Delivering Global Macro Investment Insights

DeSaque Macro Research

DeSaque Macro Research Limited was formed by Said DeSaque in April 2012 with the view to delivering global macro investment insights aimed at providing new ideas to clients.

Said DeSaque has over 26 years of experience working as a professional economist in financial services. Prior to establishing DeSaque Macro Research, Said held positions as Senior Economist at Robert W Baird and William Blair. He began his career as a graduate at PaineWebber in 1986, where he eventually became Head of the London Economics Department.

Said takes a very keen interest in international relations, along with their implications for economic development. His research interests include the economic transformation of China and its implications for global capital markets, particularly in the United States. He is a member of Chatham House in London.

The US economy and capital markets have historically been Said’s main focus of attention. He frequently presents his views to institutional investors in diverse geographic locations. In recent years, Said has also been carefully monitoring economic developments in Asia, particularly China and Japan.

Strong US Economic and Equity Market Outlooks: Investors Only Have Policy Mistakes to Fear

Rising Real Yields Need Not Unravel US Equities as End to COVID-19 Restrictions Loom

Outlook for US Treasuries and Fed Policy: Beware the Lingering Legacies of Deflationary Psychology

Dramatically Rising US Bank Liquidity in 2021: Supportive for Treasuries and Risky Assets

Global Economist, DeSaque Macro Research

Said Desaque

Global Economist

Cross Asset Strategy

<p>The steepening US Treasury yield curve reflects expectations of a normalisation of economic activity, boosted by fiscal and monetary stimulus, as well as doubts that the Fed's current forward guidance can be maintained. Media concerns about the impact of rising Treasury bond yields on risky assets appear to overlook the fact that the yield curve typically steepens at this stage of the economic cycle.</p>
<p>The relationship between the yield curve slope and equities is complex: expectations of stronger growth should produce higher corporate profit estimates that can offset the impact of rising yields if the interest rate term structure steepens. Increases in secular corporate profit growth estimates can also help to support higher valuations in the wake of higher bond yields, as testified by events in the late-1990s. Current profit forecasts for the next year remain in firm uptrend and should support equity prices.</p>
<p>This early stage of the current economic expansion makes comparisons of Fed policy concerns with the late-1990s inappropriate, whereas the events of 1994 demonstrate the damage that a sudden change in Fed policy can inflict on financial markets. Prior to February 1994, the Fed had not commenced a tightening cycle for six years and, consequently, investors were complacent about the risks of a change in policy course. There are, however, some notable differences between the current environment and 1994, notably less dogmatic adherence by the Fed to the predictions of the Phillips Curve and greater awareness of the pitfalls of tighter financial conditions on the real economy due to the rapid growth of the capital markets.</p>
<div>History and current forward guidance by the Fed suggest further steepening of the yield curve, an outcome still consistent with positive equity returns. Since 2001, rising yields commencing below 3% have not prevented higher equity prices, whereas starting points above this level have presented headwinds.  </div>

The steepening US Treasury yield curve reflects expectations of a normalisation of economic activity, boosted by fiscal and monetary stimulus, as well as doubts that the Fed's current forward guidance can be maintained. Media concerns about the impact of rising Treasury bond yields on risky assets appear to overlook the fact that the yield curve typically steepens at this stage of the economic cycle.
The relationship between the yield curve slope and equities is complex: expectations of stronger growth should produce higher corporate profit estimates that can offset the impact of rising yields if the interest rate term structure steepens. Increases in secular corporate profit growth estimates can also help to support higher valuations in the wake of higher bond yields, as testified by events in the late-1990s. Current profit forecasts for the next year remain in firm uptrend and should support equity prices.
This early stage of the current economic expansion makes comparisons of Fed policy concerns with the late-1990s inappropriate, whereas the events of 1994 demonstrate the damage that a sudden change in Fed policy can inflict on financial markets. Prior to February 1994, the Fed had not commenced a tightening cycle for six years and, consequently, investors were complacent about the risks of a change in policy course. There are, however, some notable differences between the current environment and 1994, notably less dogmatic adherence by the Fed to the predictions of the Phillips Curve and greater awareness of the pitfalls of tighter financial conditions on the real economy due to the rapid growth of the capital markets.
History and current forward guidance by the Fed suggest further steepening of the yield curve, an outcome still consistent with positive equity returns. Since 2001, rising yields commencing below 3% have not prevented higher equity prices, whereas starting points above this level have presented headwinds.  

Steeper US Yield Curve: Equity Prices To Be Supported by Corporate Profits Unless Yields Breach 3%