Macro Monitor
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.
2023—A Year Of Round Trips
The S&P 500 index painted a picture of a runaway market in 2023, but for a lot of non-equity markets, 2023 was a year of round trips.
2024 Time Cycles—Watch Politics & Geopolitics
Given how many potential political and geopolitical hotspots there are at present, it might be a bit presumptuous to think 2024 will be a typical year. Politics and geopolitics are the most underpriced risk for 2024.
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.