All the Credit, Ep. 33
An examination of 'low for long". Thoughts on potential interest rate paths and soft versus hard landing possibilities in 2023.
As macro concerns continue to shift, markets anticipate an easing in inflation and monetary policies in 2023. Although markets’ opposition to central bank guidance will likely lead to periods of volatility, it brings opportunities as well. Explore our first quarter market outlook for insights into the potential path ahead for the global bond market, assessments of regional macro environments, and sector-by-sector outlooks with associated opportunities.
Learn more about the four key themes that shape our first quarter fixed income outlook:
Signs of moderating global inflation are clearly positive. Yet, developed market central banks will likely continue tightening policy given the potential damage from lingering, elevated price increases. Hence, a global economic moderation/recession—rather than inflation—stands as one of the pre-eminent negative risks in early 2023.
Markets see a path lined by further easing in inflation and benign economic conditions as they continue to price in cuts in monetary policy rates later this year. The markets’ opposition to the central banks is a dangerous game that will contribute to periods of heightened volatility, regardless of which player blinks first.
While 2023’s potential outcomes remain expansive, the opportunity to secure yield is readily apparent after last year’s repricing in interest rates and credit spreads. The breadth of potential outcomes will also generate greater dispersion in corporate results, credit spreads, and alpha relative to beta. Thus, accurate sector rotation, bottom-up credit research, and relative-value assessment should outperform indiscriminate market exposure given the volatility to come.
Investing across regions with different fundamental profiles brings opportunities in varying asset classes. For example, the contrasting macro/policy cycles in Europe and the U.S. carries broad implications for government debt. Meanwhile, China’s policy u-turns on COVID and the property sector present ramifications for Asia, EM asset classes, and commodities, amongst other areas.