“After the solid US economic data and signs of an inflation that are difficult to get rid of, markets predict less than two rate cuts this year and see the easing cycle ending above 4%, 150 basis points above the Fed's estimated neutral rate. Furthermore, despite disinflation in the euro area, markets doubt that the ECB can lead the Fed nthe easing cycle”. He writes it Paolo ZanghieriSenior Economist at Generali Investments.
Overly pessimistic markets?
In our latest market outlook – continues the expert – “we argue that markets could be excessively pessimistic towards central banks. The US job market is slowing down rebalancing, which will cool wage growth, while new rents point to moderating housing costs. There Fed aWe will await more reassuring data and we expect the first of two rate cuts this year in September”.
“The fears that the ECB waits for the Fed seem exaggerated, given that the June cut has already been announced. The exchange rate does not worry us too much: only a strong impact on the trade-weighted euro could have serious repercussions on inflation. We still have 75-100 basis points of ECB cuts in our portfolio for this year”, explains Zanghieri.
The analysis
The slowdown in inflation, the prospects of rate cuts and the soft landing of the United States “are the basis of our call to moderately increase duration exposure. However, green shoots in the global economy and erratic US inflation keep risks to yields two-sided in the near term. However, we believe 10-year US Treasury yields above 4.60% represent a good entry level. The brighter economic outlook will support corporate profits, but geopolitical risks and still optimistic valuations leave us neutral on the riskiest segments (equities and high-yield securities).”
Expecting stable spreads on high-quality names, “we prefer EUR Investment Grade Credit financed by underweights in Cash and short-dated securities,” he concludes Zanghieri,
