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No Cold Turkey

The financial markets have maintained their recent upward run, which has been fueled by a stream of seemingly positive developments that have boosted equities and high-yield bonds. However, we caution against the current wave of optimism, which could face a sharp reversal if the widely anticipated gentle economic deceleration fails to materialise.

How Can 0.1% Feel So Good?

Last week witnessed a notable boost to investor sentiments as the 0.1% outperformance of U.S. inflation data versus expectations prompted a discernible uptick in risk appetites. The impact resonated through the global bond markets, with a significant decline in yields—U.S. 10-year notes receded by 20 basis points (bps), paralleled by a steeper 30 bps reduction in New Zealand. Equities, too, ended the week on a high, with markets generally advancing 2-4%. European and Japanese indices, in particular, benefited, eclipsing gains in the U.S. and capitalising on a concurrently retreating U.S. dollar.

A Festival of Confusion, Not Light

We've been hearing mixed signals lately. On one hand, we're told that US equities are surging because of lower long-term interest rates and robust earnings forecasts. However, central bankers continue to express concerns about stubbornly high core inflation, vowing to keep interest rates elevated for an extended period of time. Alarmingly, a US household survey reveals that inflation expectations are on the rise, and not declining. Federal Reserve's Confounding Commentary. The commentary from Fed governors last week was, frankly, perplexing. Just days after their November FOMC meeting, Fed governors were offering intricate insights into the potential future of policy rates, which only added to the market's confusion.

Nothing is for Certain

Last week, volatility in the bond market was unprecedented with a peak-to-trough drop of 43bps in the US 10-year government bond yield. It would be wrong to see the move as a validation of a more positive view of the future. The fall in bond yields was the consequence of good news from policymakers and economic data. However, the scale of the rally in the bond market was exaggerated by the closing of a huge, short position in the treasury market.

Monthly Review of Macro and Market Performance

Through October, data reports for the global economy showed stronger-than-expected growth in the United States and some stabilisation in China. Third quarter US GDP growth came in well ahead of expectations at 4.9%. Still, strong consumer spending growth was a positive feature. The sharp increase in inventories means that the headline growth somewhat overstates the underlying strength of the economy. Around 1.3 percentage points of growth came from the build-up inventories, which may reverse in subsequent months. Former investors’ worries that the US economy faces an imminent recession still seem far from the truth.

Strong US Growth Too Hot to Handle?

Astute investors following the US economy would find the current trend of robust growth and persistent inflation concerning. That economic dynamic has had the Federal Reserve appear worried, too. As we approach this week's FOMC meeting, it's widely anticipated that the Fed will keep the interest rates unchanged. Nevertheless, we anticipate the accompanying statement to subtly acknowledge the enduring strength in economic growth and inflation evident from recent data points.