Strategic Income Opportunities Fund Monthly Insight

What will the Fed do next?

Nov 26, 2018

Recent economic developments make the
Fed’s path less certain.

Inflation is moving moderately higher and resides near the Federal Reserve’s target rate. As measured by Core CPI (Consumer price index excluding volatile food and energy prices), October inflation came in at 0.2% month-over-month and 2.1% year-over-year, which was overall closely in line with economists’ consensus expectations.

While October’s uptick is a shift from recent softness, when looked at over a rolling three-month average, Core CPI was just 1.6%, versus 2.3% in October of last year. Moreover, looking at the six-month moving average of the month-over-month change in Core CPI inflation, we can clearly see that the measure peaked in early 2018 and has drifted lower for much of the year. We believe the current level of inflation is reasonable and far from concerning for Fed policy makers.

A larger focus for the Fed right now is the recent moderation in business fixed investment, which holds vital implications for how policy unfolds in the months ahead. Tangible signs of weakness in the more rate-sensitive segments of the economy – particularly housing and parts of the auto market – introduces a higher degree of uncertainty around the Fed’s next move.

At this point, we think the Fed is in the process of adjusting its thinking on the path of policy rates going forward, which should make its December meeting and subsequent press conference interesting and potentially market-moving.

Outperformance with lower volatility

Outperformance with lower volatility chart

Source: Morningstar as of 10/31/18. Returns are from 10/31/17 through 10/31/18. Volatility is measured from 10/31/17 through 10/31/18 using daily returns. For standardized performance of the BlackRock Strategic Income Opportunities Fund, click here

The performance quoted represents past performance and does not guarantee future results. Investment return and principal value of an investment will fluctuate so that an investor's shares, when sold or redeemed, may be worth more or less than the original cost. Current performance may be lower or higher than the performance quoted.

In the Strategic Income Opportunities Fund, we hold the majority of duration in the 0- to 5-year part of the yield curve. We maintain minimal exposure to longer rates as we expect the curve to continue to steepen in the near term. We slightly reduced the fund’s inflation protection positions (in breakeven form) given our view that inflation expectations are now more fairly priced in the market.

We recently made tactical additions to the fund’s non-U.S. credit and emerging market allocations. We added exposure to German sovereign rates as a hedge to waning growth and elevated geopolitical risk in the Eurozone. We hold some exposure to European financials, which we believe may ultimately benefit from higher rates as the European Central Bank tapers its stimulus program.

Emerging markets continue to face the headwinds of a stronger dollar, global trade tensions, and local political uncertainties. However, we believe price weakness has created value in the space. We hold select positions in China, Argentina and Mexico.

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