What Could the Economic Policy Look Like Under a Republican Administration in 2025?
As the 2024 U.S. presidential election nears, PGIM discusses financial & economic implications of policy themes focused on trade, deregulation & immigration.
MACRO
- While last week’s stronger-than-expected September non-farm payroll report in the U.S. prompted a broad consolidation across markets, that repricing wasn’t entirely unexpected given the pre-existing rallies across rates, credit, and equities. At this point with another payroll report before the next Federal Reserve meeting, the snapshot of unexpected resilience in the labor market pertains to whether the next rate cut is 50 bps or, more likely, 25 bps. However, if the September report is a precursor of a more sustained labor revival, the pertinent question for the Fed may shift to how quickly the easing cycle may conclude.
- Furthermore, the decline in the unemployment rate component of the report to 4.1% remans within the boundaries of the Fed’s projections for an unemployment rate that would end 2024 and 2025 at 4.4%, 2026 at 4.3% as well as a longer-run projection of 4.2%. The strength in the September data also continues a string of recent reports—e.g. the March report with a +303k payroll gain and the May report with a +272k gain—that were subsequently followed by notable moderation in the various payroll measures.
- For additional insight on labor conditions, our latest credit analyst survey (representing coverage of ~90 industries/subindustries) touched upon several topics from a bottom-up perspective, one of which is the labor picture. Most respondents continue to characterize labor availability as unchanged or getting better (i.e., better availability and more manageable wage inflation). However, the expectations for marginal reductions in company headcount increased from 21% in June to 36% in September, with the increase coming from a reduction in “no change (67% to 60%)” and “marginal increases (11% to 4%).”
DEVELOPED MARKET RATES
- In the near to intermediate term, the recent reversal presumably sets the bottom end of the range in yields, for now, leaving the question of where the top of the range might be. While the top of the range could be in the 4.3-4.6% area, especially if next week’s CPI comes in firm, the Fed will likely remain in easing mode and fixed income inflows should also continue. Thus, a 4.0-4.3% top of the range appears more reasonable with a potential central tendency of 3.80% on the U.S. 10-year yield.
- With much of the recent repricing coming on the heels of U.S. developments (e.g., firm ADP, September payrolls, ISM services combined with Powell’s recent comments that he is no hurry to cut), there are global variations of note. The European rates market has a firmer tone after the Euro Area’s initial CPI report for September fell below the ECB’s 2% inflation target. Therefore, we now expect a 25 bp ECB rate cut in October, followed by sequential 25 bp cuts until June 2025, which would take the deposit rate to 2.25% (i.e., estimated nominal neutral).
- Japan is dealing with a whiplash-inducing leadership adjustment following the naming of Shigeru Ishiba as the country’s next PM. While Ishiba initially had some hawkish monetary policy comments, he has recently endorsed a more dovish tack at the BoJ—spurring a late-September rally, that appears to have the BoJ more aligned with the presumed easing trajectories of the ECB and the Fed.
- Agency MBS modestly underperformed Treasuries last week. The interest rate selloff, fueled by Friday’s NFP data, provided some relief for the recent production higher coupons, as 30-year 6.5% issues tightened by 2 bps. Anticipated yield-based demand remains a key driver of performance on the stack. 30-year 4% and 4.5% issues were the laggards, ending roughly 3 wider, as the likely target of that buying shifted into 5% issues, which tightened by 1 bp, with Friday’s selloff.
IG CORPORATES
- The spread tightening in U.S. IG was already underway when the non-farm payroll report prompted another 4 bps in tightening with spreads ending the week 6 bps tighter to 83 bps. Of note, last week’s tightening brought spreads to their YTD tights, and the YTD wides were also notched after a weak payroll report, this particular one being the July payroll report. Thus, U.S. IG is exhibiting a strong reaction to payroll data.
- While most sector performance was clustered around tightening of 5-7 bps, the energy complex outperformed with 8-10 bps of tightening. The auto sector lagged with spreads unchanged to +2 bps. Humana lagged on profitability concerns and Boeing trailed on its capital needs, which is being met with an equity raise. In addition to these idiosyncratic situations, corporate event risk appears to be emerging with activist investors involved in CVS, Air Products, and Pfizer. Furthermore, global M&A in 2024 is approaching $3T, which represents a 15% increase from 2023.
- Euro IG spreads remain relatively compressed at 112 bps, which is about 5 bps off of the YTD tights. After a high volume summer, issuance has slowed and technicals are providing more support. Although auto names in Europe struggled recently, the sector rebounded strongly last week, e.g., VW spreads were 15 bps tighter. Given the reduced energy presence in the European market, spreads have not reacted strongly to the turmoil in the Middle East, and the market generally appears well supported going forward.
LEVERAGED FINANCE
- HY investors continued to weigh tight valuations against a shift to easing monetary policy and economic growth. Spreads have tightened to post Global Financial Crisis levels, but technicals remain strong and supportive enough that buyers continue putting cash to work at any sign of market weakness. Further, the pace of HY bond upgrades has quickened, and new issuance remains elevated and key focal point.
- New issuance continued apace with $8.7B from 11 deals. Also, HY funds reported their 10th week of inflows out of the past 13 weeks, with $977M of inflows into ETFs and $1.23B into actively managed funds. Last week's inflows were the second largest in four months and the largest for actively managed HY funds since November 2023. Performance was mixed across sectors, with Telecom (0.33%), Paper (0.28%), and Chemical (0.13%) as the top performers.
- U.S. loan prices gained around 26 bps last week. Meanwhile, $55M flowed into the market during the period, bringing YTD inflows to $8.8B. New issuance for Q3 was very large at approximately $120B, and we expect the high pace of new issuance to continue into year-end given the how full the forward calendar still is.
- In Europe, risk-free yields sold off last week, as stronger-than-expected employment data. The broad European currency high yield index gained 0.09% last week, while yields eased and spreads tightened. The primary market remains busy, with nine deals pricing last week and another eight facilities expected this week, all of which we expect will be easily absorbed.
EMERGING MARKETS
- EM hard currency spreads continued to tighten last week, with the HY portion of the index again outperforming, as the economic backdrop remains supportive and conviction builds around a soft landing. While spreads tightened across all ratings categories, CCCs and Bs were notably tighter. EM corporates tightened again last week, driven by the strong U.S. data and are now within 10 bps of the post-GFC tights.
- Despite further escalation of Middle East tensions, markets remained resilient, with only the Israel complex widening and no evidence of contagion spilling into other EM credits. Technicals remain favorable, with another inflow into EM HC funds last week and manageable levels of new issuance. However, tail risks remain, and the outcome of the U.S. election remains in question, which argues for adding risk only at the margin in select new issues.
- EMFX declined last week as the USD gained and LatAm outperformed. With Middle East risk bringing a bid to oil, oil importers were among the underperformers last week. We used USD strength to reduce our long USD beta and are looking to fully eliminate it before the U.S. election. Outside of a further Middle East escalation, we believe the combination of global central bank cuts, China stimulus, and Saudi Arabia's shift in strategy presents a favorable backdrop and will result in FX carry reasserting its outperformance.
- In local rates, yields rose as oil prices jumped and U.S. payroll growth surprised to the upside reversing the recent rally, which had been driven by declining crude prices and the aggressive rate cuts priced into the Fed funds rate curve. We have reduced our short-term outlook and reduced our overweight in Mexico, South Africa, and Czech. Securitized products
- CMBS spreads were steady at the top of the credit stack last week, while BBB- spreads continued strengthening, and the credit curve flattened further. A five-year deal priced with the last-cash-flow tranche coming in at T+106 and the BBB- tranche at T+550. We continue to recommend staying at the top of the capital structure as CRE fundamentals have deteriorated.
- RMBS spreads were unchanged last week, while CRT markets remained quiet. We suspect investors are holding tight in lieu next week's new STACR deal, which will be the final CRT issuance of the year. Five new RMBS deals totaling $1.5B priced last week, bringing YTD gross issuance to $100B. Net supply is expected to remain positive in 2024, over $10B due to slower prepays and muted deal redemptions.
- U.S. CLO spreads were unchanged across the capital structure despite a firmer tone in the market. Following the record weekly volume at the end of September, new issuance returned to 2024 weekly averages last week. Total issuance in the US was about $11.2B across 25 deals. We expect gross issuance to continue apace in the near term as dealer pipelines remain robust and managers look to print transactions prior to year-end.
- ABS spreads were unchanged last week. New issuance is expected to pick up over the next three weeks in the run-up to a securitized conferenced at month-end and elections the week after. This week's uptick will see prime auto, commercial auto, solar loan, and home improvement transactions. At $256B YTD, issuance is 25% ahead of last year's tally. We remain cautious on consumer fundamentals: U.S., German, Spanish, and UK consumer loan performances are pressured but afloat despite mixed macro-economic outlooks.
MUNICIPAL BONDS
- Technicals in the muni bond market were mixed last week with $1.6B of inflows, bringing the YTD total to $28B, combined with an expected $23B in net supply from September and October.
- Muni rates finally cracked after the strong payroll report Friday but still outperformed on week. Last week’s elevated supply was met with healthy subscription levels, while the number of offerings remain below five‐year averages. Even with Friday’s selloff, the muni/Treasury ratio richened back to the one-year average, which could limit crossover buying. Furthermore, reinvestment capital is expected to moderate as October continues.
Source(s) of data (unless otherwise noted): PGIM Fixed Income as of October 2024.
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U.S. Investment Grade Corporate Bonds: Bloomberg Barclays U.S. Corporate Bond Index: The Bloomberg Barclays U.S. Investment Grade Corporate Bond Index covers U.S.D-denominated, investment-grade, fixed-rate or step up, taxable securities sold by industrial, utility and financial issuers. It includes publicly issued U.S. corporate and foreign debentures and secured notes that meet specified maturity, liquidity, and quality requirements. Securities included in the index must have at least 1 year until final maturity and be rated investment-grade (Baa3/ BBB-/BBB-) or better using the middle rating of Moody’s, S&P, and Fitch.
European Investment Grade Corporate Bonds: Bloomberg Barclays European Corporate Bond Index (unhedged): The Bloomberg Barclays Euro-Aggregate: Corporates bond Index is a rules-based benchmark measuring investment grade, EUR denominated, fixed rate, and corporate only. Only bonds with a maturity of 1 year and above are eligible.
U.S. High Yield Bonds: ICE BofAML U.S. High Yield Index: The ICE BofAML U.S. High Yield Index covers US dollar denominated below investment grade corporate debt publicly issued in the US domestic market. Qualifying securities must have a below investment grade rating (based on an average of Moody’s, S&P and Fitch), at least 18 months to final maturity at the time of issuance, and at least one year remaining term to final maturity as of the rebalancing date.
European High Yield Bonds: ICE BofAML European Currency High Yield Index: This data represents the ICE BofAML Euro High Yield Index value, which tracks the performance of Euro denominated below investment grade corporate debt publicly issued in the euro domestic or eurobond markets. Qualifying securities must have a below investment grade rating (based on an average of Moody's, S&P, and Fitch). Qualifying securities must have at least one year remaining term to maturity, a fixed coupon schedule, and a minimum amount outstanding of €100 M. ICE Data Indices, LLC, used with permission. ICE DATA INDICES, LLC IS LICENSING THE ICE DATA INDICES AND RELATED DATA "AS IS," MAKES NO WARRANTIES REGARDING SAME, DOES NOT GUARANTEE THE SUITABILITY, QUALITY, ACCURACY, TIMELINESS, AND/OR COMPLETENESS OF THE ICE DATA INDICES OR ANY DATA INCLUDED IN, RELATED TO, OR DERIVED THEREFROM, ASSUMES NO LIABILITY IN CONNECTION WITH THEIR USE, AND DOES NOT SPONSOR, ENDORSE, OR RECOMMEND PGIM FIXED INCOME OR ANY OF ITS PRODUCTS OR SERVICES.
U.S. Senior Secured Loans: Credit Suisse Leveraged Loan Index: The Credit Suisse Leveraged Loan Index is a representative, unmanaged index of tradable, U.S. dollar denominated floating rate senior secured loans and is designed to mirror the investable universe of the U.S. dollar denominated leveraged loan market. The Index return does not reflect the impact of principal repayments in the current month.
European Senior Secured Loans: Credit Suisse Western European Leveraged Loan Index: All Denominations EUR hedged. The Index is a representative, unmanaged index of tradable, floating rate senior secured loans designed to mirror the investable universe of the European leveraged loan market. The Index return does not reflect the impact of principal repayments in the current month.
Emerging Markets U.S.D Sovereign Debt: JP Morgan Emerging Markets Bond Index Global Diversified: The Emerging Markets Bond Index Global Diversified (EMBI Global) tracks total returns for U.S.D-denominated debt instruments issued by emerging market sovereign and quasi-sovereign entities: Brady bonds, loans, and Eurobonds. It limits the weights of those index countries with larger debt stocks by only including specified portions of these countries’ eligible current face amounts of debt outstanding. To be deemed an emerging market by the EMBI Global Diversified Index, a country must be rated Baa1/BBB+ or below by Moody’s/S&P rating agencies. Information has been obtained from sources believed to be reliable, but J.P. Morgan does not warrant its completeness or accuracy. The Index is used with permission. The Index may not be copied, used, or distributed without J.P. Morgan's prior written approval. Copyright 2021, J.P. Morgan Chase & Co. All rights reserved.
Emerging Markets Local Debt (unhedged): JPMorgan Government Bond Index-Emerging Markets Global Diversified Index: The Government Bond Index-Emerging Markets Global Diversified Index (GBI-EM Global) tracks total returns for local currency bonds issued by emerging market governments.
Emerging Markets Corporate Bonds: JP Morgan Corporate Emerging Markets Bond Index Broad Diversified: The CEMBI tracks total returns of U.S. dollar-denominated debt instruments issued by corporate entities in Emerging Markets countries.
Emerging Markets Currencies: JP Morgan Emerging Local Markets Index Plus: The JP Morgan Emerging Local Markets Index Plus (JPM ELMI+) tracks total returns for local currency–denominated money market instruments.
Municipal Bonds: Bloomberg Barclays Municipal Bond Indices: The index covers the U.S.D-denominated long-term tax-exempt bond market. The index has four main sectors: state and local general obligation bonds, revenue bonds, insured bonds, and pre-refunded bonds. The bonds must be fixed-rate or step ups, have a dated date after Dec. 13, 1990, and must be at least 1 year from their maturity date. Non-credit enhanced bonds (municipal debt without a guarantee) must be rated investment grade (Baa3/BBB-/BBB- or better) by the middle rating of Moody's, S&P, and Fitch.
U.S. Treasury Bonds: Bloomberg Barclays U.S. Treasury Bond Index: The Bloomberg Barclays U.S. Treasury Index measures U.S. dollar-denominated, fixed-rate, nominal debt issued by the U.S. Treasury. Treasury bills are excluded by the maturity constraint but are part of a separate Short Treasury Index.
Mortgage Backed Securities: Bloomberg Barclays U.S. MBS - Agency Fixed Rate Index: The Bloomberg Barclays U.S. Mortgage Backed Securities (MBS) Index tracks agency mortgage backed pass-through securities (both fixed-rate and hybrid ARM) guaranteed by Ginnie Mae (GNMA), Fannie Mae (FNMA), and Freddie Mac (FHLMC). The index is constructed by grouping individual TBA-deliverable MBS pools into aggregates or generics based on program, coupon and vintage.
Commercial Mortgage-Backed Securities: Bloomberg Barclays CMBS: ERISA Eligible Index: The index measures the performance of investment-grade commercial mortgage-backed securities, which are classes of securities that represent interests in pools of commercial mortgages. The index includes only CMBS that are Employee Retirement Income Security Act of 1974, which will deem ERISA eligible the certificates with the first priority of principal repayment, as long as certain conditions are met, including the requirement that the certificates be rated in one of the three highest rating categories by Fitch, Inc., Moody’s Investors Services or Standard & Poor’s.
Palmer Square AAA CLO DM Index represents the discount margin of CLO AAA rated tranches in the Palmer Square CLO Senior Index, which is designed to reflect the investable universe of U.S CLO senior original rated AAA and AA debt issued after Jan 1, 2011.
Global Aggregate Bond Index is a measure of global investment grade debt from twenty four local currency markets. This multi-currency benchmark includes treasury, government-related, corporate and securitized fixed-rate bonds from both developed and emerging markets issuers.
U.S. Aggregate Bond Index: Bloomberg Barclays U.S. Aggregate Bond Index: The Bloomberg Barclays U.S. Aggregate Index covers the U.S.D-denominated, investment-grade, fixed-rate or step up, taxable bond market of SEC-registered securities and includes bonds from the Treasury, Government-Related, Corporate, MBS (agency fixed-rate and hybrid ARM passthroughs), ABS, and CMBS sectors. Securities included in the index must have at least 1 year until final maturity and be rated investment-grade (Baa3/ BBB-/BBB-) or better using the middle rating of Moody’s, S&P, and Fitch.
Euro Aggregate Bond Index is a broad-based flagship benchmark that measures the investment grade, euro-denominated, fixed rate bond market, including treasuries, government-related, corporate and securitized issues. Inclusion is based on currency denomination of a bond and not country of risk of the issuer.
Japanese Aggregate Bond Index The Japanese Aggregate Index contains fixed-rate investment-grade securities denominated in Japanese yen and registered as domestic bonds. The index is composed primarily of local currency sovereign debt but also includes government-related, corporate, and securitized bonds.
The S&P 500® is widely regarded as the best single gauge of large-cap U.S. equities. There is over U.S.D 9.9 trillion indexed or benchmarked to the index, with indexed assets comprising approximately U.S.D 3.4 trillion of this total. The index includes 500 leading companies and captures approximately 80% coverage of available market capitalization.
The DAX Index is a total return index of 30 selected German blue chip stocks traded on the Frankfurt Stock Exchange. The equities use free float shares in the index calculation. The DAX has a base value of 1,000 as of December 31, 1987. As of June 18, 1999 only XETRA equity prices are used to calculate all DAX indices.
The STOXX 600 Index is derived from the STOXX Europe Total Market Index (TMI) and is a subset of the STOXX Global 1800 Index. With a fixed number of 600 components, the STOXX Europe 600 Index represents large, mid and small capitalization companies across 17 countries of the European region.
The Nikkei 225 Index is a price-weighted average of 225 top-rated Japanese companies listed in the First Section of the Tokyo Stock Exchange. The Nikkei Stock Average was first published on May 16, 1949.
Shanghai Composite Index is a capitalization-weighted index. The index tracks the daily price performance of all A-shares and B-shares listed on the Shanghai Stock Exchange. The index was developed on December 19, 1990.
MSCI ACWI is a free-float weighted equity index. It was developed with a base value of 100 as of December 31 1987. MXWD includes both emerging and developed world markets.
FTSE 100 is a capitalization-weighted index of the 100 most highly capitalized companies traded on the London Stock Exchange. The equities use an investibility weighting in the index calculation. The index was developed with a base level of 1000 as of December 30, 1983.
MOVE Index is a yield curve weighted index of the normalized implied volatility on 1-month Treasury options. It is the weighted average of volatilities on the CT2, CT5, CT10, and CT30. (weighted average of 1m2y, 1m5y, 1m10y and 1m30y Treasury implied vols with weights 0.2/0.2/0.4/0.2, respectively).
VIX Index is a financial benchmark designed to be an up-to-the-minute market estimate of the expected volatility of the S&P 500® Index, and is calculated by using the midpoint of real-time S&P 500 Index (SPX) option bid/ask quotes.
Bloomberg Commodity Index Bloomberg Commodity Index (BCOM) is calculated on an excess return basis and reflects commodity futures price movements. The index rebalances annually weighted 2/3 by trading volume and 1/3 by world production and weight-caps are applied at the commodity, sector and group level for diversification. Roll period typically occurs from 6th-10th business day based on the roll schedule.
The U.S. Dollar Index indicates the general international value of the USD. The USDX does this by averaging the exchange rates between the USD and major world currencies. The ICE US computes this by using the rates supplied by some 500 banks.
2024-7922
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