Schroder Investment: Probability of a "soft landing" for the US economy increases, global bond market unlikely to see structural rebound

According to the Wise Finance app, Schroders' Global Unconstrained Fixed Income Investment Team seems to believe that "patience is a virtue" when it comes to addressing inflation and implementing a looser interest rate environment. In the past month, due to significant improvements in U.S. inflation data, the team has raised the probability of achieving an "economic soft landing" in 2024 to the highest level. This reduces the risk of an "economic hard landing." With the overall economic situation improving, the risk of a "hard landing" is relatively low.

The meetings of major central banks around the world have concluded smoothly without any surprises. The European Central Bank (ECB) has initiated a new round of loose policy, a decision that was already anticipated. However, due to the recent high service sector inflation in the Eurozone and the current economic rebound, it is expected that the ECB will adopt a cautious stance going forward. Meanwhile, the Federal Reserve has adjusted its interest rate forecast, currently expecting one rate cut in 2024, lower than the previous expectation of two cuts. However, the "mainstream forecast" of the committee still implies two rate cuts, consistent with the forecasts of 8 members.

So, what factors have led the team to further increase the probability of the U.S. economy achieving a "soft landing"? In short, it is the signs of easing inflation pressure. Despite considering a series of economic data, the trend of U.S. inflation is undoubtedly one of the key factors. After all, a decrease in inflation rate is crucial for achieving an "economic soft landing" as it can create conditions for the Federal Reserve to ease policy. In May, the U.S. Consumer Price Index (CPI) showed some encouraging signs, with the service sector costs excluding housing (the so-called "super core" inflation) showing significant improvement within the month. In fact, service sector inflation has actually started to decline compared to the previous month.

2024 saw the highest global voter turnout in history (exceeding 2 billion people), reflecting the ongoing possibility of political instability. However, investors find it difficult to predict the numerous unexpected surprises that have occurred in developed and emerging markets in a short period of time. France's fiscal challenges have led to a drop in local government bond valuations, and the sudden announcement of a presidential election has further intensified financial market pressure. Currently, the decline in European assets has not yet formed a buying opportunity, and the possibility of significant changes in the French political situation cannot be ignored due to the uncertainty surrounding economic prospects. However, this downturn is expected to bring investment opportunities.

Due to the higher likelihood of a "soft landing" in the U.S. economy, it is difficult for the global bond market to experience a structural rebound from current levels. In terms of asset allocation, there is still a preference for secured bonds over other credit categories, including bonds issued by international organizations and other government bonds. However, unlike U.S. government agency mortgage-backed securities, due to ongoing political risk factors, there is less inclination to rely solely on the improvement of these bond valuations to decide on increasing investments in these assets. In terms of corporate bonds, the preference continues to be for European investment-grade bonds over U.S. investment-grade bonds, but a cautious stance will be maintained due to ongoing political risks