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    Gavekal Research

    Gather Round The Punch Bowl

    US monetary policy tightening is over, at least for now. While the Federal Reserve is not adding any more hooch to the punch bowl, chairman Jay Powell has promised to stop cutting his serving sizes. Although not much of a surprise, the Fed’s guidance is broadly positive for just about everything but US dollar cash—especially equities and real assets.

    0
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    Gavekal Research

    Video: The Fed's Potential Paradigm Shift

    The Federal Reserve is debating a fundamental shift in its inflation targeting. Right now it's targeting 2% inflation no matter what it has been in the past, a so-called "bygones" policy. In this video interview Will discusses the consequences of switching to price-level targeting, where the aim is to keep average inflation over time at 2%.

    0
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    Gavekal Research

    An Investor's Rough Guide To Modern Monetary Theory

    Modern Monetary Theory—the idea that governments can spend as much as they want, free from funding constraints—is attracting more and more attention. Will examines the precepts of the theory, explores whether it really brings anything new to the table, and outlines some of the implications for investors should it ever be applied as practical policy.

    16
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    Gavekal Research

    Video: Shifting Sands At The Fed

    The US Federal Reserve has said it is likely to end its process of balance sheet “normalization” sooner than previously planned. This sounds like an obscure monetary technicality, but it has important implications for investors. In this video interview Will explains why.

    0
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    Gavekal Research

    The Trouble With Price Level Targeting

    The Federal Reserve is talking about changing the way it targets inflation. Currently it tweaks policy in an attempt to zero in on a specific inflation rate: 2%. Under the framework it is discussing, instead it would aim to hit a price index level consistent with a particular long term average inflation rate. The distinction might sound subtle, but by targeting a price level, the Fed would compensate for any undershooting by attempting to...

    6
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    Gavekal Research

    The QT Endgame

    A voting member of the FOMC said yesterday that the Federal Reserve should quit shrinking its balance sheet later this year. This was the clearest indication yet that the US central bank will end quantitative tightening one or two years sooner than the 2020-2021 estimate put forward by Chairman Jay Powell last July. I suspect Brainard will get her wish.

    2
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    Gavekal Research

    A Looser Fed And Tighter Banks

    News flow from the US and beyond over recent months has pointed to an easing of financial conditions. A notable exception has, however, emerged: US commercial banks have stopped loosening lending standards and have started to tighten them—just a touch. I remain constructive, but have gotten more cautious about US risk assets.

    0
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    Gavekal Research

    Video: Conflicting Signals From The US Labor Market

    The US labor market is sending apparently contradictory signals. On one hand the unemployment rate ticked higher in January. On the other, job creation was much stronger than expected. Will looks behind the latest data points to examine the labor market’s underlying trends, and concludes they spell relatively bullish news for the US economy and risk assets over the coming months.

    0
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    Gavekal Research

    Don't Fear Corporate Leverage (Yet)

    With Brexit, the US-China trade war and a synchronous global slowdown, these are anxious times for investors. But apparently, all these concerns pale in comparison with worries about US corporate leverage. According to a BofAML survey this month, corporate indebtedness is the biggest single worry among fund managers. We beg to differ.

    17
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    Gavekal Research

    The Bull Case For US Housing

    As the US government shutdown drags on, US-China tariff talks stutter, the Chinese growth engine slows, global trade slumps and GDP forecasts get cut, the stream of macro-misery in recent days has seemed relentless. On Tuesday, the US National Association of Realtors added its voice to the dirge, reporting that sales volumes for existing homes fell -10% year-on-year to a three year low in December. With new home sales and construction equally...

    10
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    Gavekal Research

    Video: Beyond The Government Shutdown

    As the US government shutdown threatens to enter its fifth week, Will looks back at previous shutdowns to weigh the likely impact on America’s economy and financial markets, against the backdrop of an aging economic cycle, flattening yield curve and tighter financial conditions.

    0
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    Gavekal Research

    A Good News Story From The US

    As the record government shutdown denies Americans vital services and federal workers paychecks, the US has hardly been putting its best foot forward. While we don't expect this political impasse to change the growth trajectory, it does weigh on the market mood. Against such a dour backdrop, we think a good news story from the US economy can be easily missed.

    0
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    Gavekal Research

    Rollover In The US, Not Recession

    This week’s revenue forecast downgrades from Apple and Delta Air Lines and Thursday’s steep dive in the ISM manufacturing PMI only appeared to confirm what market participants already knew: US growth is rolling over. Yet despite the recent sell-off in equities and the further flattening of the US yield curve, we see no recession on the horizon.

    0
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    Gavekal Research

    More Half Full Than Half Empty

    Despite dovish comments from the Federal Reserve about the future trajectory of interest rates, US equities fell further on Wednesday. The S&P 500 has now fallen -14% since early October. Meanwhile, 10-year treasury prices have risen almost 5%. Momentum traders will therefore find good reason to shun equities and add exposure to long-dated treasuries. We suggest doing the opposite.

    0
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    Gavekal Research

    Opportunities Beyond The Death Cross

    November’s payroll report gave investors in US equities reason to cheer on Friday as it suggested reduced inflationary pressure, yet they chose to focus on an escalating row over the fate of a top Chinese telecom executive that is intensifying trade tensions with China. A -2.3% fall in the S&P 500 had the technically-inclined scrambling to glean meaning from a “death cross” as the 50-day moving average fell below the 200-day level. We remain...

    2
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    Gavekal Research

    Don’t Sweat About The Yield Curve

    At least as interesting as the 1.1% rise in US equities on Monday, following the weekend’s news of a three-month US-China tariff truce, was the day’s decline in long-dated US treasury yields and the concomitant flattening of the US yield curve. But was this bond market action good news or bad for investors?

    5
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    Gavekal Research

    Christmas Comes Early

    The most cherished gifts often come in small packets, and investors duly cheered just two small words yesterday by the Federal Reserve chairman. In a speech, Jerome Powell said policy rates were “just below” the neutral level. That was a big change from a month earlier when he said they were “a long way from” the not-too-hot-not-too-cold level. This suggests that the pace of interest rate hikes may lessen, while on the same day data was released...

    0
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    Gavekal Research

    The Drag Of US Housing

    Despite the overall US growth outlook remaining decent, markets have taken on an ugly tone, with US equities having given back their 2018 gains and credit spreads gapping wider. Adding to grim tidings, yesterday saw weak housing data released, which is a worry as the sector often leads the broader US economy.

    16
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    Gavekal Research

    GE Is More Fish Than Fowl

    There is suddenly a flood of commentary speculating that General Electric is a canary in the proverbial coal mine for the US corporate credit market. With investors focused on the troubled conglomerate’s underfunded pension scheme and ailing power business, GE has seen its credit rating downgraded and become a focal point for broader fears that US corporates have taken on too much debt and bought back too much equity. Without taking a view on GE...

    5
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    Gavekal Research

    Hong Kong Seminar — November 2018

    At Gavekal’s seminar in Hong Kong this week, Yanmei Xie, Arthur Kroeber and Will Denyer presented their latest views on China's economy, trade war, and how to approach asset allocation in the US.

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