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

Fewer uncertainties surrounding the Fed’s policy decision probably helped, but the renewed sell-off in oil is a big concern for all credit classes. We recommend caution and a neutral stance towards credits at this juncture.

We believe higher quality Corporate bonds should be able to weather the higher volatility expected from a rate hike and oil sell-off. Maintain Favorable.

Inflation met expectations in October.  Overall inflation not under-shooting expectations is likely to give the Fed some comfort when it decides on the rate hike in December. Various wage inflation measures show some promise but we will be patient and wait for confirmation.

Our interpretation of the current Fed stance is that it has shifted from “hike if the data and the market support” to “hike unless the data and the market perform poorly.”

Based on the four key features of the current macro environment: global disinflation, monetary conditions divergence, an extended bull market, and sub-par economic performance, 1998 ticks all the boxes.

We are moving to a more constructive stance towards credits within the Fixed Income space.

We think higher Quality Corporate bonds offer a better reward/risk profile now.

Inflation met or slightly beat expectations in September.  We are watching the oil prices and the dollar closely for signs that the disinflationary headwind might be dying down.

There are three Ds that are ruining the Fed’s little rate hike plan: the Dollar, Disinflation, and the Decline in wealth effect.

It’s too early to move back into credits; we recommend a defensive stance within the Fixed Income space.

Despite more attractive value now, we expect volatility and near term headwinds to persist.

Longer term drivers of inflation, such as velocity of money, capacity utilization, wage inflation, all suggest disinflation is here to stay.  It’s still too early to call the bottom in oil prices so we continue to expect weaker producers’ inflation ahead.

1) Why The Big Sell-Off In Stocks? 2) Why Didn’t Interest Rates Go Lower? 3) Why Was The Dollar Weaker?

We expect volatility to persist in the near term as the market deals with uncertainties surrounding the Fed rate hike decision and China. A defensive stance is recommended within the fixed income space.

The overall widening trend in the last year has not shown any sign of reversing. 

The current inflation numbers are not yet reflective of the recent sell off in oil prices so we expect even weaker inflation going forward.

Re-deflation is the period where reflation gives way to deflation or disinflation. It has been so prevalent that it triggered a new “Higher Risk” signal in our Risk Aversion Index.

The re-deflation theme has been so prevalent that it triggered a new “Higher Risk” signal in our Risk Aversion Index. There are significant negative implications for all risky assets.

We would like to see a stabilization in oil prices before we turn favorable to Corporate credits. For now, we maintain a Neutral view on these bonds.

With the recent weakness in oil prices and the renewed strength of the U.S. dollar, we would not be surprised to see weaker headline numbers in the next few months. The expectations of a rate hike might actually end up pushing the rate hike further out. We are now less sanguine about a pick-up in PPI in the rest of the year.