Fixed income highlights
- Federal Reserve Vice Chairman Stanley Fischer rounds core PCE inflation up. Fed Governor Lael Brainard rounds down. The resulting polemical views on the outlook for inflation highlight the splits in the Federal Open Market Committee (FOMC) on display in last month’s three dissenting views.
- Monetary and fiscal coordination gone wrong. Considering regulatory policy as a type of fiscal policy, recent enforcement actions resulting in declining bank stock prices highlights a potential for economic fallout. The unintended impact of these actions leading to collapsing confidence in equity markets highlights risks to future credit growth.
- A quiet taper? The Bank of Japan (BoJ) delivered a policy innovation—the replacement of QQE + NIRP (Quantitative and Qualitative Monetary Easing + Negative Interest Rate Policy) with QQE + yield curve control. The shift from the previous policy explicitly acknowledges the limits to monetary policy’s ability to circumvent financial intermediation.
Strategy and outlook
Prospects for rising headline and core inflation follow the easing of the downward pressure on goods inflation. A stable dollar and stable or even rising commodity prices all point to upside potential in inflation figures in the coming months. A broad range of indicators point to labor markets at full employment, and the long-awaited signs of wage inflation have definitively shown up, even if wage gains still pale in comparison to prior recoveries. The opportunities in TIPS from still very attractive levels vs. nominal Treasuries alongside less downside risk from potentially falling commodity prices raises this sector to overweight. More broadly, we continue to have a positive view on credit, but political risks and high valuations continue to support our preference for higher-quality credits. In the context of those political risks it’s worth noting one of the unintended consequences of the political retreat from global trade is rising prices for consumers, a scenario perversely beneficial to our TIPS recommendation.
Insights and Resources