Global | Monetary Policy & Inflation
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Summary
- Trouble in the corporate bond market?
- Despite the Fed, the US economy is rebounding.
- Japan’s inflation is somehow sub 3%.
Corporate Debt Explosion
With interest rates rising, some smell trouble in the corporate bond market. The past decade experienced an explosion of corporate debt, with nonfinancial debt in the S&P 500 growing 90% between end 2014 and H1 2022 – hitting $6.4tn (Chart 1). We see no reason to sweat, though: companies have capitalized on low rates in the past to strengthen their credit profile and limit exposure to higher rates. Here is how to trade that view.
The US Economy Is Rebounding
Despite all the Fed’s efforts, the US economy continues to gain momentum. Jobless claims are falling, the NY Fed manufacturing survey is up 30 points, retail sales beat expectations, and manufacturing production was higher than expected despite the strong dollar. Meanwhile, the economic surprise index has U-turned since Q2 (Chart 2).
Japan Is an Inflation Outlier
Japan’s inflation picture is less acute than other countries. Indeed, headline inflation is running at 2.6% compared to the US’s 8.2% and euro area’s 9.1% (Chart 3). Meanwhile, core inflation in Japan is running at a paltry 0.4% versus the US’s 6.3% and euro area’s 4.3% (Chart 4). Why? Our analysis finds Covid and the commodity shock have impacted the country less than the US or euro area.