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Sticky Inflation Equals Sticky Rates
If we needed a reminder on how persistent some components of inflation are – we got it this week. Core consumer price inflation (CPI) remained more than double the Fed’s target rate – with rents surging to 0.65% month-on-month. And whilst both headline and core were largely inline with expectations, inflation remains uncomfortably high. As soon as the CPI numbers hit the tape – probabilities of an additional 25 bps hike went up. Markets had not priced that in. What’s more, the probabilities of rate cuts next year dropped. It’s premature to conclude the Fed has hit their terminal rate…
One Case for Bond Yields Falling in 2024
It’s been a horrible 3-years for bond / fixed income investors. In short, they have been slaughtered as yields shot higher. For example, losses in long-maturity bonds (e.g. greater than 10 years in duration) are close to historical levels. Consider the all-important US 10-year treasury…. an asset which underpins every financial asset. It has plunged 46% since peaking in March 2020. Put another way, these yields went from ~0.5% at their lows to ~4.8% last week. What we’ve seen in the bond market is one of the most severe market crashes on record. 30-year bonds have plunged ~53%. As a parallel, the equity market crashed 57% during the 2007-09 financial crisis
Just How ‘Strong’ was the Sept. Jobs Report?
Never take a headline print at face value. There’s always more to the story – where it pays to dive into the details. Digging below the surface takes some work – however it’s worth doing. Last week was a great example. The BLS told us 336,000 jobs were added vs expectations of 160,000. Sounds strong? But was it? Not really. For example, since June 2023, full-time employment is lower by some 696,000 jobs
Not Just Equities Trading ‘Per the Script’
A little over 2 months ago – I described the market as “euphoric”. For example, valuations were in excess of 20x forward earnings – despite what we saw in bond markets. Something was horribly wrong. My simple advice was do not add to positions at those levels. The downside risks were just too high. My thesis was whilst stocks could easily rally to ~4500 — any further meaningful upside felt ‘limited’ . Turns out we didn’t go too much higher. Now stocks could easily catch a bid in the 4200 zone – that’s what I expect. However, the risk/reward still doesn’t look that favourable…