Sharing her latest analysis of data and an overview of asset allocation strategy, Emma Moriarty, Portfolio Manager, CG Asset Management, commented:
“Our portfolio positioning remains defensive. Over the past month, we have reduced our target weighting in risk assets to 30%, due to rich US equity market valuations and a weakened outlook for UK corporate profits following the October budget. Index-linked bonds, the majority of which is held in TIPS, constitute 32% of the multi-asset portfolios. The remainder is held in dry powder (cash, T-Bills and short-dated UK corporate credit).
“In light of the stronger economic performance and higher trend growth rate of the US economy relative to its competitors, we remain constructive on the US dollar. The CG multi-asset funds have continued to increase their weighting to USD up to 26%. Across the Atlantic, market focus is beginning to turn to the final FOMC meeting for this year, which will take place next week and bring with it a new Dot Plot. The latest labour market data showed a combination of resilient wage growth (4%, which doesn’t appear consistent with a 2% inflation target) but rising unemployment.
- “In a similar vein to the wage growth data, last Wednesday’s CPI print did not show further progress towards disinflation, with headline CPI ticking back up to 2.7% YoY and core CPI at 3.3% YoY. Despite the evidence to suggest continued inflationary pressure, the FOMC’s recent change of emphasis – away from prioritising inflation and towards defending against a further deterioration in the labour market – will likely emphasise the developments in unemployment to justify making the additional 25bp rate cut priced in by OIS and Fed Funds Futures markets.
- “But as the FOMC rushes to make rate cuts, the elephant in the room is becoming more visible. Jerome Powell has been repeatedly asked whether the economic policies of the incoming Trump administration are accounted for in the FOMC’s policymaking. So far Powell has emphatically said no, on the basis that it would be adding too much speculation to the forecasts. However, failing to incorporate some estimate of the impact of tariffs risks conditioning monetary policy on a materially lower path of forecast inflation than is likely to be the case.
- “Since last month, the most important development for the direction of US economic policy is the Trump administration’s selection of Scott Bessent for Treasury Secretary. While this was welcomed by US Treasury markets as the selection of “the adult in the room”, who might be able to soften the implementation of some of Trump’s more aggressive plans, his “3-3-3” policy (3% real growth, 3% fiscal deficit, 3 million barrels of oil production per day) shows aggression of a different nature. If achieved, a policy of 3% real growth and a 3% deficit would stabilise the US fiscal position. But even though Bessent has allowed for a multi-year adjustment period, reducing the deficit from its current 6.5% to 3% requires a major fiscal contraction. This suggests that there is potential for a more uncomfortable economic adjustment than the Bessent relief rally implied.”
