US

The Federal Reserve minutes for meetings held on the 3-4th May were released last night, and for markets that have been beaten up by rates volatility, they provided some interesting takeaways.

Consumers are being hit from seemingly all angles at the moment. Higher interest rates are coming, higher inflation is already hitting their pockets hard and economic growth is expected to slow.

The vast majority of the high yield universe used the attractive funding conditions last year to term out their maturity profiles. In fact, 2022 maturities in both US and European high yield equate to just 1% of their respective indices.

At the beginning of this year you would have struggled to find a single investment bank or asset manager (ourselves included) that thought owning 10-year US Treasuries (USTs) was a good idea.

Earnings season is now in full swing, and it has undoubtedly been eventful. During the first quarter, companies have had to navigate multiple obstacles, including surging commodity prices, hawkish central bank policies, a Russian invasion, further supply chain disruptions caused by lockdowns in China, and dwindling consumer confidence.

As this remarkable cycle rapidly progresses, thoughts have more recently turned to the chances of a US recession in 2023, and whether the Fed can somehow pull off a soft landing.

Growth in 2022 is likely to be above historical averages for most developed economies, even after adjusting forecasts for the impact of the Russian invasion.

Officially the Fed pivoted from its ‘transitory’ inflation rhetoric in December last year.

Soaring inflation was already a dominant theme for markets coming into 2022. The sanctions imposed on Russia in response to its invasion of Ukraine have only exacerbated its expected rise, and pushed its expected peak further out.

The much-anticipated March FOMC meeting is finally upon us, and given there was no meeting in February investors will be very glad of this window into the Fed’s thinking, particularly given the ongoing and far-reaching economic ramifications of Russia’s invasion of Ukraine.

We think a base case that central banks will follow a more measured monetary policy path than markets are currently pricing in is reasonable given the current backdrop.

Escalating geopolitical tensions have contributed to a volatile past week for investors, but uncertainty regarding central bank action continues to dominate the bond markets, with one investment bank now predicting nine straight hikes from the Fed beginning at its March meeting.