MacroPass: Alf Peccatiello On Growing Fragility Inside The Credit Markets

Concerning as they are, these signs may open the door to opportunity

This week’s installment (our third) of our new MacroPass service for premium members of this Substack comes from Alf Peccatiello, publisher of The Macro Compass.

It’s a recent report Alf just sent to his private subscriber list noting several key signs of fragility he’s picking up on in the credit markets, particularly in rising debt service ratios…and what these indicators make him think next big macro trade will be.

If you somehow missed our previous announcements, MacroPass is a weekly rotating selection of premium analysis from many of the big thinkers interviewed on Thoughtful Money.

So far the list of contributors includes experts like Tom McClellan, Darius Dale (42 Macro), Doomberg, Kevin Muir (The Macro Tourist), Alf Peccatiello (The Macro Compass), Lance Lambert (ResiClub), Ed Yardini (Yardini Research), David Hay (Haymaker), Melody Wright (M3_Melody), David Stockman (Contra Corner), David Brady (FIPEST Report), John Rubino and Adam Kobeissi (The Kobeissi Letter)

And the list keeps getting longer….

In fact, Michael Howell of Capital Wars just agreed to join the contributing faculty :)

Our MacroPass service kicked off two weeks ago with Tom McClellan’s excellent April McClellan Market Report.

And last week’s submission was from Kevin Muir of The Macro Tourist on China and the emerging opportunity he currently sees in Chinese equities.

If you’re already a premium subscriber to this Substack, just continue below to read this week’s report from Alf.

And if you’re not (yet), read the start of Alf’s post below. If you like what you see, just upgrade to premium and access the full report, as well as all past and future MacroPass content.

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Fragilities

April 24, 2024

The narrative has changed rapidly since January.

We moved from ‘’The Fed must cut this year, and possibly a handful of times’’ to ‘’Cuts? Who needs cuts at all? If anything the Fed should consider hiking!’’

The charts above show the market-implied distribution of Fed Funds over the next 12 months as observed in January (left chart) and today (right chart).

The differences are striking.

I define a ‘’Soft Landing’’ cutting cycle as gentle over time, moving Fed Funds down from 5.25% to a range between 3.25% and 4.00% - between 5 and 8 cuts in the 8 Fed meetings which occur 12 months ahead.

It’s quite impressive to see how the market perception of the odds of such an event has changed.

In January, the Perfect Soft Landing was priced as a 28% probability.

Today, that probability has been literally halved to a meagre 15% - the perfect, disinflationary Soft Landing has been reduced to a tail outcome.

On the other hand, the Fed on hold for another 12 months (making for a total of 20-24 months of Fed Funds at 5.25%!) is now not seen as an aberration anymore.

The small 4% odds in January have now become a more relevant 14% - to be summed to a more meaningful probability the Fed will actually hike (!) going forward.

In macro, most alpha is generated when you can successfully deviate from consensus.

And sometimes markets become so enamoured of a narrative that they