Preview:
Executive Summary
- In the US, we are sticking with a view that moderating growth and acceptable inflation will stay the Federal Reserve’s (Fed) hand and reverse the recent jumps in bond yields.
- In Europe, the full impact of the significant policy tightening to date has yet to be felt, which affirms our belief that further rate hikes are unlikely.
- In the UK, forward-looking indicators suggest growth will remain lackluster, with risks also skewed to the downside, which could see the focus shift to when future rate cuts may come.
- In China, moderating growth and inflation should keep Chinese interest rates at current low levels for longer.
As we anticipated, global growth has downshifted and inflation rates worldwide are generally receding. Financial conditions in the US and Europe are tightening, there is weaker demand for manufacturing and services across a number of countries, and deflationary pressures in China are easing price pressures globally. These trends, coupled with the major central banks advocating for a prolonged period of restrictive monetary policy, are expected to further dampen economic growth and inflation which, in turn, should lead to lower developed market (DM) government bond yields and a modestly weaker US dollar. That stated, concerns over a “higher-for-longer” rate environment driven by factors such as stronger-than-expected growth in the US, increased US Treasury (UST) supply to cover a growing fiscal deficit and inflation remaining above respective central bank targets may lead to periods of heightened market volatility. Spread sectors such as emerging markets (EM), high-yield, bank loans and select areas of the mortgage-backed securities (MBS) space offer attractive yield, in our view, but we acknowledge their vulnerability to unanticipated shifts in macro-related sentiment, geopolitical developments and the ongoing risk of central bank overtightening.
Topics covered in the full publication:
- Key drivers
- US: Staying the course
- China: Targeted support and early signs of stabilization
- Euro Area: growth slowing and inflation falling
- United Kingdom: less of an outlier
- Global market rates: relative value by region
- Relative value by sector
WHAT ARE THE RISKS?
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Equity securities are subject to price fluctuation and possible loss of principal. Fixed-income securities involve interest rate, credit, inflation and reinvestment risks; and possible loss of principal. As interest rates rise, the value of fixed income securities falls. International investments are subject to special risks including currency fluctuations, social, economic and political uncertainties, which could increase volatility. These risks are magnified in emerging markets. Commodities and currencies contain heightened risk that include market, political, regulatory, and natural conditions and may not be suitable for all investors.
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