will likely be delayed, and timelines extended as issuers wait for less volatile markets and more assured execution.
- Secondary spreads continued to tighten this past week:
- Spreads on 10-year super-senior AAA conduit CMBS decreased 4 bps to 119, following a 9 bp decrease in the prior week. AA – A spreads tightened 15 bps to 200 and 260, respectively, while BBB- spreads remained unchanged at 515 bps.
- Agency CMBS. Last week saw just over $1 billion in new agency issuance, consisting primarily of Fannie DUS transactions. Total agency issuance reached $82.6 billion for the year-to-date period ended June 10. Agency issuance is down 7% from last year's point ($88.8 billion).
Agency spreads tightened 3-5 bps for senior Freddie K and GeMs bonds while remaining unchanged elsewhere.
