Macro Monitor
Treasuries’ Short Squeeze—More Room To Run
The massive short squeeze in Treasuries had a perfect setup and a powerful catalyst.
End Of Tightening—A Tunnel Before The Light
With the market penciling in four rate cuts in 2024, the consensus appears to have accepted the idea that the last rate hike of the series was in July. We look at various market indicators around the end of previous hiking cycles and compare the historical pattern with today’s episode.
Risk Aversion Index: Stayed On “Higher-Risk” Signal
While recession risk remains high, financial conditions have eased considerably with the recent retracement in bond yields and the dollar. We are in a favorable seasonality window and not being too bearish makes sense at this point.
A Major Yield-Curve Steepening Cycle Has Started
The 10Y-2Y yield curve broke above the key level of -0.4% and that means a double-bottom pattern is in play. While we are confident that a major steepening cycle is here, we have to acknowledge that the nascent move could fail. A steepening move is also the market’s way of signaling easier conditions ahead.
Risk Aversion Index: A New “Higher-Risk” Signal
Our Risk Aversion Index moved higher in October and triggered a new “Higher-Risk” signal.
Equity Duration Risk—Going The Wrong Way For The Magnificent Seven
Typically, duration contracts when rates go up, all else equal. The Magnificent Seven, however, saw their duration going the wrong way: They seem to be the only cohort to see duration lengthening and are now more risky than a year ago.
Risk Aversion Index: Stayed On “Lower-Risk” Signal
Despite the “Lower-Risk” signal, the surge in bond yields and a higher U.S. dollar have materially tightened financial conditions: Caution is strongly recommended.
New Cycle High In U.S. 10-Year Yield
The 10-year yield made a new cycle high just before the Jackson Hole meeting. That is significant, as it not only broke the lower-high-lower-low pattern since last October, but also rejected the hypothesis, “we have seen the cycle high in interest rates,” which was the consensus at the start of 2023.
Risk Aversion Index: Stayed On “Lower-Risk” Signal
The Risk Aversion Index ticked up in August, but its “Lower-Risk” message is unchanged. Within fixed income, we remain constructive on shorter maturity and higher-quality credit.
U.S. Dollar—Still The Cleanest Dirty Shirt
The U.S. dollar broke below its recent support; its weakness has been a dominant driver of risky assets and its direction will be an important determinant of the current rally.
Risk Aversion Index: Stayed On “Lower-Risk” Signal
The rally in risky assets became even more broad-based, with small caps and EM participating fully.
Not All Fed Pauses Are Equal
The latest pause is widely expected to be short-lived, but many things can happen to extend the pause or even completely end the tightening cycle. While some markets show little distinction between a final pause and an interim one, most behave in a way that’s consistent with the economic backdrop.
2023 Time Cycle—Mid-Year Update
So far, it’s all about sector exposure in 2023.
Risk Aversion Index: New “Lower-Risk” Signal
The risk rally has survived a wide range of challenges, including renewed central bank hawkishness, and tighter credit/bank-lending standards, among others. “Soft landing” is still the key narrative that supports the current rally.
Liquidity & Lending—Headwinds Still Ahead
Liquidity and lending conditions have tightened significantly over the course of the current tightening cycle, but they are likely to get worse before they get better.
Risk Aversion Index: Stayed On “Higher-Risk” Signal
Despite an AI-fueled equity rally, an imminent liquidity reduction and ongoing bank-credit tightening are serious headwinds for risky assets in the near term.
Three Themes To Watch—An Update
The Value/Growth dynamic seemed to indicate a return to the “lower rates are good for Growth stocks” regime. China reopening is still alive and well, despite a recent pause. The GSCI Industrial Metals/Gold ratio has broken below its recent range, which bodes ill for inflation expectations going forward.
Debt Ceiling—Risk Of An Accident Higher Than Normal
An earlier-than-expected X-date means higher market volatility and increased chance of a temporary short-term deal. Typically, the debt ceiling drama is short-lived and there’s not much impact on most assets before or after a resolution. Overall, the possibility of an accident is now above average.
Risk Aversion Index: Stayed On “Higher-Risk” Signal
Despite the resilience in most risky assets, the recession probability has increased and the prospect of further credit tightening has only added to the downside risk.
The MOVE Is Now A Better Risk Gauge
The MOVE index, a volatility gauge for the bond market, has become a far better risk barometer—and it surged to a new cycle high in March.
current issue
