U.S. midterms, jobs, earnings put credit markets to the test: SocGen

Investors face a crowded week of political and economic events, with Tuesday's U.S. midterm elections, Friday's employment report and another wave of corporate earnings threatening to disrupt a tentative recovery in global credit markets, according to Société Générale.

In an Oct. 30 research report, strategist Juan Esteban Valencia said corporate bond markets could extend their recent gains if government bond yields stabilize and geopolitical tensions don't escalate.

The Nov. 3 elections represent a major source of uncertainty, with the possibility of a change in congressional control raising questions about the direction of U.S. economic and fiscal policy.

Société Générale said a Democratic takeover of Congress could lead to significant changes in U.S. policy. However, the bank expects the week's political developments, economic releases and earnings announcements to be broadly supportive of credit markets, or at least unlikely to cause a major deterioration.

For bond investors, the more immediate concern may be volatility in sovereign debt markets, which has contributed to widening corporate credit spreads over the past two months.

Employment data

Friday's October employment report will be another closely watched event, particularly as investors assess the outlook for interest rates following last week's Federal Reserve decision to leave borrowing costs unchanged.

Economists expect U.S. nonfarm payrolls to increase by just 55,000 in October, compared with 29,000 in September, according to consensus estimates cited by Société Générale. The unemployment rate is expected to remain at 4.2%.

Wednesday's ADP private-sector employment report is expected to show an increase of 70,000 jobs, down from 90,000 in September.

The economic calendar also includes manufacturing activity data on Monday, September job openings on Tuesday and services-sector readings on Wednesday.

The figures could influence expectations for Federal Reserve policy. Société Générale's economists anticipate another U.S. interest-rate increase by March 2027, while forecasting one or two additional increases by the European Central Bank.

Earnings season

Corporate earnings will provide another important test of investor confidence.Société Générale expects the coming week to be the second busiest of the third-quarter reporting season in both the United States and Europe.

By Friday, approximately 86% of U.S. companies and more than 70% of European companies are expected to have reported quarterly results.

Corporate earnings have generally remained healthy despite higher borrowing costs and geopolitical uncertainty, providing support for investment-grade and high-yield debt. The bank expects the next round of results to reinforce that trend.

Credit markets recover, but risks remain

The outlook follows a rebound in corporate bonds after several weeks of selling pressure.

European investment-grade credit spreads narrowed by approximately six basis points last week to 116 basis points over benchmark yields. U.S. investment-grade spreads tightened by two basis points to 105 basis points.

High-yield markets also recovered, with U.S. spreads narrowing by 13 basis points to 341 basis points.

However, Société Générale cautioned that the underlying sources of market instability have not disappeared. Oil prices remain elevated amid the conflict in the Middle East, with Brent crude futures trading above $115 a barrel during much of the preceding week.

Renewed geopolitical tensions or sharp movements in government bond yields could reverse the recent improvement in credit markets. The bank expects spreads to narrow gradually through year-end but no longer anticipates a full recovery to its previous forecasts. It also expects renewed pressure on credit spreads during the first half of 2027.

Société Générale favors U.S. dollar investment-grade debt over euro-denominated investment-grade bonds and European investment-grade debt over high-yield securities. Its preferred sectors include financials, utilities, real estate and corporate hybrids.

Meanwhile, the bank expects corporate bond issuance to remain active in November, with roughly €20 billion to €25 billion in new issuance anticipated over the coming weeks.

For investors, the central question is whether economic resilience and healthy corporate profits can sustain the recovery in credit markets despite political uncertainty, elevated energy prices and the prospect of further interest-rate increases.