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With a lot of pessimism seemingly already priced in to China’s “risky” assets, we suspect a thawing in US/China relations could give them a boost. But we think their longer-term outlook is less rosy. Meanwhile, we don’t think US/China tensions will have …
17th November 2023
A thawing in China/US tensions could, in our view, help “risky” assets in China for a while by reducing the “China risk premium” that seems to have emerged. But we doubt it would fully reverse the recent underperformance of China’s equity markets relative …
16th November 2023
During the past decade, the global economy has transitioned out of an era in which globalisation was the key driver of economic and financial relationships into one shaped by geopolitics. Previously, most governments had believed that closer economic …
Growing external and domestic headwinds suggest to us that Brazilian financial markets will come under pressure over the short term and are unlikely to resume their outperformance beyond that. Brazilian assets have fared relatively well amid the ongoing …
15th November 2023
Investors seem to be banking on a “Goldilocks” US economic environment which, if sustained, might lead to bull markets for most bonds, equities, and currencies. But we think this is a bit optimistic. Financial markets are having a great time since the …
We think that bonds in Emerging Markets (EMs) will struggle in the next couple of months. Further ahead, though, we expect their yields to fall, as both “risk-free” rates and spreads drop. The yields of EM local-currency and dollar-denominated bonds have …
While past dips in the 10-year Treasury yield since inflation peaked proved to be short lived, we think that yield will continue to fall from here. Investors have taken the softer-than-expected US CPI data for October, published today, as confirmation …
14th November 2023
Moody’s decision to revise down its outlook for the US sovereign credit rating may add to the growing sense that market participants are becoming more worried about the fiscal outlook in the US. So, it is worth assessing to what extent such concerns are …
13th November 2023
Although yesterday’s poorly digested auction of 30Y Treasuries served as a reminder that the outlook for fiscal policy has the potential to undermine US long-dated government bonds, we still think their yields will end 2024 lower than they are now given …
10th November 2023
Even though we expect the S&P 500 to end 2024 at a much higher level than it is now, we doubt it will build on its recent gains over the coming months given the outlook for the economy. The story for much of this year has been the surprising resilience of …
While the US dollar has bounced back a bit this week, its struggles over the past month or so are in some ways similar to the lead up to its sharp fall in Q4 of last year . But we think a comparable slide over the coming months looks unlikely . After …
9th November 2023
Following the release of our new analysis on real equilibrium interest rates (R*) last month, we held an online Drop-In last week and in-person Roundtable events with clients yesterday to discuss our findings. This Update answers several of the questions …
Given our pessimistic view of the economy in the US, we think that equities there will fare quite poorly in the near term. But the biggest components of the S&P 500 might hold up better. Equities have bounced back sharply over the past ten days, with the …
8th November 2023
Despite some differences in the monetary policy outlooks for Australia and the US, we doubt 10-year yields in the two economies will diverge much. Earlier today the Reserve Bank of Australia (RBA) made what looks likely to be one of the last moves in the …
7th November 2023
We think the risks to the “goldilocks” view being discounted in markets are skewed towards a bigger slowdown in the US than is currently discounted, driving credit spreads up over the coming months. The market reaction to data in the US last week, rounded …
6th November 2023
We think today’s big moves in markets in the wake of October’s US Employment Report are a sign of things to come over the next twelve months or so. More evidence that the labour market in the US is cooling and that wage growth there is moderating (see …
3rd November 2023
The yields of UK government bonds (Gilts) have dropped back in recent days, and we think that they will fall further over the next year or so, even if they settle far above their post-pandemic lows. UK government bond yields have fallen a bit further …
2nd November 2023
We think the Bank of Japan’s continued steps towards policy normalisation are consistent with somewhat higher JGB yields and a significant rebound in the yen over the coming quarters. To recap, the BoJ made another tweak to its Yield Curve Control (YCC) …
Although Treasury yields have fallen back in recent days, the big picture is that they are still much higher than they were when headline and core inflation peaked more than a year ago in the US. In this Focus , we examine the role of inflation in the …
The Treasury’s Quarterly Refunding announcement (QRA) today may have eased some upward pressure on Treasury term premia, but we think these premia are unlikely to fall further over the coming years. Although the Treasury today increased the auction size …
1st November 2023
As is often the case, it is hard to know just what to make of the Bank of Japan’s latest policy announcement. Our sense is that the resulting rise in Japanese government bond yields is more likely to endure than the sharp fall in the yen. To recap, the …
31st October 2023
Our View: Growth in the US and other advanced economies will disappoint, keeping pressure on “risky” assets but favouring “safe” ones. But when the economic environment improves, “riskier” assets will rebound, with equities further boosted by enthusiasm …
A renewed surge in the spreads of private-label commercial mortgage-backed securities (CMBS), at a time when the spreads of high-yield (HY) corporate bonds have remained fairly subdued (see Chart 1), has attracted little attention in US bond markets amid …
30th October 2023
Today’s rebound in Amazon’s share price following news that its sales were better than expected in Q3 has shored up the performance of the ‘Magnificent 7’ in what has otherwise been a tough week for most of them amid a mixed bag of reports, lingering …
27th October 2023
In line with our upwardly revised forecasts for the 10-year US Treasury yield, we’ve raised our projections for 10-year government bond yields in most other developed market economies. But we still expect those yields to fall, in general, by the end of …
Spreads in Greece, Italy, Portugal, and Spain have diverged in unusual directions this year, and we doubt that these trends will revert any time soon. As was universally anticipated, the ECB stood pat at its meeting today: policy rates were kept unchanged …
26th October 2023
We think the Chilean peso is poised for a rebound in 2024 as the headwinds from the narrowing interest rate differential and the terms of trade deterioration reverse. The Chilean peso has underperformed nearly all other major emerging market currencies …
The war between Hamas and Israel – and the potential for escalation to the wider region – has increased the uncertainty around the economic and financial market outlook, but in most scenarios is unlikely to generate a sustained hit to major asset markets. …
We expect the US Treasury 10-year/2-year yield spread to turn positive before long, and subsequently rise further over the next year or so. The rapid move towards “disinversion” of the US Treasury yield curve seems to have regained steam today as yields …
25th October 2023
Long-term Treasury yields have risen to new cyclical highs despite a generally weak global economic backdrop. Short-term “technical” indicators also suggest to us the surge in yields may have run its course. PMI survey data released earlier today was …
24th October 2023
Concerns over supply -demand dynamics in the Treasury market seem to be a key factor pushing up Treasury term premia. But we think rising inflation uncertainty among investors has also played a part. The ACM estimate of the 10-year Treasury term premium …
23rd October 2023
US financ ial conditions may soon tighten further, as t he economy slows and credit spreads rise. But, by then, the 10-year Treasury yield may be falling. On Thursday, the 10-year Treasury yield briefly broke through 5% for the first time since 2007. That …
20th October 2023
Big banks in the US have reported quite strong earnings in Q3 but, given our pessimistic view of the economy there, we doubt that their stocks will outperform much in the next couple of months. Earnings season started last week in the US, and most major …
19th October 2023
We still expect the 10-year Treasury yield to fall in the coming quarters. But we’ve revised up our projections for that yield from now to end of 2025, and now think it will reach its cyclical low in 2024. There are two key reasons why we have pushed up …
We think China’s improving economy may help stop the fall in the country’s stock markets, and see them outperform those of the US for a bit. China’s stronger-than-expected Q3 GDP data, released earlier today, seem to have given the Hang Seng Index a small …
18th October 2023
We think equilibrium real policy rates in advanced economies will continue to rise over the next decade or so. That has profound implications for government bond yields and risky asset valuations. Discussions of ‘higher for longer’ generally relate to the …
17th October 2023
The full report is available to download from the button at the top right to Global Economics, Global Markets, Asset Allocation and The Long Run subscribers, as well as to CE Advance clients. If this is outside of your current subscription and you would …
Chapter 4: Financial market implications …
Chapter 3: Where will inflation (and nominal rates) settle? …
Chapter 2: How will the savings/investment balance affect r*? …
Chapter 1: Will stronger potential growth boost r*? …
Introduction and framework …
r* and the end of the ultra-low rates era: executive summary …
Market jitters around the war between Hamas and Israel appear to have stabilised today. But given that the uncertainty on that front is unlikely to fade entirely any time soon, it is worth taking stock of the warning signs evident in commodity markets. …
16th October 2023
We don’t expect a rise in earnings expectations to give the S&P 500 much of a near-term boost, but think the picture is more positive further ahead. Although US earnings season is getting under way, corporate profits probably haven’t always been front of …
13th October 2023
We think the macroeconomic environment will continue to play the key role in the outlook for emerging markets (EM) dollar-denominated sovereign bonds this year and next. Despite country-specific risks, we expect the yields of most of those bonds to fall …
We still think the Fed and investors are too pessimistic about inflation in the US returning to target. We expect a continued fall in both core and headline inflation to push down US Treasury yields over at least the next year or so. CPI data out of the …
12th October 2023
Estimates suggest that the term premium of US 10-year Treasuries has bounced back to positive territory. We think that this can be at least partly explained by demand and supply factors. And we suspect that term premia might rise a bit more, even though …
The fall in Treasury yields since last Friday has pushed corporate bond yields down and equities up in the US. But while we think that Treasuries will keep rallying, we suspect that corporate bonds and equities will fare quite poorly in the near term. …
11th October 2023
We expect a continued paring back of US interest rate expectations to keep pushing long-dated Treasury yields down in coming quarters. But higher term premia may limit those falls in yields. Moves in long-dated Treasury yields have been mixed so far …
10th October 2023
