Weekly CIO commentary

A securitized solution for insecure times Saira Malik, CFA Chief Investment Officer

Bottom line up top On behalf of Nuveen’s Global The new norm: filling in the blanks, reading between the lines. Last week, Investment Committee Federal Reserve Chair Kevin Warsh offered markets few clues on the policy path ahead — a new standard operating procedure, and one investors are still getting As Nuveen’s Chief Investment used to. Warsh did, however, strike a notably hawkish tone while emphasizing Officer and leader of that the Fed’s “just the facts” policy statement was intentionally free from forward our Global Investment guidance. He also reiterated there is “no soft inflation target,” only 2%, and argued Committee, Saira drives that markets should focus on incoming data rather than trying to divine the Fed’s market and investment next move. Investors, he stated, should be “playing the ball, not the referee.” As for insights, delivers client asset the unusually public debate among committee members, Warsh described the three allocation views and brings dissents favoring a rate hike instead of the majority’s vote for a continued pause as a together the firm’s most healthy “family fight” that should ultimately produce better policy. senior investment leaders to deliver our best thinking and Last week’s economic data releases provided a mixed backdrop. Second-quarter U.S. actionable investment ideas. GDP came in at an annualized rate of +1.5%, below the consensus +2.1% forecast, In addition, she is a portfolio but that miss was mitigated by healthy underlying demand, as consumer spending manager for several key grew +3.2%. On the inflation front, the Personal Consumption Expenditures (PCE) investment strategies. Price Index for June showed further moderation, with the headline print of 3.7%, roughly in line with expectations and below May’s 4.1%.

Warsh has cautioned against declaring victory against inflation prematurely, arguing that the Fed’s credibility depends on durable price stability. Interestingly, while the Fed historically has preferred core PCE as its inflation barometer, Warsh favors a different gauge: the Dallas Fed Trimmed-Mean PCE. Unlike the headline CPI and PCE indexes, which can be subject to volatile moves in energy, food and travel prices, the trimmed-mean calculation removes the most extreme monthly swings, thereby reducing temporary noise and producing a smoother measure of underlying inflation. Over the past three years, this less-volatile measure has declined steadily but remains notably above the Fed’s 2% inflation target, suggesting that underlying pressures have eased more gradually than implied by the more familiar headline metrics (Figure 1). Although the trimmed-mean approach has merit as a statistical filter and analytical tool, the resulting data doesn’t necessarily represent the definitive measure of inflation. By stripping out the largest price movements each

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month, the data may mute genuine inflation shifts. Investors should therefore assess trimmed-mean inflation with a healthy skepticism, in our view.

Treasuries are telling their own story. Perhaps the most important signal last week came not from the Fed, but from the U.S. Treasury market. Despite another decision to leave the policy rate unchanged, both the 10- and 30-year Treasury yields remain elevated near multiyear highs. Long-term rates at these Although the levels increasingly suggest investors are demanding additional compensation for Fed remained on persistent above-target inflation, heavy Treasury issuance and doubts about the hold last week, Fed’s willingness to tighten policy further if inflation fails to moderate further. In other words, the bond market is flashing yellow as the Fed continues to take no the bond market action even as inflation remains uncomfortably warm. showed signs of impatience Figure 1 with the lack of The Fed’s search for a “Goldilocks” inflation metric action amid still- present inflation Year-over-year Headline CPI, Headline PCE and Trimmed-Mean PCE inflation (%) pressure. Headline CPI Headline…