In a challenging period for fixed income assets, the Fixed Income Dashboard lays out relevant data to illustrate key developments for the asset class.
At long last we’ve reached an inflection in inflation prints. For months investors, economists, and policymakers alike have been frustrated by the growing disconnect between the increasing disinflationary pressures in the pipeline that went unreflected in government releases. Finally, the hard and soft data have converged as deflationary impulses from durable goods begin to weigh on inflation prints. Also, early indications show a softening in supercore services measures, excluding shelter costs, with their own massive pipeline of disinflationary forces as the calendar flips to 2023. To be sure, inflation remains well above target, but disinflation (the slowing of price inflation) is broadening out.
While the Fed continues to beat its hawkish drum, the terminal rate is coming into view with an offramp to a pause in rate hikes – should we see continued broad-based slowing of inflation prints over the next few months.
Trends in Inflation
Source: Natixis IM Solutions, FactSet. Inflation trends data shown from 8/31/10 to 11/30/22
Fed Shift from Active to Passive Tightening
While rate hikes are the Fed’s primary tool to control monetary policy, it is simply a mechanism by which to tighten financial conditions. It’s a broader measure of the cost of capital and the accessibility to credit. In fact, financial conditions began to tighten well before actual rate hikes commenced, as forward guidance from the Fed moved sequentially more hawkish. But, since the Fed has hiked over 350 basis points since June 2022, we have seen financial conditions ease. Many market participants point to this as a challenge for the Fed.
From Fed Chair Jerome Powell’s comments at recent meetings, one shouldn’t expect a pivot. Rather, the Fed appears to be transitioning from active to passive tightening as interest rates have pushed into restrictive territory. The Fed’s objective has shifted from rapidly tightening financial conditions to keeping them in restrictive territory. Higher rates for longer equates to de facto tightening – as real policy rates continue to move higher as inflation fades.
Recession Watch: The Passive Tightening Tool
Chicago Fed National Financial Conditions Index Source: Natixis IM Solutions, FactSet, Bank of America Merrill Lynch. Chicago Fed NFCI data shown from 12/31/93 to 12/9/22
Fixed Income Dashboard – Q4 2022
This in-depth chart deck highlights historical data related to:
• Asset class valuations
• Relative valuations
• Credit conditions
• Distress ratios and defaults
• Inflation trends
• Yield curve
• Treasury yields
• Asset flows
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