Venture forth in emerging markets, but be cautious on funding risks

We see selective value in fixed income with more to come as the US dollar eases

Time to read: 4 min

A tightening of financial conditions, led by US Federal Reserve (Fed) rate hikes and an appreciating US dollar, have pressured emerging market (EM) assets so far this year. However, Invesco Fixed Income believes that concern over a generalized “crisis” in EM external debt (and external vulnerability) is largely unwarranted. That said, structural impediments are likely to limit EM growth over the medium term – particularly in the context of a stronger US dollar. We believe there is selective value in EM right now in markets that have been unjustifiably impacted by tightening US dollar funding conditions.

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Currency outlook: China may intervene if renminbi/US dollar exchange rate reaches 7.0

Invesco Fixed Income shares its views on currencies around the world

Time to read: 3 min

US dollar: Neutral.

We believe the dollar is caught between two macro trends. On the one hand, US growth has positively diverged from the rest of the world, leading to increased interest rate differentials. Higher growth and larger interest rate differentials are typically positive for the US dollar. On the other hand, the US is running large budget and current account deficits. We believe these dueling factors will keep the US dollar in a holding pattern in the near term, but we expect the budget and current account imbalances to eventually drive it lower.

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Interest rate outlook: US markets may price in slower growth in the second half of 2019

Invesco Fixed Income shares its views on rates around the world

Rob WaldnerTime to read: 4 min

US: Neutral.

We expect US interest rates to remain range-bound due to moderating gross domestic product (GDP) growth and looming US Treasury supply. Growth over the next few quarters will likely be driven by consumption and capital expenditures supported by US tax reform. We believe the market will begin to price in a less positive growth picture in 2019, as the effects of tax stimulus wear off and the impact of tighter Federal Reserve (Fed) policy begins to take hold. We could see below-trend growth in the second half of 2019. Additionally, core US inflation has begun to soften, and in the coming months we expect softer rental and service inflation to drive core consumer price inflation below 2% (excluding tariff-related price increases). In addition, US Treasury supply has continued to increase in 2018 while Fed purchases have declined. This combination has led to increased volatility in the Treasury market.

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Currency outlook: Convergence of global economic forces may cause weakening of US dollar

Invesco Fixed Income shares its views on currencies around the world

Time to read: 2 min

US dollar: Neutral. In our view, the US dollar remains trapped between two trends. Interest rate hikes (and ongoing balance sheet reduction) by the US Federal Reserve have increased US dollar funding costs and tightened financial conditions, further fueling the US dollar rally. However, while global growth has been strong, it does appear that US economic activity has peaked. This convergence typically causes the US dollar to weaken. If the trade environment stabilizes, this may benefit other currencies versus the US dollar in the near term.

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Interest rate outlook: US core inflation may drop below 2% barring tariff-related shocks

Invesco Fixed Income shares its views on rates around the world

Rob WaldnerTime to read: 3 min

US: Neutral. With growing trade worries and above-trend growth, we expect US rates to stay range-bound. Core US inflation slowed in August, and we believe it will continue to slow for the rest of the year. Going forward, we expect softer rental and service costs to drive core consumer price inflation below 2%, excluding tariff-related price increases. Absent any major trade-driven shocks, US growth is likely to remain above-trend for the rest of the year, supported by stronger energy sector capital expenditures, increased job growth and consumption. We continue to see 2018 gross domestic product (GDP) growth reaching around 2.8%, 1% above the long-term sustainable trend. There is a risk of tighter global financial conditions due to trade-related tensions and additional tariffs in the next few months — this may cause asset price volatility that could ultimately benefit US Treasury prices.

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Fed raises rates, but what’s next?

September Fed rate hike widely predicted, but what do we expect in December?

James Ong

Time to read: 4 min

As expected, on Wednesday the US Federal Reserve (Fed) raised the federal funds rate by 0.25% to a target range of 2.00% to 2.25%.The so-called dot plot, the Fed’s way of communicating its forward interest rate guidance, showed no change in the number of rate hikes anticipated through 2020 and signaled that no policy decisions are expected to be made in 2021. The statement issued by the Federal Open Market Committee (FOMC) also removed the sentence noting that “policy remains accommodative.” While the changes were few, the market rallied, signaling a dovish interpretation, as it digested this change as an incremental step toward acknowledging that the end of the hiking cycle is near. Chairman Powell later explained that the sentence was not removed to imply any changes in policy. His comments that the Fed would be willing to respond to trade-related impacts on growth also gave support to Treasury yields.

December rate hike uncertain due to slowing inflation and potentially negative impact of trade disputes

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