Anders Faergemann

Welcome to this PineBridge podcast, where today we will be discussing current economic conditions and how they align with our base case of stabilization in 2026. We'll also be reviewing this year's podcast series and see what lessons we can draw from them in terms of how to position within rates and FX coming into 2026. I'm Anders Faergemann, Head of Global Sovereigns and Economics. With me is Hani Redha, Head of Strategy and Research for Global Multi asset. So Hani, it's been a while since I heard an economic update from you. We still seem to have this data fog, and there are signs of growing divisions within the FMC and how to interpret these economic forces. But why don't you help us understand the relevant trends in the US economy?

Hani Redha

Sure, and there's not much to report, to be honest, at least not anything particularly reliable. We still have some reliability issues around the data right now, given the shutdown effects, and that's both in terms of the collection of the data itself, and in terms of timing, you know, with the shutdown and then the restart. It creates some distortions in the growth data as well. But overall, the picture hasn't really changed much. We still have a labor market that remains weak, although there's no signs of non- linearity at this stage and some signs of stabilization. Jobless claims  are still very stable, giving us at least some relief that there's nothing really sinister happening at this point, and inflation came in soft. 

But again, we don't think that's a fair reflection of what's going on. We do expect inflation to rise in Q1 So overall, I would say not much of a change on the economic front, but we will be getting much more clarity in the next few weeks and months.

Anders Faergemann

Thanks Hani. That's very clear. So, it sounds like stabilization is still our base case. As I mentioned earlier, instead of just looking ahead, as we normally do, I want us to review our market and macro calls and see what we can learn from the discussions we had in 2025. Are you ready for that, Hani? 

Let's do this. Okay, so I've prepared a list of five of our most discussed and relevant themes. It's entirely subjective and could easily have doubled the number of topics. Let's make a countdown from five to one and get your views on each theme or topic. 

So. coming in at number five, I have selected “soft landing”. So, if you recall, in our first podcast in February, we outlined our base case for the 12 months ahead, emphasizing soft landing as our central scenario. We were all too aware of the short-term noise with the tariff situation. And I, for one, underestimated Trump's intentions, even so I like the way you outlined our three-month versus 12-month scenarios as “uncertainty by design”. 

So how do you think we fared on that particular theme?

Hani Redha

This was a year of really outsized policy impulses hitting the macro tape. And, you know, for us to kind of end up in a soft landing was far from obvious. With April being the major test, I think we did fairly well to stick to our guns that what we were seeing was not enough to really cause an end to the economic cycle volatility, for sure, but not enough to derail what was looking like a pretty robust setup, all things considered. 

And what I take away in contrast to that, I'd be very surprised if 2026 involved this level of volatility and policy uncertainty. I hope so at least. And you know, if anything we're going to see in our base case, some degree of re-acceleration of growth at the global level, and so that should make things more stable. If anything, I think there's going to be more visibility in 2026 compared to what we were facing in 25 but the main uncertainty to me revolves around technology and how the capex itself and the impact of that technology will impact both the macro and the market.

Anders Faergemann

Interesting, and I'm sure we'll come back to to that theme later on. You don't know the countdown here, but I agree with you in terms of the soft landing scenario, it turned out to be not too hot, not too cold. It really became a Goldilocks environment in the second half of the year. And as you allude to, we have recalibrated the global macro scenarios, and now we end up with stabilization into 2026.

Well back to the top five list of themes for 2025. So at number four, risk assets. So Hani, your timing on getting back into risk after Liberation Day in April was quite remarkable. But, we also have other examples in the podcast series of us touting credit risk. 

And when Rob was our guest in April, he talked about capped volatility, I thought that was very thoughtful and insightful information. At the time, we even titled our May podcast “Beyond Peak Uncertainty”. And in June, I mentioned the low volatility carry regime, despite all the economic and geopolitical uncertainty. And that's, I would say, is exactly what has been developing in the second half. We've seen this low volatility theme carry on. So, what are your thoughts on risk and risk assets, and how is it relevant for how we should position into 2026?

Hani Redha

The policy uncertainty clearly created a tricky environment to navigate in risk, but overall, again, that resilience is what guided us to kind of stay the course in terms of risk exposure for most of the year. And I think that next year looks like it's going to be an okay year for us, for risk assets as well. As I said, you know, in our base case, expecting re-acceleration, lower rates, lower inflation and ongoing capex should be pretty positive for risk assets as a backdrop. The risks to that, you know, are the Fed's challenge, obviously, is this tightrope to walk to avoid recession on one end and overheating on the other. So, it is going to be challenging for that reason, and either of those risks could materialize. 

But I think the base case looks pretty decent, and then I'd say that the word of the year, probably for 2025 was “bubble”, a lot of “bubble talk”. We'll see if that continues in 26 but in multi asset, our sense had been that this was being exaggerated, and that valuations were actually very well anchored. So overall, we think that it's going to be a pretty decent year for risk, but with probably a few, let's say, unexpected twists along the way.

Anders Faergemann

I like that. Well, certainly from my perspective, we're looking at carry-to-vol as a big theme for 2026. I like what you mentioned early doors around the economic assessment that you're not looking for any non-linear moves, especially in unemployment. I think that would be important for risk and risk assets in 2026 Okay, let's move on. Number three, I've picked the topic that's very relevant to everything you and your team do on a daily basis, but it also brings up the whole discussion around cyclical and structural, which I know you like. So, here I'm thinking of AI productivity and US exceptionalism. So I know it's a very broad topic, but how relevant were these factors to markets from a multi-asset perspective in 2025 and what are your predictions for 2026?

Hani Redha

This is one where we've been quite “non-consensus”. There was almost an exodus out of US assets early into 2025. I still hear a lot of people touting the strengths outside of the US, but to us, the US remains the center of innovation and more importantly, the adoption of these new technologies that are becoming available. There's a lot of de-regulation on the way as well. So, we think the US is going to continue to lead, but it's good to see the rest of the world also kind of turning the corner as well and putting the trade uncertainty behind us. 

So, I think the overall backdrop is good, but to us, the US is going to lead the way and on productivity. This is a theme, as you know, and as we've talked about in our other forums, where we look out over multiple years in our capital market line process and a lot of deep work there, even prior to the pandemic, it had signaled to us that there was a shift happening in productivity, and this will be a defining characteristic of this regime that we're in now with a very different playbook, and I think we'll be flushing that out as we go through the year, but it's generally one which is, you know, promising for this inflationary growth. A lot of skepticism surrounds that, but we think it can definitely happen. We've seen it in the past, and we see the ingredients falling into place for a pretty unique period ahead of us, right?

Anders Faergemann

And I guess that plays into our dollar view, and I'm sure we'll come back to that later. And you mentioned the fears around asset rotation earlier in the year, again, that didn't seem to come to fruition, and we've seen some dollar stability, at least in the second half of the year. 

Okay, so we've arrived at the runner up in our topics of the year list, the Fed and the Fed's reaction function. So it won't be a surprise to you, Hani, that the Fed was top of mind all year. We talked about Fed independence. 

We spoke about this shadow Fed chair and the prospects for a new one. We mentioned Kevin Hassett as a front runner in July, but we also spotted Powell's pivot towards “a shortfalls based approach” in the Jackson Hole symposium, which paved the way for a more front loaded Fed, which we saw from September onwards. 

However, the theme I want to come back to here is we kept coming back to it, was what the Fed should do versus what the Fed will do. And Hani, you spotted this theme very early on and highlighted its importance, especially in context of the impact on the two-year rate and the impact implications for FX. 

So. the question is, in your mind, how did it play out, and how can we draw lessons for 2026?

Hani Redha

This was a particularly interesting theme, because, again, we're in a very unique situation now where we're questioning the Fed's independence potentially as we get a new Fed chair. I think overall, our assessment has been that to some extent, that's been exaggerated. We don't think that the institution is coming crashing down in terms of independence, although we do think there'll be less cuts than the market expects, the margin of difference has shrunk. 

And I would say that for me, one of the key things that led to this very big difference between what the Fed should do versus what they will do, was something that hadn't been quite appreciated, and that was the impact of immigration as one of the policies that really changed significantly in 2025 - that reduction in immigration flows meant that the actual equilibrium level of rates, or the appropriate level of rates was actually a lot lower and so the what the Fed should do actually wasn't, in the end, that different to what the Fed would do, because in both cases, it looked like it was justifiable for the Fed to continue with its cutting cycle. 

So I think that the framework was very helpful for us to differentiate between these two things. But as things have played out, I've found that what they should do has ended up being close to what they will do anyway.

Anders Faergemann

I like that, and you mentioned immigration. There were other themes that I could have brought up as number one theme for the year - policy makes data reliability, the fiscal view, even the basement trade. And maybe that'll come up in future years.

But number one topic for discussion in our 2025 podcast, drum roll, please. US Rates, surprise, surprise! Rates and FX, where the main topic for the year as a whole, is Rates. Who would have thought so? I reviewed all our podcasts and recommendations for the year. So, to give you a quick summary of our calls of on US rates from listening, we were on the lower rate trajectory from an early stage, and we captured the low volatility environment pretty quickly too. But sequencing is important to understand the context of the recommendations. 

So, if we go back to our first podcast in February, we flagged the room for US yields to move lower over 12 months, in line with our soft-landing scenario. We highlighted, however, that the short-term uncertainty and residual seasonality could drive yields higher temporarily, but there would be the opportunity to add duration, and that came to fruition. I think that was a good example of the sequencing that we're also talking about now for 2026. 

We also highlighted that 2024 was a year of elevated rates volatility, and so we could potentially see lower volatility in 2025. We had to wait for that to come, to come into the marketplace. But if you look at the year as a whole, we were actually in a pretty tight range from February onwards. So, the 10-year rate, on a weekly close basis, has been trading between 4% and four and a half percent, and since September, we've been in an even narrower range of four to four and a quarter percent. In May, we had a big debate within the team on whether we would hit 4% or 5% first in 10-year rates. 

The conclusion was 4%, which was a surprise at the time, since the market was trading above four and a half or flirted with that level, and getting very concerned about three core threats to the long end, namely, the fiscal situation, inflation expectations becoming anchored and the institutional framework, including Fed independence. 

Since then, as we know, rates rallied, and we did hit 4% in September, which is the time we monetize that view, and we've then lifted our 12-month forecast to four and a quarter. As part of that call, we talked a lot about the tug of war in the 10-year between the front end and the long end, and that is an ongoing theme. 

But more recently, we've emphasized how any rates vol is likely to be centered around the shape of the curve rather than the actual level. So, without the intro to the question Hani over to you, in terms of what are your key takeaways on the rate side, and how can we use this year's experience to outline the rates trajectory for 2026?

Hani Redha

Sure, and I think you know that structural versus cyclical approach was very helpful, as we recognize that on a structural basis, yes, there were some concerns around the sustainability of US fiscal policy, the level of Federal debt, and that led to some of those flare ups that we saw in yields, but I give you a lot of credit for keeping us anchored to both the cyclical and the structural and that's not a trade to have on all the time, and that there was going to be ongoing concerns, in a kind of slow burn fashion, about the fiscal situation.

But that cyclically, we were expecting growth to slow, inflation to normalize, and that was anchoring us towards lower yields, around 4% and I think we did well to take that off when we got there and recognize the structural, that we're not in the same kind of low rate, low inflation environment, that we were in, you know, pre pandemic and that we are in a different regime. 

So, the structural means that yields are anchored at a somewhat higher level than they were in the previous regime. But cyclically, we had to recognize that normalization was underway and that's what led us towards lower yields all through the year. 

In 26, I think that the rate outlook is going to be a corollary of the policy environment that we just discussed. And so the lower volatility that we expect, the more visibility, the lack of large policy impulses, like we saw in 25, means that the volatility of rates should remain low and will be largely range bound. I think in this environment, it'll be about picking out the high and the low ends of the range and being a bit more tactical about how to take advantage and generate alpha from duration, rather than having very strong directional views. That's the difference I see between 26 and 25.

Anders Faergemann

That's fantastic and that chimes very well with the way I look at the world. It's been a great experience to go through the pods with you Hani. I thought there were three factors that helped us all the way through 2025. The way I see it, we had the framework of our global macro scenarios as a number one pillar and the second was the timing. Timing the turns was not always easy. I thought we did well in terms of the rates story. I thought your calls on the risk assessment were well taken, but obviously we had some howlers as well. We got a bit too optimistic on the dollar in February, but we course corrected in May, and we've been one of the few dollar bulls in the second half of the year, where we've seen more stability, admittedly, but that's been non-consensus. 

And then finally, I'd say this collaboration with Multi Asset and the Sovereigns’ team has been extraordinary, and they will not have achieved the same without your insights. I know you won't blow your own trumpet, but that's really how I feel, it's very unique. So, altogether we always aim to be forward looking. And this is where sequencing arrives. And I think that could be the buzzword for 2026. You said 2025 was a year of bubble. I think sequencing will be our dominant word for 2026, So thanks Hani and any other comments before I wrap up?

Hani Redha

No, all good. And there's great partnership, great teamwork, and let's hope for a slightly less eventful year ahead.

Anders Faergemann

Yeah, I know that's what you've been talking about. Let's pick swings. We'll just go for ones here, but yeah, looking ahead, I'll mention three core views coming into 2026, number one growth acceleration in the US really, from March onwards, but within a stable global macro environment. So, rate of change should boost the dollar. That's one of our big calls. 

Second rates, higher in Q1 but lower for the rest of the year. Really a repeat of what we've seen in previous years. And this is where the sequencing comes in. And then the third call is continuation of this low vol carry regime, until proven wrong, and there will be some wobbles, but with the growth acceleration, and if we can avoid recession, I think this is good for credit, even at current valuations, and the US dollar should benefit from all of this beyond current market expectations. 

So, sequencing will be critical, but that's our call. So. thank you, Hani. That's all very clear and actionable by treasuries. When you see levels above four and a quarter in the 10-year, think 5% in the 30-year is a big technical level, plus continue buying dollars on dips. With that, we'll be back soon again with our next update. 

For more information, please visit PineBridge.com. Till next time. Thanks for listening…

ENDS