Inflation/Deflation

US bond investment takeaways from this week’s PCE and employment releases.

A global recession continues to be likely over the next 12 months. The impact of tighter monetary policy is slowly being felt. Government bonds look increasingly attractive as a safe haven.

In Part 2 of this series, we prescribe the treatment needed to produce a recovery for the ailing Chinese economy. Authorities will only panic and unleash “irrigation-style” stimulus if the unemployment rate rises sharply, or a financial crisis unravels in onshore markets. This is not yet the case.

Highlights The simple relationship between the unemployment rate and inflation, the traditional Phillips Curve, is not especially strong. But this perspective is archaic and ignores the lessons learned by central bankers during the 1960s and 1970s.…

In Section I, we respond to the ongoing challenge to our view that the US economy is on a recessionary path. The available evidence overwhelmingly supports the notion that US monetary policy is tight, which argues against the “no landing” economic scenario. It also underscores that the recessionary clock is indeed ticking unless the monetary policy stance eases soon. The “soft landing” narrative remains improbable and may have been unduly boosted by artificially low inflation readings over the summer. Until concrete signs of the meaningful rate cuts emerge, we will continue to recommend that investors maintain defensive portfolio positions. In Section II, we review the “modern-day” Phillips Curve, and explain why it is unlikely that the Fed will see a sustainable return to its 2% target without a rise in the unemployment rate above NAIRU.