Prospect Capital Corp., an $8 billion publicly-traded private credit fund, had the outlook on its Baa3 credit grade cut to negative by Moody’s Ratings, the second such revision by a ratings firm in as many weeks.

Prospect is now on the cusp of junk at three out of the five firms that rate its debt, following S&P Global Ratings’ outlook revision last week and a similar action from Kroll Bond Rating Agency earlier this year. Prospect has seen a “deterioration in asset quality over the last 12 months,” Moody’s said in a report Tuesday.

The rating company specifically cited the share of borrowers paying Prospect by accumulating more debt with the fund, an arrangement known on Wall Street as payment-in-kind, or PIK. About 16% of Prospect’s total income was from payment-in-kind as of June 30, according to Moody’s, up from 10% the year prior.

That figure is “one of the highest levels among peers,” Moody’s said in the report.

Prospect has faced increased scrutiny in recent months over its PIK income, its relationship with a real estate investment trust it fully controls and its reliance on retail investors for funding.

Last month, Wells Fargo & Co. cut its price target on the fund to $4.50 from $5.00 over the risk of dilution for existing shareholders. The revision followed a heated earnings call during which Prospect CEO John F. Barry III lashed out at the Wells Fargo analyst, blasting some of his questions as “absurd.” On earnings calls and in documents, Prospect has defended PIK arrangements, seeing them as appropriate for some borrowers.

Representatives for Prospect did not immediately respond to a request for comment.

Moody’s also pointed to the fund’s subordinated structured investments and real estate holdings, which expose the fund to the volatility of equity returns. It also cited a lower debt-to-equity ratio relative to peers, as well as a deteriorating asset coverage ratio, for the outlook cut.

Moody’s, which kept Prospect’s rating steady at Baa3, said it could downgrade the fund if it sees meaningful asset deterioration, lowered profitability or a further decrease to the asset coverage ratio cushion.

The ratings firm said it could upgrade Prospect if the fund effectively manages portfolio asset quality and reduces its higher-risk exposures, strengthens its asset coverage ratio cushion, or generates profitability that compared with peers.

Source: Theedgemarkets

Some investors expect a back-to-back 50bps cut

The Fed decided to begin this easing cycle with a double 50bps rate cut at last week’s decision, with the new dot plot pointing to another 50bps worth of reductions by the end of 2024. At the press conference following the decision, Fed Chair Powell noted that the economy is in good shape and that that the decision was designed to keep it there.

Combined with the Committee’s dovish take on interest rates, Powell’s view that there is no imminent risk of recession allowed investors to increase their exposure in stocks, while the dollar suffered some more losses.

Investors went as far as to pencil in another 75bps worth of reductions by December, despite the Fed’s dot plot pointing to 50, and despite a Reuters poll revealing that a strong majority of economists agree with the Fed. Economists believe that policymakers will cut interest rates by 25bps in both November and December, but according to the Fed funds futures, investors are assigning a strong 55% chance for a back-to-back double cut in November.

Dovish bets pose upside risks

This implies that there may be upside risks moving ahead should data heading into the November decision continue to suggest that the economy is faring well and/or that inflation is not slowing as fast as initially believed.

Indeed, both the Atlanda Fed GDPNow and the New York Fed Nowcast models are pointing to solid growth rates for Q3, while the composite S&P Global PMI for September came in slightly better than expected, holding well above 50, despite the further weakness in the manufacturing sector.  This corroborates the notion that the world’s largest economy is doing well.

PCE inflation enters the limelight

Now, investors are likely to turn their attention to Friday’s PCE inflation metrics for August, which are accompanied by the personal income and spending data. As is usually the case, the spotlight is likely to fall on the core PCE price index as it is the Fed’s favorite inflation gauge.

Considering that the core CPI for the month held steady at 3.2% y/y, there is the likelihood for the core PCE to have also held steady at 2.6% y/y. This view is corroborated by the Fed’s own projections, which suggest that inflation will end 2024 at 2.6%. Reuter’s poll is even pointing to an uptick to 2.7%.

Thus, should such an outcome be accompanied by strong income and spending numbers, investors will have fewer reasons to believe that a back-to-back double rate cut will be warranted, something that could help Treasury yields move higher and the US dollar to recover some ground.

Nevertheless, that doesn’t mean Wall Street will pull back. Even at a slower pace, interest rates are destined to continue decreasing. Thus, as long as data keep pointing to decent economic performance, equity traders may be willing to add to their risk exposure.

Euro/dollar may extend latest setback

Euro/dollar pulled back on Monday, after the Euro area PMI revealed that business activity fell into contraction in August, prompting traders to increase their bets about another 25bps cut at the October ECB decision.

The setback occurred after the pair hit resistance last week near the 1.1180 and should Friday’s US data prove supportive for the dollar, the pair may continue sliding, perhaps until it tests the 1.1025 zone, marked by the low of September 3, or the round figure of 1.1000, which stopped the price from moving lower on September 11.

Now, in case the data encourages investors to increase their Fed rate cut bets, euro/dollar may climb back to the 1.1180 zone, or the 1.1200 area, marked by the highs of August 23 and 26, the break of which could pave the way towards the high of July 18, 2023, at around 1.1275.

US Federal Reserve governor Michelle Bowman said on Tuesday key measures of inflation remain "uncomfortably above" the Fed's 2% target, warranting caution as the Fed proceeds with cutting interest rates.

Bowman said she agreed that progress on lowering inflation since it peaked in 2022 means it is time for the Fed to reset monetary policy.

But she dissented to last week's half-point rate reduction in favor of a more "measured" quarter-point cut because "the upside risks to inflation remain prominent," including global supply chains at risk of strikes and other disruption, aggressive fiscal policy, and a chronic mismatch between housing supply and demand.

"The US economy remains strong and core inflation remains uncomfortably above our 2% target," Bowman said in comments prepared for delivery at a Kentucky Bankers Association convention in Virginia.

"Core" inflation refers to the Personal Consumption Expenditures price index stripped of food and energy costs, which Fed officials consider a good guide to overall inflation trends and which Bowman said she expects was running still at around 2.6% through August.

Inflation data for August will be released on Friday.

"I preferred a smaller initial cut in the policy rate while the US economy remains strong and inflation remains a concern," Bowman said. "I cannot rule out the risk that progress on inflation could continue to stall."

After holding the benchmark rate of interest steady for 14 months in a range between 5.25% and 5.5%, the Fed last week in an 11 to one vote cut it to the 4.75% to 5% range.

Bowman's dissent was the first by a member of the Fed's Board of Governors since 2005.

While she said she was prepared to support further cuts if incoming data showed the job market weakening, she argued that wage growth and the fact that there were still more open jobs than available workers suggested the labour market remained strong overall.

"I continue to see greater risks to price stability, especially while the labor market continues to be near estimates of full employment," with the unemployment rate at 4.2%, she said.

She said she worried that fast rate cuts might also unleash "a considerable amount of pent-up demand and cash on the sidelines," possibly fueling inflation again, while monetary policy may also not be as restrictive as some Fed officials believe.

Source: Theedgemarkets

Bowman's Speech

OPEC's latest World Oil Outlook (WOO) 2024 makes it clear: peak oil demand is not on the horizon. Despite ongoing discussions around transitioning to renewable energy, OPEC forecasts global oil demand to grow significantly, reaching over 120 million barrels per day (mb/d) by 2050. This projection is driven by strong demand from non-OECD countries, which are expected to see the majority of growth.

“What the Outlook underscores is that the fantasy of phasing out oil and gas bears no relation to fact,” OPEC said in its WOO forward.

From 2023 to 2029, global oil demand is expected to increase by 10.1 mb/d, with non-OECD countries leading the way, adding 9.6 mb/d to reach 66.2 mb/d. Meanwhile, demand in OECD countries is projected to stagnate, oscillating around 46 mb/d. Long-term, non-OECD demand will continue to rise, adding 28 mb/d by 2050, while OECD demand is expected to decline. India, Other Asia, Africa, and the Middle East will be key drivers of this growth, with India alone expected to increase its demand by 8 mb/d.

Sectors like petrochemicals, road transportation, and aviation are set to play a critical role in future demand. Petrochemicals alone are projected to account for an additional 4.9 mb/d of oil demand, driven by increasing demand for ethane and naphtha. Road transportation is forecast to grow significantly before stabilizing, while aviation demand will add another 4 mb/d by 2050.

OPEC’s outlook also underscores that oil and gas will continue to dominate the global energy mix, accounting for over 50% through 2050. The organization stresses the importance of continued investment in the oil sector, estimating $17.4 trillion will be needed by 2050 to ensure stable supply.

According to OPEC, oil demand will remain robust for decades, with growing demand in non-OECD regions and the continued need for investments in oil infrastructure. Despite the rise of renewables, OPEC’s view is that oil will continue to play a critical role in meeting the world’s energy needs for the foreseeable future.

Source: OILPRICE

Crude oil inventories in the United States fell by 4.339 million barrels for the week ending September 20, according to The American Petroleum Institute (API). Analysts had expected a drop, but a much smaller one at -1.1-million-barrels.

For the week prior, the API reported a 1.96-million-barrel increase in crude inventories.

So far this year, crude oil inventories are 15 million barrels under where they were at the start of the year, according to API data.

On Tuesday, the Department of Energy (DoE) reported that crude oil inventories in the Strategic Petroleum Reserve (SPR) rose by 1.3 million barrels as of Sept 20. Inventories are now at 381.9 million barrels. The SPR is now up roughly 35 million from its multi-decade low last summer, although still down 253 million from when President Biden took office.

Oil prices rose on Wednesday ahead of the API data release after an announcement from China that it would employ a monetary stimulus to kick its economy into gear. Other catalysts helping to push prices up are the threat of supply disruptions in the United States as a result of the hurricane and continued fear over Middle Eastern tensions.

Gasoline inventories also fell by a substantial amount this week, falling 3.438 million barrels, more than offsetting last week’s 2.34-million-barrel increase. As of last week, gasoline inventories are just below the five-year average for this time of year, according to the latest EIA data.

Distillate inventories fell by 1.115 million barrels, compared to last week’s 2.3-million-barrel increase. Distillates were about 9% below the five-year average for the week ending September 13, the latest EIA data shows.

Cushing inventories also were down, shrinking by 26,000 barrels, according to API data, on top of the 1.4-million-barrel draw of the previous week.

Source: OILPRICE