Views from the Desk: Inflated expectations?

The history of market expectations for U.S. interest rate cuts during 2024 makes for some interesting reading. In the space of eight months we have seen these expectations go from seven cuts within the year to zero cuts, as questions were raised about the economy, until today, where market expectations sit at multiple cuts before the end of the year.

At the time of writing, Federal Reserve Chair Jerome Powell has just finished speaking at Jackson Hole, where his comment that “the time has come for policy to adjust” has left markets in no doubt that September rate cuts are coming—the only questions are the extent of this cut and if markets will see more before the year is out.

Two thoughts lend even more weight to this. The first is that the downward revision of jobs added in the year by 818,000 should cool wage growth inflation (although this surely raises longer-term concerns over the reliability of official data from the world’s most important economy). The second is that any rate cut close to November runs the risk of being perceived as a political move so Powell may want to make a move quickly.

Against this background it’s no surprise that we’ve seen a significant uptick in content centered around debt—covering U.S. treasuries, debt issues elsewhere, and the private credit sphere.

With Savvy Investor specializing in deeply researched evergreen thought leadership, the content that most stands out to us is thoughtful in nature and long-term in its outlook. U.S.-focused content we have enjoyed reading this month includes State Street’s recent look at the future of treasuries “Who Will Buy the Oncoming Surge of Treasuries? And at What Price?”. This paper raises an interesting question and provides firm conclusions alongside much for readers to ponder. We also enjoyed reading Franklin Templeton’s “How Equities and Treasuries Performed in Rate-Cutting Cycles” for its broad historical perspective. Both of these papers are surprisingly snappy reads considering the topics they cover. MetLife Investment Management meanwhile offers another detailed look at debt in “U.S. Treasuries in the Post-Pandemic Era”.

For allocators looking further abroad and arguably further along the risk curve, we have plenty of top-quality content to present this month. “2024 Midyear Emerging Market Debt Outlook: EM Economies Flip the Script” provides PineBridge’s usual in-depth outlook and is notable for the timeliness and insight contained. Invesco also impressed us with its piece “EM Macro Insights: 6 Reasons Why EM Local Debt Could Now Provide an Attractive Entry Point”, which gives a quick point-by-point rundown of the firm’s thesis backed by plenty of charts. And finally, we have to mention “Into the Spotlight: The Case for EMD in Insurance Portfolios” by Man Group. This is just the first part of what Man Group has to say about the feasibility of EM debt as a long-term portfolio diversifier. We look forward to what part two reveals when it is published.