Morgan Stanley IM: Are We There Yet? No! But Not All the News Is Bad
Jim Caron, Portfolio Manager and Chief Fixed Income Strategist, shares his macro thematic views on key market drivers.
20.10.2022 | 08:24 Uhr
The market is collectively trying to assess when the Fed will stop hiking rates i.e. Are We There Yet?
The timing of when the Fed may stop hiking is not only tethered to
inflation falling, but to their prescriptive precondition to end the
tightening cycle. But the recent CPI inflation report complicates
things, where historically the Fed doesn’t stop tightening until policy
rates exceed the inflation rate.
The problem is that inflation pressures are broadening into the
service sector, particularly problematic for the Fed because service
sector inflation is more structural than cyclical inflation - e.g. goods
- and ultimately harder to control.
With inflation still rising, this muddies the view of where the
terminal rate might end, adding a risk that the Fed may once again need
to adjust higher than 4.75%, their forecast as of mid-September.
So when does the cycle end? It was thought the peak would be 4.75%
in early Q1 of 2023, but this might go higher and be pushed out further,
a risk that will weigh on asset valuations, as it is incorporated into
earnings and discounted future cashflows.
Despite the risk, the investment implication is that although we may
not have bottomed, we are getting close and finding well-valued assets
to hold through the likely upcoming volatility.
The silver lining is that a strong jobs market keeps the economy
from falling into a deep protracted recession i.e. Not All the News Is
Diversification does not eliminate risk
of loss. There is no assurance that a portfolio will achieve its
investment objective. Portfolios are subject to market risk, which is
the possibility that the market values of securities owned by the
portfolio will decline and that the value of portfolio shares may
therefore be less than what you paid for them. Market values can change
daily due to economic and other events (e.g. natural disasters, health
crises, terrorism, conflicts and social unrest) that affect markets,
countries, companies or governments. It is difficult to predict the
timing, duration, and potential adverse effects (e.g. portfolio
liquidity) of events. Accordingly, you can lose money investing in this
portfolio. Please be aware that this portfolio may be subject to certain
additional risks. Fixed income securities are subject to the
ability of an issuer to make timely principal and interest payments
(credit risk), changes in interest rates (interest-rate risk), the
creditworthiness of the issuer and general market liquidity (market
risk). In a rising interest-rate environment, bond prices may fall and
may result in periods of volatility and increased portfolio redemptions.
In a declining interest-rate environment, the portfolio may generate
less income. Longer-term securities may be more sensitive to interest rate changes. Mortgage- and asset-backed securities
are sensitive to early prepayment risk and a higher risk of default,
and may be hard to value and difficult to sell (liquidity risk). They
are also subject to credit, market and interest rate risks. Certain U.S. government securities
purchased by the Strategy, such as those issued by Fannie Mae and
Freddie Mac, are not backed by the full faith and credit of the U.S. It
is possible that these issuers will not have the funds to meet their
payment obligations in the future. High-yield securities (“junk bonds”) are lower-rated securities that may have a higher degree of credit and liquidity risk. Public bank loans are subject to liquidity risk and the credit risks of lower-rated securities. Foreign securities are subject to currency, political, economic and market risks. The risks of investing emerging market countries are greater than risks associated with investments in foreign developed countries. Sovereign debt securities are subject to default risk. Derivative instruments
may disproportionately increase losses and have a significant impact on
performance. They also may be subject to counterparty, liquidity,
valuation, correlation and market risks. Restricted and illiquid securities may be more difficult to sell and value than publicly traded securities (liquidity risk).
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