Interest-Rate Sensitivity Analysis
As the global economy transitions away from the era of Great Moderation, our three-part research series reveals that the evolving interest-rate sensitivity of the U.S. economy is yet another aspect of the emerging paradigm that carries significant investment ramifications. Explore each offering below to learn more.
Assessing the U.S. Economy's Evolving Sensitivity to Interest Rates
Meeting clients’ various objectives requires identifying the contours of our new investing paradigm. To that end, this paper establishes a relationship between easing supply chain constraints and a staggered economic adjustment to rising interest rates. While this sequential reaction may mitigate the economy’s sensitivity to interest rates going forward, the full effects of the current cycle’s tightening campaign have yet to be felt. That ongoing transmission process points to a backdrop consistent with our “weakflation” base case.
The Balance Between Corporate Profit Margins and Economic Resilience
Weakflation conditions would seemingly pose a tangible threat to corporate profit margins and credit spreads. However, the modeling of profit margins under our macro scenarios reveals that most of the compression has already occurred, leaving margins set to move sideways. Taking it a step further, under our base case, we consequently expect corporate profits to drift slightly higher. When we shift to a probability-weighted forecast based on our scenarios—including an outsized effect from the recession scenario—profits also continue to appear resilient well into 2024.
Tracking the Transition from Tighter Policy to Corporate Spreads
Although the prolonged inversion of the U.S. Treasury curve is consistent with a recession scenario, the factors identified in our research likely mitigated forces that would have otherwise pulled the economy into a recession by now. However, the consequent fixed income opportunities may be different than prior periods of positive returns. Indeed, the environment is likely one where we can meet various investment objectives without taking undue credit risk in overly levered capital structures and with an emphasis on U.S. assets amidst the county's relative economic stability.