Fixed Income
In Section I, we note that while recent inflation developments point to some supply-side and pandemic-related disinflation, they also point to potentially stickier inflation over the coming several months. The inflation, monetary policy, and geopolitical outlook remains sufficiently risky that an overweight stance towards equities within a global multi-asset portfolio is not justified, and we continue to recommend a neutral stance for now. This month’s Section II is a guest piece written by Martin Barnes. Martin, who retired from BCA Research as Chief Economist last year after a long and illustrious career, discusses the outlook for government debt and the possibility of an eventual crisis.
We recommend that investors use the following framework to think about whether potential disinflation would be bullish or bearish for share prices: disinflation will prove to be bullish for global share prices if it is due to an improvement in supply-side dynamics, but bearish if it is demand driven. We believe it is the latter.
It takes time for wage inflation to die. So, if 2022 was the year that central banks’ monster tightening killed bond and stock market valuations, then 2023 will be the year that it finally reaches the economy and kills profits, jobs, and the wage inflation that has so far refused to die. This means that commodity prices have substantial further downside, while healthcare relative performance has substantial further upside.
This week’s report takes a look at risk-adjusted return opportunities in US spread product.
Is the US in a wage-price inflation spiral that could lead to more aggressive Fed rate hikes? Is it time to buy UK Gilts after a wild month of volatility? We answer "no" to both questions, as we discuss in this week’s report.
The Fed’s tone has taken a decidedly dovish turn during the past week and, despite September’s hot CPI print, there is mounting evidence that a period of disinflation is coming. This makes the case for a pause in the Fed’s tightening cycle in Q1 or Q2 of next year.