Reflection of the day
2023.11.22
Prediction 2024 season starting……
GS (Goldman Sachs) is predicting the S&P500 to rise a modest 5% in 2024. This begs the question: Is it worth the risk ?
As written before, when you have fixed income at close that range, why would you be in equities ?
2023.11.10
This mornings one of may headlines that look all the same:
"Fears of higher interest rates for longer returned to markets late this week following hawkish comments from Federal Reserve (Fed) Chair Jerome Powell on Thursday.
Powell reiterated the narrative that reigning in inflation was the Fed’s main focus and further interest rate hikes may be necessary to achieve this goal. That clashed with the views of many market participants, who have recently become confident that peak rates have been reached, driving a strong equity market rally late last week and early this week. Stock markets fell, Treasury yields rose, and the dollar strengthened following Powell’s comments.”
I’m going out on a limb here:
Powell is bluffing, certain that his rhetoric generates the effect of monetary tightening and it actually might just do that. Looking back at some of our postings, household savings down by >80% since end of pandemic, rise in delinquencies, softer labour market, PMI retraction etc. still point to a softening economy. The idea of building a long position in long bonds paired with some percentage of shorter duration is absolutely on. Crude might be a buy soon. So is hedging your USD positions.
2023.11.08
Europe’s economy is leading the US in apparently already lapsing into recession. Meanwhile, its corporate sector is a long way behind the US, and is only now falling into an earnings recession. Third-quarter profits announcement are on course for the first year-on-year decline since the pandemic year of 2020. Even if the energy and materials sectors, greatly buffeted by turbulent commodity prices, are excluded, Deutsche Bank AG shows that Europe’s companies have been sharply worse than the rest of the world:
One major contributor to this is that European companies weren’t able to raise their margins in the third quarter, unlike their counterparts in the US, Japan or the emerging markets:
Failure to make greater sales has done even more damage to the bottom line. While the problems for the European economy are known, the corporate sector’s problems came as a nasty surprise. The greatest (if perverse) reason for hope may be that companies also chose in greater numbers than at any point in the last decade to downgrade their guidance for future sales. With any luck, the bad news is now in the price. The number upgrading revenue forecasts is also high, but as this chart from Citibank demonstrates, overall this is the most downbeat European companies have been about the future since the pandemic:
Our take from this:
ECB is probably cutting interest rates earlier than the FED, as the resilience of the US economy is surprisingly remarkable. Barring any contrarian US data, interest rates will stay higher in the US compared to EU. This is why we believe that the European equity market should be observed closely and ought to be privileged within a well diversified portfolio
Souce: Bloomberg
2023.11.02
The “de-dollarization” theme has vanished in 1-2 quarters because of a strong price action in the USD. It serves as another strong testimony for the “price leads narrative” notion.
If we look at actual data, the de-dollarization is simply not a thing, but instead the de-EURization should be a discussion topic, which it is basically not.
Look at the SWIFT-data below. The USD is doing just fine, but the EUR is not.
Bottom-line in FX:
We remain long JPY/USD, we prefer KRW to EUR in cyclical FX and we see MYR, NOK and CAD as the most oversold / overshorted for those of a short-term persuasion.Chart: The de-EURization is what should be of concern
2023.10.30
Cracks are deepening for vulnerable EM firms as global borrowing rates hit the highest since the financial crisis, halting refinancing opportunities for $400 billion of bonds due in 2024.The struggle may be in its early stages as refinancing challenges are likely to worsen once another $300 billion of debt comes due in 2025. High-quality firms may see a spike in rates, but some lower-rated ones may face failed refinancing deals—leading to defaults and bankruptcies.
2023.10.25
Two JPMorgan veterans have joined Brahman Capital to run a macro fund targeting Japan’s rate market at a time when bonds are having some of their biggest swings in years. “We strongly believe inflation in Japan is real and it’s here to stay,” said Ville Vaataja. “And with that, BOJ is behind the curve.”
Tends to be bullish for interest rates/JPY.
2023.10.21
Euro - quo vadis?
The HCOB Germany Manufacturing PMI was revised slightly lower to 39.6 in September 2023 from a preliminary of 39.8, continuing to point to a fifteenth straight month of contraction in the manufacturing sector. Output fell to the greatest extent for almost three-and-a-half years amid a further
sharp albeit slightly slower drop in new orders. Weaker demand across the sector was due to several factors, including customer uncertainty, widespread efforts to reduce stocks and weakness in construction activity. Also, a further steep drop in backlogs of work was recorded at the end of the third quarter.
Manufacturers looked to trim staffing capacity accordingly, with factory employment falling for the third time in as many months. Meanwhile, September saw further declines in both input costs and output charges. Lastly, there was a notable deterioration in goods producers' expectations towards future output to the lowest since November last year.
Internationally, central bank interest rate decisions will be key, with announcements from the ECB, Bank of Canada, and Turkey’s TCMB. Flash services and manufacturing PMIs will be released in Australia, Japan, France, Germany, the Euro Area, and the United Kingdom.
Australia's inflation rate, Germany's Ifo Business Climate, and GFK consumer confidence, as well as GDP growth rates in South Korea and Spain, and the UK's unemployment rate, will also be closely watched.
2023.10.17
Is China’s slowdown to point to, for any chance?
Germany won’t escape a second recession quarter this year, with forecasters predicting ongoing industrial weakness. GDP declined 0.2% in the quarter through September and is seen contracting 0.1% in the final three months of the year.
2023.10.14
Some time back, not much, we touched foot with the diminished US household savings situation post-pandemic (PP) vs. 09/23 (I think)….PP the savings stood just over $2 trillion and recently $180 billion. The US economy is , to a great extent , driven by consumption. The present savings reserves were actually an indicator that consumer staples would halt or even fall. See the chart below:
CONSUMER STAPLES/S&P 500
NOT QUITE satisfactory.Growth has been strong, but it is hard to argue that the US is in a typical early-cycle expansion when staples underperform.
Analysts explain the downturn by noting that staples are rate-sensitive. The assessment is, especially among lower-income consumers, the rising cost of credit card and auto loans pinch the household budget. There might be more switching to cheaper store brands. This might explain why many of the weakest performers among staples have been branded food companies.
A changing relationship
Trailing price/earnings ratio
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2023.10.13
Thursday's U.S. consumer price data stoked expectations that the Federal Reserve is perhaps not yet done with monetary tightening. Markets are now pricing in about a 40% probability of a rate hike in December, versus a 28% chance before the report. We believe that a hike before the end of 2023 is rather unlikely.
Also weighing on investors' minds is Friday's report from China - where deflation, not inflation, is worrying the markets - which showed the consumer price index unchanged in September from a year earlier, missing the forecast of a 0.2% gain in a Reuters poll.
2023.10.11
In May 2021 we posted our first paper “Is inflation on the horizon?” when the FED and BCE were still in denial. What follows after May 2021 can be seen on the chart below. Ever since September last year, the trend in core inflation (excluding food and fuel) has been firmly lower. The graph below shows the highest value predicted (white line) and the lowest (gray line). Both point downward, with the actual core consumer inflation print (blue line) comfortably in between. This was not always the case. As recently as August 2022, the actual print was in line with the highest estimate while in 2021 inflation twice came in higher than even the highest prediction:
That helps to explain market action, with belief in a “soft landing” gaining traction steadily as the financial community builds confidence that it actually understands inflation now. Not quite so sure. Geopolitical events in the middle-east are capable of delivering bad surprises. So does Russia. What really will help, is a warm winter, as core inflation is not what consumers have to take out of their pockets. Core inflation is a measure that the Fed loves, but it is not real.
2023.10.02
In our view, it is half as bad. The Govt shut down, our best assessment, will, as in the past, agree to disputes in order to avoid shut down that is now pushed forward to mid November.
Quoting David Kotok from Cumberland Advisors:
Quote
I’ve written about how the dysfunctional politics in America are raising market-based interest rates even as the Federal Reserve is on “hold.” I’ve cited the widening spread between the 30-year federal agency yield versus the 30-year US Treasury yield. I’ve cited how the credit insurance cost on the United States (10-year credit default swap denominated in euro) is now as high as it was at the peak of the debt ceiling fight last May. Also note that the five-year US dollar-based credit default swap has doubled from 20 basis points to 40 basis points since Jan. 1. I’ve noted the beginning of widening credit spreads on various types of financing. These are market-based prices. These are my not my assertions or opinions. Anyone who thinks that political dysfunction doesn’t have a cost is ignoring the facts.
Unquote
2023.09.29
The present economic situation on both sides of the Atlantic signal that now is a good time to add duration in a fixed income portfolio or increase fixed income in a mixed one.
The market thinks that both Fed and ECB policy rates will peak this year and they will begin to be cut next year (not sure). The market can always be wrong, of course, but if it is right, you want to be actively invested. You’ll want to own duration, you’ll want to be out of cash. You do not have to do it all right now. But you should have a plan to get more actively invested over the next six to twelve months. Let’s assume you buy an investment grade bond with 2.5 years of duration that yields 6%. If you look out over two years, you’re going to clip a coupon of 6% twice, that’s 12% total return, and then if rates are cut by 100 basis points, you’re going to generate 2,5% additional return from owning duration. That’s a 14.5% two year total return, which is pretty good for a high quality bond strategy. That of course assumes that inflation is under control.
2023.09.26
Despite greater confidence among economists that the US can avert a recession, American workers are increasingly concerned about their finances and employment prospects. Which means less spending ahead. Buying plans for the next six months retreated for cars, homes and major appliances.
"Responses showed that consumers continued to be preoccupied with rising prices in general, and for groceries and gasoline in particular,” Dana Peterson, chief economist at the Conference Board, said in a statement. “Consumers also expressed concerns about the political situation and higher interest rates.”
The labor market — and broader economy — have remained remarkably resilient in the face of a rapid increase in interest rates, supporting incomes and household balance sheets. That said, hiring has slowed and prices have picked up at the pump. Many consumers have run down their savings (post pandemic savings stood at $2.1 Trillion and Aug 23 170 billion , a drop of 80% and decades-high borrowing costs are pushing homeownership further out of reach.
Source: Bloomberg (edited by DC)
2023.09.22
We have a new analogy for monetary policy (Source Bloomberg)
Huw Pill, the Bank of England’s chief economist, has given a speech in which he favored a “Table Mountain” scenario. In line with the wide and flat peak behind Cape Town in South Africa, the idea is that rates would reach a plateau, and then stay there for a long time.
Under this scenario, according to Pill, rates needn’t go quite so high as in a “Matterhorn” scenario, named for the famously sharp triangular Alpine peak, but they would have to stay at that high plateau for an extended period. To quote FEC chair Powell “high(er) for longer”
2023.09.21
Our best opinion is that FED chair Powell has really convinced the market that he’s not sure why the economy is still so strong. Consumption continues strong despite having raised interest rates from basically 0% to 5.5%. The resilience of the US economy surprises.
The market finds that all too believable. And that in turn convinces that only something bad (a big dip in the economic data or a financial accident) will prompt the FED to cut rates any time soon. Powell has been saying that for a long time. This time, the market believed him. It is very probable that interest rates will stay high through 2024 , not excluding further rises if economic data continues strong.
2023.09.20
The world economy may be set for a slowdown as interest-rate increases weigh on activity and China struggles to right its ship. Global growth will ease to 2.7% in 2024, the slowest since the Covid-19 outbreak, according to the latest OECD forecasts.
2023.09.19
The German Bundesbank expects economic output to decline in the third quarter of this year due to weak consumption and exports and stubbornly high inflation. Thanks to good earnings and financing ratios and temporary government aid, the industrial sector, overall, cushioned the shock of extremely high energy prices quite well.
One problem, however, is the dependence on China. Almost half of the industrial companies in Germany are dependent on critical upstream products from China, and 80% of them consider substitutes from other countries to be difficult.
2023.09.18
Besides all concerns, one more little complication is the steady grind higher in oil prices to new highs that is stoking inflation concerns, just as central banks in most developed economies are at or approaching the end of their tightening cycles. Stagflation fears are rising.
2023.09.16
The latest cartoon with the couple being rowed by Mr “death” tells it all. Comments to that.
The reaction in the euro following this week’s raise in interest rates makes us aware about how investors view the world.
The inflation-focused ECB on Thursday raised deposit rates by 25 pips to 4% — the highest point since introducing the EUR . Now, this should boost the euro. It is common knowledge that currencies love higher rates. But on thursday de currency lost 0.8% vs the USD to 1.06 — a three-month low. The euro’s losing streak now runs to nine weeks in a row.
ECB president Christine Lagarde , at the press conference, says there could be more raises in store, but even that had no positive effect on the currency. Question remains if the ECB really will tighten further, considering that the region’s economy feels the weight from the tighter policy enacted so far and from the impact of weaker Chinese demand on German manufacturing.
ECB euro area growth forecasts is now estimated at 0.7 % growth for 2023, down from 0.9 % previously, and cutting off 0.5% from next year’s forecast, to 1 per cent.
Another raise in interest rates might just trigger an undesired economic slump.
2023.09.13
On June 29, we suggested to go long the Japanese Yen, citing it would be a long play. We would argue that the BOJ will likely tighten policy again in 2023. USD/JPY is always a yields play.
But 2-year US yields have peaked, while investors are finally pricing the risk that Japan may finally end its negative rates policy in the coming months. The yield story from both sides will now weigh
on USD/JPY over the coming months.
2023.09.12
Today’s cartoon depicts what the European Commission announced by cutting its economic projections for the euro area on Monday, largely due to weak performance by the continent’s largest economy. Market participants interpreted the weak data as another sign that central banks could be nearing the end of their rate hiking cycles.
2023.07.12
In the recent past everybody was speaking about an imminent recession and in particular using a certain financial indicator to cement their forecast: the spread between short-term and long-term bonds. An inverted yield curve, in which long-term bonds yield lower interest than short-term, has historically predicted recessions, as becomes clear if you note the years in which that happened in the following chart:
But the meaning of an inverted yield curve is widely misunderstood. It doesn’t cause a recession. It is instead an implicit prediction about future Fed policy — namely, that the Fed will cut rates in the future, presumably to fight a deepening recession. So the inverted yield curve wasn’t really independent evidence, just a market reflection of the same “recession is coming” consensus so much anticipated by media.
2023.07.07
Late 80ies I suggested a client to go long 30y bonds that around those times were yielding aprox 9% p.a. We were somewhat late to the greatest bond bull market in modern history (set in the 1970s, when inflation hit runaway levels). Central banks, led by the US Federal Reserve, launched a draconian response, pushing interest rates sky-high. Over the 40 deflationary years to the end of 2021, the annualised real return on bonds in the world bond index was 6.3 per cent, not far short of the 7.4 per cent return on global equities over the same period.
Question for these days is if bonds could return satisfactory yields compared to equities in the present inflationary environment. Could a mix of short term (2y) with very long term (30y) be the answer?
2023.07.03
Conflicting data everywhere….wrapping up macroeconomic from recent data , inflation in the eurozone continues to fall, mostly due to declining energy prices. Only Germany, the bloc’s largest economy, shows rising prices and a slightly higher unemployment rate. Nevertheless, ECB set to hike rates in July and Sept.
In the US we see a similar story where revised GDP grew at 2% annualised in Q1 (vs. estimate of 1.3%), but falling inflation with PCE (personal consumption expenditure) falling to 3.8% from 4.3% in May. Core PCE (strips out food and energy) 4.6% from 4.7% of previous month.
2023.06.29
It seems that at ECB’s forum in Sintra , Portugal, only BOJ’s Ueda accepts more inflation (contrary to Powell and Lagarde planning further tightening) and as a consequence the Yen weakened close to the 145 level.
We still advocate to be long the Yen as at some point interest rates in Japan are bound to rise. It’ s a long play though.
2023.06.26
Japan’s economic cycle is nicely de-synced from other countries. While US growth is slowing and Europe is flirting with recession again, Japan’s economy is by some measures heating up. GDP has been lifted by strong capex. Tourism has roared back. Nick Nelson of Absolute Strategy Research points out that Japanese PMIs have surged recently, to 55, a level he figures is consistent with 5 per cent annualised growth.
2023.05.26
2023.05.23
Over the coming days the political body may arrogate to itself a metaphysical power: transforming the utterly unthinkable into hard reality. By failing to raise American´s debt ceiling in time, Congress could drive the country into its first sovereign default in modern history. A collapse in stockmarkets, a surge in unemplyment, panic throughout the global economy-all are within the realm of possibility.
2023.05.22
Japan’s inflation might be back for good. The pandemic and Ukraine war cost shocks forced companies to raise prices, something normally frowned upon. Might Japan finally slay its deflation monster? Inflation excluding fresh food and energy sat at 3.8 per cent in April, a four-decade high. Perhaps more importantly, there are some signs of wage growth rising, as workers reclaim lost purchasing power.
Though real wage growth remains deeply negative, companies involved in Japan’s annual shunto wage talks have agreed to a 3.7 per cent pay increase, the biggest since Japan’s asset bubble burst in the early 1990s. Nishihara calls it “a transitionary period towards a new inflationary era”. Our previously posted thought of a yen strength is definitely in the cards.
2023.05.18
We do not believe that the US actually defaults on its debt. But, let’s, for one small instant, think it could happen. What do investors do? The knee-jerk reaction across markets would be severe and immediate.
But would the result be a flight to the dollar and gold in retreat? Such an event would undoubtedly cause tremendous volatility across markets, with waves of defaults in pension funds and banks. Stocks would crash and every bond on the planet would look less attractive.
After the triple top graph we published recently and the opportunity cost of the metal, Gold, in such an event (default on debt) might sound like an attractive investment, but the metal generally fares poorly in the midst of a widespread selloff. Consider, for instance, the events of 2008. From the end of July, gold was in negative territory while the US dollar soared. And this was a crisis with its roots firmly in the US housing and banking industry. The explanation is that investors generally sell all liquid assets, like gold, to meet margin calls and other financial obligations in such times.
Later in a crisis, gold generally does well. We also saw this with the outbreak of Covid, with the metal initially falling, then hitting record highs.
The key to the turning point is exactly when rate cuts come into play, which presents a wildcard to the theory, because presumably, if the US defaults (again unlikely) , policymakers around the world will attempt to deliver financial stimulus very, very fast.
2023.05.05
Recently we have published a graph with a triple top for the metal . As gold climbs toward a record, some of last year’s biggest buyers are finally pulling back.
Demand from central banks fell to 228.4 tons in the first quarter, the World Gold Council said.That’s down 40% from the preceding three months.
It’s still strong, but it’s the second straight quarter of decline, and a sign the institutions’ historic bullion binge may be coming to an end. We can only try to explain this by thinking that the opportunity cost of holding gold is rising because of higher interest rates and concomitantly inflation expectations could be scaled down for exactly the same reason (higher interest rates).
2023.05.04
The general attention has moved from the US Federal Reserve to the European Central Bank in regard of today’s increase in interest rate. Will it be 25bp and an outlook for more to come or similar to the US (rather accommodating) "this is it and let’s observe” by raising 50 bp?
Today will be the 7th raise the ECB has orchestrated for a region whose headline inflation is around 7% in average. The specific banking turmoil in the US is, so far, limited to the US (well Switzerland had his own event with the collapse of Credit Suisse, but that is another story).
The Fed did yesterday what markets expected by raising 25 bp and is convinced it will be the last in this cycle. Jerome Powell signed that the Fed might pause and give itself time to assess banking troubles, closely monitor inflationary data and the debt ceiling.
2023.05.03
The general expectation is that the FOMC (Federal “Reserve" Open Market Committee) hikes rates by another 25 basis points today. What happens afterwards is when the forecasts (“guesswork") start to get more ambiguous (pls vide the Economist “Mona Lisa” effect) , with some predicting that this will mark the end of the hiking cycle or that at least there will be some kind of pause.
There is no crystal ball and it is impossible to know, but there are some crystal-clear risks out there. The regional bank mess seems to continue, at least judging by what investors are doing to some of these shares. It's certainly not good. The easing of oil prices and manufacturing surveys point to a slowdown.
However, not all is gloom. Housing seems very robust. Earnings season has been good. Service consumption is strong, salaries continue resilient and unemployment is still very low. Hedge your bets would be our advice.
2023.05.02
Highly anticipated euro-area inflation numbers are in and may give the ECB a green light to slow down its most aggressive ever rate hiking campaign.
Core inflation, which strips out volatile items like fuel and food costs, decelerated to 5.6% in April from 5.7% the month before, the first easing in 10 months.
Headline price-growth, meanwhile, ticked up to 7%—a touch more than anticipated and still far above the central bank’s 2% target.
Adding to the case for a smaller hike this week, an ECB survey showed the region’s banks curbed lending more than anticipated last quarter after rates jumped and turmoil gripped the financial sector. These facts might just support our view (reflection April 28) of a few days about the million $ question if the €/$ rise to continue or not.
2023.05.01
In January 2022 we posted a paper asking “are we in an asset bubble?” in our advisory section. In fact, the same year the bubble busted. See the chart below that shows household net worth , which includes cash, real estate , equities and bonds - have been inflated through massive monetary and fiscal stimulus during the pandemic. The effect pushed house hold wealth well beyond trend relative to consumption. Meanwhile the curve has inverted, however still over trend.
2023.04.28
The European economy is doing better than expected even if core inflation is taking longer to slow.
German inflation surprised by slowing in April, even though it accelerated in France and Spain. The mixed data will fuel the debate over how big a rate hike ECB officials will go for. The overall euro-area inflation number is due just two days before the bank’s May 4 policy meeting.
The EU dodged a winter recession by growing at the start of the year. It expanded 0.1% in the first quarter, falling short of consensus. France and Italy bounced back from negative readings at the end of last year, while Spain gathered momentum and Germany stagnated.
The million Dollar question that might arise is: €/$ rise to stall or not?
2023.04.27
The Bank of Japan began its first policy meeting with new governor Kazuo Ueda at the helm. While the consensus is for no change to ultra-easy stimulus settings on Friday, no one is willing to rule out another surprise like in December, when former governor Haruhiko Kuroda wrong-footed investors with a doubling of the 10-year bond yield band.
This time the surprise could come in bullish for the yen considering the stickiness of Japan’s stripped CPI.
We believe that a stronger Yen by year-end 2023 is on the table. The main factor being the interest rate differential in favour of the yen. In other words, cooling of US economy will stall/diminish interest rate increases in the USD, vs. a pivot to a more restrictive policy for the yen.
2023.04.26
SELL IN MAY AND GO AWAY?
"Sell in May and go away" is an investing adage that says an investor can improve annual returns by selling stocks in May and not reinvesting until November.
The adage refers to seasonal stock market performance where the summer months have historically averaged lower returns compared to others.
One more thing makes us wonder if investors prepare for this adage: surge in 3m-TBs. Spread between 1m and 3m TBs below:
2023.04.24
Opportunity cost
When short-term factors, like panics and manias, fade, the two things that matter more for gold than anything else is the unit in which it is measured, and what economists call the opportunity cost of ownership. The relative strength of the currency in which it is priced matters, because gold is ultimately a hard money alternative to fiat. As something physical it protects the owner from fluctuation in the dollar, euro, yen, or whichever other unit their portfolio is denominated in. At the same time, owning it comes with a small negative yield -- linked to the cost of storage. That means that it also inversely correlates with real rates.
2023.04.22
Another week, another stack of data showing Jerome Powell’s year-long campaign to cool the US economy may be working (supports our view for long term treasuries). The Fed Chair’s task now is to avoid overtightening. The economy looks to be stalling (by design) and there’s softening in the labor market as well as housing. Despite the unpleasantness in Silicon Valley last month, regional banks look like they’ll come through the inflation fight in one piece (if earnings this week are any measure). But some may still be in for a tough time—and so too will the consumers and companies who rely on them for credit. Those credit conditions are worsening (vide Dallas Fed credit chart posted recently) and profit margins are getting squeezed, perhaps enough to give the Fed room to pause its rate-hiking cycle after next month’s still-expected hike. But while inflation persist, several Fed officials said they support further interest rate rises to help crush sticky price pressures. The US economy, however, is like an aircraft carrier—it doesn’t change direction right away - takes time. And that means if growth keeps slowing, that long-predicted recession might finally come to pass.
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Nevertheless, there are some corners of the market where no one seems all that concerned. Big banks have benefited from worried customers leaving their smaller counterparts, and hedge funds are also notching wins. The biggest new funds are raising money at levels not seen since before the start of the pandemic. Four new firms are poised to eclipse $1 billion by year-end.
Source: Bloomberg
2023.04.18
One thing that's striking is how much negativity is in the market. Rallies are always hated these days. And sentiment is always an imprecise thing to measure. But the latest Bank of America fund manager survey shows that among active managers, exposure to equities, relative to bonds just hit its lowest level since 2009. The survey never got anywhere near this bad during even the pandemic period, which is hard to believe.
2023.04.15
The dents in global economic growth are growing more visible and fallout from financial-market tension is lingering—potentially indicating that most central banks are close to a peak in hiking interest rates. While the US is making some progress in its inflation fight, the Federal Reserve is still expected to hike rates again next month, potentially followed by a pause. The possible price of progress? Fed staff economists now forecast a “mild recession" later this year. The European Central Bank and its regional counterparts might keep going with rate hikes a bit longer, but from Brazil to Indonesia, central banks could pivot toward rate cuts. A new wrinkle is the Saudi-Russia oil alliance: The OPEC+ decision to cut output for the second time since President Joe Biden sought an increase will widen supply shortfall later this year. For consumers, gas and oil prices could rise, possibly pushing inflation back up while funneling more money to Vladimir Putin and his war.
Source: Bloomberg
PS: the above commentary from Bloomberg is full in line with our" trade ideas - just an idea", published earlier this April 2023
2023.04.12
Dallas Fed Survey (71 banks) decline in loan volume
The labor market looks soft-landingish. Issues in credit and banking warn of possible recession. Housing on the other side still looks robust and autos as well. And the good news is that, almost certainly, after today's CPI report, you'll still be able to choose your own theory about this economy.
2023.03.08
Yields on two-year Treasuries have extended their spike to 5.07%, putting them 107 basis points above the 10-year and through the 100bp pain barrier for the first time since 1981.
This kind of inverted yield curve is a strong indicator for recession.
The market seems to ignore it. For how long ?
2023.03.07
Getting technical. Trend lines on charts and volatility targets are forcing quants into a concerted buying spree, and may spur a further rally.
The million $ question is……where to?
Recent buying by institutional helped the S&P 500 bounce away from a technical danger zone.
2023.02.17
The P/E (The price-to-earnings ratio is the ratio for valuing a company that measures its current share price relative to its per-share earnings) of the SP for the current year is 19.
This means that the Index (S&P500) yields presently 5.26% (100:19)
This is marginally higher than the 6m T-Bill return of 4.82% or less than 1.5% return than a 10y TBond. In other words the risk premium of holding equity is at its lowest since 2007.
2023.02.16
Last year, most US investors and central bankers underestimated how high inflation would climb. Now they may be underestimating how high interest rates will need to go to bring it back down.
In spite of the Federal Reserve’s most aggressive credit tightening campaign in four decades, the US economy and financial markets started the new year with a bang. Payrolls surged, retail sales jumped and equity prices soared.
Combined with an inflation rate that’s proving sticky and running well above the Fed’s 2% target, that’s a recipe for more rate hikes from central bank Chair Jerome Powell and his colleagues to cool things off.
2023.02.16
After posting our cartoon of the day about soft landing on Feb 8th, 2023, today’s Reuters starts the morning article with today’s reflection:
Forget soft landing, equities seem to be betting on no landing for the U.S. economy:
a sublime state where steady growth and low unemployment can co-exist with slowing inflation and higher interest rates.
2023.02.06
The chance of a soft landing comes down to how easily inflation falls. No one really has any idea what will happen, in large part because of the mass transition from goods spending to services spending in the aftermath of Covid:
we’ve never seen an economic event like it.