Three Themes Investors Need to Know

Text on screen: PIMCO

Footer Overlay: PIMCO provides services only to qualified institutions, financial intermediaries and institutional investors. This is not an offer to any person in any jurisdiction where unlawful or unauthorized.

Text on screen: Ken Chambers Fixed Income Strategist

Kenneth Chambers: Back in October, we talked about the central banks, the need to fight against inflation, and it was going to make recession more likely. And then at the start of this year, we detailed this idea that inflation was likely to moderate across many developed markets. Central banks were going to remain restrictive at these policy rates, but a shallow recession a bit farther in the future. Maybe could you share some color around how the events of the first couple of months have impacted our outlook?

Text on screen: Tiffany Wilding, Economist

Tiffany Wilding: Sure. Everything was actually looking quite good. Over the turn of the year, we saw much more resilient economic data. Inflation was even looking a bit stickier. But of course, things turned around very quickly.  We saw this banking sector stress that happened in mid-March.

FULL PAGE GRAPHIC: TITLE – Fractured Markets, Strong Bonds: Macro outlook. The graphic shows Three Economic Themes Through 2023 Across Developed Markets (DM). The circle on the left shows an hourglass image with the text: Potentially deeper recession, sooner. The circle in the middle shows an image of a government building with the text: Central banks: Less tightening, but slower easing. The circle on the right shows a weighing scale image and the text: Fiscal policy and regulation: Focus on moral hazard?

So overall, just taking a step back given these events, we would just highlight three things that we are really focused on or three themes about the outlook.

 the first is that the banking sector stress has resulted in a higher risk of a deeper recession, maybe sooner.

There's various academic studies that suggest when banks perceive a higher cost of capital, or a cost of capital is rising, then they actually pull back on their lending growth. And we do think we are seeing a rising cost of capital in the banking sector.

So, all of that means that we are probably going to see lending growth slow and slower lending growth is just going to slow the economy.

FULL PAGE GRAPHIC: TITLE – Fractured Markets, Strong Bonds: Macro outlook. The graphic shows Three Economic Themes Through 2023 Across Developed Markets (DM). The circle on the left shows an hourglass image with the text: Potentially deeper recession, sooner. The circle in the middle shows an image of a government building with the text: Central banks: Less tightening, but slower easing. The circle on the right shows a weighing scale image and the text: Fiscal policy and regulation: Focus on moral hazard?

the second thing is that inflation is still elevated. So central banks, they're going to be slower to ease than they have in the past.

Going from four to two, again, it's going to take more time. And part of the reason for that is just labor markets are still very strong, or at least they are coming into this period with relative strength and wage inflation or the wage level adjustment has just taken longer to happen and that's because it's just less flexible than prices. So you're going to have wages that are continuing to catch up with the price level adjustment that we've had. And that's just going to mean that wage inflation looks elevated for longer.

Images on screen: The Federal Reserve building

That means that probably the Federal Reserve, as a result of tighter credit conditions within banks, maybe they don't need to tighten as much because of this. But there might not be as fast or as aggressive in terms of easing either just because they're still having to deal with elevated inflation risks.

Then in terms of actually starting that normalization path back to neutral in the past we've said maybe that starts around the end of this year and the brunt of that happens in 2024. And I think that's still reasonable.

FULL PAGE GRAPHIC: TITLE – Fractured Markets, Strong Bonds: Macro outlook. The graphic shows Three Economic Themes Through 2023 Across Developed Markets (DM). The circle on the left shows an hourglass image with the text: Potentially deeper recession, sooner. The circle in the middle shows an image of a government building with the text: Central banks: Less tightening, but slower easing. The circle on the right shows a weighing scale image and the text: Fiscal policy and regulation: Focus on moral hazard?

Just on the third theme, you're going to see that kind of behavior from governments as well. They're not going to preemptively ease and we're not going to see the type of aggressive response like we did to the pandemic.

So, the FDIC, the Fed, they still are able to invoke the so-called systemic risk exemption. When a bank does fail, they can come in ex-post and say we're going to guarantee all the deposits. But in terms of a blanket provision ahead of time, that would probably help with confidence, which is so important in these kinds of events. We just don't see that happening. And furthermore, on the regulatory side that could actually tighten in the coming quarters as a result of this.

Kenneth Chambers: Certainly, a lot going on from the macro front. What's your advice for investors today?

Tiffany Wilding: Sure, so I think lags with monetary policy, they are working. The tighter financial conditions are becoming more apparent. Recession risks have elevated. But obviously, this is a good environment for bonds.

Text on screen: For more insights and information, visit pimco.com

Text on screen: PIMCO

Disclaimer

All investments contain risk and may lose value. Investing in the bond market is subject to risks, including market, interest rate, issuer, credit, inflation risk, and liquidity risk. The value of most bonds and bond strategies are impacted by changes in interest rates. Bonds and bond strategies with longer durations tend to be more sensitive and volatile than those with shorter durations; bond prices generally fall as interest rates rise, and low interest rate environments increase this risk. Reductions in bond counterparty capacity may contribute to decreased market liquidity and increased price volatility. Bond investments may be worth more or less than the original cost when redeemed.

Statements concerning financial market trends or portfolio strategies are based on current market conditions, which will fluctuate. There is no guarantee that these investment strategies will work under all market conditions or are appropriate for all investors and each investor should evaluate their ability to invest for the long term, especially during periods of downturn in the market. Outlook and strategies are subject to change without notice.

This material contains the opinions of the manager and such opinions are subject to change without notice. This material has been distributed for informational purposes only and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.

PIMCO as a general matter provides services to qualified institutions, financial intermediaries and institutional investors. Individual investors should contact their own financial professional to determine the most appropriate investment options for their financial situation. This is not an offer to any person in any jurisdiction where unlawful or unauthorized. | Pacific Investment Management Company LLC, 650 Newport Center Drive, Newport Beach, CA 92660 is regulated by the United States Securities and Exchange Commission. | PIMCO Europe Ltd (Company No. 2604517, 11 Baker Street, London W1U 3AH, United Kingdom) is authorised and regulated by the Financial Conduct Authority (FCA) (12 Endeavour Square, London E20 1JN) in the UK. The services provided by PIMCO Europe Ltd are not available to retail investors, who should not rely on this communication but contact their financial adviser. | PIMCO Europe GmbH (Company No. 192083, Seidlstr. 24-24a, 80335 Munich, Germany), PIMCO Europe GmbH Italian Branch (Company No. 10005170963, Corso Vittorio Emanuele II, 37/Piano 5, 20122 Milano, Italy), PIMCO Europe GmbH Irish Branch (Company No. 909462, 57B Harcourt Street Dublin D02 F721, Ireland), PIMCO Europe GmbH UK Branch (Company No. FC037712, 11 Baker Street, London W1U 3AH, UK), PIMCO Europe GmbH Spanish Branch (N.I.F. W2765338E, Paseo de la Castellana 43, Oficina 05-111, 28046 Madrid, Spain) and PIMCO Europe GmbH French Branch (Company No. 918745621 R.C.S. Paris, 50–52 Boulevard Haussmann, 75009 Paris, France) are authorised and regulated by the German Federal Financial Supervisory Authority (BaFin) (Marie- Curie-Str. 24-28, 60439 Frankfurt am Main) in Germany in accordance with Section 15 of the German Securities Institutions Act (WpIG). The Italian Branch, Irish Branch, UK Branch, Spanish Branch and French Branch are additionally supervised by: (1) Italian Branch: the Commissione Nazionale per le Società e la Borsa (CONSOB) (Giovanni Battista Martini, 3 - 00198 Rome) in accordance with Article 27 of the Italian Consolidated Financial Act; (2) Irish Branch: the Central Bank of Ireland (New Wapping Street, North Wall Quay, Dublin 1 D01 F7X3) in accordance with Regulation 43 of the European Union (Markets in Financial Instruments) Regulations 2017, as amended; (3) UK Branch: the Financial Conduct Authority (FCA) (12 Endeavour Square, London E20 1JN); (4) Spanish Branch: the Comisión Nacional del Mercado de Valores (CNMV) (Edison, 4, 28006 Madrid) in accordance with obligations stipulated in articles 168 and  203  to 224, as well as obligations contained in Tile V, Section I of the Law on the Securities Market (LSM) and in articles 111, 114 and 117 of Royal Decree 217/2008, respectively and (5) French Branch: ACPR/Banque de France (4 Place de Budapest, CS 92459, 75436 Paris Cedex 09) in accordance with Art. 35 of Directive 2014/65/EU on markets in financial instruments and under the surveillance of ACPR and AMF. The services provided by PIMCO Europe GmbH are available only to professional clients as defined in Section 67 para. 2 German Securities Trading Act (WpHG). They are not available to individual investors, who should not rely on this communication. | PIMCO (Schweiz) GmbH (registered in Switzerland, Company No. CH-020.4.038.582-2, Brandschenkestrasse 41 Zurich 8002, Switzerland). The services provided by PIMCO (Schweiz) GmbH are not available to retail investors, who should not rely on this communication but contact their financial adviser. | PIMCO Asia Pte Ltd (Registration No. 199804652K) is regulated by the Monetary Authority of Singapore as a holder of a capital markets services licence and an exempt financial adviser. The asset management services and investment products are not available to persons where provision of such services and products is unauthorised. | PIMCO Asia Limited is licensed by the Securities and Futures Commission for Types 1, 4 and 9 regulated activities under the Securities and Futures Ordinance. PIMCO Asia Limited is registered as a cross-border discretionary investment manager with the Financial Supervisory Commission of Korea (Registration No. 08-02-307). The asset management services and investment products are not available to persons where provision of such services and products is unauthorised. | PIMCO Investment Management (Shanghai) Limited Unit 3638-39, Phase II Shanghai IFC, 8 Century Avenue, Pilot Free Trade Zone, Shanghai, 200120, China (Unified social credit code: 91310115MA1K41MU72) is registered with Asset Management Association of China as Private Fund Manager (Registration No. P1071502, Type: Other) | PIMCO Australia Pty Ltd ABN 54 084 280 508, AFSL 246862. This publication has been prepared without taking into account the objectives, financial situation or needs of investors. Before making an investment decision, investors should obtain professional advice and consider whether the information contained herein is appropriate having regard to their objectives, financial situation and needs. | PIMCO Japan Ltd, Financial Instruments Business Registration Number is Director of Kanto Local Finance Bureau (Financial Instruments Firm) No. 382. PIMCO Japan Ltd is a member of Japan Investment Advisers Association, The Investment Trusts Association, Japan and Type II Financial Instruments Firms Association. All investments contain risk. There is no guarantee that the principal amount of the investment will be preserved, or that a certain return will be realized; the investment could suffer a loss. All profits and losses incur to the investor. The amounts, maximum amounts and calculation methodologies of each type of fee and expense and their total amounts will vary depending on the investment strategy, the status of investment performance, period of management and outstanding balance of assets and thus such fees and expenses cannot be set forth herein. | PIMCO Taiwan Limited is an independently operated and managed company. The reference number of business license of the company approved by the competent authority is (110) Jin Guan Tou Gu Xin Zi No. 020 . The registered address of the company is 40F., No.68, Sec. 5, Zhongxiao East Rd., Xinyi District, Taipei City 110, Taiwan (R.O.C.), and the telephone number is +886 2 8729-5500. | PIMCO Canada Corp. (199 Bay Street, Suite 2050, Commerce Court Station, P.O. Box 363, Toronto, ON, M5L 1G2) services and products may only be available in certain provinces or territories of Canada and only through dealers authorized for that purpose. | PIMCO Latin America Av. Brigadeiro Faria Lima 3477, Torre A, 5° andar São Paulo, Brazil 04538-133. | No part of this publication may be reproduced in any form, or referred to in any other publication, without express written permission. PIMCO is a trademark of Allianz Asset Management of America LLC in the United States and throughout the world. ©2023, PIMCO.

CMR2023-0410-2837302