Articles by Chun Wang, CFA, PRM Director of Multi-Asset Strategies

Our Risk Aversion Index edged down again in February and stayed on the “Lower-Risk” signal generated at the end of January.

Improvement in bank lending trends should be a tailwind for economic activity, while steeper yield curves also imply a looser lending environment lies ahead. Another area supporting U.S. economic resilience is the wealth effect: The surging wealth effect is boosting consumer confidence which, in turn, leads to higher consumption.

CPI readings were a tad hotter than estimates again in January. Given the speed of disinflation that’s currently priced in by the market, we are probably headed toward a period of expectation adjustment.

Positive economic momentum is apt to carry on for a while longer. Within fixed income, we are turning favorable toward credit, especially high quality investment-grade corporate bonds.

The probability of a soft landing has materially increased, while stronger than expected growth is likely to put a floor on inflation, which challenges the consensus disinflation view. A refresh of our Dollar Monitor suggests a weaker dollar going forward.

CPI readings for December were a tad hotter than estimates. The path forward is unlikely to be a straight line down. Watch geopolitics closely, as it could drive prices in either direction very quickly.

While recession risk remains high, financial conditions have eased considerably, undoing all of the tightening seen in 2023.

Given how many potential political and geopolitical hotspots there are at present, it might be a bit presumptuous to think 2024 will be a typical year. Politics and geopolitics are the most underpriced risk for 2024.

The S&P 500 index painted a picture of a runaway market in 2023, but for a lot of non-equity markets, 2023 was a year of round trips.

While recession risk remains high, financial conditions have eased considerably with the recent retracement in bond yields and the dollar. We are in a favorable seasonality window and not being too bearish makes sense at this point.

With the market penciling in four rate cuts in 2024, the consensus appears to have accepted the idea that the last rate hike of the series was in July. We look at various market indicators around the end of previous hiking cycles and compare the historical pattern with today’s episode.

The massive short squeeze in Treasuries had a perfect setup and a powerful catalyst.

CPI readings for October were softer than estimates. We caution against linearly extrapolating the current disinflation trend. Our scorecard update shows an uptick in inflation pressures.

Our Risk Aversion Index moved higher in October and triggered a new “Higher-Risk” signal.

The 10Y-2Y yield curve broke above the key level of -0.4% and that means a double-bottom pattern is in play. While we are confident that a major steepening cycle is here, we have to acknowledge that the nascent move could fail. A steepening move is also the market’s way of signaling easier conditions ahead.

Despite the “Lower-Risk” signal, the surge in bond yields and a higher U.S. dollar have materially tightened financial conditions: Caution is strongly recommended.

Typically, duration contracts when rates go up, all else equal. The Magnificent Seven, however, saw their duration going the wrong way: They seem to be the only cohort to see duration lengthening and are now more risky than a year ago.

Latest numbers are largely in line with expectations. Higher wages boost the wealth effect, which supports the economy, which also means inflation and rates are likely to stay higher for longer. The latest update of our inflation scorecard shows inflation pressures are starting to build again.

The Risk Aversion Index ticked up in August, but its “Lower-Risk” message is unchanged. Within fixed income, we remain constructive on shorter maturity and higher-quality credit.

The 10-year yield made a new cycle high just before the Jackson Hole meeting. That is significant, as it not only broke the lower-high-lower-low pattern since last October, but also rejected the hypothesis, “we have seen the cycle high in interest rates,” which was the consensus at the start of 2023.