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GLOBAL MACRO EXPECTATIONS FOR 2019 - January 2019

GLOBAL MACRO EXPECTATIONS FOR 2019
  • The U.S. economy will likely slow in 2019. We expect U.S. GDP growth for 2018 to be north of 3% alongside consensus estimates of 2.5% growth in 2019. We expect inflation to be subdued, housing to be stable, and the strength of the consumer to remain strong.
  • Accordingly, we anticipate the Fed will raise interest rates one or two times in 2019, which is in line with the consensus view of two hikes.
    • The 10-year U.S. Treasury yield will reside in a range of 2.50-3.25%, absent the occurrence of a significant catalyst that accelerates GDP growth and pushes yields higher.
    • Major central banks will continue efforts to normalize monetary policy in 2019 based on incoming economic data and market developments rather than on a preset course of action.
    • We expect China’s economy to avoid a hard landing in 2019 with GDP growth of 6.0-6.2% supported by recent fiscal stimulus measures and more accommodative financial sector policies. Though China-U.S. tensions will be protracted, there are signs of improvement on trade. We think a full-blown trade war will be avoided although additional tariffs on Chinese goods are likely.
ELEMENTS OF OUR BROAD VIEW
  • We favor bank loans, given their interest rate hedge and attractive “income carry” profile; out-of-index asset-backed securities and non-agency residential mortgage-backed securities; and defensive credits and financials in the corporate investment grade sector.  
  • We are cautious on emerging markets debt but it is more a question of “when” rather than “if” we rebuild our exposure. Idiosyncratic risk is elevated in the high yield market, which speaks to the importance of strong industry and issue selection in navigating the fixed income market at this point in the credit cycle.
  • We are less favorable on U.S. Treasuries, agency mortgage-backed securities, and commercial mortgage-backed securities.
  • Our current strategy with credit is to have exposure, but not maximum allocations given current valuations.  As stated above, we expect spread sectors generally to outperform in 2019, with the potential for more upside if we see modest spread tightening.
  • Given our outlook for the credit markets, the economy, and interest rates, we will continue to be buyers of spread sectors on any meaningful widening of spreads.
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