Pacific Funds, June 2019

Informational commentary from Pacific Asset Management, manager of Pacific FundsSM Fixed-Income Funds.
 

As expected, the Federal Open Market Committee (FOMC) held the federal funds target rate range at 2.25‑2.50%. Fed officials tried to balance expectations, and pressure, from various areas to cut rates with a more patient approach to economic developments. Language changes relative to May were more pronounced, with “patient” being removed from the Fed’s statement (see below).
 

June 19, 2019 Statement May 1, 2019 Statement

“. . .economic activity is rising at a moderate rate.”

“. . .economic activity rose at a solid rate.
“Although growth of household spending appears to have picked up from earlier in the year, indicators of business fixed investment have been soft.” “Growth of household spending and business fixed investment slowed in the first quarter.”
“Market-based measures of inflation compensation have declined. “On balance, market-based measure of inflation compensation have remained low in recent months.
“In regard to economic activity, strong labor market conditions, and inflation near the Committee’s symmetric 2 percent objective as the most likely outcomes, but uncertainties about this outlook have increased. “In regard to economic activity, strong labor market conditions, and inflation near the Committee’s symmetric 2 percent objective as the most likely outcomes.”
“In light of these uncertainties. . .” “In light of global economic and financial developments. . .”
“. . .will closely monitor the implications of incoming information for the economic outlook and will act as appropriate to sustain the expansion, with a strong labor market and inflation near its symmetric 2 percent objective.” “. . .will be patient as it determines what future adjustments to the target range for the federal funds rate may be appropriate to support these outcomes.”

 

The Fed dot plot chart showed eight Fed forecasters projecting at least one-to-two rate cuts in 2019.  However, median projections did not move as nine members did not forecast lower fed funds rates in 2019. Median projections for 2020 and 2021 were revised lower:
 

Target Federal Funds Rate at Year-End

fomc-chart-1

Source: U.S. Federal Reserve. The “dot plot” is a statistical chart consisting of data points plotted on a simple scale. Each shaded circle indicates the value (rounded to the nearest 1/8 percentage point) of an individual Federal Open Market Committee member’s view, where each participant at that particular meeting thinks the fed funds rate should be at the end of the year for the current year, the next few years, and the longer run. Forecasts and projections are based on current market conditions and are subject to change without notice. Projections should not be considered a guarantee.
 

Other Projections:

  • GDP in 2020 was revised from 1.9% to 2.0%.  Long run expectations remained at 1.9%.
  • Unemployment was revised lower for 2019, 2020, 2021 and over the long run to 3.6%, 3.7%, 3.8% and 4.2%.
  • Inflation expectations for 2019 and 2020 were revised lower for Core personal consumption expenditures (PCE) and PCE, as Core PCE was revised to 1.8% and 1.9% and PCE was revised to 1.5% and 1.9%, as long run PCE remained the same at 2.0%.
  • Fed Funds Rate projections for 2020 and 2021 were revised lower from March, with 2020 showing a projection of 2.1% and 2021 at 2.4%, while the long run projection was lowered to 2.5%.

While markets may not have gotten the cut some expected, Fed guidance was well received.  The S&P 500 continued to march higher post meeting and press conference. Despite the median dot plot forecast not moving in 2019, Chairman Powell noted in his press conference that “a number of those who wrote down a flat rate path agree that the case for additional accommodation has strengthened since our May meeting”.  Futures currently imply a 100% chance of a rate cut in the July meeting and 66% chance that fed funds will be 50 basis points lower the end of the third quarter.1 Given the balanced risks within the economy and much anticipated G20 Summit, we believe the Fed was prudent in their decision to be patient.
 

1Bloomberg Finance L.P., 6/19/19.

Definitions 

Core personal consumption expenditures (PCE) price index is the Fed’s preferred measure of U.S. inflation, which measures the prices consumers pay for goods and services without the volatility caused by energy and food prices.

The S&P 500 index is a market capitalization-weighted index of 500 widely held stocks often used as a proxy for the U.S. stock market.

One basis point is equal to 0.01%.


Disclosures

This publication is provided by Pacific Funds. Pacific Funds refers to Pacific Funds Series Trust. This commentary reflects the views of the portfolio managers at Pacific Asset Management as of June 21, 2019, are based on current market conditions, and are subject to change without notice. These views represent the opinions of the portfolio managers and are presented for informational purposes only. These views should not be construed as investment advice, an endorsement of any security, mutual fund, sector, or index, the offer or sale of any investment, or to predict performance of any investment. Any forward-looking statements are not guaranteed. All materials are compiled from sources believed to be reliable, but accuracy cannot be guaranteed.

All investing involves risk, including the possible loss of the principal amount invested.

Pacific Life Insurance Company is the administrator for Pacific Funds. It is not a fiduciary and therefore does not give advice or make recommendations regarding insurance or investment products.

PLFA3

Pacific Life Fund Advisors LLC (PLFA), a wholly-owned subsidiary of Pacific Life, is the investment adviser to Pacific Funds. PLFA also does business under the name Pacific Asset Management and manages certain funds under that name.

Bloomberg Finance L.P. is unaffiliated with Pacific Life Insurance Company, Pacific Funds, their affiliates, their distributors, and representatives.