As the dust settles after the rout in Argentina debt markets it appears some of the largest Emerging Market funds took the brunt of the collapse with returns dropping up to 3.5% on the day. This leaves many with a less than 1% return for the year to date. The question now; are they a buy at this juncture, we think not. The outlook for a US recession is increasing in probability and if that is an occurrence over the coming twelve to eighteen months the last place we think you want to be is in lower-rated assets as the spread widening that may occur could be punishing, hence our stance in longer maturity higher-rated assets.
Yesterday was all about economic data as US CPI came in a little higher than expectations and the German ZEW index came in at disastrous levels.
On the US CPI both overall and ex-food and energy indices came in up 0.3% with firmness broad-based although there is thought to be some impact from the tariffs in the data. The headline rate moved up from 1.6% to 1.8% YoY and the core rate up to 2.2% from 2.1%. Energy prices were strong as gasoline jumped by 2.5% but there was also surprising strength in used car pricing, apparel and medical care. We continue to monitor the data as our long-duration positioning is reliant on a relatively low inflationary outlook.
So to the German ZEW report…..Ouch. The current situation index came in at -13.5 from the -6.3 expected, bad enough but the expectations index which was expected at a lowly -28 came in at -44.1 from the prior months reading of -24.5. Now call us old fashioned if you want, but does Germany really need a hard Brexit, on top of the very obvious weakness in the manufacturing sector, we think not. Could be Boris’s timing is spot on.