Macro Monitor
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.
Yield Curve Re-Steepening—At A Critical Crossroads
We studied market behavior around yield curve re-steepening and identified six historical cases. Of those, three were successful and preceded major recessions. The other three instances failed and reversed to new lows. The gist of the study: We are at a critical crossroads.
Risk Aversion Index: Stayed On “Higher-Risk” Signal
Inflation concerns have been pushed aside by the upcoming curtailment of credit and lending. The possibility of a recession has no doubt increased, and risky assets are apt to face challenges.
Three Themes To Watch
The China-reopening theme is alive and well, which will likely support cyclical outperformance. The disinflation trade is at a crossroads. Value/Growth started to decouple from interest rates.
Weight Watcher Update—Still Like Value Sectors
While the valuation gap between Growth and Value sectors was compelling just a couple of years ago, it has closed drastically the last twelve months. Our analysis shows that Value sectors (Energy, Industrials) are still more favorable than Growth sectors (IT, Health Care).
Risk Aversion Index: A New “Higher-Risk” Signal
Inflation worries have rekindled expectations for additional rate hikes. Providing this dynamic is still in play, risky assets are apt to face challenges.
Soft Landing Or Recession? A Dashboard Update
The weight of evidence clearly leans more toward a recession, but the wild card is the recent dovish turn of global central banks, which can significantly boost confidence from investors, consumers, and businesses.
Risk Aversion Index: Stayed On “Lower-Risk” Signal
Seasonality is still an advantage, and financial conditions have eased. Within fixed income, we remain favorable toward both Treasuries and higher-quality investment-grade corporate bonds. We maintain a neutral stance on the yield curve.