Leveraged Loans Decline For The First Time in 16 Months

Working Age Men Show Improvement

Even though the headline jobs report missed, there were enclaves of strength. As you can see in the bottom chart, the labor force participation rate among men aged 25-54 increased to 89% on a seasonally adjusted basis. This is about a 1% improvement from the bottom which was hit in 2013, 2014, and 2015. The metric is a still over 3% below the peak in 1999, but this is a step in the correct direction. The chart on top shows the total labor force participation rate of people 25-54 on a seasonally adjusted basis. As you can see, it was pushed higher by the improvement from men. It is now at 79.1% which is about 3% off the peak in the late 1990s. This improvement being driven by men is unusual for this cycle since much of the improvement has come from women. Their participation rate for the same age of people is at 75%. It has improved about 2% from the bottom of this cycle. It is about 2% lower than the peak in the early 2000s.

Leveraged Loan AUM Declines

This expansion period can be categorized as one in which loans have been given out whenever anyone needs money to whoever is asking for it, no questions asked. Cov-lite loans have dominated lending (they became 81% of the defaulted loan market in 2017) because that extra yield is worth not knowing much about the business lenders are giving money to. After the financial conditions started to improve in 2016, leveraged loans became hugely popular. As you can see in the chart below, its popularity has waned in the 2nd half of 2017. There was a decline in leveraged loan fund assets under management for the first time since June 2016. The leverage loan market declined because of cash withdrawals and a weak secondary market. The total assets under management fell $790 million to $156 billion. The growth started slowing in 2017 because the increase in retail inflows dried up and because the Fed looks like it will be raising rates quicker. I wouldn’t get that worried about this decline because the Chicago Fed Financial Conditions index is still just one basis point off the low of the cycle.

Breakdown Of Emerging Market Economic Forecasts

The emerging market economies drove growth in 2017. While America is expected to accelerate in 2018 because of the tax cut, the emerging markets will once again be relied upon to drive global growth. The chart below breaks down the real GDP growth in 2017 and 2018 in the major emerging markets. The red dot shows the percent change from 2017 to 2018. Technically, 2017 isn’t in the books yet because Q4 still hasn’t been reported. However, investors are always looking ahead. As you can see, Romania and Turkey are expected to have the biggest drops as central and eastern Europe has a slowdown.

In the mixed bag group in Asia, China is expected to see a drop, while India is expected to see an improvement. 2017 was the first time in a few years where China grew faster than India. India is expected to regain the lead in 2018 and maintain it for at least the following 4 years. Obviously estimates that far out are guesses based on demographics. Economists didn’t expect the demonetization effort to be put in place in 2016 which caused India to slow down in 2017. There’s almost always something unforeseen that causes actual results to miss the estimates. As you can see on the right, Brazil is one of the commodity exporters which are expected to see a rebound as global demand pushes up prices.

G10 Accelerates Past U.S.

As you can see from the chart below, usually when the G10 PMI index is doing much better than the U.S. PMI index it’s a recession signal. What separates this latest signal from the past two is that both are improving. Before the prior two recessions, the U.S. was in worse shape than the G10. Now, the G10 is in better shape than America. Keep in mind, the G10 is made up of developed nations. This shows how there is growth throughout the world. With the way the manufacturing industry has ramped and fallen many times this cycle, I wouldn’t be surprised if another soft patch is hit in the 2nd half of 2018. If the G10 PMI mean stays this strong throughout 2018, it would be the longest stretch of strength in this business cycle.

GDP Looking Solid

The Q4 GDP report will be released on January 26th, so the estimates for the report will be finalized shortly. As you can see from the chart below, the blue chip consensus expects 2.7% growth. The GDP Now estimate from the Atlanta Fed was lowered from 3.2% to 2.7% on Friday. It fell because of a few factors. The forecast for real consumer spending and the forecast for real private fixed investment growth both fell because of the employment report and the non-manufacturing ISM report. The next estimate will come out on January 10th. The NY Fed GDP Now forecast for Q4 increased from 3.87% to 3.97% The imports and exports report boosted estimates. The Q1 estimate blasted from 3.15% to 3.45% mostly because of the ISM manufacturing report. I’m skeptical of optimism based on a report which isn’t part of the quarter. Finally, the St. Louis Fed forecast increased slightly to 3.05%. This makes the average estimate 3.24%.

Conclusion

The latest update on the breakeven inflation rate is 2.01%. Copper has been falling for the past few days as it’s down 8 cents from its recent peak. That’s not surprising, given the run it was on in December. The trade where commodities and anything related to them rally is still on. It’s an extension of what happened in December. The U.S. has become more like an emerging market country than a developed country because of its reliance on commodities. It recently started exporting natural gas. Increases in energy prices will be good for GDP growth and employment in the regions where fracking occurs.

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