Inflation

Aza Teeuwen reflects on a busy quarter for the Asset-Backed Securities team, highlighting the primary deals and trading that occurred all the way through the quarter until the end of December, the performance of ABS for the quarter, and his confidence that ABS is in a good position to carry its strong momentum into 2024.

Dillon Lancaster provides an update on the recent events which occurred during Q4 2023, highlighting the volatility in the treasury market which dominated the beginning of the fourth quarter, and the turnaround in November, which saw US inflation fall below expectations and labour data weaken.

After a tumultuous year for fixed income, government bond markets were finally delivering a story of falling inflation in Q4 2023. In our Investment Grade quarterly update, Gordon Shannon reflects on Q4, and in particular the month of December which proved to be one of the strongest months of the year, as hopes of multiple rate cuts in 2024 were accelerated.

Federal Reserve Governor Christopher Waller gave a speech on November 28 titled: “Something Appears to Be Giving”, where he laid out the reasons why he is becoming more confident of the Fed’s ability to bring inflation down to its 2% target. 

There is good reason for fixed income investors to be positive as we move into 2024, although there is also reason to remain cautious. The welcome news is that inflation globally has finally started to fall after remaining stubbornly high for most of 2023.

With most central banks presumably at highs in terms of monetary policy rates during the current cycle, the focus has rightly shifted to the timing of the first cut. 

December’s CPI inflation report showed numbers slightly ahead of consensus in the US. On a month-on-month basis, headline CPI came at 0.3% compared to a Bloomberg consensus of 0.2%, whereas core CPI figures were in line with said consensus at 0.3%.

We recently highlighted in our 2024 outlook our expectations of significant inflows into fixed income to be an important technical driver of performance in the year ahead.

The solid end to 2023 for financial markets has influenced a positive start to 2024.

The direction of monetary policy rates going forward is more clear, following the Federal Reserve's release of its new summary of economic projections and the dovish remarks of Jerome Powell.

Following October’s encouraging US CPI report and the subsequent comments from Federal Reserve officials, financial markets now anticipate that the Fed has completed its rate hiking cycle having reached terminal rates.

After a horrible year for financial markets in 2022, the macro-outlook for 2023 had a lot of consensus views, with most predicting a much better year ahead, helped by supportive rate cuts from central banks and positive returns from both government bonds and credit.