30 July 2020
At GAM Investments’ Weekly Fixed Income Meeting held on 28 July, several managers discussed their views on the fixed income space across emerging and developed markets.
Paul McNamara – Emerging Market Debt
Dollar weakness is positive for EM, although we would view this as being more a result of European strength than any true weakness in the US. That said, the joint European bond issuance is perhaps the most positive news out of Europe in a long time. The second wave of infections does seem to be fading in the US states that have reopened early. The primary question, in our view, is the issue of inflationary threat. We see the expansion of broad money as being a natural part of lockdown. White collar workers, for the most part, are still being paid, which has led to a spike in savings rate due to service sectors not operating, and the resulting rise in deposits is boosting M2. We would therefore hesitate to say that the usual correlation between broad money aggregates and inflation can be relied upon. Commodity prices year-on-year are not sending any warning signs of inflation. We remain reasonably bullish on the local EM asset class.
Florian Komac – European Credit
We have had a positive macro newsflow, with the biggest item being the EU agreeing on a rescue package as part of their fiscal planning up until 2027. The Covid-19 component of this plan amounts to EUR 750 billion. EUR 390 billion will be handed out in grants to the hardest hit countries. The remainder will be distributed via low interest loans. Approximately 28% of the EUR 390 billion will be given to Italy. This money will come from the EU issuing a bond starting in 2021 and ending in 2026, with the goal of having it repaid by the 2050s. The message, that Europe can act as one during a crisis, is overall positive and helps with the unification of Europe and the ongoing political project. Flash PMIs were solidly over 50 after being in the high 40s in June, indicating a continuing recovery. As a result to all the positive news, both IG and HY spreads tightened solidly. There remains a level of pent-up demand, so we will see what happens when the consumption backlog has been cleared while the fallout from the virus grows.
Adrian Owens – Global Rates
From our perspective, markets have been relatively subdued over the past few weeks. Monetary aggregates continue to rise sharply in the US, Euro area, UK and even Japan. In the US, M2 broad money (the method of measuring an economy’s money supply) was 23% in June. In the UK, we are seeing M4 broad money levels around 12%. Even in the euro area, M3 is above 9%. In 2018/2019, this was typically running around 4.5% in the US and Euro area. Overall, broad money growth in Japan Asia is also reaching levels not seen since the late eighties. While the relationship between broad money growth and inflation is imprecise and the lags are variable, the relationship tends to be fairly clear over time. On the wages front, we have seen a small pickup in the US. In light of some of the Covid-19 issues, productivity within many areas is coming under pressure. Falling productivity means higher unit labour costs, which for now should mitigate some of the disinflationary pressures from weaker economic activity. While it seems unlikely that inflation will pick up much over the next 18 months, the seeds for higher medium-term inflation have been planted. The US dollar, meanwhile, is looking increasingly precarious, in our view. In an era where interest rates are close to zero around the developed world, relative money growth is also something to watch. The US is seeing its relative money growth outpace the rest of the world which, among other things, continues to point to continued dollar weakness.
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