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.
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