Another Blowout Ahead for Credit Spreads?

By Elliott Wave International

Credit investors aren't worried about a thing. They sneer at the possibility of a recession. A slew of corporate defaults? Nah. Complacency is so extreme that Elliott Wave International's December Global Market Perspective warned that a tipping point might be at hand:

Two of the most important credit-market sentiment indicators in the United States point to extreme optimism. On November 8, investment-grade credit spreads (left chart below) narrowed to just 74 bps, their tightest level in nearly three decades. One week later, high-yield (i.e. junk) spreads fell to 253 bps, their tightest level in nearly two decades. The equivalent spreads in Europe have narrowed to their tightest levels since early 2022:

What do these extremes mean? As we discussed in March, investors buy riskier corporate debt (over treasuries) when they view the future optimistically, causing spreads to narrow. In contrast, they buy safer treasuries (over corporates) when they view the future pessimistically, causing spreads to widen. As shown, the three major financial crises over the past two decades reached their zenith as terrified investors sold corporate bonds indiscriminately.

Are credit spreads preparing for another blowout? A decade ago, EWI observed a compelling pattern in equities, whereby European stocks peaked "prior to major tops in the Dow" (Elliott Wave Financial Forecast, July 2013). The pattern was best exemplified by the FTSE 100, which peaked one month before the DJIA in 1987, seven months before the DJIA in 1990, two weeks before the DJIA in 2000, and three months ahead of the DJIA in 2007. Could Europe's credit markets be signaling similar trouble?

Credit spreads in key sectors have already started to widen. Plus, EWI's January Global Market Perspective shows a highly revealing 3.4-year cycle of U.S. corporate high-yield spreads which directly relates to the year – 2025. Get Global Market Perspective insights now by following this link.

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This article was syndicated by Elliott Wave International and was originally published under the headline Another Blowout Ahead for Credit Spreads?. EWI is the world's largest market forecasting firm. Its staff of full-time analysts led by Chartered Market Technician Robert Prechter provides 24-hour-a-day market analysis to institutional and private investors around the world.

Will the Fed Do an About-Face in 2025?

By Elliott Wave International

Would you like the ability to predict what the Fed will do with its fed funds rate? Just watch the bond market. Elliott Wave International's August Financial Forecast did just that and predicted the Fed would “play catch up.”

The chart below shows the current fed funds rate relative to the yield on both 3-month and 6-month U.S. T-bills:

This week, the yield on both T-bills closed at their lowest levels in a year and have dropped well below the fed funds rate. Based on the current level of T-bill yields, the pressure is mounting on the Fed to lower the fed funds rate to align with T-bill rates, which again are signaling impending economic weakness. The Fed had its chance on Wednesday to lower its rate but did not act. Why? Because, as Chapter 3 of The Socionomic Theory of Finance notes, the average lag time is five months, and the rate decline began accelerating only a month ago. Of course, the more the Fed waits, the more dramatic their reduction will be as they play catch-up to the market. If U.S. T-bills are at current levels or lower by the time of the next Fed meeting on September 18, our model predicts that the Fed will lower the fed funds rate commensurately with the lower level of T-bill yields. [emphasis added]

Indeed, the Fed lowered the fed funds rate by 50 basis points in September. It was the first time the central bank had cut rates in four years. Two other rate cuts followed (November and December) in 2024.

What decisions will the Fed make in 2025? Follow this link to get EWI's current bond market insights by reviewing their new January Elliott Wave Financial Forecast.

Speaking of The Socionomic Theory of Finance, learn how financial markets really work by watching this video from Robert Prechter – it’s FREE.

This article was syndicated by Elliott Wave International and was originally published under the headline Will the Fed Do an About-Face in 2025?. EWI is the world's largest market forecasting firm. Its staff of full-time analysts led by Chartered Market Technician Robert Prechter provides 24-hour-a-day market analysis to institutional and private investors around the world.

Elevate Your Elliott Wave Analysis

By Elliott Wave International

RULES are great. They tell you what you can't do. The Elliott Wave Principle has three.

In a five-wave impulse (shown in the chart below):

• Wave 2 can never retrace more than 100% of wave 1
• Wave 3 can never be the shortest of waves 1, 3 and 5
• Wave 4 can never end in the price territory of wave 1

But GUIDELINES tell you what's PROBABLE. And that's what you want to know!

For instance, the guideline of alternation states that if wave two of an impulse is a sharp retracement, expect wave four to be a sideways correction, and vice versa. The chart below illustrates.

Sharp corrections are almost always zigzags (single or double). Sideways corrections include flats, triangles and combinations.

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This article was syndicated by Elliott Wave International and was originally published under the headline Elevate Your Elliott Wave Analysis. EWI is the world's largest market forecasting firm. Its staff of full-time analysts led by Chartered Market Technician Robert Prechter provides 24-hour-a-day market analysis to institutional and private investors around the world.

Debt, Defaults and Delinquencies (Oh My!)

By Elliott Wave International

It's a double whammy: U.S. credit card defaults jump to the highest level since 2010 as personal savings dry up. Expectations for the months ahead are even more glum. Elliott Wave International lay it out in their November Financial Forecast:

The latest New York Fed Consumer Loan Survey reveals that consumers' expectations for delinquencies rose to 14.22% in September, as shown on the chart below. Over the past seven years, the only higher readings came in March and April 2020 in the midst of the last U.S. recession:

The survey goes back only to 2013, but the history of consumer loan delinquencies suggests that the next debt crisis will be way more disruptive than those of the 2000s. Ahead of the relatively mild recession that began in the first quarter of 2001, for instance, delinquency rates on consumer loans barely budged, rising less than 1% from March 2000 to the start of the recession in March 2001, according to the Fed. By the end of that recession, the consumer loan delinquency rate was actually lower than it was at the beginning of the economic contraction. As its moniker suggests, the Great Recession of 2007-2009 was rockier. Ahead of the recession that began in December 2007, consumer loan delinquencies rose for two full years to 2.64%. At the end of the recession in June 2009, the delinquency rate was at a modern-day high of 4.85%. The current setup suggests a bigger rise in delinquencies. As of mid-2024, the rate has been rising steadily for 3 years and 9 months, from 1.52% in the third quarter of 2021, which was the lowest level in the Fed's half century of data. Currently at 2.74%, consumer loan delinquencies are up 79%. "Consumers Have a Debt Problem," says a headline from The Wall Street Journal on September 16. The subhead adds that they are therefore "leaning on credit cards as other sources of credit have dried up." This trend is untenable as the latest Forbes survey places the average credit card interest rate at 28.7%.

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This article was syndicated by Elliott Wave International and was originally published under the headline Debt, Defaults and Delinquencies (Oh My!). EWI is the world's largest market forecasting firm. Its staff of full-time analysts led by Chartered Market Technician Robert Prechter provides 24-hour-a-day market analysis to institutional and private investors around the world.