Monday Musings: January 11, 2021

Jan 11, 2021


Public Trust Credit Team
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House Democrats move forward with a case for impeachment against the President

This morning, House Democrats brought forth a single article of impeachment against President Trump with the charge of inciting the mob that undertook a violent attack on the U.S. Capitol last Wednesday. House Speaker Nancy Pelosi formally pushed Vice President Mike Pence to invoke the 25th Amendment to relieve President Trump of his duties after the Capitol protests turned violent, giving the Vice President 24 hours to invoke the 25th Amendment before moving forward with the impeachment initiative. A vote is expected later this week, potentially as soon as Wednesday. The equity market was largely unaffected by last week’s turmoil including the Capitol incident and the special election run-off in Georgia last Tuesday for two U.S. Senate seats, both of which were called for the Democrat candidates (Raphael Warnock and Jon Ossoff). The Senate will now be split 50-50 between Democrats and Republicans with Vice President-Elect Kamala Harris presiding as the tie-breaking vote.
Though the House may take a vote regarding impeachment proceedings against President Trump, it remains unclear if or when that legislation would be moved over to the Senate. House Majority Whip James Clyburn stated over the weekend that an impeachment proceeding would impede on Cabinet confirmations for President-Elect Joe Biden’s nominees and put the incoming administration at a severe disadvantage by not having its members in place. Representative Clyburn noted that should the measure pass, the House might give President-Elect 100 days to get the administration running before sending any articles over to the Senate. The incoming Biden Administration has an ambitious legislative agenda and a host of measures to address in the near term including COVID-19 vaccination deployment, Cabinet member confirmations, and possible additional fiscal stimulus.

Weaknesses in the labor market

The rapid rise in COVID-19 cases and related restrictions to curtail the spread of the virus took a toll on the labor market in the last few weeks of 2020. In December, nonfarm employment fell by 140k following the 336k job gain recorded in November. The drop was primarily related to the leisure and hospitality sector, though the government and private education sectors also recorded notable job losses. Positively, some industries did well and added jobs including construction, manufacturing, transportation, retail trade, and temporary staffing services. The gender gap was particularly noticeable in December with women losing 156k jobs while men gained 16k. Still, the unemployment rate held steady at 6.7% in December month-over-month, and the labor force participation remain unchanged at 61.5%. In comparison with pre-pandemic levels recorded in February 2020, the U.S. has lost 9.8 million jobs.
The weak payroll numbers increase the likelihood of additional calls for fiscal stimulus shortly after the Biden administration is sworn in on January 20. The job market is expected to remain bleak in the next few months, but hiring is likely to gain momentum in the second half of 2021, particularly in the hard-hit leisure and hospitality sector, as the Covid-19 vaccine becomes widely available and consumers resume spending. There was some positive news last week in terms of economic activity with the ISM services PMI index coming in at 57.2 for December, not as strong as the 60.7 reading for the manufacturing sector but still stronger than anticipated. This implies that the economic activity is still holding up well on both the manufacturing and non-manufacturing front.

Investment-grade spreads start the year tight, setting up a challenging year to find value in corporate debt

Investment-grade (IG) spreads have started the year well within their traditional non-recessionary range of 90 to 130 bps. We expect it will be a difficult year to find value among U.S. corporate debt as fundamentals in the market suggest further tightening. Last year was a record year for issuance, setting up 2021 to be a negative net issuance year and likely continuing to grind down spreads. In addition to supply fundamentals, the large amount of negative debt and low rates around the world continue to funnel money into U.S. credit as investors chase yield. In fact, research by Bank of America shows that U.S. IG debt accounts for 41% of global investment-grade yield, keeping U.S. credit attractive to foreign investors. Barring a significant departure from current fundamentals, we expect that 2021 will be a challenging year to find much value in IG credit.
All comments and discussion presented are purely based on opinion and assumptions, not fact. These assumptions may or may not be correct based on foreseen and unforeseen events. The information presented should not be used in making any investment decisions. This material is not a recommendation to buy, sell, implement, or change any securities or investment strategy, function, or process. Any financial and/or investment decision should be made only after considerable research, consideration, and involvement with an experienced professional engaged for the specific purpose. Past performance is not an indication of future performance. Any financial and/or investment decision may incur losses.

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