Are central banks already taking a victory lap?

CONTRIBUTORS

Sonal Desai, Ph.D.

Chief Investment Officer,
Portfolio Manager

Nikhil Mohan

Economist, Research Analyst
Franklin Templeton Fixed Income

Angelo Formiggini

Economist,
International Research Analyst

Patrick Klein, Ph.D.

Director of Multi-Sector Strategy,
Portfolio Manager
United States

John Beck

Director of Global Fixed Income,
Portfolio Manager
United Kingdom

David Zahn, CFA, FRM

Head of European Fixed Income,
Portfolio Manager
United Kingdom

Executive summary

Our growth projections for the United States continue to improve as a “soft landing” becomes the most likely outcome, while other economies may face harsher conditions. US and European central banks appear to have reached the peaks of their hiking cycles, but we believe it is still too soon to declare victory against inflation. A core tenet of our macro view is central banks will need to maintain rates at higher levels than the market anticipates, which will keep pressure on yields across the curves.

We are still cautious about taking broad-based risks as spreads are currently not pricing in any potential downside; however, all-in yields remain at historically high levels, making them appear attractive to us. We are finding pockets of value across several sectors and are focusing on security selection.

In this issue we cover:

Macroeconomic themes

Fed narrative changes, but inflation battle not won
Still healthy private sector surplus
Uncertainty around the US economy continues

Portfolio themes

Yield investors provide a technical tailwind to credit
Market discounting downside risk
Follow the Fed speak

US economic review

Underlying macro fundamentals still point to structurally higher US Treasury Yields

Euro area economy

Navigating the pause

Special topic: Commercial real estate realities—Pandemic reckoning and WeWork’s uncharted journey

There has been a lot of attention given to the ever-worsening office sector of commercial real estate (CRE) with headlines capturing defaults. WeWork, who was supposed to challenge the dynamic of shared office use, filed for bankruptcy on November 7. With co-working being one of the largest categories of office space, the decline of WeWork mirrors what is happening in office CRE and the challenges the Commercial mortgage-backed securities (CMBS) sector faces.

Read the full paper to learn more.

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