Markets face another inflation surprise

January inflation comes in higher than expected. What will it mean for markets and the Fed?

James OngTime to read: 2 min

The Feb. 14 inflation report showed that prices rose more than expected in January, which could raise market concerns over future Federal Reserve (Fed) policy and lead to continued market volatility. The consumer price index (CPI) rose 2.1% year-over-year, compared to consensus expectations of 1.9%, while core CPI rose 1.8%, compared to consensus expectations of 1.7%.1

The market’s focus is on core CPI, shown below, since it is the closest data point to the core personal consumption expenditures index (PCE), which is the Fed’s preferred measure of inflation.

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Will cash be king as the Fed hikes rates?

Cash yields have risen along with rates, which may help investors reduce duration risk

Time to read: 3 min

US money market fund balances recently reached their highest level in seven years1 and, according to Crane Data, average money market fund yields crossed the 1% threshold for the first time since November 2008.2 Invesco Global Liquidity believes that more investors may consider cash and conservative fixed income solutions as part of their active asset allocation in the near term for multiple reasons.

Cash yields rise due to Fed rate-hiking cycle

Yields on cash and conservative low duration vehicles have become more attractive since the US Federal Reserve (Fed) began removing monetary policy accommodation and moved away from a near-zero federal funds rate. Since December 2015, this policy shift has driven

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Interest rate outlook: Above-trend growth could cause US inflation later in 2018

Invesco Fixed Income shares its views on rates around the world

Time to read: 4 min

US:

We expect US interest rates to be range-bound in the first half of 2018, but with a risk of higher yields in the second half. Our rates view is driven by our analysis of growth, inflation and monetary policy in the US and globally. Our models estimate that US growth approached a near cycle high at just above 3% in the fourth quarter of 2017. Growth should remain strongly above trend at 2.75%3 in 2018.

Inflation is likely to remain low for the first half of this year. Headwinds facing the housing and auto markets could

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Currency outlook: Possible global central bank policy surprises could suppress US dollar

Invesco Fixed Income shares its views on currencies around the world

Time to read: 2 min

US dollar:

We expect the US dollar to weaken throughout 2018. We base our view on positive global growth and predicted changes in global monetary policy. While we believe US growth will maintain its strengthening trend, growth across the developed world (especially in Europe and Japan) is likely to be even stronger. Global central banks, especially the European Central Bank (ECB) and the Bank of Japan (BOJ), are likely to tighten policy in response. We believe market expectations of policy tightening are currently much lower for the ECB and the BOJ compared to the Federal Reserve, which means there is more room for a market surprise that could cause their currencies to rise against the US dollar. In addition, strong global growth environments have historically led to a weaker US dollar, as US investors seek higher risk premia abroad and non-US investors stay home. We do not believe corporate repatriation flows will be a large driver of US dollar price action. Foreign profits are already largely held in dollar-denominated assets, and repatriation is likely to occur over many years.

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What does market volatility mean for fixed income?

As inflation fears roil the markets, we share our outlook for global bond markets

Time to read: 4 min

Market expectations of inflation have risen in recent days, after signs of wage growth — often seen as a harbinger of inflation — appeared in the January jobs report. We at Invesco Fixed Income believe investor concerns that inflation is finally showing signs of life have helped drive interest rates higher and impacted credit markets, where worries over higher interest rates (and their potential impact on companies) have caused declines in stock markets and other risky assets.1

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US Treasuries contend with debt ceiling déjà vu

Extraordinary funding measures are running out, and concerns are evident in Treasury yields

Time to read: 2 min

The so-called “extraordinary measures” that are currently being used to fund the US government are projected to run out in early March. With this “drop-dead” date quickly approaching, it appears that the Treasury bill market is already reacting to the potential disruption. Below I answer some frequently asked questions about the debt ceiling, extraordinary measures and the impact on Treasury markets.

When is the government likely to run out of funds?

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