Michael Buchanan

In its most recent analysis, Western Asset, part of the Franklin Templeton group, highlights its base case calls for further weakening of global growth and further declines in inflation with a greater emphasis on services disinflation.

“Goods price inflation is running modestly below pre-pandemic levels, but with ongoing deflationary pressures from Asia, it’s hard to see a meaningful persistent uptick going forward. Services inflation remains elevated, but wage pressures are abating as job markets soften and service sector demand is slowing. Headline inflation is close to target in most advanced economies, which has allowed central banks to reduce policy rates as their inflation concerns lessen while growth concerns rise,” notes Western Asset chief investment officer Michael Buchanan.

Growth is slowing in the US and remains moribund in the rest of the world. At the same time lower policy rates and the recent Chinese stimulus package should lessen recessionary fears.

“We remain overweight to interest-rate duration, but less so as rates have fallen, and markets have moved closer to our base case. Spread sectors have performed well and we expect this to continue if the downward growth trajectory remains gentle and services disinflation continues. However, valuations have less yield advantage now to offset potential macro and political risks going forward. Emerging market (EM) debt appears to remain attractive fundamentally, but both internal and external political risks have hampered performance in some countries.”

“In Australia progress on inflation remains slow, but there are signs of progress with the labour market loosening and wages growth rolling over. The RBA remains hawkish to encourage restraint, but we expect the conditions to allow them to start a shallow easing cycle in early 2025. Growth is slow, but tax cuts from mid-year will help to rebuild buffers.”

Read the report.

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