Preview:
Executive Summary
- In the US, we expect inflation to be well below US Federal Reserve (Fed) targets by late 2024, resulting in more Fed easing than is currently expected.
- In Europe, a mild growth contraction and additional declines in core inflation should allow the European Central Bank to loosen policy in 2Q24.
- In the UK, downside growth risks support our view that the market is still underestimating the degree of rates cuts that the Bank of England is likely to deliver.
- In China, we maintain our view that moderating growth and inflation should keep Chinese interest rates at current low levels for longer.
Global growth continues to downshift, led by Europe, the UK and China. In the US, we anticipate growth will slow further, but still avoid a recession. On the inflation front, 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 accumulating effects of monetary tightening by the major central banks, should further dampen global economic growth and inflation which, in turn, should lead to lower developed market (DM) government bond yields and a modestly weaker US dollar. This macro backdrop is supportive for emerging markets (EMs), particularly in Latin America, which we expect to outperform. Other spread sectors such as high-yield, bank loans and select areas of the mortgage-backed securities (MBS) space offer attractive yield, but we acknowledge their vulnerability to unanticipated shifts in central bank policy, macro-related sentiment and unanticipated geopolitical developments. Lingering 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 also lead to episodes of heightened market volatility.
Topics covered in the full publication:
- Key drivers
- US: Decelerating inflation should drive more Fed easing
- China: Support still necessary, but no big turnaround
- Europe: Disinflation well underway
- Global market rates: relative value by region
- Relative value by sector
Definitions:
A Mortgage-Backed Security (MBS) is a type of asset-backed security that is secured by a mortgage or collection of mortgages.
Deflation refers to a persistent decrease in the level of consumer prices or a persistent increase in the purchasing power of money.
Disinflation is a temporary slowing of the pace of price inflation and is used to describe instances when the inflation rate has reduced marginally over the short term.
WHAT ARE THE RISKS?
All investments involve risks, including possible loss of principal. Please note that an investor cannot invest directly in an index. Unmanaged index returns do not reflect any fees, expenses or sales charges. Past performance is no guarantee of future results.
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. Derivative instruments can be illiquid, may disproportionately increase losses, and have a potentially large impact on performance. Liquidity risk exists when securities or other investments become more difficult to sell, or are unable to be sold, at the price at which they have been valued. Low-rated, high-yield bonds are subject to greater price volatility, illiquidity and possibility of default. Commodities and currencies contain heightened risk that include market, political, regulatory, and natural conditions and may not be suitable for all investors.
U.S. Treasuries are direct debt obligations issued and backed by the “full faith and credit” of the U.S. government. The U.S. government guarantees the principal and interest payments on U.S. Treasuries when the securities are held to maturity. Unlike U.S. Treasuries, debt securities issued by the federal agencies and instrumentalities and related investments may or may not be backed by the full faith and credit of the U.S. government. Even when the U.S. government guarantees principal and interest payments on securities, this guarantee does not apply to losses resulting from declines in the market value of these securities.