Rob Waldner

The coronavirus “sudden stop” needs credit support

The U.S. economy is currently experiencing a “sudden stop” in growth, as efforts to combat the spread of the coronavirus increase. Social distancing will likely have a direct impact on workers and small businesses across the economy. Invesco Fixed Income’s expectations currently are for the U.S. and European economies to contract sharply in the second quarter this year, and this estimate is subject to further revision down if the virus continues its aggressive spread. This very sharp contraction is pressuring all players in the U.S. economy and creating a funding need for corporations, small businesses, and households. It is vitally important that funding needs be met to ensure that the exogenous economic shock the U.S. economy is experiencing does not migrate into a financial crisis, which would likely further pressure economic growth.

Continued

The coronavirus impact on fixed income markets

Macro impact
 
The spread of the coronavirus globally has continued unabated in recent weeks. The combination of “business as usual” in Europe and the U.S. and limited testing has exacerbated the issue and increased uncertainty regarding the extent of the outbreak and the ultimate path the outbreak will take. As policymakers take more aggressive measures to control the spread of the virus, we will likely see a large impact on global growth. As the extent of the outbreak has expanded, investors have had to price in a larger impact on growth over a longer period.
 
Invesco Fixed Income expects Q1 growth in the U.S. and Europe to be weaker than expected and Q2 growth to be significantly negative, as these economies are hit by fear and the impact of measures implemented to contain the virus. The path forward also remains very uncertain, which is a headwind for markets.
 
China provides a model for us to think about what lies ahead. China implemented strong measures to control the virus, which has hit the economy badly in Q1. China has now controlled the outbreak and is in the process of returning to work. Once the level of daily infection peaked, the process of returning to work started. Infections in the U.S. and Europe are still rising, and it is likely the epidemic will take a while to peak in these regions. It is the impact on growth and uncertainty around the virus propagation that is causing current market action.
 
It is very important to acknowledge that we believe this is a fundamentals-driven correction, which makes it very different than a financial crisis. The resolution of this situation will likely take time as we watch the epidemic play out in the U.S. and Europe. Financial conditions-driven crises, such as the one in Q4 2018 and the Global Financial Crisis can be resolved quickly by central banks. In the case of fundamentals-driven crises, central banks can only ameliorate, not solve, them. We expect this market to follow a U pattern rather than a V.
 
We expect risk assets to continue to be volatile, and markets will likely take a while to bottom. U.S. interest rates have been the shock absorber, but there is little room for bonds to rally further, in our view, as we do not expect the U.S. Federal Reserve (Fed) to embrace negative interest rates. The Fed will likely cut rates close to zero, but we expect the yield curve to remain positively sloped. Lower U.S. interest rates will likely erode the interest rate advantage of the dollar versus other developed market currencies, which will likely weigh on the dollar going forward versus other developed market currencies.

Continued

Fed cuts rates in surprise move

In a surprise inter-meeting move this morning, the Federal Reserve (Fed) announced a 50 basis point cut in U.S. interest rates to the range of 1% to 1.25%, attributing the cut to the evolving economic risks from the coronavirus.
 
The Fed decided to cut rates on its own, without a coordinated move by other major central banks, after the G-7 conference call earlier today.  The Fed had the most room to move, as U.S. rates were higher than those in the other G-7 countries.
 
The market had been expecting a rate cut at the next Federal Open Market Committee meeting, but the inter-meeting timing of this cut caught the market by surprise.  Immediately following the announcement, fed fund futures rallied, indicating that the market expects to see additional rate cuts, and short-term rates fell faster than long-term rates, steepening the yield curve.
 
The economic impacts of the coronavirus are mostly yet to come in the United States and are highly uncertain.  From that perspective, we view the Fed’s move as a type of “insurance cut.”  Going forward, we expect markets to be driven by growth expectations in the face of the spreading virus.  The Fed move on its own will likely have little impact on the path for economic fundamentals in the near term, and hence the ultimate impact of this move on risk markets is unclear at this stage.

Continued

Assessing the unknowns as coronavirus spreads

Developments in the last week have made it clear that the spread of the COVID-19 coronavirus is unlikely to be contained and that it is something the world will likely have to deal with on an ongoing basis. Unfortunately, there are still many unknowns about the virus including how it spreads, what the fatality rate will prove to be, and whether scientists will be able to control it somewhat in the near future through improved treatment or a vaccine. This uncertainty is beginning to change people’s behaviour and is having an impact on the markets.
 
The spread of this virus is first of all a humanitarian issue, but for the balance of this note we will discuss the economic and market impact of the spread.

Continued

Fixed income: Gauging the ripple effects of softening economic growth

Key takeaways

• In the US, we believe peak levels of growth are behind us and expect to see slowing in the second half of 2019.
• Outside the US, there are also signs of softening growth.
• Inflation is likely to increase somewhat, but we do not believe that wage inflation will be significantly passed through to consumer prices in 2019.

Global macro

In the US, we believe peak levels of growth are behind us, although we expect annual growth of around 2.75% to persist through the first half of 2019 before slowing.  Fiscal stimulus is still having a positive effect on growth, but will likely wane in the second half of 2019.  In addition, the positive financial tailwinds that have been driving the economy may turn more neutral as monetary policy continues to tighten.  Therefore, while consumer spending will likely be additive to growth in the first half, as the boost from tax cuts winds down, the question is how much will the consumer want to spend thereafter? Consumption has grown at an unsustainably high level, in our view, over the last several quarters, driven by stronger consumer confidence and tax cuts. A meaningful slowdown in consumption could have negative implications for broader growth.  These effects mean that risks to economic growth are higher in late 2019 than they have been in previous points in the cycle.

Continued

Interest rate outlook: U.S. GDP of 2.8% expected in 2018

U.S.: Neutral

Continued

Five risks that could affect fixed income markets

Invesco Fixed Income is positive on fundamentals for the rest of this year. Global growth is solid and inflation is tame. As central banks have pivoted away from stimulus, tighter financial conditions have hurt risky assets. But major central bank policies are still generally easy – we expect the Federal Reserve to tighten gradually, and the runway for other central banks to normalize policy is still long. Nevertheless, political uncertainty, trade tensions and a sell-off in emerging markets have challenged investors in recent months. We expect these factors to generate further volatility and believe caution is warranted. However, we believe greater volatility will generate new opportunities for fixed income investors against a backdrop of solid macro and credit fundamentals. Below are five risks we are monitoring.

Continued

Interest rate outlook: U.S. inflation should peak this summer

U.S. growth remains strong, accelerating in the second quarter versus the first quarter’s lackluster 2.2% performance.¹ We expect 2018 growth of around 2.8%, with strong contributions from capital expenditures and consumption. Core inflation continues to be benign, and we see it peaking in the next two months at around 2.2%. After that, softer rental and service costs should drive it back below 2%. In our view, the U.S. Federal Reserve will hike one more time this year before pausing in response to declining inflation. Strong growth and lower-than-expected inflation point to a 10-year Treasury yield of around 3%. However, supply dynamics will likely begin to shift in the third quarter as the Treasury begins to issue more long-term debt. This may pressure the Treasury yield curve steeper.

Continued

Rates outlook: Falling U.S. inflation may become a Fed concern by late 2018

Economic data have been mixed since the Bank of Canada increased the overnight rate 25 basis points in January.¹ Employment growth remains positive and consumer price inflation has been firm.

Continued

Interest rate outlook: Weaker-than-expected data lower US inflation expectations

Invesco Fixed Income shares its views on rates around the world

Continued

Above-trend growth could cause U.S. inflation later in 2018

Employment growth has been strong enough that the Bank of Canada (BOC) hiked its overnight target rate to 1.25% in January.¹ The BOC statement attempted to balance the view that growth was near capacity with concerns that raising rates too quickly could cause the economic expansion to stall. The 10-year yield has broken through its previous peak of 2.15% on the growth story and a modest pickup in inflation.² We believe yields should continue to move higher from these levels.

Continued

What does market volatility mean for fixed income?

Market expectations of inflation have risen in recent days, after signs of wage growth – often seen as a harbinger of inflation – appeared in the January jobs report. We at Invesco Fixed Income believe investor concerns that inflation is finally showing signs of life have helped drive interest rates higher and impacted credit markets, where worries over higher interest rates (and their potential impact on companies) have caused declines in stock markets and other risky assets.¹

Continued

2018 Investment Outlook: Global fixed income markets look well-supported by macro factors

Macro

The current investing environment seems daunting. Markets have had a strong couple of years and valuations are tight. At the same time, risks abound. Geopolitical risks including North Korea, terrorism, Brexit and unpredictable politics in Europe and the U.S. make for an uncomfortable investing environment. In such uncertain times, it is important to use an investing framework to help manage through the many risks in the markets, to remind us of the markets’ key driving forces and to help measure the impact of events or potential risks.

Continued

Interest rate outlook: Bank of Canada to pause

After raising the target overnight rate 0.25 percentage points at each of the previous two meetings, the Bank of Canada (BoC) kept the rate unchanged at its meeting on October 25, 2017. While growth has remained strong, it has slowed from the second quarter and the BoC appears ready to give its two previous rate hikes time to filter through the economy before taking further action. Additional uncertainty around the breakdown in North American Free Trade Agreement trade negotiations leaves the BoC cautious regarding future hikes. The Canadian 10-year yield appears to have peaked for the moment and yields have several reasons to fall from current levels, in our view.

Continued

Interest rate outlook: Bank of Canada likely to raise rate again

The Bank of Canada (BoC) has hiked interest rates at two consecutive meetings, bringing the overnight benchmark rate to 1.00%.¹ GDP growth and employment trends remain strong, while inflation has stayed below the BoC’s 2.0% target. The Canadian 10-year government bond yield has followed an upward trend after hitting its lows in the second quarter. We believe higher rates are likely.

Continued

Why we are not afraid of the Fed

The Federal Reserve (Fed) raised interest rates in March and is likely to raise them again twice this year, yet the financial markets have taken this news in stride. Why is this? Simply put, the Fed is behaving dovishly, considering the positive growth pattern we are seeing.

Continued

Outlook 2017: Fixed income under a Trump administration

Invesco Fixed Income’s 2017 macro outlook is likely to be significantly influenced by the policy direction of the newly elected U.S. President Donald Trump and his administration. We believe there are a few key policy elements that will likely be implemented early in the Trump administration.

Continued

What will drive markets after Trump’s victory?

In a surprising outcome, American voters elected Donald Trump as the next president of the United States. This result was viewed as unlikely by the market. In the short term, the market reaction may be driven by increased uncertainty. However, over the medium term, Invesco Fixed Income expects the economic impact of Trump’s policies to drive markets.

Continued