Opportunities for investors as yields drop below 5%

yields are slipping past 5% after fed share Jerome Powell reemphasized the need to see more data before they have the confidence to cut rates the economic Outlook is uncertain however and we remain highly attentive to inflation risks and I think it's appropriate to take signal now and we are taking signal and the signal that we're taking is that it's likely to take longer for us to gain confidence that we are on a sustainable path our next guest thanks while we stay higher for longer there might be some opportunity in the fixed income space to break it all down for us Leslie falconio UBS Global wealth management head of taxable fixed income strategy is here Leslie good to talk to you today we saw the markets push higher in a significant way yesterday on the back of the those comments from the Fed chair the yields pushing higher today but I wonder if anything has changed for you at least in your outlook given the messaging coming through from the Central Bank you know it hasn't and I think the important point is that the market was very hawkish going into the FED meeting I mean they had they had priced out a tremendous amount of cuts down to about one cut at the end of the year 30 basis points but it wasn't just about 2024 they also had a very shallow cutting path into 25 and 26 and this left that terminal rate or that neutral rate well above 4% which we deemed and we still deem a bit too high and I think that because the rumor of this potential hike was so permeating the marketplace you know and they asked chair Paul five different times about whether or not that would be the path and I think he actually sort of eliminated that you know probability you know you can never say never but highly unlikely but he also you know acknowledged that inflation is not making the progress that they had hoped and they are going to still be data dependent and more than likely that high for longer might last a little bit longer but he clarified the path of cutting and I think that's really the important part here Leslie do you believe that the FED is going to be able to declare Victory on inflation and will that come at some point this year you know going to the 2% Target and I don't even think they have that in their own projections when you look at the SCP I think they need to see you know continued progress lower right they they want to see this disinflation trend and they just don't want to see an acceleration right it doesn't have to be at 2% before they cut nor do we think that it's going to be at 2% for quite some time but I do think they just need to see it move in the right direction so I think that in terms of that commentary he you know he made that perfectly clear he also emphasized how far they've come how far they've come in you know labor loosening how far they come with inflation coming down versus these pre-pandemic levels it's this first quarter data just been a bit disappointing and he also mentioned the nuances that we have with owner's equivalent rent and auto insurance and those things that have really kept inflation elevated but I do think that when we do believe that inflation Trends down in the second half of the year we think growth will also Trend down in the second half of the Year while remaining above Trend that's why we lean more towards that soft Landing camp but he just can't see a reacceleration and I think that's what that that is is what will really change his tone re acceleration for a sustained period of time Leslie one of the things the Fed chair wasn't asked about yesterday um is about the external factors things that are not necessarily in the fed's control you look at what's happening overseas maybe you know potential developments in Ukraine we saw how it played out at least in the energy Market in the initial months of the conflict there I mean how are you thinking about that we sort of talk about as if this is about the FED policy taking hold and really trickling down but there are a few things here that could be X factors keep inflation sticky well I mean I think that's a great point because there's are there's a lot of things that haven't been in the feds control right hiking hiking interest rates is not going to alleviate supply issues right so or you know when it comes to the you say geopolitical risk you know the risk there say if oil spikes you know as he's mentioned this and we believe this as well it has to be for a sustained period of time so if it's something that occurs over 3 to six month period I don't think that changes the Outlook but I think one of the things that he is a bit surprised as as are we to a certain extent that he still calls the current policy rate restrictive but we know that the these higher interest rates hasn't had really that impact on the consumer as one might anticipate except for say the mortgage rate or the residential housing market but as we know most of these consumers locked in into three and a half four percent so I think that you know having you know control is is taking a little bit longer than what he thought and I think the the fact that they've been on hold for you know 10 months at a peak rate of five and a quarter 5 and a half hasn't had the impact in terms of curtailing demand to the extent to which he you know I think he thought it would and we feel the same way but we do expect demand slowly decline we do expect the labor market to start to loosen over time um but I I do believe that he's in a situation where inflation probably won't drop as quickly as he would like and if he keeps rates higher for longer and this headwind to demand starts to accelerate you could see that unemployment rate go above 4% and I think through his eyes that's when a problem could occur and that's when they're really going to start cutting lesie FL cono who is the UBS Global wealth management head of taxable fixed income strategy Leslie thanks so much for joining us here this morning thank you

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Length: 5min 15sec (315 seconds)

Published: Thu May 02 2024