FATT - Mid-Year Outlook: Lots In The Air

• Investment uncertainty is focused on the nature of the current spike in inflation, which the Fed argues is transitory, though a growing number of people do not buy this narrative. Historically, the Fed has never been able to head off any longer-lasting inflation uptrends without a recession.
• A longer-lasting inflationary outlook seems unlikely without a meaningful break in the U.S. dollar. H2 2021 should resolve any job market distortions caused by the temporary, excessive unemployment benefits, which will help clarify the labor supply picture.
• The Fed is in the same boat as bond investors regarding how to interpret the economic data. Until there is greater clarity, the central bankers likely will go slow on transitioning to tapering, despite the “hawkish” tilt of the June FOMC meeting.
• Bond investors can find attractive total return opportunities in emerging market bonds, which generally have priced in more inflation expectations and still trade at solid risk-adjusted spreads relative to developed market bonds.

For further details see: