In today’s briefing:
- Global Monetary Policy Outlook: Bracing for an Asymmetric Policy Rate Path
- The Outside-The-Box Way to Play A Relief Rally
- Term Premium and Real Rates: Drivers of Risk Appetite
- The Hoo-Ha in the Bond Market
Global Monetary Policy Outlook: Bracing for an Asymmetric Policy Rate Path
- Monetary policy conduct in Western economies is still dominated by inflation considerations, particularly tight labour markets. Strong demand for services makes it difficult for central banks to lower policy rates.
- Tight labour markets are no longer regarded by central banks as being compatible with price stability. Labour hoarding will slow disinflation, making it more difficult to quickly reduce policy rates.
- Central banks are reviewing their estimates of their neutral policy rates due to the different inflationary backdrop. Various factors suggest that higher neutral policy rates for a considerable period.
The Outside-The-Box Way to Play A Relief Rally
- The stock market is oversold, washed out and poised for a FOMO relief rally.
- Our review of sector relative performance leads us to believe that the leadership in a rebound will be led by the cyclically sensitive materials stocks.
- In particular, gold and gold stocks have defied their inverse correlation to USD strength and could be strong beneficiaries under a relief rally scenario.
Term Premium and Real Rates: Drivers of Risk Appetite
- The financial markets have taken a risk-off tone as bond yields rose against a backdrop of better news on inflation and employment, and expectations that the Fed has finished hiking.
- If the nominal Fed Funds rate stays steady and inflation falls, this will induce higher real rates, excessively tight monetary conditions and eventually a pivot toward easing.
- We believe the market is at or near the point of maximum pain and investors should be prepared for a FOMO scramble for bonds and risky assets.
The Hoo-Ha in the Bond Market
- The upward spike in Treasury yields, particularly at the longer-end, has introduced market anxieties lately
- But the recent jump in the 10-year yield, unlike earlier periods, seems to be influenced by the unobserved term premium component
- I introduce my long-maturity term premium estimate, attempt to tease out statistical relationships and conjecture on the potential rate path
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