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Fixed Income

“No landing” upsides & implications

With strong employment data increasing “no landing” plausibility, we look at what this could mean for markets and how we’re positioning our bond portfolios.

While inflation has unquestionably been the headline investor topic this year, speculation around a “no-landing” scenario is a hot contender for second place. A “no landing” is where the economy continues to grow while inflation continues to drop.

Today, the consensus is that would manifest as a ‘Goldilocks’ or possibly a ‘Platinumlocks’ environment (an even more optimistic version of Goldilocks), where we move into a new economic cycle or extend the current one, without suffering the pain of a recession in the near or medium term. Basically, 2024 becomes an extension of 2023.

The main factor driving a possible “no landing” is strong employment data and the resulting robust consumer continuing to spend. In the US, and to a more modest extent Europe, employment remains solid, chasing away notions of a near-term recession.

Ultimately, for as long as people are in jobs and getting paid, they are going to keep spending. In response, we are closely watching the jobless claims and wage inflation data for indications of a no-landing scenario playing out.


Upsides for risky assets

When we talk about a “no landing”, we can assume that the economic environment remains robust, or at least does not soften dramatically. Taking the US as the lead economy, in real terms, this would mean the Federal Reserve could afford to keep interest rates higher for longer than it might have done in an environment where the economy was weakening or heading towards recession. The economy trumps inflation every time, so unless the former begins to falter, there is no need to cut rates aggressively. A “no landing” is therefore good for risk appetite.

From an investment perspective, we would expect this to translate into risk assets, like equities and high yield bonds, generally doing better, because there’s no significant pressure on the underlying companies’ earnings or operating environment.

Conversely, we’d expect a higher-for-longer rates outlook to pressurise interest-rate sensitive assets. While the market has now adjusted its view to align with the central bank messaging of three cuts this year in the US, it continues to optimistically price in multiple cuts for 2025, putting pressure on longer-duration assets over the medium term should inflation stabilise at a higher level (we think 2.5% to 3%), or indeed re-accelerate, given looser financial conditions and a confident consumer.

A “no-landing” scenario also has implications for the US dollar. The dollar notably weakened last year in response to markets enthusiastically pricing in up to seven US rate cuts in 2024. Interestingly, despite the pricing revision down to three cuts, we have seen some continued weakness in the dollar – perhaps attributable to a lack of certainty regarding the timing of Europe and UK cuts. But overall, we would expect to see the dollar to stabilise, rather than weaken, from here.


Positioning around a “no landing” possibility

It seems a recession scenario is now largely out of the picture, but a more notable growth slowdown remains feasible. Right now, the economy is a bit like an ice cube in a cool drink – it is melting, but very slowly. If risk assets benefit, the trade-off will be higher inflation and only moderate growth. And rates won’t need to be cut as aggressively, meaning good news could become bad news as much-anticipated easing doesn’t manifest.

The question then becomes one of whether “higher for longer” ultimately results in the recession we have been expecting for two years, or that this is a new reality where higher rates are the new normal.

From a fixed income perspective, the high yield sector continues to offer tailwinds despite rallying from November. The CCC compression trade could continue to perform in the short term, but remember it’s not a risk-free position ─ these corporates are the ones most vulnerable to higher interest rates when it comes to re-financing. We continue to like coupon income, as well as shorter-dated, good-quality credits where refinancing requirements look straight-forward, which can leave you with a return opportunity of +6% over one year.

In an economic environment that is hinting at a positive trajectory but ultimately remains uncertain, we are watching employment and inflation numbers for our next signal on how this cycle is going to land, or not!



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