“KEEP ON DANCING” – The Jacksons, 1976

“KEEP ON DANCING” – The Jacksons, 1976

Last week’s Fed meeting confirmed what many market participants had expected for a couple of months, namely that monetary policy will likely shift from patiently neutral toward easing through a combination of rate cuts and balance sheet expansion. This clear dovish signal followed comments by ECB President Mario Draghi indicating that rate cuts were on the table if the ECB decides to ease in the face of downside risks to the Eurozone. Some investors may question the Fed’s justification in making this shift, especially in light of their stable projections for growth and unemployment, but a combination of disinflationary pressures and uncertainty on external conditions are clearly the primary risks in the minds of Fed governors. We believe the 1995 example is most relevant today, when the Fed cut rates after a sustained trend of tightening moderated inflation pressures. Markets have heard this song before and will keep on dancing to the familiar beat.

What’s Next?

The Fed is One Step Away From its First Rate Cut Since 2008

One of the key supports for financial markets this year has been investor expectations of easier monetary policy. The shift from pricing rate hikes and balance sheet reduction to rate cuts and asset purchases has more than offset concerns about global growth and trade uncertainty. Last week, the Fed largely delivered on investor expectations, confirming the dovish pivot they have been communicating since the end of last year. In our view the highlights from the meeting are:

  • Projections for the target rate (the “dot plot”) were revised down significantly toward market pricing (for the second time) and now point to no hikes for this year. Importantly, the median longer-term neutral rate is now 2.5%, indicating that Fed members think the current level of rates is sufficient to promote growth in the absence of material downside risks.
  • Indeed, their projections for growth and unemployment did not change much and Chairman Powell confirmed that growth and the labour market remain “solid“.

  • However, inflation projections were revised down significantly from 1.8% (or close to their 2% target) to 1.5% (or markedly below target) for 2019.
  • Their statement dropped the “patience” references and Powell confirmed they are ready to act if needed. And, for the first time in a while, the board is split between doves and hawks.

Roads? Where We’re Going, We Don’t Need Roads

In our view, the 1995 case is most relevant to today’s context, although it is not a perfect analogy. Starting in early 1994, the Fed raised rates continuously from 3% all the way to 6% in the span of 15 months. This contained price appreciation but business spending was showing signs of slowing down and so, in July 1995, the Fed, under the leadership of Alan Greenspan, thought a more accommodative policy was apt and cut rates by 0.25%. Today, the Fed has engaged in slower and less drastic policy tightening, but they are also seeing, as they did in 1995, inflation under control while risks to growth mount. By cutting rates pre-emptively in 1995, the Fed was able to extend the economic expansion until the tech bubble burst. Back to the future, investors today expect the Fed to take the same action this year and succeed in supporting the expansion.

One other interesting parallel is noteworthy: back in 1995, President Clinton was a year out from running for re-election, and the easier policy helped to avoid a possible recession that would have made his re-election chances much tougher. The New York Times opened their 7 July 1995 story on the rate cut by writing, “Under mounting political and economic pressure to stave off a possible recession, the Federal Reserve reduced short-term interest rates for the first time since 1992.” We could easily imagine reading a very similar headline in the next few months.

Got Our Dancing Shoes On, but Listening Closely to the Beat

As in 1995, we expect risky assets to extend their gains over the medium term. Lower bond yields should lower debt service costs and promote credit creation. Without an imminent threat of recession, growth-oriented assets should benefit from both cash-flow growth and lower discount rates. One countervailing headwind is that valuation for some assets has become quite rich. In particular, the carry in G10 nominal bonds and high yield credit spreads looks quite expensive historically (though less so when compared to other assets). In equities, the S&P 500 index is expensive by almost any metric. Whether you consider the underlying assets, earnings, dividends or cash flows that you get for the price you pay for US stocks, you are getting much less today than you would have historically.

However, the elephant in the room is the US-led trade war and resulting uncertainty. A key question for investors is whether the impacts will be felt primarily via the demand or supply channel. In the Fed’s view, the impacts will largely be on the demand side and not lead to a significant pick-up in prices. Outside of the macro impacts to growth and inflation, we are concerned about the sensitivity of market sentiment to the ebb and flow of trade negotiations. While the latest news has been positive and a meeting between President Trump and Xi is likely next week, we are not convinced the thorny issues can be easily resolved. Nevertheless, we prefer to remain risk-on to benefit from the tailwinds of an easier Fed and tactically hedge tail risk via options.

Keep on Dancing

The Jacksons

Strategy Behaviour

Our medium-term views remain cautious, and we are pairing an overweight in government bonds with an underweight in high yield corporate credit. We are also complementing our equity exposure with options to protect the portfolio in the case of equity drawdowns.

Performance Review

Over the month of June so far, the Uni-Global – Cross Asset Navigator fund is up 3.1% versus 6.5% for the MSCI AC World index and 1.1% for the Barclays Global Aggregate index (USD hedged). Year-to-date, the Uni-Global – Cross Asset Navigator has returned 6.8% versus 16.1% for the MSCI AC World index, while the Barclays Global Aggregate index (USD hedged) is up 5.7%.

Unigestion Nowcasting

World Growth Nowcaster

World Growth Nowcaster

World Inflation Nowcaster

World Inflation Nowcaster

Market Stress Nowcaster

Market Stress Nowcaster

Weekly Change

  • Our world Growth Nowcaster was steady over the week, with a slight improvement in developed economies offset by weakness in the emerging world.
  • Our world Inflation Nowcaster was also steady this week, as most countries did not see material changes to inflationary pressures.
  • Market stress moved down further, as spreads became more supportive.

Sources: Unigestion. Bloomberg, as of 24 June 2019.

Navigator Fund Performance

Performance, Net of Fees 2018 2017 2016 2015
Navigator (inception 15 December 2014) -3.6% 10.6% 4.4% -2.2%

Past performance is no guide to the future, the value of investments can fall as well as rise, there is no guarantee that your initial investment will be returned.



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Unigestion UK, which is authorised and regulated by the UK Financial Conduct Authority, has issued this document. Unigestion SA authorised and regulated by the Swiss FINMA. Unigestion Asset Management (France) S.A. authorised and regulated by the French Autorité des Marchés Financiers. Unigestion Asia Pte Limited authorised and regulated by the Monetary Authority of Singapore. Performance source: Unigestion, Bloomberg, Morningstar. Performance is shown on an annualised basis unless otherwise stated and is based on Uni Global – Cross Asset Navigator RA-USD net of fees with data from 15 December 2014 to 24 June 2019.