US inflation appears to be slowing against a backdrop of still robust economic growth.

3. The Federal Reserve (Fed) hiked rates by 25 bps,⁵ as widely expected. Fed Chair Jerome Powell struck a relatively balanced tone at the press conference, leaving the option for additional hikes while reiterating that monetary policy is in restrictive territory. Going forward, the Fed will be monitoring when the “long and variable” lags from its tightening campaign to date impact the real economy. The resilience of US economic data suggests the lag may be longer than in the past. 

4. The Bank of Japan (BOJ)’s latest statement on monetary policy delivered a hawkish punch to rates markets near the end of the month, prompting the 10-year Japanese Government Bond (JGB) yield to move above 50 bps for the first time since 2015. The BOJ statement, whose implications were leaked to the press before the statement was released, pushed up US dollar (USD) rates on the back of robust US GDP data. Over time, domestic JGBs may prove to be somewhat more attractive for Japanese institutions vs. USD rates. While we’ve already seen a reduction of the Japanese footprint in 2022 due to interest-rate volatility in the US, as well as more expensive hedging costs, the future sunsetting of BOJ’s yield-curve control may lead to a less active Japanese buyer base.

5. The Politburo in Beijing released a highly critical statement of the post-COVID-19 shutdown economic recovery in late July. The statement emphasized boosting domestic consumption, stabilizing the property sector, proactive fiscal policy, improved employment, and getting a handle on local government debt. The statement didn't mention specifics but was broadly welcomed by markets that await further details on fiscal easing in China. While the issues appear to have been identified, the markets still await specifics on funding details, size, and measures to promote consumption and stabilize confidence.

The global food supply seems far more fragile under the geopolitical dynamic.

What’s Keeping Us Up at Night…

1. Commodity volatility returned with the collapse of the Black Sea grain deal with Russia and the banning of non-basmati rice exports from India. The first is caused by ongoing tensions in the Russia-Ukraine war and means that a larger portion of the Ukrainian grain will have to leave overland, rather than by sea. The second issue is due to sharp increases in domestic prices of rice in India, forcing the government to curtail export of this critical staple. Both are reminders of the overall risk to markets and headline CPI that can arise from exogenous shocks to global food supply that seems fragile under the current geopolitical dynamic. Oil prices are also creeping upward, with both West Texas Intermediate (WTI) and Brent climbing above US $80 per barrel.

2. Reaction function⁶ from China – Following the comments of Richard Koo, chief economist at Nomura Research Institute, who recently described the current situation facing China as a “balance-sheet recession,” we await what will be the reaction function of the Chinese central bank. Once diagnosed, balance-sheet recessions are generally fought with substantial fiscal spending. We haven’t seen any announcement of such a policy by Beijing, but if one were to come, it would have substantial impacts on global growth and inflation, as well as energy prices.

¹  Yield curve is a line that plots interest rates of bonds having equal credit quality but differing maturity dates; its slope is used to forecast the state of the economy and interest-rate changes.
²  The CPI in the US is defined by the Bureau of Labor Statistics as “a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services. 
³ Purchasing Managers' Index (PMI) is an indicator of the economic health of the manufacturing sector. A reading above 50 signals economic expansion; below 50 signals contraction.
⁴ PCE, or the Personal Consumption Expenditures Price Index (PCE) is defined by the US Bureau of Economic Analysis as a measure of the prices that people living in the US, or those buying on their behalf, pay for goods and services. The index is known for capturing inflation (or deflation) across a wide range of consumer expenses and reflecting changes in consumer behavior. 
⁵ A basis point is a unit that is equal to 1/100th of 1%, and is used to denote the change in a financial instrument. The basis point is commonly used for calculating changes in interest rates, equity indices and the yield of a fixed-income security. 
⁶ Reaction function is a contingency plan for how a central bank will react to certain events or data releases.
⁷ Spreads are the difference in yields between two fixed-income securities with the same maturity, but originating from different investment sectors.
⁸ Core/core plus typically invest in a baseline of investment-grade bonds such as government, corporate, and securitized debt. Core plus funds can take that baseline, and add additional sectors such as corporate high-yield, emerging-market debt, or non-US currency exposures to enhance returns. 
⁹ Convexity is the relationship between bond prices and bond yields.
¹⁰ Carry is the difference between the yield on a longer-maturity bond and the cost of borrowing.
¹¹ Securitized credit involves pooling a large number of loans into an investable asset. Examples include mortgage-backed or asset-backed securities. 
¹² Duration is a measure of the sensitivity of an investment’s price to nominal interest-rate movement.

Global Aggregate is represented by the Bloomberg Global Aggregate Index, a broad-based measure of the global investment-grade fixed-rate debt markets. Euro Aggregate is represented by the Bloomberg Global Aggregate Index - European Euro, which includes fixed-rate, investment-grade Euro denominated bonds. UK Aggregate: Bloomberg Global Aggregate Index - United Kingdom which includes fixed-rate, investment-grade sterling-denominated bonds. US Aggregate: Bloomberg US Aggregate Bond Index is composed of securities from the Bloomberg Government/Credit Bond Index, Mortgage-Backed Securities Index, Asset-Backed Securities Index, and Commercial Mortgage-Backed Securities Index. US Fixed MBS: Bloomberg Agency Fixed-Rate MBS Index tracks fixed-rate agency mortgage backed passthrough securities guaranteed by Ginnie Mae (GNMA), Fannie Mae (FNMA), and Freddie Mac (FHLMC). US CMBS: Bloomberg CMBS ERISA Eligible Index, which measures the performance of investment-grade commercial mortgage-backed securities, which are classes of securities that represent interests in pools of commercial mortgages. The index includes only CMBS that are Employee Retirement Income Security Act of 1974. US ABS: Bloomberg Asset-Backed Securities Index, the ABS component of the Bloomberg US Aggregate Index, which has three subsectors: credit and charge cards, autos, and utility. US IG Corporates: Bloomberg US Corporate  Bond Index covers all publicly issued, fixed rate, nonconvertible, investment-grade debt. US Corporates Aaa: Bloomberg Aaa Corporate Index designed to measure the performance of investment-grade corporate bonds that have a credit rating of Aaa; US Corporates Aa: Bloomberg Aa Corporate Index; US Corporates A: Bloomberg A Corporate Index, designed to measure the performance of investment-grade corporate bonds that have a credit rating of Aa; US Corporates Baa: Bloomberg Baa Corporate Index; designed to measure the performance of investment-grade corporate bonds that have a credit rating of Baa; US High-Yield Corporates: Bloomberg US Corporate High Yield Index is an unmanaged broad-based market-value-weighted index that tracks the total return performance of non-investment grade, fixed-rate, publicly placed, dollar denominated and nonconvertible debt registered with the Securities and Exchange Commission. Global IG Corporates: Bloomberg Global Credit - Corporate Index is an unmanaged index considered representative of fixed rate, non-investment grade debt of companies in the US, developed markets, and emerging markets. Emerging-Markets Debt: Bloomberg Emerging Markets Hard Currency Index includes USD-denominated debt from sovereign, quasi-sovereign, and corporate EM issuers. Bank Loans: LSTA Leveraged Loan Index, which is a market-value-weighted index that is designed to measure the performance of the US leveraged loan market based upon market weightings, spreads, and interest payments. JP Morgan Emerging Markets Bond Index Global Index is a broad-based, unmanaged index which tracks total return for external currency denominated debt (Brady bonds, loans, Eurobonds and US dollar-denominated local market instruments) in emerging markets. Bloomberg US MBS Index tracks fixed-rate agency mortgage backed pass-through securities guaranteed by Ginnie Mae (GNMA), Fannie Mae (FNMA), and Freddie Mac (FHLMC).

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