Franklin Templeton: The Big Picture 2Q24

Preview:

2Q24 highlights

• In the US, bond yields are likely to remain sensitive to whether growth and inflation are moderating. The expected Fed rate cuts later this year should help push market yields lower.
• In Europe, more pieces of the disinflationary jigsaw puzzle are falling into place, suggesting that the first rate cut will take place at the European Central Bank (ECB) June meeting.
• In the UK, we also see the Bank of England (BoE)as close to cutting, with the June meeting seen as most likely.
• In China, we maintain our view that officials will continue with an accommodative monetary policy stance given a number of economic headwinds.

Overview

Global growth has downshifted and inflation rates worldwide are generally receding. Deflationary pressures in China, tightening financial conditions in the US and Europe, and subdued demand for manufacturing and services across a number of countries are easing price pressures globally. These trends, coupled with the major central banks promoting a measured and gradual approach to easing monetary policy, are expected to further dampen economic growth and inflation, which, in turn, should lead to lower developed market (DM) government bond yields and a modestly weaker US dollar. That stated, concerns over monetary policy missteps, inflation rates stabilizing above central banks targets, stronger-than-expected growth in the US and increased US Treasury (UST) supply to cover a growing fiscal deficit are all phenomena that may lead to periods of heightened market volatility. Spread sectors such as emerging markets (EM), high-yield, bank loans and select areas of the mortgage-backed securities (MBS) space offer attractive yield, but we acknowledge their vulnerability to unanticipated shifts in macro-related sentiment, geopolitical developments and the ongoing uncertainty over monetary policy rate trajectories.