Stephen Fitzsimmons, Institutional Portfolio Manager on the BlueBay U.S. Fixed Income Team, discusses how the reality of the data shows there is no evidence that the US economy needs lower rates any time soon.
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Hello and welcome back to the Weekly Fix, my name is Stephen Fitzsimmons, Institutional Portfolio Manager with RBC GAM’s BlueBay Fixed Income team.
As we find ourselves eagerly progressing toward the milder weather months of 2024, and expectations of spring blooms and time spent outdoors are readily fulfilled, many market participants cannot help but feel jilted by their overwhelming expectations for rate cuts that they held coming into the year that simply have not materialized.
On the BlueBay fixed income team here at RBC GAM, we have maintained since 2023 that market participants have been overly optimistic regarding their rate cuts expectations. Core CPI last week proved to be another consecutive disappointment and came in at a month-over-month level of 0.36%, against market hopes of 0.3% or less. Despite the shelter component of the index coming roughly in line with expectations at 0.4%, other service inflation components remain stubbornly high with the super-core inflation measure at 0.65%. We maintain the first cut is likely to come in the second half of 2024 or even early 2025 as this data, coupled with persistently strong US economic and jobs numbers, will continue to make it difficult for the Fed to justify an earlier cut.
Yields sold off and stocks demonstrated bouts of volatility on the heels of the inflationary data. Credit spreads remain stubbornly tight as investors continue to engage with the investment grade bond market to lock in higher yields. More idiosyncratically, we also had fuzzy panda expressing material short positions on a publicly traded life insurer on accused, and subsequently refuted, allegations of malfeasance. This idiosyncratic event will take time to play out but highlights to us just how much of a zoo the markets can prove to be from time to time.
The past couple of years have loudly demonstrated that the banality once associated with fixed income markets is a thing of the past and that fixed income is exciting again. How investors choose to engage with it and with whom they choose to do so, however, is of critical importance as folks continue to lock in elevated levels of income from the asset class.
As always, we appreciate your attention.
Summary points
Investors feel jilted by their overwhelming expectations for rate cuts.
Core CPI proved to be another disappointment, again coming in higher than expected.
Yields sold off and stocks demonstrated bouts of volatility on the heels of the inflationary data.