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.
Despite the market spillover from developed market rate volatility, Western Asset does not view the recent market rout as sufficient basis to steer away from Emerging Market debt (EMD).
The Emerging Market (EM) bear market could provide resplendent valuation opportunities. In our view, valuation and fundamentals will carry the day. The key to our prognosis: continuation of sustained moderate global growth.
A wide spectrum of potential Brexit scenarios still remains. On balance, our base case is for Parliament ultimately to support a “Plan B” deal. Under this outcome or an “extend” scenario, the probabilities now tilt toward a softer or later Brexit; the odds of a "no-deal” Brexit have fallen.
Chart of the Week
Chart courtesy of ClearBridge Investments. Source: ClearBridge, Bloomberg as of 4/4/2019. 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
Friday saw a solid U.S. jobs report, with only a couple of wrinkles; Germany's manufacturing sector had a distressing February; Greece's debt crisis generated an ironic payday; Brexit hit yet another pothole.
China's strong GDP performance in Q1 was a surprise to the upside. But is the economy enjoying a longer-term turnaround?
Western Asset examines recent trends in the muni bond market and provides its outlook about conditions ahead.
Throughout the bumpy ride of Q3 2018, we maintained our convictions with an overall bullish bias which turned out to be justified in the rapid reversal that followed. We think the macro backdrop is supportive of the credit cycle; while long by historical standards, we believe it will endure.
Is the latest yield curve inversion a cause for concern or a false alarm?
Further hikes are unlikely
The upcoming "Fed Listens" schedule of public events is unlikely to result in major policy changes. We also doubt the upcoming shift in the Fed’s inflation strategy will have any significant effect on inflation expectations, except to make rate hikes even less likely in 2019.
Bond Market Outlook
Subdued core inflation allows central banks a very long leash to keep interest rates low. Further interest rate hikes are likely off the table until growth picks up enough to push inflation rates higher.
January webcast summary
Subdued global inflation should provide monetary policymakers with a ramp to be more accommodative and perhaps pull back from their normalization efforts. We’re encouraged by the Fed's latest commitment to be more data-dependent.
We expect that the Fed will eventually adopt a “wait-and-see” strategy this year, with at most one more rate hike in 2019.
Income and global credit are becoming mainstays of fixed-income investing – an actively managed, unconstrained approach can be a valuable tool to face today's rapidly-changing market conditions.
Q4 Market Commentary
Continuing global expansion is the priority for policymakers worldwide; steps are being taken in the right direction so far.
None of the five early warning indicators tracked by Western Asset point to an end of this expansion phase of the economy.
Market and Strategy Update
Our thought now is that the optimism for US growth is a bit overdone and pessimism around lethargic global growth rates has swung too far to the downside.
Fixed income update
While we don’t see this credit cycle ending soon, its longevity does warrant extra scrutiny on valuations and some types of of risk.
While the Fed is expected to hike rates twice more this year, the potential removal of the word “accommodative” from its guidance would be a more notable development.
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