Displaying items by tag: fixed incme

The Bureau of Labor Statistics released the CPI report for August which showed a 3.7% increase in inflation which was above expectations of 3.6%. Core CPI came in at 4.3% which was in line with expectations.

It marks the third straight monthly increase in inflation as July saw CPI at 3.2%. Some of the factors contributing to this were a 5.6% increase in energy prices and a 7.3% increase in owners-equivalent rent. 

Initially, Treasuries weakened on the news as it incrementally increased the odds of another hike by the Federal Reserve. However, the fixed income complex was quickly bid up on the drop as market participants seem willing to look past the hotter than expected inflation data.

Two major components of the inflation report - housing and wages - are softening which spells relief for the market. Rents are already dropping in key markets, while recent labor market data shows that unemployment is ticking higher. Much of this data will take time to be reflected in the CPI. Thus, investors are willing to use the weakness to add to fixed income. 

Finsum: Fixed income was bid up despite a hotter than expected CPI report. This seems to be because investors are increasingly confident that inflationary pressures will continue to recede.

In a strategy piece for BNP Paribas, Daniel Morris and Olivier de Larouziere share some thoughts on the fixed income market and recent developments over the last couple of months which has resulted in them revising their outlook for the near and intermediate-terms.

The biggest surprise has been the resilience of the US economy in 2023 despite the Federal Reserve’s aggressive rate hikes. In essence, the odds of a ‘soft landing’ continue to tick higher as inflationary pressures continue to ebb in key areas. Recent weakness out of China is another indication that the global economy is decelerating, but it also has positive implications for inflation.

However, the Fed has not pivoted in terms of its policy given that inflation remains uncomfortably high in certain areas like services and wages. This, in concert with an economy that continues to expand, is the major reason why a Fed pivot is unlikely till sometime next year. 

BNP remains unsure about the terminal rate this cycle. But, it believes it will be higher than what they were forecasting a few months ago. One factor in this incorrect forecast is that the bank failed to account for the impact of higher government spending and large deficits which is also contributing to economic strength. 

Finsum: BNP Paribas shared its fixed income outlook for the rest of the year. Overall, the bank remains bullish but believes that any pivot in terms of Fed policy is not near.