Fed Hikes May Not be Over

“Expectations that the U.S. economic cycle is coming to an end are highly overstated.”

“It seems the entire world is thinking about a U.S. recession, not about inflation. But barring a major external shock I really don’t think the threat of recession is imminent,” she wrote. “The U.S. has a very strong labour market, which is starting to push up wages, while robust consumption supports firms’ pricing power.”

Sonal Desai, chief investment officer for the fixed-income group at Franklin Templeton, forecasts at least two hikes this year as policy makers respond to the risk that wage growth fans inflation. That’s at odds with traders who’ve priced out the hiking cycle and have upped wagers on cuts in 2020.

Desai’s view sheds light on the strategy at the heart of the firm’s Global Bond Fund that she helped manage with Michael Hasenstab before her elevation to CIO in September. Her fixed-income unit is run separately from the global macro team, which is famed for contrarian bets.

Desai concedes that the partial government shutdown will curtail economic growth in the first quarter but says that output will simply be shifted into the second-quarter reading. Overall, the investor sees 2019 expansion moderating on last year’s pace — but still above potential.

Reference:

Bloomberg, Natasha Doff & Cecile Gutscher, “Bond Titan Says Betting That Fed Hikes Are Over is ‘Very Misguided'”