Macroeconomics

Income has returned. After a couple of barren years, yields in high-quality bonds that were not too long ago returning just 2% or 3% are now set to bring in 7% to 8%. And this jump in yields looks to be a game changer for investors.

Next week markets will receive January Consumer Price Index (CPI) inflation prints from the US and the UK, which will no doubt be widely followed. In the US, the Bloomberg consensus is for a significant drop in headline CPI from 3.4% to 2.9%, while core is expected to decline by a less spectacular 20 bps from 3.9% to 3.7%. For the UK, consensus is for a small increase in CPI inflation from 4.0% to 4.1%.

The long-awaited Personal Income and Outlays report for December was released last Friday. This piece produced by the U.S.’ Bureau of Economic Analysis contains information about personal income, savings rates and very importantly the Personal Consumption Expenditures (PCE) price index, the Fed’s preferred inflation gauge of the economy.

A member from our Multi-Sector Bond team provides an update on the recent events which occurred during Q4 2023, highlighting the volatility in the treasury market which dominated the beginning of the fourth quarter, and the turnaround in November, which saw US inflation fall below expectations and labour data weaken.

Aza Teeuwen reflects on a busy quarter for the Asset-Backed Securities team, highlighting the primary deals and trading that occurred all the way through the quarter until the end of December, the performance of ABS for the quarter, and his confidence that ABS is in a good position to carry its strong momentum into 2024.

After a tumultuous year for fixed income, government bond markets were finally delivering a story of falling inflation in Q4 2023. In our Investment Grade quarterly update, Gordon Shannon reflects on Q4, and in particular the month of December which proved to be one of the strongest months of the year, as hopes of multiple rate cuts in 2024 were accelerated.

Federal Reserve Governor Christopher Waller gave a speech on November 28 titled: “Something Appears to Be Giving”, where he laid out the reasons why he is becoming more confident of the Fed’s ability to bring inflation down to its 2% target. 

With most central banks presumably at highs in terms of monetary policy rates during the current cycle, the focus has rightly shifted to the timing of the first cut. 

There is good reason for fixed income investors to be positive as we move into 2024, although there is also reason to remain cautious. The welcome news is that inflation globally has finally started to fall after remaining stubbornly high for most of 2023.

December’s CPI inflation report showed numbers slightly ahead of consensus in the US. On a month-on-month basis, headline CPI came at 0.3% compared to a Bloomberg consensus of 0.2%, whereas core CPI figures were in line with said consensus at 0.3%.

We recently highlighted in our 2024 outlook our expectations of significant inflows into fixed income to be an important technical driver of performance in the year ahead.

The solid end to 2023 for financial markets has influenced a positive start to 2024.