The US economy grew faster than forecast in 2023 and 2024, defying consensus expectations. A surge in fiscal spending in the post-COVID period, a resilient job market and a rally in risk assets underpinned growth in the last two years, with the long-term nature of US mortgages helping cushion the impact of aggressive rate increases.
Can the US economy repeat the robust growth of the last two years again? While consensus estimates suggest that could be the case, we expect downward surprises as there are many areas of weakness, including cyclical sectors such as manufacturing and housing. Such sectors have been soft since the hiking cycle began and appear to be under pressure in the current environment of higher rates and higher costs.
GDP growth: excess of optimism?
Tepid labour market
While the job market remains strong, with relatively low unemployment, the conditions have softened over the past 12 to 18 months. The hiring pace has slowed significantly, and a large portion of the hiring is confined to the government, healthcare and private education sectors.
In contrast, cyclical sectors have been exhibiting an anaemic rate of employment growth. Additionally, classic metrics of labour market turnover such as the hiring rate or the quits rate give the picture of a labour market characterized by very low churn. Most Americans who want to be employed have a job but may find it challenging to find a new job if they lose the existing one. This leaves space for a more material increase in unemployment if layoffs were to accelerate for any reason.
Furthermore, with President Donald Trump’s administration focused on reining in spending, the public sector could start to see some material job losses soon. This would likely affect consumption. After several years of extremely robust demand and private spending, we continue to believe some deceleration might be warranted, especially when looking at the rise in delinquencies on consumer credit. Uncertainty on trade policy could also be a factor driving lower investment and lower hiring in the private sector in the US from here.
In recent weeks, bond markets have ramped up their expectations for further rate cuts by the US Federal Reserve. The markets are now pricing in three quarter point rate cuts instead of just one at the beginning of the year. The first few weeks of Trump’s presidency has been hectic and unsettling for the markets, with US 10-year bond yields falling about 70 basis points from a two-year peak of 4.80% and the S&P 500 eroding all its gains made after he was elected. The focus of the markets has been on the steep tariffs imposed on Mexico, Canada and China as well as the travails of Ukraine.
In Europe, weak data across PMIs, industrial production and sluggish consumption continue to push the European Central Bank (ECB) towards a faster cutting cycle compared to the Fed, although the German government’s plan to loosen its purse strings to increase defence spending has cast a shadow over the pace of reduction. In the UK, over the last part of 2024 markets had priced out most of the easing from the Bank of England (BOE), bringing yields on Gilts to levels not seen since 2008. We think such degree of tightening might be unsustainable in the long run for the UK economy. Confidence amongst businesses and consumers has nosedived since the infamous first budget of Rachel Reeves last year.
Inflation trajectory
Although inflation has slowed after peaking in 2022, it still remains a drag for the bond market and a concern for central bankers. However, we are optimistic about the path of inflation.
It’s also worth highlighting that a large component of US YoY CPI is still coming from highly lagged components of the basket such as shelter and auto insurance. For shelter, the adjustment process has been unexpectedly slow but looking at overall trends in new rental markets in the last 12 to 18 months, there’s been a normalization.
In recent weeks, market focus has shifted from actual data to expectations of new exogenous shocks coming especially from changes in US policy. Trump’s tariff policy is just once instance of how unpredictable and erratic US news flow could be in the next quarters.
Republicans have won such a large mandate also due to the discontent generated by the cost-of-living crisis seen under the previous administration and the Trump administration will try to avoid inducing new inflationary waves. We also believe that Treasury Secretary Scott Bessent will seek to rein in government spending, going by his recent remarks about the state of government finances.
Energy prices are another important factor that can help keep inflation in check. Trump and his staff have made sufficiently clear that the desired direction for oil prices should be lower. Whether this comes from increased production or more pressure on OPEC remains to be seen.
Government bonds are in favour
Given the above, we continue to see value in government bonds across developed markets, if anything as a powerful hedging tool in case of a more material and unexpected slowdown. US rates are still the core holding, but global ex-US rates and in particular UK and Australia look attractive as well, given structural weaknesses in these economies. Corporate credit continues to look expensive at this juncture, with credit spreads close to all time tights. As always, it’s very hard to exactly time the moment of material widening in spreads.
As such, given our long duration bias we still prefer to include some credit exposure across our portfolios as a diversifier. However, within such credit exposure we are very selective.
Strategy specific risks
- Share Class Hedging Risk - The share class hedging process can cause the value of investments to fall due to market movements, rebalancing considerations and, in extreme circumstances, default by the counterparty providing the hedging contract.
- Interest Rate Risk - The Strategy can invest in assets whose value is sensitive to changes in interest rates (for example bonds) meaning that the value of these investments may fluctuate significantly with movement in interest rates.e.g. the value of a bond tends to decrease when interest rates rise
- Pricing Risk - Price movements in financial assets mean the value of assets can fall as well as rise, with this risk typically amplified in more volatile market conditions.
- Contingent convertible bonds - The Strategy may invest in contingent convertible bonds. These instruments may experience material losses based on certain trigger events. Specifically these triggers may result in a partial or total loss of value, or the investments may be converted into equity, both of which are likely to entail significant losses.
- Credit Risk - The issuer of a bond or a similar investment within the Strategy may not pay income or repay capital to the Strategy when due.
- Derivative risk - the Strategy may use derivatives to reduce costs and/or the overall risk of the Strategy (this is also known as Efficient Portfolio Management or "EPM"). Derivatives involve a level of risk, however, for EPM they should not increase the overall riskiness of the Strategy.
- Liquidity Risk (general) - During difficult market conditions there may not be enough investors to buy and sell certain investments. This may have an impact on the value of the Strategy.
- Counterparty Default Risk - The risk of losses due to the default of a counterparty on a derivatives contract or a custodian that is safeguarding the Strategy's assets.
- Sub investment grade bonds - The Strategy may invest a significant portion of its assets in securities which are those rated below investment grade by a credit rating agency. They are considered to have a greater risk of loss of capital or failing to meet their income payment obligations than higher rated investment grade bonds.
- Charges from capital - Some or all of the Strategy’s charges are taken from capital. Should there not be sufficient capital growth in the Strategy this may cause capital erosion.
Il valore delle menti attive: il pensiero indipendente
Una caratteristica fondamentale dell’approccio di investimento di Jupiter è che evitiamo l’adozione di una view della casa, preferendo invece consentire ai nostri gestori specializzati di formulare le proprie opinioni sulla loro asset class. Di conseguenza, va notato che tutte le opinioni espresse, anche su questioni relative a considerazioni ambientali, sociali e di governance, sono quelle degli autori e possono differire dalle opinioni di altri professionisti degli investimenti Jupiter.
Important information
This document is intended for investment professionals* and is not for the use or benefit of other persons. This document is for informational purposes only and is not investment advice. Investment involves risk. Past performance is no guide to the future. You are advised to exercise caution. If you are in any doubt about any of the contents of this document, you should obtain independent professional advice. It is the responsibility of any person in possession of this document to inform themselves, and to observe, all applicable laws and regulations of relevant jurisdictions. Market and exchange rate movements can cause the value of an investment to fall as well as rise, and you may get back less than originally invested. The views expressed are those of the individuals mentioned at the time of writing, are not necessarily those of Jupiter as a whole, and may be subject to change. This is particularly true during periods of rapidly changing market circumstances. Every effort is made to ensure the accuracy of the information, but no assurance or warranties are given. Holding examples are for illustrative purposes only and are not a recommendation to buy or sell. Issued in the UK by Jupiter Asset Management Limited (JAM), registered address: The Zig Zag Building, 70 Victoria Street, London, SW1E 6SQ is authorised and regulated by the Financial Conduct Authority. Issued in the EU by Jupiter Asset Management International S.A. (JAMI), registered address: 5, Rue Heienhaff, Senningerberg L-1736, Luxembourg which is authorised and regulated by the Commission de Surveillance du Secteur Financier. No part of this document may be reproduced in any manner without the prior permission of JAM/JAMI/JAM HK. In Hong Kong, this document is issued by Jupiter Asset Management (Hong Kong) Limited. No responsibility can be accepted for any consequential loss from this information.
*In Hong Kong, investment professionals refer to Professional investors as defined under the Securities and Futures Ordinance (Cap. 571 of the Laws of Hong Kong) and in Singapore, institutional investors under Section 304 of the Securities and Futures Act, Chapter 289 of Singapore (the "SFA")