Global Fixed Income Outlook & Strategy
By David Rolley, CFA, Portfolio Manager
US technology companies may still be exceptional, but the US economy may not be.
Market Recap & Outlook
US technology companies may still be exceptional, but the US economy may not be. A big downward revision to May and June payroll employment has dimmed the narrative around US economic growth. July payrolls grew 73,000, but this now follows two months of near-zero gains. The White House was not amused, and the head of the Bureau of Labor Statistics was fired. Ten-year Treasury yields rallied to 4.2%.
What is going on? Slow growth. First-half US GDP growth averaged about 1.5%, and we may get more of the same, in our view. Labor supply growth is stalling, as net migration has been curtailed. Payrolls grew by 1.5 million over the past year, for an average of 125,000 per month. If we stop creating new establishment jobs, that will be a major negative development. That leaves only productivity as a growth driver. Output per hour has been slowing for a year and was 1.3% year-on-year (YoY)in Q1 2025. We expect a slightly better Q2 result, but not much.
Inflation looks sticky, in our view: the core personal consumption expenditure price index, the Fed’s preferred measure of inflation, has been stuck at about 2.8% YoY, for a year, while average hourly earnings, i.e., wage inflation, is a point higher at 3.8%. The 1% gap between these is a separate measure of effective productivity. AI may be boosting Magnificent Seven share prices, but not the US economy.
Fiscal policy probably won’t speed things up much, as 17%-18% tariffs are a $300bn sales tax hike, which we believe will likely offset any business tax cuts from the budget. We see the deficit as a share of GDP stuck at about 6.5% of GDP next year.
Our Strategy
Even though inflation looks stuck, we see future growth scares leading to policy rate cuts beginning in September. These should be enough to keep GDP running at 1.5%-2.0% for the next year, but not enough to shrink Federal deficits. The net result may be a range-bound Treasury yield, and a weaker dollar, as markets come to terms with the increasingly narrow base of US exceptionalism. We see broader grounds for optimism in Europe, Asia, and emerging markets.
Important Disclosures
Key Risks: Credit Risk, Issuer Risk, Interest Rate Risk, Liquidity Risk, Non-US Securities Risk, Currency Risk, Derivatives Risk, Leverage Risk, Counterparty Risk, Prepayment Risk and Extension Risk. Investing involves risk including possible loss of principal.
This marketing communication is provided for informational purposes only and should not be construed as investment advice. Any opinions or forecasts contained herein reflect the subjective judgments and assumptions of the authors only and do not necessarily reflect the views of Loomis, Sayles & Company, L.P. Investment recommendations may be inconsistent with these opinions. There is no assurance that developments will transpire as forecasted and actual results will be different. Data and analysis does not represent the actual or expected future performance of any investment product. Information, including that obtained from outside sources, is believed to be correct, but Loomis Sayles cannot guarantee its accuracy. This information is subject to change at any time without notice. Market conditions are extremely fluid and change frequently.
Market conditions are extremely fluid and change frequently.
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Any investment that has the possibility for profits also has the possibility of losses, including the loss of principal.
There is no guarantee that the investment objective will be realized or that the strategy will generate positive or excess return.
Past market experience is no guarantee of future results.
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July 2025
Congress may have just enacted the last significant Federal tax cut in my lifetime, maybe even in the lifetime of my younger colleagues.
June 2025
As we monitor how current US tariff policies are affecting the markets, we have not seen a significant spike in inflation within the Consumer Price Index (CPI).
May 2025
Can the US economy and asset markets remain exceptional even if they are undependable?
April 2025
It is a cliché of military history that it is easier to start a war than to end one, and the war one starts may not be the war one gets. We will see if the same themes apply to trade wars in coming months, but a trade war analysis is not the only lens by which Liberation Day can be viewed.
March 2025
Global risk markets are responding to US White House policies and have moved pricing due to changes in federal government employment, tariff, and foreign policies. The result is a repricing of rearmament prospects and top line growth in the Eurozone and growth risks in the US.
February 2025
After a busy couple of weeks of fiscal and trade policy executive orders from the new White House administration.