The first four months of 2022 have been one of the worst starts of the year for fixed income total returns, driven largely by a dramatic rise in Treasury rates. Equity markets have also performed poorly as corporate earnings are pressured by rising labor and input costs. Three primary risks emerged during the first quarter: rapidly rising inflation and accelerated Federal Reserve (Fed) tightening, the ongoing war in Ukraine and China’s COVID lockdowns. As a result, many forecasters have increased their recession probabilities in 2023 and 2024. Despite this backdrop, credit spreads across both corporate and structured asset classes have remained resilient. Spreads reflect a slower growth environment but are well below what would be implied by a near-term recession. Markets are priced as though the Fed will navigate the current challenges and avoid a hard landing.
The upcoming Fed meeting on Wednesday and the April employment report released on Friday will highlight the week’s economic calendar. With regard to the latter, consensus forecasts call for another round of solid employment data. A moderation in job growth might be viewed positively if it serves to cool wage inflation concerns, and suggest the Fed will not have to push as aggressively as currently forecasted.
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