Fidelity International: Expects the Federal Reserve still has 100 basis points of rate cut space this year, favorable for fixed income assets
Fidelity International fund manager Rick Patel stated that the U.S. labor market is weak, and he expects the Federal Reserve to have 100 basis points of room for rate cuts within the year, which will benefit fixed-income assets. He pointed out that overall inflation in the U.S. is currently above the Federal Reserve's target, and consumers are facing negative real income, which may put downward pressure on private consumption. He believes that U.S. Treasury bonds with maturities of 5 to 10 years are the most attractive, while corporate bonds have lower appeal. U.S. stock valuations are high, and fixed-income products can serve as a diversification tool
According to the Zhitong Finance APP, last Friday (September 5), the U.S. reported that non-farm payrolls increased by only 22,000, and the unemployment rate rose to near a four-year high. Fidelity International fund manager Rick Patel believes that the U.S. labor market has become weak, and the Federal Reserve is likely to cut interest rates, with a remaining potential of 100 basis points for cuts within the year, which is favorable for fixed income assets.
He admitted that overall inflation in the U.S. is currently above the Federal Reserve's target, with hiring and layoffs at very low levels, but in reality, it is very fragile, and a small change could worsen the labor market. He expects the Federal Reserve to have the opportunity to make significant interest rate cuts in the short term, with still 100 basis points of room for cuts within the year.
He analyzed that the factors leading to the slowdown in U.S. economic growth will continue in the coming months, with the health of U.S. consumers being the most concerning.
In the next few months, a rare situation will be observed, where U.S. consumers will face negative real income, meaning that the average wage growth of U.S. consumers will be lower than the average inflation level. This situation only occurred during the outbreak of the pandemic in 2021 and is expected to exert downward pressure on private consumption.
He believes that U.S. Treasury bonds with maturities of 5 to 10 years are currently the most attractive. As market concerns about the U.S. fiscal situation reach a peak, the rise in long-term bond yields has also made their valuations attractive. However, U.S. corporate bonds have relatively low attractiveness due to the narrow spread with government bonds, and if the economic growth period slows down more than expected, it will be unfavorable for the fundamentals of corporate bonds.
The U.S. has implemented reciprocal tariffs globally, and he stated that tariffs have affected some supply chains and demand, which may pose adverse factors to economic growth and employment prospects. If the number of layoffs continues to increase, it could be enough to worsen the labor market and exacerbate economic downturn risks.
Additionally, Rick Patel believes that U.S. stock valuations have become quite high, and defensiveness may not be as strong as before. He expects fixed income products to serve as an important tool for diversification during stock market adjustments
