Stock returns since the Fed hiked in December... Read More
The U.S. dollar has rebounded as expected after the end to global concerted economic growth. Uncertainty over Federal Reserve rate hikes remains supportive of the U.S. dollar. Nonetheless, we await another rise in fair value estimates before again committing to a stronger U.S. dollar.... Read More
Stabilization in Canadian economic growth and rising inflation are likely to see the Bank of Canada raising interest rates along with the Fed this summer. ... Read More
The consumer appears mostly healthy, but still reluctant to make big ticket purchases. Credit card debt is rising, but not out of line with historical standards. Some warts regarding wages keeps our focus on non-cyclical, defensive sectors. Additionally, long-end U.S. Treasury yields will likely struggle to rise until these warts are removed.... Read More
Anyone believing the U.S. 10-year note yield hitting 3.0% or core inflation reaching the Fed's target of 2.0% would induce higher U.S. Treasury volatility is thus far sadly mistaken. Monetary policy uncertainty across major central banks is near post-crisis lows, especially with the ECB and BoJ months away from discussing their own exit from quantitative easing. ... Read More
A big bump in the pace of core inflation to 2.0% through March 2018 should not necessarily be chased by investors. History suggests large shocks to core inflation are met with muddled to narrower TIPS breakevens in the months following. Whether or not TIPS breakevens can add another 25+ bps of widening will very likely dictate the pace of hikes by the Federal Reserve.... Read More
We don't see any signs of panic over the 3% threshold in emerging market ETF flows. ... Read More
In his inaugural edition of a new column, Jim discusses the regime shift in interest rates. The bond market is now focused on inflation rather than financial stability. Understanding this will prove vital as central banks embark on quantitative tightening in the years to come. ... Read More
Optimism Everywhere How This Optimism Manifests Itself Biases In The Surveys How the Biases Show Up ... Read More
Financial markets are unfortunately suffering from a circular reference due to group-think and herd mentality. We use the information and ideas from 'the group' as a heuristic to form our own opinions. The world has become exponentially more complicated and inter-connected, therefore to remain functional we allow the crowd to help us make decisions. Unfortunately, positioning in financial markets become polarized and surveys of the economy are of waning utility.... Read More
We estimate the reversal rate (or neutral rate) by stress testing lending growth and financial leverage with changes in the fed funds target rate. The rate leading to greater than 50% probability of causing a contraction in lending... Read More
We are back to inflation being THE latent factor impacting nearly all asset classes. A continued march higher in inflation causing belief by long-end U.S. Treasury investors would produce a very unfavorable scenario for zombie companies and the numerous investment grade companies on the bubble. High yield has yet to reflect much of these risks, but we would not be surprised they begin surfacing assuming U.S. 10-year yields march higher above 3.0% on the heels of higher inflation.... Read More
Over the past week we provided numerous research posts suggesting U.S. high yield OAS are primed to widen. Here's why: 1) Concerted global economic growth has ended, led by Eurozone weakness, 2) High yield's negative correlation to the U.S. treasury yield curve is expected to snap toward positive like equities, 3) Cyclicals are beginning to under-perform non-cyclical, defensive sectors, and 4) Higher U.S. treasury yields put pressure on so-called zombie companies (14% of S&P 1500).... Read More
Just as active managers began to enjoy dispersion among S&P 500 stock returns near the end of 2017, correlations shot higher.... Read More
Bonds and equities are disconnected, with investors in each foreseeing risks very differently. Bond investors will remain calm as long as uncertainty over FOMC and ECB monetary policy stays very low. The Federal Reserve are enjoying the tailwinds of rising inflation expectations, but hope (surveys) and a commodities rebound will be on shaky ground in the event global economic growth continues to slow.... Read More
Flattening in the Treasury curve is back in the headlines and the financial sector is in the spotlight as a result. Continued flattening and tighter financial conditions present serious threats to regional bank performance. ... Read More
Leverage traders and specs both heavily short the the U.S. 10-year Treasury. ... Read More
Inflation expectations have been rebounding with a rally across industrial metals and energy. But, enthusiasm for higher sovereign yields are not yet reflecting deteriorating economic growth across the globe. Our outlook suggests a skew toward lower yields, not higher. The air has yet to come out of lofty survey expectations.... Read More
Weakening consumer balance sheets are a headwind for gold performance. ... Read More