There's "a strong case for investing in bonds" as a recession looms this year, fixed-income investing giant Pacific Investment Management Co. says in a new report. Tiffany Wilding, Pimco chief US economist, is on "Bloomberg Markets: The Close."
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In front of it, Tiffany Wilding joining us right now: chief U.S Economist, over Ed Pimco, fixed income giant actually just released a report that was bullish on bonds and mourned of a mild recession this year.
I want to get to some of those calls in just a second Tiffany, but I do want to start off, of course, with CPI your general expectations and, more importantly, if you can give us any sort of insight into why we've seen this trend of declining uh inflation yeah.
So so you mentioned potentially for a negative month over month print, and we do think that will be the case.
You know, and importantly here that's picking up the fact that you have seen Global Energy prices, you know come off of their peaks that we saw uh last year, so that is, that is definitely putting downward pressure on inflation.
You know, and I would just say more broadly that if you don't get another 50 percent increase in Energy prices like what we saw last year or a 50 increase in Auto prices, you will have U.S inflation coming down pretty quickly from like eight percent to uh.
To four percent you know so the other thing I would just highlight.
We think core inflation tomorrow also moderates.
We think the three month over three month, Pace, you know, could get down to 2.7 percent um.
You know so that's getting closer to certainly closer to the fed's Target yeah, absolutely and and core is what the FED looks at when you back out food and energy costs.
There's now talk about how perhaps it's more useful for look at even a more narrow measure of inflation, which would strip out housing as well as Medical Care people are calling it super core.
Is that a useful way of looking at inflation right now well, I mean I, think you can just look at wages and kind of come to the same conclusion and not have to do all of that work.
You know, but if you do look at wages, you know what you find is that you know kind of similar to broader price inflation.
You know wages are from a year-over-year perspective, they're still running at elevated levels, but there have been kind of some more recent indications that you know.
Wages are also you know, starting to moderate a little bit here.
You know now we expect there will be a recession as a result of the tightening and financial conditions that the Federal, Reserve and other central banks have put in place.
Restrictive policy, you know, and as the labor market weakens throughout the course of 2023, that would also put some more downward pressure on wage inflation.
Talk to us a little bit here about how the market has been reacting to all this.
We saw in the FED minutes uh that were released last week.
The idea that the FED had some discussions at that last meeting about the market trying to price in rate a rate Cuts excuse me in the second half of the year and the idea that they're concerned that Financial conditions might ease a little little bit quicker than what the FED wants it to.
Are you seeing that, in your own research and in your own sort of discussions that you're having in bimko that the market, it might be a little bit too far ahead of the Fed? Well, you know I, think I, think that the the market will will always um.
Sort of look to the market is forward-looking um, so it is trying to judge you know the probabilities of various outcomes at any.
Given time you know, and of course it's you know, we have a baseline view that you will get the Federal Reserve that will pause around five percent uh.
You know maybe hike one or two more times you know, and then, by the middle of of next of this year, 2023 you you will have inflation, that's moderated enough for the FED at least to start talking about normalizing rates back towards neutral, so cutting it's possible.
They start cutting by the end of next year and so I think the market uh you know being forward-looking, is is already you know, just pricing in the appropriate.
You know policy probabilities, you know now.
It is of course important that the FED keeps you know, Financial conditions restrictive today, because that helps you know the economy make the adjustment uh.
You know towards lower inflation rate.
So that's the tricky part of what the FED has to deal with.
How sensitive is the Federal Reserve to loosing fund Financial conditions? I mean you look at Financial conditions today they certainly loosen given the rally in stocks and the push lower in yields, and why are they so sensitive to it? Does because does it make it harder for inflation to get to two percent? Is it a case of people just getting ahead of their skis? Well, I mean so I think you need.
You know some sustained period of tighter Financial conditions.
You know, certainly in order to uh, to bring down inflation.
You know so, of course, uh policy.
Works through lags, you know, and there you you need.
You need policy to remain restrictive.
You know in order to put uh, you know the type of you know to have the kind of drag on the economy that will result in inflation, moderating back to two percent.
So of course, I think the Federal Reserve wants.
Inflation wants Financial conditions to remain restrictive.
You know, but the other thing here is is that if inflation starts to come down more quickly than many expect, including the FED uh, you know, then you just don't need financial conditions to remain as tight as as long so.
You know the Federal Reserve came out with a three and a half percent uh core inflation forecast in their SCP, and that seems kind of aggressive.
Actually, so it's you know it's possible that it's okay for financial conditions to ease a little bit as we have you know better inflation data coming in we'll talk about some of the positioning here.
Of course, the big headline on the Bloomberg terminal earlier today regarding in Pimco and the big hole on that Now's, the Time to buy bonds, something that we've heard from a lot of the the big fixed income managers out there here give us an explanation not only of why you made that call but Square the circle with this idea.
Here of how you deal with the potential for rates continuing to come down, but still being able to make a good return on a total return basis, at least off of whatever that mix ends up being yeah well.
Well, so I think ultimately um.
You know we we did say you know.
Bonds are back um, you know and that's because I think primarily the um.
The interest rate adjustment uh that we've needed as a result of the higher inflation that we've gotten you know in our minds, is as largely taken place and that's not only the fed.
You know we think kind of a five percent level where the FED pauses seems reasonable, giving the underlying Trends and inflation um.
Similarly for other central banks, the ECB at three uh, you know the bank of England, the Bank of Canada kind of somewhere in between that's largely priced by markets.
So it's you know, I think we're not going to see another 450 basis point increase in policy rates next year.
You know so that just means you know that bond market volatility is probably going to come down.
Uh, the more normal correlation between bonds and risky assets is probably going to restore itself.
You know, and certainly you know at these higher yield levels.
That means bonds are attracted active again from a portfolio perspective for our investors.