Mild declines in corporate credit
Corporate credit was modestly lower this week as declines in commodity prices and mild concerns around valuations weighed slightly on prices.1 Despite declining approximately 0.9% this week, high yield bonds continue to benefit from a mix of rising U.S. equities, low U.S. government bond yields and generally light new-issue volume.2,3,4 After returning approximately 1.1% in April, high yield bonds are now providing a year-to-date return of approximately 3.8%.2 Senior secured loans were also mildly lower this week despite registering yet another inflow into the asset class. Bank loan mutual funds recorded an inflow of $190 million for the week ended May 3, marking the 25th consecutive weekly inflow for a total of $21.1 billion over that span.5 Year to date, senior secured loans are providing returns of approximately 1.69%.6 Despite the past few weeks’ decline in oil prices, high yield energy bonds and energy senior secured loans are holding in relatively well.1 High yield energy bonds declined by 0.70% this week and are now providing year-to-date returns of 2.3%.7 Energy senior secured loans declined by approximately 0.26% this week, bringing the year-to-date return to approximately 5.5%.8

On track for rate increases
While the latest U.S. growth and inflation figures were disappointing, the U.S. Federal Reserve signaled that recent softness in economic data wouldn’t alter its plans to proceed with gradual rate increases this year.9 In the statement following its two-day meeting earlier this week, the Fed explicitly stated that the first-quarter slowdown would be transitory and that it “continues to expect that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace.”9 Largely ignoring the decline in March inflation, the Fed took the longer view, noting “inflation measured on a 12-month basis recently has been running close to the Committee’s 2 percent longer-run objective.”2 Taken together, the statement left the door wide open for a rate hike in June.

April payrolls rebound
While a number of disappointing economic releases in recent weeks raised some concerns over the U.S. economic momentum, Friday’s nonfarm payrolls report helped fuel investors’ expectations for future U.S. growth.10 At 211,000, April’s jobs growth was a notable turnaround from the disappointment of March, when only 79,000 jobs were created, and provides some level of comfort amid otherwise mixed economic data.10 Earlier in the week, data showed inflation weakened unexpectedly in March, with personal consumption expenditures (PCE) declining 0.2% from a month earlier.11 U.S. productivity also declined, falling at an annual pace of 0.6% in the first quarter of 2017, against expectations of a 0.2% decline.12 With the pace of hiring picking up again in April, however, investors received some level of reassurance that the economy is poised to pick up in the second quarter. While the strong jobs report increases the likelihood that the Fed will raise rates in June, with wage growth remaining subdued, it is unlikely to push the Fed to tighten at anything but a gradual pace through the remainder of the year.12

Chart of the week: Productivity continues to decline

  • Nonfarm productivity in the United States declined 0.6% in the first quarter of 2017 and, for the full year 2016, the U.S. economy experienced its slowest annual productivity growth in five years.13 As the chart highlights, longer-term business productivity in the United States has been on a gradual downswing since peaking in mid-2004.14
  • The disappointing productivity figure for the quarter was in line with other data released in recent weeks – gross domestic product, inflation and consumer spending, among them – that point to a potential for continued slow economic growth in the coming quarters.15,16,17
  • The Federal Reserve looked beyond such data at its meeting this week, noting in its press release accompanying the meeting that it viewed recent economic data as likely to be “transitory.”9
  • Still, productivity is a critical factor in an economy’s longer-term growth potential, and the U.S. economy’s longer-term decline in productivity suggests that the so-called new normal of low growth and low interest rates is likely to remain in place for the foreseeable future.

1 Federal Reserve Bank of St. Louis,
2 Bank of America Merrill Lynch High Yield Master II Index.
3 Federal Reserve Bank of St. Louis,
4 Federal Reserve Bank of St. Louis,
5 Thomson Reuters Lipper.
6 Credit Suisse Leveraged Loan Index.
7 Bank of America Merrill Lynch High Yield Energy Index.
8 Credit Suisse Leveraged Loan Index (energy component).
9 U.S. Federal Reserve,
10 U.S. Department of Labor,
11 U.S. Department of Commerce,
12 The Wall Street Journal,
13 U.S. Bureau of Labor Statistics,
14 Bureau of Labor Statistics via Macrobond.
15 U.S. Bureau of Economic Analysis,
16 Federal Reserve Bank of St. Louis,
17 U.S. Bureau of Economic Analysis,

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