Credit Research Update

At the conclusion of 1H21, we pondered risks posed to the global economy, and to credit markets, given the historically easy financial conditions that existed. For example, Bloomberg’s US Financial Conditions Index had eased to near 14+ year highs. Despite the expectation of exceptionally strong growth, global central banks remained dovish and seemed to be explicitly aiming for a high-pressure economy. At the time, we pointed to the risks correlated with this particular policy backdrop including complacency and inflation. We noted that either, or both, could cause tightening financial conditions, and disrupt the economic growth and credit cycles over the medium-term. We believe that those risks have become modestly higher as we come to the conclusion of Q3. With regard to the global growth outlook, we have seen a slowdown in the pace of growth across the world’s major economies since the end of Q2. US, UK, euro-zone and Chinese payroll, PMI (manufacturing and services), and retail sales data have suggested that growth has slowed over the summer. For sure a slowdown in growth was inevitable given that historically high growth rates in the first half of the year had left most economies either at, or close to, their pre-pandemic levels of output. Still, supply constraints and the rapid spread of the highly contagious Delta variant have weighed on global goods and services sectors.