Quarterly Market Commentary
Optimism for a synchronized global recovery has given way to anxiety over potential EM or European crises. While our viewpoint remains optimistic, taking into account the vagaries of downside risks is crucial.
The Western View
Today, fears dominate the financial news, and we have a slightly more cautious tone overall. Yet despite prevalent fears, we remain bullish on several sectors within fixed income – and continue to see opportunity.
Western Asset Global Outlook
The current steady but unspectacular global growth backdrop has not materially changed. We remain optimistic that global growth of around 3% is sustainable while recognizing that high debt loads and other headwinds, including low productivity and...
February’s Market Volatility
In the last two years, market sentiment has swung from pessimistic “secular stagnation” to today’s “reflation trade” enthusiasm. As optimists, we have focused on the higher-yielding spread sectors. But despite market optimism about accelerating growth, the need to protect against unpleasant surprises remains crucial.
The transition from Janet Yellen to Jerome Powell as chair of the Federal Reserve (Fed) is happening at an interesting moment for financial markets and the US economy. Two topics in particular have recently come to the fore of investors’ minds: the potential for an increase in inflation and the current pricing of Fed interest rate hikes. We address both in the final section of this note. However, some context is needed first. Before addressing the topics du jour, we assess Yellen’s record and then provide an outlook for the Fed under Jerome Powell. It is only with the context properly established that we can attempt to adequately address the issues of the day.
Chart of the Week
Source: Bloomberg, June 22, 2018.Past performance is no guarantee of future results. Indexes are unmanaged, and not available for direct investment. Index returns do not include fees or sales charges. This information is provided for illustrative purposes only and does not reflect the performance of an actual investment.
CHART OF THE WEEK
OPEC made a deal to hike production by 1 million barrels – and included Russia; Emerging Market election season begins with Turkey; European service growth beat expectations for June; U.S. tax revenue from its metals tariffs netted nearly $800 million so far; the costs have yet to be tallied.
Western Asset examines recent trends in the muni bond market and provides its outlook about conditions ahead.
The May FOMC minutes reaffirmed our view that the Fed’s reaction function will be less hawkish than feared.
Investors define ESG in a variety of ways and have different reasons for adopting ESG.
Figures for April indicate that far from taking off, as many believe, U.S. inflation is stabilizing and could even fall.
Market & Strategy Update
Despite the fairly meaningful downshift in growth and inflation, we still believe that the global recovery will be ongoing but could take a very long time to gain traction – even with the help of continued accommodative monetary policy.
Western Asset sees the US dollar succumbing to the gravitational pull of cyclical and technical forces that should bolster the appeal of non-US currencies; the current dollar strength is not the start of something more permanent.
Various Federal Reserve (Fed) policymakers expect US inflation to accelerate in 2018, and market analysts generally agree with them. Of course, these same folks predicted rising inflation in previous years as well. It didn’t happen then, and we think it is unlikely to happen in 2018.
The credit cycle is still in expansion mode, and investors who run for cover too early may regret missing out on incremental returns.
In this Q&A, Western Asset Portfolio Manager and Research Analyst John Bellows discusses the outlook for growth and inflation, the impact of recent tax cuts, the maturity of the current business cycle and where to find value in the market when everything seems expensive. Read more.
US Mortgage Market
The US mortgage market is markedly stronger and simpler in the aftermath of the subprime credit bubble that led to the financial crisis. For investors, the mortgage market is attractive today as a result of greater protections for bondholders, better mortgages backing those bonds and a healthier US housing market and consumer. Read more.
The big picture in bonds
The slow but steady recovery since the financial crisis continues to make progress; looking ahead, we expect another 2+% growth year in 2018, perhaps better with the new tax law. The fundamental investment backdrop is exceptional, but prices are high -- so sector and security selection remain key.
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