Articles by Chun Wang Director of Multi-Asset Strategies
Inflation - Not Going Anywhere Soon
Inflation remains muted and is certainly softer than what the Fed would like to see. The recent string of softer global economic data, especially outside of the U.S., has torpedoed the market’s expectations for inflation. The recent string of softer global economic data, especially outside of the U.S., has torpedoed the market’s expectations for inflation.
Interest Rates & Currencies: It’s Complicated
The recent sudden strength in the dollar is mostly attributable to the divergent central bank policies. This supports a bullish dollar outlook over the medium term.
Mid-Term Election – Favorable For Stocks
General patterns are a weaker dollar, rising stocks and range-bound bond yields.
Risk Aversion Index—Moved Up Again, Stayed On Higher Risk Signal
The hawkish Fed and various geopolitical risks weigh on market sentiment, so caution is highly recommended.
U.S. Bonds
U.S. Quality Corporate Bonds & Munis Rated Favorable; High Yield Bonds Rated Neutral.
Transitory Inflation
August inflation unexpectedly fell into the negative territory. The softness in global inflation makes it harder for a single country to decouple on the upside. If the strength in the dollar has staying power, this will show up in lower import prices going forward, another headwind for inflation. The Fed’s hawkish stance certainly does not help inflation expectations either.
Current State Of Stock-Bond Relationship = “Easing”
We define four states of the stock-bond relationship based on the directions of stock price and bond yield movements; stocks fear tightening more than true risks, while bonds are more responsive to Risk-On and Risk-Off.
Risk Aversion Index—Ticked Lower, Still On Higher Risk Signal
New ECB stimulus should support risky assets near term but caution is warranted.
Another Pause in Inflation
July inflation was slightly lower than expectations. So far we have not seen sustained wage inflation pressure. The pause in inflation is global in scope, which makes it even harder for a single country to decouple on the upside. Inflation at producers’ level is still moderate.
Yield Curve Too Flat? Short Term Maybe, Longer Term Probably Not.
With the Fed policy approaching actual tightening, the market is trying to price in a rate hike in the next year or so. This is a rather typical market response.
A Year Before Tightening - Stocks Will Be Fine
We studied the five previous initial rate hikes and present the average pattern over the one year period prior to these events.
Risk Aversion Index Ticked Up - Still On “Higher Risk” Signal
There have been several cases in the last couple years where credit and/or currency risk-off events never affected equities. We will soon find out if this is just another one of those. Caution is recommended.
Inflation Taking A Pause
June inflation is in line with or slightly lower than expectations. The increase in hourly earnings stalled too. So far the recent bounce-back in inflation has not posed a big enough threat to make the Fed policy more hawkish in the near future. Inflation at producers’ level seems to be taking a pause too.
10-Year Yield: 250-280 Range Intact
As we expected, at 250-270, the 10-year yield stayed within our narrow target range in June.
Time Cycle Composite—Mid-Year Update
Our beginning-of-the-year message—“lower your expectations and be patient” has largely been true so far this year as most equity markets tracked the historical pattern pretty closely.
Risk Aversion Index - Stayed On Higher Risk Signal
The level of this index is in an extreme zone where false alarms are more likely as small movements in the index can trigger new signals.
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