Labor Market

The balance of risks favors accelerating wages and stable core inflation during the next few months. This will result in a move higher in rate hike expectations, benefitting Treasury curve flatteners.

We are confident that the reward/risk tradeoff to holding equities and high-yield corporate bonds is deteriorating and that rallies in these assets are high-risk affairs.

We continue to recommend a cautious investment stance, staying at benchmark duration, as the recovery in risk assets looks more like a counter-trend rally than the start of a new bullish run.

The Fed's recent dovishness represents an acknowledgement of the feedback loop between Fed policy and financial conditions. Expect Fed hawkishness to ramp back up prior to the next rate hike, likely in June.

The Fed's recent dovishness represents an acknowledgement of the feedback loop between Fed policy and financial conditions. Expect Fed hawkishness to ramp back up prior to the next rate hike, likely in June.

The Fed's decision to scale back intended interest rate hikes reflects economic reality.

The current uptrend in Treasury yields will be cut short once the dollar appreciates in response to an increasingly hawkish Fed. Maintain benchmark duration and add a long 2/10 barbell, short 5yr bullet trade to profit from Fed hawkishness.

Expectations of a deepening EM/China growth slump and RMB depreciation have been the key to the selloff in global risk assets. There is no basis for these expectations to improve. Therefore, there are few fundamental reasons for EM and global risk assets to rally much further. Stay put. In Brazil, the impeachment rally is unsustainable and will reverse sooner than later. Stay short Brazilian risk assets.

The relief rally is not over, and could benefit from commodity and currency market movements. Oil prices likely are banging out a bottom. In general, however, a healthy dose of caution is warranted. Our bias is to sell into, rather than chase, rallies in risk assets.