UBS analysts see increasing evidence that the Federal Reserve will cut rates later in 2024.
The bank's note highlights a recent decline in inflation, with the core PCE price index showing its slowest monthly increase this year. This follows a similar trend in the Consumer Price Index (CPI).
The slowdown in consumer spending is also contributing to the moderation of inflation. Real consumption growth has been revised downwards, indicating a moderation in spending that helps reduce price pressures.
UBS also points to other signs of cooling economic activity, including revised GDP growth figures and sluggish orders for durable goods. A rise in continuing jobless claims further suggests a weakening labor market.
According to the bank, the Federal Reserve's data-dependent approach means that upcoming economic data, particularly the June jobs report, will be crucial. While Fed officials acknowledge the ongoing struggle with inflation, they also recognize the lagged effects of previous rate hikes.
UBS believes this paves the way for rate cuts later in the year, and that economic data will likely prompt the Fed to act. Analysts anticipate the market will factor in further cuts by 2025, leading to lower bond yields by the end of the year. They predict a return of 3.85%.
In this environment, UBS sees diversified fixed-income strategies as attractive. They recommend a core holding in quality bonds alongside investments in higher-yielding areas of the bond market to capitalise on the potential for lower rates and moderate economic growth.
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