Perspectives Blog

Inflation — The usual suspects

Zach Pandl, Portfolio Manager and Strategist | August 11, 2014

Four factors figure empirically into how and why inflation moves: (1) commodity prices, (2) spare capacity, (3) changes in exchange rates, and (4) monetary policy. These same factors argue for a gradual recovery in U.S. inflation in the year ahead, which could be a headwind for high-quality fixed-income returns. In contrast to U.S. markets, in markets with prospects for a trend lower in inflation expectations (e.g. certain pockets of EM), falli…

ECB asset purchases — Bazooka or damp squib?

Martin Harvey, Fund Manager, Threadneedle International Ltd | September 22, 2014

With inflation expectations declining to the levels that preceded the recent shift in policy, should the ECB and the financial markets be worried? In our view, the ECB probably won’t be wholly impressed by the reaction of inflation expectations to recently announced measures, and will be keeping a close eye on favored measures. We believe that we would need to see a further significant deterioration in growth and inflation expectations to kick…

Inflation consternation

Martin Harvey, Fund Manager, Threadneedle International Ltd | November 5, 2013

An inflation slowdown in the Eurozone has prompted calls for central bank action, as reduced liquidity coupled with euro strength threatens the recovery. The expectation of imminent easing by the ECB should assert downside pressure on yields, and lead Bunds to outperform other markets. It is uncertain whether the ECB will act this week; we think any intervention is likely to be verbal, at least at first. October inflation in the eurozone slowe…

Slack and inflation

Zach Pandl, Portfolio Manager and Strategist | July 21, 2014

…abor market than commonly believed. Limited spare capacity in turn implies earlier rate hikes and more risk that inflation eventually overshoots the Federal Reserve’s target. In recent decades that target was “minimum unemployment,” with the minimum defined as the rate consistent with stable inflation. Judging by this standard, the unemployment gap today is less than one percentage point, implying a small amount of remaining labor market slack an…

Release the doves

Marie M. Schofield, CFA, Chief Economist and Senior Portfolio Manager | October 20, 2014

The Fed (and all central banks) is highly sensitive to shifts in inflation expectations by either consumers or the markets. The one-year TIP breakeven appears to be pricing in some deflationary pulse and is also pulling down longer term inflation expectations across the curve. My expectations for growth are unchanged at 2.5%-3.0%, but I am concerned there may be some larger shortfall in demand next year for some reason we do not yet know. Whil…

U.S. rates – Waiting for the sound

Zach Pandl, Portfolio Manager and Strategist | May 5, 2014

…ains in April). The U6 unemployment rate has also declined to 12.3% from 13.1% in December. Separately, core PCE inflation edged up to 1.2% year-over-year from 1.1% previously. With a trend-like gain for April (and no revisions to prior months), the Fed’s preferred measure of core inflation will increase to 1.4% when reported on May 30. It is these shrinking gaps that motivate our cautious views about duration risk. Importantly, we do not take is…

FOMC December meeting scouting report

Zach Pandl, Portfolio Manager and Strategist | December 16, 2013

…smoother fiscal negotiations in coming months. The main risk to our expectations is the still-low level of core inflation. At the September FOMC meeting press conference, Chairman Bernanke said that the decision to slow the pace of QE depended on “the receipt of evidence supporting the Committee’s expectation that gains in the labor market will be sustained and that inflation is moving back towards its 2 percent objective over time” (our emphasi…