The Federal Reserve is expected to initiate interest rate cuts in the U.S. by the middle of the year, albeit at a more gradual pace compared to other developed economies, according to insights shared by major bond manager PIMCO.
In a recent market outlook report, experts at PIMCO highlighted their preference for bond markets in countries like Australia, Canada, and the United Kingdom due to lower inflation risks compared to the U.S. They pointed out that despite the global economic slowdown, the U.S. has managed to maintain strong momentum thanks to various supporting factors.
Factors such as significant pandemic-related stimulus packages, elevated fiscal deficits, and advancements in artificial intelligence are believed to contribute to the U.S.’s robust growth. Furthermore, the economic policies of candidates in the upcoming U.S. presidential election are viewed as potentially favorable for U.S. economic expansion, posing challenges for growth in other regions.
While the Federal Reserve has projected multiple rate cuts in the coming year, recent positive economic indicators could affect the timeline for implementing a less restrictive monetary policy. PIMCO anticipates a soft landing scenario for the U.S. economy, where high interest rates help curb inflation without causing a recession, but they note the lingering risks of economic contraction or higher-than-expected inflation.
In terms of credit markets, PIMCO sees U.S. agency mortgage-backed securities as attractive and opts for high-rated corporate debt over riskier, high-yield bonds of firms that may be more vulnerable to economic downturns. The outlook underscores the elevated inflation risks in the U.S. and the prevalent concerns about recession in other parts of the world.
Overall, PIMCO’s analysis points to a nuanced global economic landscape with varying challenges and opportunities in different markets.
