Macro Matters: Rate Capitulation
Which macroeconomic trends do we think matter the most? Read through the investment implications in this month’s issue of Macro Matters.
Key takeaways
Growth: The growth backdrop remains resilient, supported by fiscal spending and continued artificial intelligence (AI) investment. A key debate is increasingly around the sustainability of AI-driven capital expenditure and whether private sector investment can offset tightening policy settings. The U.S. remains the primary beneficiary of the AI buildout. Europe struggles with weak productivity overall and limited fiscal flexibility, while China is reliant on exports despite efforts to fulfill domestic demand.
Inflation: Inflation has remained a headwind, with the U.S. Consumer Price Index proving stubborn and European inflation continuing to move higher. However, inflation has yet to broaden across underlying components the way we saw in 2022, providing some comfort that additional policy tightening may be less extensive than the previous hiking cycle.
Rates: Large borrowing requirements, rebuilding term premia, and persistent inflation uncertainty continue to drive elevated bond market volatility. The sharp rise in developed market yields in September reflects investors becoming less willing to look through higher energy prices. With markets shifting from pricing modest policy adjustments to small hiking cycles, higher yields are beginning to create more attractive income opportunities.
Geopolitics: The geopolitical landscape remains one of the most important transmission mechanisms for markets. Beyond the immediate impact of conflicts, geopolitical developments continue to influence commodity prices, inflation expectations, supply chain decisions, and fiscal spending priorities.
Our economic outlook
The global economy continues to be characterized by resilience in recent activity but growing divergence beneath the surface. In the U.S., strong payrolls, consumer spending, and business activity surveys point to continued economic momentum. However, softer labor demand indicators and ongoing weakness in consumer sentiment suggest growth may not be as robust as headline Purchasing Managers’ Index data implies. We view the U.S. economy as slowing gradually from above-trend levels. At the same time, inflation remains stubborn. Recent upside surprises in both consumer and producer prices reinforced the Federal Reserve's (Fed’s) concerns around underlying inflation persistence. With policy rates now on the move and long-end rates doing some of the Fed’s job, we expect policymakers may prefer to remain on hold leading to the midterm elections and assess incoming data before considering any further adjustments later in the year.
More broadly, Europe remains caught between improving growth and resurgent inflation. Fiscal support and stronger activity indicators have helped growth stabilize, but inflation pressures and rising sovereign yields—particularly in countries such as France where the political backdrop is noisy—continue to tighten financial conditions. In China, economic activity has shown signs of stabilization, although we remain unconvinced that current policy measures will generate a durable recovery in domestic demand.
Prospective changes to asset allocation
- Equities
Risk appetite remains constrained by high real yields and continued geopolitical uncertainty. Strength in earnings expectations has helped disguise a modest re-rating in 12-month forward price/earnings multiples. We continue to retain a positive view on broad-based U.S. equities and eurozone equities with a strong valuation tailwind. In Japan, we refined our view for more “robust” allocations in the financials sector. - Fixed income
Real yields are starting to look attractive, but we see no immediate monetary or fiscal catalyst on the horizon to push nominal yields lower. We have been underweight U.S. duration, particularly in the long end of the curve. As for the rest of the developed market, we have been neutral but see the latest capitulation of bond markets as starting to push up against an attractive entry point. - Commodities and foreign exchange
We continue to favor commodities while broadening the opportunity set. In energy, we continue to prefer relative value over directional exposure, given persistent geopolitical noise. We like industrial metals and retain a modest overweight to agricultural commodities as underlying fundamentals soften. Within currencies, we remain positive on select economies supported by favorable growth dynamics, orthodox monetary policy, and attractive entry levels.
Multi-asset allocation views
These multi-asset views reflect tilts to our strategic asset allocation models and are based on a 6- to 12-month time horizon, driven by both quantitative and fundamental research.
+ (Overweight on overall asset class)
= (Neutral on overall asset class)
– (Underweight on overall asset class)
Forward investment implications
| Equities |
Sector-specific commentary | |
| Overall: | We favor a barbell approach, blending quality and sentiment as real yields continue to act as a headwind for risk appetite. | |
| EM | We remain selectively positive in technology-sensitive areas. | |
| Eurozone | We have shifted toward a positive view on the eurozone equity market, with a valuation tailwind. | |
| Japan | We are beginning to shift exposure toward more defensive Japanese sectors such as financials. | |
| U.S. | We prefer broad-based U.S. equity exposure. | |
| Fixed income |
Sector-specific commentary | |
| Overall: | We avoid the long end of interest rate curves in the U.S. while we selectively like European bonds. | |
| U.S. | We prefer the intermediate part of the curve that is less sensitive to growth and inflation revisions but we continue to remain underweight the long end. | |
| Eurozone | In our view, eurozone bonds toward the front of the curve have a tailwind from overly hawkish monetary policy guidance. | |
| Japan | We shifted to neutral exposure on Japanese government bonds. | |
| EM | Over the medium term, we continue to favor EM debt with a significant carry cushion and orthodox monetary policy. | |
| Currencies (FX) | Sector-specific commentary | |
| USD | The U.S. dollar continues to remain a strong portfolio diversifier and looks attractive versus select developed markets. | |
| EUR | Despite the repricing of interest rates to rate hikes, we now expect the euro to be under pressure from low growth. | |
| EM |
We remain selectively positive on high-growth, low-inflation emerging market currencies. |
|
| Commodities | Sector-specific commentary | |
| Oil | We continue to manage energy exposure fluidly, having moved from directional exposures to relative value exposure across the curve. | |
| Precious metals | We are neutral on precious metals and lean toward continued tactical management of this exposure. | |
| Industrial metals | We continue to manage this exposure tactically. We are positive over the medium term but see near-term headwinds for metals. | |
| Agriculture |
We remain positive on agriculture, seeing several idiosyncratic risks on the horizon. |
|
Common questions about asset allocation and macro insights from Allspring
- Why is asset allocation so important for long-term investors?
Asset allocation is one of the primary drivers of long-term investment outcomes for both advisors and investors. From our perspective, it determines how portfolios balance growth potential with risk management across different economic environments. We believe a well-constructed asset allocation anchors portfolios through cycles of growth, inflation, tightening, and recession, helping investors stay invested and aligned with their objectives. Connect with us to see if our insights align with your goals.
- How does macroeconomic analysis influence asset allocation decisions?
Our monthly Macro Matters commentary focuses on identifying the economic forces influencing markets at each state of the cycle, including growth momentum, inflation dynamics, monetary policy, and geopolitics. These factors shape relative opportunities and risks across asset classes. We use macro analysis to frame what we believe are plausible investment implications and to develop multi-asset views on risk/reward characteristics that inform strategic asset allocation decisions. Contact our team to discuss implications for your model portfolios.
- Should investors change their asset allocation frequently based on the news?
In our view, asset allocation should evolve but not react impulsively. We differentiate between strategic asset allocation, which reflects long-term goals and constraints, and tactical moves, which may reflect shorter-term macroeconomic and market conditions. Our monthly commentary helps investors assess when small, incremental adjustments may be appropriate while avoiding the pitfalls of chasing headlines or attempting to time markets.
- How do rising or falling interest rates affect asset allocation?
Interest rate environments play an important role in shaping both equity and fixed income allocations. When rates are rising, duration exposure, equity valuations, and sector leadership can all shift. When rates stabilize or fall, different opportunities emerge. Our commentary is driven by both quantitative and fundamental research to emphasize understanding the drivers behind rate moves, such as inflation pressures, changing growth expectations, or monetary policy shifts, and adjusting allocations accordingly rather than relying on simple rules of thumb.
- What role can non-domestic assets play in portfolio allocation?
Global asset allocation may expand an investor’s opportunity set and help manage macro risks that are country-specific. Differences in economic cycles, central bank behavior, fiscal policy, and relative valuations can create meaningful dispersion across regions. While global investing may introduce additional risks, such as currency fluctuations and geopolitical considerations, we believe they can be thoughtfully incorporated into diversified portfolios over time.
- How can investors approach asset allocation during periods of heightened uncertainty?
Periods of uncertainty often feel like the most difficult time to make asset allocation decisions, but they are often when discipline matters most. Our perspective is to focus on fundamentals, valuations, and medium-term trends rather than short-term volatility. Monthly macro updates are designed to help investors put uncertainty in context, separate signal from noise, and avoid emotionally driven allocation changes.
- What is the goal of Allspring’s monthly macro commentary for investors?
Our commentary aims to help investors understand how evolving macro conditions may affect asset class behavior and portfolio construction. Rather than seeking to predict markets with precision, the commentary is designed to provide a structured decision-making framework. By connecting economic trends to practical asset allocation implications, we seek to support more informed, consistent, and long-term-oriented investment decisions.
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Carry refers to the net return earned from holding an asset over time, independent of price movements, after accounting for the costs of financing or maintaining that position.
Consumer Price Index is a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services. You cannot invest directly in an index.
Duration is a measurement of the sensitivity of a bond’s price to changes in Treasury yields. A fund’s duration is the weighted average of duration of the bonds in the portfolio. Duration should be interpreted as the approximate change in a bond’s (or fund’s) price for a 100-basis-point change in Treasury yields. Duration is based on historical performance and does not represent future results.
Purchasing Managers’ Index (PMI) is an economic indicator that measures the health of a country’s manufacturing or services sector.
Term premium is the compensation investors require for bearing the risk that interest rates may change over the life of the bond.
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