In a recent update, Benoit Anne, Lead Strategist at MFS Investment Management, offered his views on: the volatility in the Federal Reserve's market-implied pricing, the potential peak of central bank hawkishness, and the implications for fixed income and equities. Anne shared insights from his recent Texas roadshow and addressed client concerns about the macroeconomic environment.
Peak hawkishness
According to Anne, the Fed's terminal rate experienced significant fluctuations, as seen in the 42-basis-point range over three days, reaching a high of 5.82% and then dropping to 5.40%1. This leaves less than three hikes fully priced in. Anne expects the Fed pricing to move back up in the near term, particularly if recent financial sector fears subside.
The upcoming FOMC meeting on 22 March will present the next major central bank challenge for global investors, as the Fed's policy rate projections will be released2. Anne anticipates that the dots will be revised upward following Chair Jerome Powell's recent remarks. A 50-basis-point move in the dots is likely the baseline scenario, while a 25-basis-point revision would be considered a dovish surprise.
Anne also addressed the collapse of Silicon Valley Bank (SVB), stating that he does not believe it is indicative of broader financial stability risks in the US financial system. He argues that the comparison to the Global Financial Crisis (GFC) is misguided and the bank's failure does not reflect a systemic risk. The US financial sector exhibits robust fundamentals and is in a much stronger position than it was 15 years ago.
During the Texas roadshow, clients raised several key macroeconomic questions, such as the likelihood of a soft landing, the expected neutral Fed policy rate, the European Central Bank's terminal rate, and the timeline for the Fed to start cutting rates. Clients also inquired about global fixed income, including default expectations in high-yield bonds, allocation within a 60–40 portfolio, curve positioning, and outlook for emerging market currencies.
Compelling valuation story
Anne observed that clients have become more constructive on fixed income and acknowledged its compelling valuation story. He noted that short-tenor credit and emerging market debt were of particular interest. However, some investors still expressed concerns about the potential for further market turbulence.
Anne emphasized that a positive macro regime transition is approaching, which would create a more supportive backdrop for fixed income and spread products. He also discussed the importance of distinguishing between real and nominal variables in economics and markets, particularly in the context of corporate profits.
Probability of declining EPS high
Corporate profits typically grow and decline with nominal GDP. As the US enters a disinflation phase, Anne believes that the probability of declining profits is high, even if the country avoids a recession. This presents a significant downside risk to equities and supports the argument for fixed income being better positioned from an asset allocation perspective. Anne views disinflation as clearly positive for fixed income, while the implications for equities are more nuanced.
In summary, Benoit Anne's update highlights the recent volatility in the Fed's market-implied pricing, the upcoming FOMC meeting's importance for global investors, and the potential peak of central bank hawkishness.
Fixed income over equities
He also emphasizes the relative appeal of fixed income over equities in the current macroeconomic environment and addresses key client concerns from his recent Texas roadshow.
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Endnotes:
1 Bloomberg data, as of 10 March 2023. Based on the Fed fund futures curve up to December 2024.
2 Source: The Federal Reserve, Summary of Economic Projections, December 2022.
3 Adapted from source: "Macro Talking Points: Week of 13 March 2023." MFS, 15 Mar. 2023, www.mfs.com/en-us/investment-professional/insights/fixed-income/macro-talking-points.html.
