Pimco is probably the most respected name in fixed income, and the firm just went on the record warning about the economy and encouraging the Fed to act. The asset manager argues that the US economy is in worse shape than many think and is admonishing the Fed to cut rates more aggressively than expectations. Pimco says that momentum in the labor market is slowing, the trade war is showing little sign of abating, and the risk of financial excess caused by lower rates appears minimal. According to Pimco, “We can’t emphasise enough that labour market momentum has decelerated more markedly than most forecasters were previously expecting”.
FINSUM: We actually are on the opposite side of the fence as Pimco. We think the market is blowing things out of proportion about the economy and is overly worried. We surely hope we are right.
It has been a rough road for equities this month. Benchmarks are down 5% and there has been frequent whip-sawing action based on data and news over the trade war. Despite the fears, JP Morgan is telling investors that it is time to buy. The bank’s equity strategists, led by Mislav Matejka think that stocks are going to turn the corner very soon. The bank thinks three elements may catalyze a move higher into the year end—restarted ECB easing, a bigger than expected Fed rate cut, and improving technical indicators on signs the market has bottomed out.
FINSUM: The Fed and the ECB could certainly help support stocks, but it hard to imagine benchmarks gaining much if we keep up the frenzy of trade war news.
The market is in the worst shape it has been for some time, maybe the worst condition of the year. The S&P 500 fell over 3% last week on the combined news of a less dovish Fed and a huge tariff increase on China. Where things go from here is very uncertain, but JP Morgan is arguing that you should buy the dip. The bank’s strategists summarize their view this way, saying “Our core view remains that one should use the prospective weakness as an opportunity to add further, similar to the May experience. We continue to believe that global equities will advance further before the next U.S. recession strikes. We think that the growth-policy trade-off is far better now than it was in 2018”.
FINSUM: The market, economy, and politics are at quite a confusing point right now. Either things will gel to send prices higher, or it will all come crashing down like it did last year. Anyone’s guess.
The market is going through a fit, and it is entirely self-induced. Firstly, the Fed hit markets with an unexpected lack of dovishness earlier this week. Then, just a day after, President Trump did what many feared he would—he announced another large round of tariff hikes on $300 bn of Chinese goods. Many suspect the move is part of an effort to push the Fed into cutting rates after it downgraded its language to calling the trade war merely a “simmer”. Markets fell sharply on the news.
FINSUM: Trump is trying to push both China and the Fed. It will likely work with the former, as they don’t have much of a choice if the economy looks vulnerable, but this is certainly not going to help China get back to the table.
Right now is high time for investors to be worried about bonds. Bond funds have received a lot of fast money in recent months because of the well-telegraphed rate cut. According to BAML, the net inflows into fixed income funds have reached a “staggering record” of $455 bn in 2019. That compares to just $1.7 tn in the last decade. Yields have tumbled this year, with ten-year yields down from 3.2% in November to just 2.06% now.
FINSUM: The outlook for bonds got murkier yesterday with the Fed’s relative lack of dovishness. It is not entirely clear that rates are going to keep falling, so it is not hard to imagine bonds facing some losses now given how much speculation there was of a large Fed rate-cutting program.