Soft landing? Central banks trying to thread the needle

Executive Summary

Since our last publication, we have upgraded our view on both the US and euro area (EA) economies, and we are no longer projecting a technical recession in the former. Where we break from market consensus is in our view on the US Federal Reserve’s (Fed’s) path to monetary policy normalization. The market appears to be confident in the Fed’s ability to orchestrate a “soft landing” that would allow the Fed to cut interest rates throughout next year. We feel the trajectory of disinflation in both the United States and EA will flatten—primarily due to wage pressures stemming from record low unemployment—and central banks are thus likely to keep rates higher for longer.

Spreads in fixed income sectors are pricing in a quite sanguine environment, with levels leaning toward long-term averages, much tighter than previous periods of stress. We retain the view that both active portfolio management and superior security selection will be the main drivers of returns for investors.

In this issue we cover:

Macroeconomic themes

• Economic conditions have remained resilient
• Wages remain a driving factor for inflation
• Upbeat employment expectations

Portfolio themes

• Interest-rate carry adds to performance
• Being mindful of yield curve positioning
• Market conditions have turned positive

US economic review

• More questions than answers

Euro area economy

• The labor market remains center stage

Special topic: Making a case for active corporate bond portfolio management

We believe skillful active management of corporate credit portfolios can potentially enhance performance and help offset the risk and return volatility associated with passive investment vehicles, including index exchange-traded funds (ETFs), over the long term.