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by  BlueBay Fixed Income teamA.Skiba, CFA Jun 18, 2024

Andrzej Skiba, Head of U.S. Fixed Income on the BlueBay U.S. Fixed Income Team, discusses why slowing inflation may open the door to future rate cuts later this year and into 2025.

'The weekly fix'

The weekly fix

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Welcome to the latest edition of the weekly fix. My name is Andrzej Skiba.

As expected, the FOMC kept rates unchanged. While a close call, dot plot projections moved one of the cuts from 2024 to 25, with 1 cut expected for this year and 4 in 2025. It’s worth noting however, that most participants did not update their forecasts after a much lower than expected CPI print, so if they did, you could easily see 2 cuts - still the base case for this year. There has been no downward revision of outer cuts in 25/26, so our concern about that scenario can be laid to rest, at least until the next September dot plot release.

Interestingly, the long run dot plot moved up to 2.8% from 2.6%. Last month Chairman Powell dismissed the importance of a small increase from previously long-standing 2.5% level, however this time the level increased even more, suggesting more FOMC officials believe rates will settle at a higher level than before. In the press conference, it was acknowledged that some committee members adjusted their forecasts, however he attributed that to individual views rather than any broad shift in Fed thinking.  

We remain of the view that 1-2 cuts are possible this year. However, we agree that incoming data needs to further validate recent easing of inflationary pressures. We had three lousy inflation prints in 1Q followed by two better ones of late. There is no reason, in our mind, why the Fed can’t cut in September if the next three CPI releases suggest continued moderation of inflationary pressures.

Looking at the fixed income universe, we continue to like front-end of the Treasury curve in high 4s and 2-30 curve steepening trades. Our attitude over the recent months has been to add, on the margin, to US duration exposure. Having said that, when external events cause a sharp rally like was the case recently with events in France prompting a global flight to safety, we stand ready to book profits when such opportunities arise.

In credit, both across corporates and securitized books, we’ve been rotating out of positions that hit our profit targets into new opportunities in the recent supply window. In this environment, we believe it’s critical to proactively manage our investment books, exiting areas that leave little room for further performance and reinvesting proceeds balancing upside potential with liquidity considerations.

Thank you for your attention.

Summary points

  • Current projections are for one rate cut expected this year and four in 2025.

  • Before rate cuts commence, incoming data needs to further validate recent easing of inflationary pressures.

  • Looking at the fixed income universe, we continue to like the front-end of the Treasury curve.

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