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E.g., 24-05-2018
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    Gavekal Research

    Playing A Flatter US Yield Curve

    The US yield curve could invert towards the end of this year or early in 2019, the head of the St. Louis Federal Reserve said on Monday. For investors it’s a troubling thought. Over the last 50 years, whenever the US yield curve has inverted, a recession has typically followed within a year or two. Yet although the current flattening of the curve is set to continue, the process will be gradual, which means inversion and an ensuing recession...

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    Gavekal Research

    Fade The US Dollar Rally

    If a week is a long time in politics, then three months is an eternity in the foreign exchange market. Three months ago, sentiment towards the US dollar reached a nadir after US Treasury secretary Steven Mnuchin expressed his desire for “a weaker US dollar”. Over the following weeks, the US currency duly weakened. But since mid-April the dollar has staged a rally, with the DXY index gaining 3.5% as the market has noted the increase in US long...

    1
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    Gavekal Research

    The American Growth Dynamic

    It is clear from data released on Friday that the US economy remains set on an expansionary and inflationary trajectory. Growth in 1Q18 came in at a stronger-than-expected 2.3%, while the US employment cost index rose 2.8% YoY to a high for this cycle. Even as consumer spending comes off the boil, US firms, in what looks like a classic late-cycle pattern, are responding to bottlenecks by investing more in their capital stock. We continue to see...

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    Gavekal Research

    Still Bond Bears

    Matching its 2013 peak, the world’s most-watched interest rate—the US 10-year treasury yield—yesterday touched 3%. Concerns are now high that it will soon move higher, perhaps much higher. For perspective, the US 10-year hit 3.75% in 2011, 4% in 2010 and 5% in 2007. In this cycle, we think yields will break above 3% and then march upwards. In short, we remain bond bears and continue to recommend keeping duration short. Today, we want to...

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    Gavekal Research

    The Message From Credit Markets

    Over the last three weeks US high yield credit spreads have collapsed by 100bp—a tightening that far exceeds the 10bp narrowing in investment grade spreads over the same period. Coming after a marked widening in the Libor-OIS and Ted spreads over February and March, this fall in credit spreads is clearly encouraging. It supports our contention that the widening of Libor spreads was an idiosyncratic anomaly, and nothing investors should be overly...

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    Gavekal Research

    US Budget Deficits And Long Term Interest Rates

    On Monday the Congressional Budget Office published its latest projections for the US economy and government finances, incorporating for the first time the effects of December’s tax cuts. With government revenues set to fall from 17.3% of GDP last year to less than 17% over the next five years, and spending expected to grow from 20.8% to more than 22%, the CBO projects that the US budget deficit will expand from 3.5% of GDP last year to more...

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    Gavekal Research

    US Auto Sales: No Longer A Growth Driver

    Strong US auto sales in March mask a stagnating longer term trend and rising auto loan delinquencies. Happily, as KX explains, neither has broader implications for overall US consumer demand. Although auto sales may no longer be contributing to US growth, rising bad loans in the sector do not prefigure a wider consumer credit crisis.

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    Gavekal Research

    Don’t Fret About Libor

    A disproportionate increase in Libor relative to other benchmark short term rates over recent months has got many observers flustered. In this concise paper, Will and KX dig down to the cause of the increase, and explain what it does and doesn’t mean for portfolio investors.

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    Gavekal Research

    Don’t Wade Into Treasuries

    Leading up to today’s Federal Reserve meeting, long-dated treasuries have slipped back into their trading range. There are two reasons to think this offers a good opportunity to “buy the dip”. First, global growth has eased off as shown by our diffusion index of OECD leading indicators, which tends to lead year-on-year changes in 10-year treasury yields by about four months. Second, investors overreacted to January’s spike in US wage growth data...

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    Gavekal Research

    The Corporate Bond Play

    With high-yield and investment grade spreads having shrunk to historically low levels, US corporate bonds are hardly cheap. Yet the combination of favorable tax policy and fiscal incontinence recommends them to any US bond portfolio. As the US economy is likely in the dog days of this cycle, the tricky question is what duration investors should focus on.

    0
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    Gavekal Research

    The Curiously Weak Dollar

    Since early February, global markets have had a volatile ride. The big exception has been the US dollar, which has stayed stoically range-bound. This is odd considering the Federal Reserve’s fairly hawkish outlook for monetary policy and the fact that imposing tariffs on metal imports should lessen the US trade deficit. Not to pat ourselves on the back, but the general Gavekal view on the US dollar has in recent times been fairly bearish (see...

    4
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    Gavekal Research

    Housing And The US Economy

    The last economic cycle in the US was marked by excesses in residential investment and a dearth of business investment, which proved negative for productivity growth. As the current cycle gets a pro-cyclical boost in its mature phase from last year’s tax reforms, that imbalance will be at least partially reversed.

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    Gavekal Research

    The US Current Account, Trump’s Trade War And Equities

    US president Donald Trump’s announcement last week of tariffs on imports of steel and aluminum are just the first salvo of a trade war aimed at reducing the US$566bn annual US trade deficit. Yet even far more extensive tariffs than those announced on Thursday will do nothing to narrow the US trade gap. As KX argues in this report, more powerful economic forces are working to widen the US trade and current account deficits over the coming...

    2
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    Gavekal Research

    Deficits And Bondholders

    Economics 101 says that when there is more of something, then other things being equal its price should go down. That is worrying for US bond investors as US lawmakers last week passed a budget deal that may raise deficits by US$320bn over the next 10 years (any new infrastructure spending will be extra). Interestingly, and perhaps not entirely coincidentally, just as debt-fueled big-government becomes the new normal in Washington, November’s...

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    Gavekal Research

    Good News Is Bad News?

    The US posted a solid employment report on Friday, and the markets didn’t like it one bit. Some 200,000 jobs were added in January, better than the expected 180,000 and prior month gain of 160,000. But what really spooked investors was the faster than expected pickup in wage growth to 2.9% YoY. On the face of it, this is good for economic growth (certainly in nominal terms) and top-line corporate revenues. The worry is that without productivity...

    2
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    Gavekal Research

    Take Profits On US Homebuilders

    Our view that real growth in the US will remain supported this year at a similar level to 2017’s 2.5% rate is based on three main elements: rising business investment following December’s tax cuts; a moderation in consumption growth as labor market tightness slows job ceation, and a neutral to mildly positive view on residential investment (see The Outlook For US Growth And Prices). The third element—our neutral view on homebuilding—merits...

    0
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    Gavekal Research

    The Sustainable Rise In US Inflation

    In her valedictory meeting yesterday, Janet Yellen presided over a slight tightening of language to indicate that the Federal Reserve’s official inflation target of 2% should be hit some time this year. Investors were not surprised as break-even inflation rates have risen to 2% from about 1.8% late last year, while the chance of four rate hikes materializing in 2018 is now priced at 22%. The fly in the ointment is still sluggish wage growth,...

    0
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    Gavekal Research

    The Outlook For US Growth And Prices

    The first estimate for real US GDP growth clocked in at 2.6% for the fourth quarter, bringing full-year 2017 growth to 2.5%. Policymakers at the Federal Reserve forecast the same rate of growth for 2018, together with a moderate pick-up in consumer inflation from 1.7% to 1.9%. At Gavekal we try to avoid making such specific numerical forecasts; as the great Danish physicist Niels Bohr used to say, “It’s very hard to make predictions, especially...

    0
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    Gavekal Research

    Taxes And Yields

    US equity markets have started 2018 committed to the idea that Goldilocks is alive and well. Although no clear picture has emerged of its impact, the passage of the most significant tax reform since the 1980s has had S&P 500 firms opining publicly that they hope to invest more and treat staff better. The corollary is that this cycle might be getting a second wind. The fear is inflation, as shown by yesterday’s move in treasury yields to...

    0
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    Gavekal Research

    Stick With Dollar Depreciation Plays

    The last year has seen a rare outbreak of consensus at Gavekal. Since last January partners and analysts have been almost universally bearish on the US dollar. In that time, the DXY dollar index has slumped some -12% from its heavily overvalued level at the beginning of 2017. Now the first 12 trading days of 2018 have seen the DXY slide -1.9%, breaching September’s support level to sink to its lowest since the end of 2014. This latest...

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