"Where are we in the business cycle?" is a question macroeconomists often are asked by investors. On the face of it, it is a reasonable question. The macroeconomic backdrop is an important input variable for key asset allocation decisions such as whether to be over- or underweight stocks relative to bonds, sector rotation, not to mention FX and credit positions. The question invites the idea that economic expansions are on the clock. They are in the sense that their average length is a question of a relatively simple empirical exercise. But a classic truism still remains. "Economic expansions don't die of old age, they're killed by economic policy", a phrase I have adapted from the U.S. version ending with the idea that economic expansions usually are killed by the Fed.
Read MoreYour corresponding blogger has spent most of his time this week recovering from Covid, which has ruined some otherwise carefully laid plans for this week’s missive. I thought that I’d start slowly then, by dissecting the topic on everyone’s minds this week; the inverted U.S. yield curve. Albert Edwards is absolutely right when he says that: "Once inversion occurs a whole new industry emerges, devoted to dismissing the relevance of the signal.” Albert quotes Juliette Declercq of JDI Research for the argument that this time is indeed different for the 2s10s, mainly because the real yield curve—here the 5s30s TIPS vs the nominal 5s30s—is still upward sloping, even steepening. Albert looks to the Macro Compass—penned by Macro Alf—for the contrasting point that if you use forward 2y yields, the real yield curve is in fact very flat. Albert concludes, perhaps not surprisingly for the ice-age perma-bear that the "Fed funds won’t need to rise much before the Fed crashes the economy and the markets. It is as they say “déjà vu all over again”.
Read MoreEquities seem to be in the throes of the death of a thousand cuts at the moment. The rebound towards the end of January, from the initial swoon, was reversed last week, and at this point a new low is all but certain. There are a number of things troubling equities. Geopolitics are a fickle catalyst for anything, but it has certainly added to the misery in the past few weeks. A Russian incursion in Ukraine remains a distinct risk, an event which would force markets to discount the risk of a more sustained military conflict on the European continent, not to mention a further leap in energy prices. The latter would intensify inflation fears, which are already weighing on markets in the context of the surge in bond yields, and the significant repricing in expectations for monetary policy, for both rates and QE. Investors could do with relief from these headwinds, but I doubt they’ll get it, at least not in Q1.
Read MoreFinancial markets have a tendency to gravitate towards the same narratives over and over, a bit like a good script writer who knows, obviously, that the hero always has to save the cat in the first scene. Core and headline Inflation have soared, and the Fed, as the perennial first mover among the major central banks—curiously flanked by its trusty squire the BOE—is now determined to kill it with rate hikes and QT, having recently abandoned all hope it being ‘transitory’. Cue new scene, and we are witnessing a torrent of forecasters tripping over each other to proclaim that they now think the federales will lift the Fed funds rate by five, six, or even seven, times this year, not to mention shrink its balance sheet by $1T. Markets have been blissfully ignoring the threat of monetary policy tightening, until now. As I type global equities are down 5-to-10% month-to-date in January, and the yield curve is flatter. What comes next?
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