“New concerns about the health of the US economy emerged after the publication of the report on the non-Farm Payrolls (NFP) of July, which highlighted a growth of the employment lower than expected. In particular, the combination of a weak figure for July and significant downward revisions of the previous months has triggered the wider rally of short-term interest rates in the United States”. André Figueira de Sousa and Lowie Debou, Fixed income fund mangers of Dpam underlines it.
Bonds, new volatility phase?
This – explains the expert – reported the situation of the summer 2024 to the minds of investors, when the weakening of the labor market prompted the Federal Reserve to cut the interest rates of a percentage point within a few months. This time, the weakening of employment is even more marked and widespread.
Trunp factor
Although so far the markets have largely ignored the impact of the uncertainty linked to Trump’s commercial policy, we believe that this impact has been underestimated. The caution of companies continues to grow due to global uncertainty on the commercial front, also fueled by the new US protectionist measures in force this week. Companies are postponing hires; Recent ISM polls have shown a weakening of employment both in the manufacturing sector and in that of the services.
The View of DPAM
The most likely scenario is an increase in the volatility of the markets, given that the Fed continues to act according to data. At first this could increase the volatility of interest rates, since better data could again lead to excluding a cut of rates by the Fed. However, since the negative dynamics of economic and employment data is destined to continue, in the end the Fed will proceed to further cuts in interest rates, thus reducing their volatility. The volatility of the spreads could increase, depending on the extent of the worsening of the data. If the deterioration is limited, this should support the spreads, since the ease of monetary policy will support the sentiment of the investors. However, given the current sensitivity to the tax concerns of investors in government bonds, we will continue to carefully select the countries and credit spreads on which to focus on.
