US_Credit_Alpha_Getting_by_with_a_little_help_from_the_Fed

Getting by with a little help fromthe Fed This week, we re-evaluate our sector ratings in investmentgrade and high yield, provide a guide for using equity factorsin credit, and analyze the historical performance of our post-earnings announcementdriftrecommendations, along withan update following 4Q earnings. BradleyRogoff,CFA+1 212 412 7921bradley.rogoff@barclays.comBCI, US Dominique Toublan+1 212 412 3841dominique.toublan@barclays.comBCI, US US Credit Alpha Overview. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Dovish undertones from the Fed provided some temporary relief to a market mired in economicand political uncertainty. Despite the brief rebound, we think spreads should widen from hereand stress the importance of factor, sector, and credit selection in this unstable environment. US Focus Systematic Credit: Factor performance through economic regimes. . . . 5 Equity-inspired factors explain more variation in credit returns on top of the traditionalmeasures of credit risk. Just like the traditional factors, investors should time their exposures tocarry, value, momentum, and volatility according to market conditions. We provide a guide fordoing so. US Focus Better Together: Combining credit analyst views and systematicearnings surprise signals in practice. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 Credit markets reflect new information from earnings releases only gradually. We analyze theperformance of trade ideas looking to exploit this dynamic post publication since 2022, andpresent new evidence on the benefits of a "Better Together" approach. Thisdocument is intended for institutional investors and is not subject to all of theindependence and disclosure standards applicable to debt research reports prepared for retailinvestors under U.S. FINRA Rule 2242. Barclays trades the securities covered in this report for itsown account and on a discretionary basis on behalf of certain clients. Such trading interestsmay be contrary to the recommendationsofferedin this report. Barclays Capital Inc. and/or one of itsaffiliatesdoes and seeks to do business with companiescovered in its research reports. As a result, investors should be aware that the firm may have aconflict of interest that couldaffectthe objectivity of this report. Investors should consider thisreport as only a single factor in making their investment decision. Focus US/European IG and HY: Trading thedrift– 4Q24 update. . . . . . . . . . . . 37 Credit markets take time to absorb new positive or negative information from earnings releases.At the sector level, in Europe, we expect outperformance from Other Utilities in IG andTechnology in HY. In the US, IG FinCos and HY REITs screen as most attractive. US Investment Grade Getting defensive: Sector relative value update. . . . . . . . . . . . . . . . . . . . . 45 Given our expectation that spreads will widen to 125-130bp in the next six months, we re-evaluate our sector ratings. We upgrade consumer products, pharmaceuticals, food & beverage,retail, refining, and tobacco. We downgrade life insurers and midstream. US High Yield Refreshing sector relative value. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57 We refresh our sector views within high yield amid rising sector dispersion. Consumer products,technology, and packaging all look cheap from a top-down standpoint and carry Overweightratings from Barclays' fundamental analyst team. Chemicals looks especially rich and israted Underweight. US Credit Alpha Overview Dovish undertones from the Fed provided some temporaryrelief to a market mired in economic and political uncertainty.Despite the brief rebound, we think spreads should widenfrom here and stress the importance of factor, sector, andcredit selection in this unstable environment. BradleyRogoff,CFA+1 212 412 7921bradley.rogoff@barclays.comBCI, US Dominique Toublan+1 212 412 3841dominique.toublan@barclays.comBCI, US Getting by with a little help from the Fed The Fed is leaning dovish.Powell sounded somewhat dismissive of the increase in inflationexpectations from both consumers and the FOMC. In particular, he stated that his "base case"was fortariff-driveninflation to be transitory (see here). Still, the Fed's assessment of inflationrisk is to the upside. Downplaying inflation implies that the focus is on the other part of the dual mandate:employment. The Fed is less optimistic on that front. It lowered its growth projections andmarginally increased its trajectory for unemployment. It also sees the bigger risks to be on theworsening side for both. So it kept two cuts in 2025 (based on the median dot in the SEP) and announced a slowdown inthe pace of QT beginning next month. That appears dovish to us. We continue to expect two cutsin 2025 as well. The market is currently implying a roughly 70% chance of three cuts (aboutunchanged month-to-date). Recent d