Fixed Income
Investors overestimate the threat current interest rate levels pose to both equities and the economy. Despite a rising long end, the gap between high-yield borrowing costs and both nominal growth and corporate profits is at five-year lows and falling. Remain overweight equities. Within Fixed Income, Upgrade High Yield and Downgrade Government Bonds and EM Debt. Downgrade Chinese Equities to Neutral.
MacroQuant recommends a slight underweight position in equities, counterbalanced by a slight overweight to bonds, and a significant overweight to cash. The model is positive on the US dollar, modestly negative on gold, and bullish on copper and oil.
The PCE/CPI gap is an increasingly important factor driving the near-term outlook for Fed policy. We discuss the drivers of that gap and conclude that it’s likely to narrow in the coming months.
