Displaying items by tag: fed

It’s a challenging period for fixed income investors given uncertainties around the economic outlook and monetary policy. While some are making bold bets on whether inflation will perk up once again or the economy fall into a recession, CIBC recommends that investors embrace this period of ‘higher for longer’ by focusing on short duration and high quality bonds.

With this strategy, investors can take advantage of generous yields while shielding themselves from potential risks. In terms of the bank’s outlook, its base case remains a moderate slowdown and a mild recession. Yet, it believes that many of these risks have already been priced in which is one factor in its bullishness towards the asset class.

Due to recent data indicating a pullback in consumer spending, weakness in retail sales, and a slowdown in housing activity, the firm believes that recession is more likely than another period of spiking inflation. Further, credit card balances are rising, while excess savings from the pandemic have been basically depleted.

If this scenario were to materialize, inflation would likely trend lower which would give central banks more latitude to loosen policy and lead to price appreciation for fixed income. 

Finsum: CIBC shared some thoughts on the economy and fixed income. It’s bullish on the asset class as it believes a mild recession is likely next year.

Fixed income posted its worst quarterly performance in over a year as the market has been reducing odds of rate cuts, while increasing odds of additional hikes and extending its estimate of the duration of tight policy. This also led to the first quarterly decline in equities this year.

Yields on long-duration Treasuries are now at their highest level since 2007. Fed hawkishness is even neutering positive reactions to benign economic data as evidenced by the recent low PCE print. Fixed income was initially bid up, however this strength was sold into as most bonds finished the day unchanged. Some additional reasons may be the recent rise in oil which could handcuff the Fed from pivoting, huge supply of Treasuries hitting the market over the next couple of quarters, and uncertainty over the government shutdown. 

In terms of fixed income performance, short-duration assets are outperforming, while long-duration assets are hitting new lows. Many strategists are now saying that yields will rise further with the 10Y going past 5%. 

The contrarian case is that the Fed is close to the end of its tightening cycle and that the economy is finally starting to show signs of contraction. Thus, investors should buy on the dip to take advantage of these elevated yields.

Finsum: Fixed income and equities both performed poorly in Q3. For fixed income, here are some of the factors behind the weakness.

‘Higher for longer’ is the main takeaway from the FOMC meeting after the committee decided to hold rates. Members also signaled that another rate hike is likely before year end. Overall, there was a hawkish tilt to Chair Powell’s press conference as 2024 odds saw consensus expectations decline from 3 to 4 rate cuts to 2 to 3 cuts. 

FOMC members’ dot plots also show expectations of less easing in 2024. In June, it saw 2024 ending with rates at 4.6%. This was upped to 5.1%. The Fed did acknowledge progress in terms of inflation’s trajectory. Powell remarked that “We’re fairly close, we think, to where we need to get.”  

Fixed income weakened after the FOMC with yields on longer-term Treasuries jumping to new highs. Yields on the 10-year reached 4.48% and have broken out above the spring highs. The increase in yields has had negative effects on equities, specifically the financial sector and small caps. However, yields on shorter-term Treasuries haven’t risen above spring highs.

It’s an indication that markets are not expecting terminal rates to move materially higher but it’s adjusting to a longer duration of high rates. For fixed income investors, it likely means that volatility will persist in the short-term. 

Finsum: Longer-term Treasury yields are breaking out to new highs following the FOMC meeting. Expectations of meaningful Fed rate cuts in 2024 are being tempered. 

Direct indexing is a new approach to investing which involves recreating an index within an investors’ portfolio which combines the benefits of passive investing in addition to tax loss harvesting capabilities with the potential for increased customization. For these reasons, it’s been growing in popularity especially as it’s become available to a wider swathe of investors.

However, according to a recent report from Hearts & Wallets, a wealth management research firm, most investors remain unfamiliar with the concept. In fact, there is considerable confusion about what it specifically means. Many weren’t able to specifically delineate between ETFs and direct indexing.

Another challenge is that many investors believed that direct indexing was closer in approximation to active investing rather than passive investing and that it would require some sophisticated management. For those who were interested in direct indexing, the potential tax savings were the biggest factor. 

One of the conclusions of the report was that the industry should consider renaming ‘direct indexing’ to something that was more definitive. Too many investors who would be good candidates for these products are dismissive due to an incorrect understanding of its function and benefits. 

Finsum: Direct indexing is growing in popularity. Yet, a recent report on the category revealed some issues that may impede its future growth. 

Exxon Mobil recently shared its long-term outlook on how it sees the global energy market evolving. Overall, it sees renewables taking a greater share but that more than half of the world’s energy needs will continue to be met by oil & gas.

It sees energy demand as being intrinsically tied with economic development. By 2050, more than 1.5 billion people will have entered the global middle class which comes with increased consumption of automobiles, air conditioners, refrigerators, etc. 

China’s per-capita energy consumption more than pentupled as the country experienced an economic boom. The company sees a similar possibility in Africa over the next couple of decades. In total, it sees global electricity consumption growing by 80% by 2050.

In order to facilitate this, it believes that all types of energy need to play a role including oil & gas. Despite the belief of many that EVs portend a peak in oil demand, ExxonMobil points out that even if every car sold in 2035 is an EV, global oil demand would only drop to 85 million barrels per day which is equivalent to 2010 levels.  

Finsum: ExxonMobil shared its outlook for the global energy market till 2050. Overall, the company believes that energy demand will continue rising and that oil & gas will remain integral for the global economy.