Macro Monitor
Yield Curve Steepening—Stalling But Trend Intact
Given the beginning of an easing cycle in September and the Trump Trade in October, the lack of steepening in the yield curve is intriguing. While tighter financial conditions are likely a challenge to the steepening move, policy regimes and the term premium are favorable toward further curve steepening.
Risk Aversion Index: A New “Lower-Risk” Signal
The market keeps brushing aside the increase in geopolitical risks and we continue to believe the risk is underpriced. On the other hand, the Trump win and favorable seasonality should support risky assets at least in the near term.
China’s “Whatever It Takes” Moment—“Believe Me, It Will Be Enough”
Market reaction to the latest flood of monetary and fiscal stimuli has been spectacular. While conviction about Beijing’s attempts to revive its flagging economy has been severely lacking, this time we should believe it. It’s certainly the right medicine China needs and the spark of confidence these actions will ignite should not be underestimated.
U.S. Election Study Update
Our assessment shows that “who” wins the White House does not seem to matter that much to most major asset classes. Nevertheless, we believe a strong dose of caution against political and/or geopolitical risk is prudent.
Risk Aversion Index: Maintaining Its “Higher-Risk” Signal
Our Risk Aversion Index edged lower but stayed on the “Higher-Risk” signal.
Anatomy Of An Easing Cycle
The economy normally fades heading into a series of rate cuts, with higher unemployment and lessening CPI inflation. Risky assets (stocks and credit) do well, and bond yields move lower. Real assets also benefit (gold in particular). On the whole, an easing cycle is favorable for most assets.
Risk Aversion Index: Maintaining Its “Higher-Risk” Signal
Election and geopolitical risks are far from being adequately priced in, while the current market pricing of Fed rate cuts is too aggressive.
Three Themes To Watch: Recession, Inflation, The Election
Is the market overreacting to recent economic data? Concerns about a growth slowdown are replacing the optimistic outlook of early 2024. Our Recession Dashboard shows increased risks, with notable declines in housing, employment, and consumer confidence. Despite this, equity and credit markets remain resilient. As we navigate these uncertain times, discover how upcoming elections and potential economic policies could shape the future.
The Current State Of Value—An Update
Value’s migration behavior was the key to its failure between 2010-2020—its pattern got progressively worse, culminating in a Value trap during 2017-2020. We believe macro tailwinds and positive surprises are both needed, and, while the setup on the macro front, post-2020, has become quite favorable, in order to breathe more life into Value we need to see the upswing in earnings surprises continue.
Risk Aversion Index: A New “Higher-Risk” Signal
The first U.S. presidential debate brought the election risk front and center.
Golden Intrigues
Chinese investors have flocked to gold as traditional investments have massively disappointed. Global central banks are also buying gold amid heightened geopolitical tension. Both trends help explain why gold has defied the gravitational pull of a stronger dollar and higher real yields.
Risk Aversion Index: Stayed On “Lower-Risk” Signal
Economic numbers will likely continue to cool a bit, but more election-year policy measures will be forthcoming in the next few months, cushioning the downside for the economy.
$Yen No Mountain High Enough?
One casualty of the U.S. market’s hawkish turn is the Japanese Yen. It certainly grabbed its share of headlines, yet, when viewing the selloff in historical perspective, this year’s uptick looks entirely inconsequential. Additionally, when considering the Yen through the lens of other Asian currencies, its outsized weakness versus the dollar essentially disappears. Dollar strength is the real driver and it has pummeled Asian currencies across the board.
Risk Aversion Index: Stayed On “Lower-Risk” Signal
The repricing of Fed cuts has largely run its course, removing one big negative from the market.
First BoJ Rate Hike In 17 Years—Not So Virtuous After All
To gauge how much faith we should have in this “virtuous” cycle, we examine the macro context in terms of the business cycle, the Yen, interest rates, and inflation. Ultimately, inflation holds the key to bond yields, as the main difference between pre- and post-1990 rate hikes boils down to inflation—which is also the key determinant of how far the BoJ can go in this tightening cycle.
Risk Aversion Index: Stayed On “Lower-Risk” Signal
The U.S. economy is likely to benefit from all the election-year policy measures yet to come.
Bank Lending & Wealth Effect Support U.S. Economic Resilience
Improvement in bank lending trends should be a tailwind for economic activity, while steeper yield curves also imply a looser lending environment lies ahead. Another area supporting U.S. economic resilience is the wealth effect: The surging wealth effect is boosting consumer confidence which, in turn, leads to higher consumption.
Risk Aversion Index: Stayed On “Lower-Risk” Signal
Our Risk Aversion Index edged down again in February and stayed on the “Lower-Risk” signal generated at the end of January.
Three Key Themes To Watch—Recession, Inflation & The Dollar
The probability of a soft landing has materially increased, while stronger than expected growth is likely to put a floor on inflation, which challenges the consensus disinflation view. A refresh of our Dollar Monitor suggests a weaker dollar going forward.
Risk Aversion Index: A New “Lower-Risk” Signal
Positive economic momentum is apt to carry on for a while longer. Within fixed income, we are turning favorable toward credit, especially high quality investment-grade corporate bonds.
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