Week of August 12, 2024

Dec Mullarkey, CFA , Managing Director, Investment Strategy and Asset Allocation

The recent U.S. Consumer Price Index print brought some cheer. The headline number dropped below 3% for the first time since early 2021, bolstering the case for a 25-basis-point (bp) rate cut at the U.S. Federal Reserve’s next meeting in September.

Goods inflation has been negative while services inflation has cooled, albeit at a slow pace. The official shelter inflation number continues to run high. But given the continued slowdown in current rent increases, that trend should start to tame shelter inflation, which is more of a look-back average.

As inflation moves closer to target, the Fed seems to be focusing more on the labor market. The last unemployment report was weak but there was a lot of noise related to weather effects and high levels of temporary layoffs. The first week of September brings the next jobs report, which will be heavily scrutinized, ahead of the Fed meeting, to help confirm if the labor market is stable or faltering. If it is the latter, then calls for a 50-bp September rate cut will likely grab headlines.

Sources: Bloomberg, Financial Times, 2024.

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Linda Kong Ting, CFA , Senior Director and Credit Analyst, Asset Management

While the knock-on effects of the Bank of Japan’s rate increase and ensuing unwind of the carry trade added volatility to the market this month, we’ve seen corporate bonds retrace more than half of the move wider already. Although there is little doubt that the consumer is incrementally more troubled – as food and beverage companies, travel and entertainment bookers, fast food restaurants and luxury goods purveyors all report waning interest from their core customers – we are somewhat more sanguine on corporate health. We believe that corporates generally will lag consumer deterioration since they have additional levers to pull to improve liquidity, such as further reductions in office space and, indeed, layoffs.

Additionally, recent rallies in bonds have decreased all-in coupon costs for corporate issuers, and nearly all the paper issued following the bout of volatility has been absorbed well into the market and tightened from new issuance levels. We are also more positive on regional banks, as some of their rate-induced balance sheet issues may subside further with the rate move, with these balance sheets already somewhat derisked following earlier crises.

Source: Bloomberg, 2024.

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