In this analysis, Benoit Anne, Managing Director – Investment Solutions Group of MFS Investment Management, looks ahead to the Fed meeting on Wednesday, shares thoughts on what investors may expect from it and the outlook for global fixed income
Market life is a cycle. And so are investor emotions about the Fed. First, there was fear. Then, there is indifference. And next, there will be anticipation.
We have now exited stage 1: fear. Indeed, whatever the Fed says this week, even if the Fed Chairman tries to maintain a semblance of hawkishness, investors won’t be too scared. It is too early to claim victory on inflation (it would be complacent to do so anyway). Therefore, we expect some persisting hints of tough language at this week’s FOMC. But there is nothing to worry about. The macro backdrop is as good as we have seen in a very long time, characterized by diminished recession risks and favorable disinflation dynamics.
In other words, we have entered the “indifference” stage of our investor emotion cycle, which essentially downgrades the significance of this FOMC as a market event. Going forward, we will definitely pay attention and we will listen, but no disaster is likely to happen. How long will the indifference stage last? It could last “for some time”. That phrase is precisely the key signal to look for this week in the official Fed statement. If the “for some time” language is maintained, that means that the Fed is in no immediate rush to switch to rate cuts.
If however “for some time” is omitted, there is a high probability that there will be a rate cut announced at the March meeting. For now, the Fed funds future market is still somewhat cautious about pricing in a rate cut in March whereas the May rate cut is already in the price.
Irrespective of the “for some time” phrase being dropped out or not, the current macro backdrop is already supportive of global fixed income, and the good news is that the Fed will do nothing to derail that. For areas of potential risk, investors now have to look elsewhere. On that list, we have politics and geopolitics, as well as the risk of overheating.
More importantly, the valuation landscape looks tricky in some pockets of global fixed income, especially after the strong rally. If you are an active portfolio manager, it is time to look at relative value and dislocations. If, however, you are a long-term investor, the good news is that the entry points for global fixed income continue to be compelling by historical standards.’