Articles by Chun Wang, CFA, PRM Director of Multi-Asset Strategies

The best interpretation of the current cross-asset message is the scenario of goldilocks, and there are reasons to believe this is a possible scenario for the near term.

The global risk rally is broad-based enough to justify a favorable credit view and we still believe higher quality credit offers better reward/risk.

Higher quality Corporate bonds are big beneficiaries of the goldilocks environment.

The latest CPI numbers are slightly weaker than expected. We think expectations for higher inflation are still on the high side. The global scope of inflation deceleration adds more weight to the recent soft readings. Patience is the right approach for the reflation trade at this point.

Despite the recent soft patch of data, the economic backdrop remains solid.

Last month, we recommended going up in quality within fixed income and we maintain this cautious stance for the time being.

The dominant theme in the last few weeks has been the notable weakness in macro-economic data.

The latest CPI is weaker and the softness was sooner than we expected.  More alarming is the recent broad-based deterioration in economic data.  Lower inflation expectations have flattened the yield curve recently, which hurt Financial stocks. We believe inflation has likely peaked for the time being and patience is the right approach for the reflation trade at this point.

We recommend going up in quality across the whole fixed income spectrum.

We recommend going up in quality across the whole fixed income spectrum.

The tapering of QE, clearly a tightening move, complicates the definition of the current tightening cycle.

The dovish rate hike is a positive for inflation and credit. A hawkish message right now would have been quite detrimental and self-defeating in terms of realizing two more hikes later this year. We believe achieving sustained 2-3% inflation could be harder than most people expect going forward. Overall, we are encouraged by the dovish hike but we think the real test for inflation is when the base effect starts to wane.

Higher quality Corporate bonds should be able to weather the rate hike quite well.

While we continue to view spread products favorably within fixed income, the March rate hike has yet to have its impact play out. In the near term, we will respect the “higher risk” signal and exercise caution.

Given the high likelihood of a March rate hike, we can’t help but wonder if the old adage of “three steps and a stumble” really holds.

CPI numbers were strong and better than expected. A big part of the recent upturn in inflation has to do with the much lower base from a year ago. We are seeing upside inflation surprises on a global basis but wage inflation is still disappointing. We are encouraged by the general uptrend in inflation data but we think the real test comes after the positive base effect subsides.

After the big supply last month, we believe there is more room for spreads to narrow.

This new signal is mostly due to a much lower reading three months ago.

The market seemed hesitant to push the Trump trade any farther as new policies have focused on trade renegotiation and immigration, the less positive part of the policy package.

Both the macro backdrop and price trend still point to narrower spreads ahead.