Macro Monitor
U.S. 10-Year: Many Reasons To Be Patient
From a price action perspective, the drop below the 50-day moving average and the failed higher-high, higher-low pattern are not supportive of an imminent up-turn in interest rates.
RAI Ticked Up And Stayed On “Higher Risk” Signal
We recommend staying cautious and exercising patience in the near term.
U.S. 10-Year: Looking For A Follow-Through
This is the first time in the last year or so the 10-year yield has broken through, re-tested, and held above the 50-day moving average.
Inflation & Monetary Policy—A Feedback Loop
Inflation and inflation expectations are key inputs to central banks’ policy decision process. Divergent policies have very different impacts on inflation.
Risk Aversion Index—Fell Sharply But Stayed On “Higher Risk” Signal
We are leaning towards a more favorable outcome for risky assets but staying alert.
U.S. Interest Rates & Credits—Keep An Open Mind
The ease with which the 10-year yield broke the strong 185 bps barrier was simply too hard to ignore. This tells us interest rates will likely go lower before going higher. The current active range is 140-185.
EU QE - Success Highly Uncertain
We rely on past experiences in Japan, the U.K., and the U.S. to give us clues about the future path of the EU QE.
Risk Aversion Index—Stays On “Higher Risk” Signal
The market is at a critical juncture with oil-related assets very oversold while equities are holding near all-time highs.
U.S. Interest Rates And Credits—Expect The Unexpected
We expect much higher volatility in interest rates this year as the market grapples with the prospect and timing of the Fed’s first rate hike. Our base case is for the Fed to raise rates in the third quarter. There are various reasons for the Fed to be patient. Inflation will be the biggest one. The threat of oil-related risk contagion is certainly real. We are concerned that equities have not fully priced in this threat.
2015 Time Cycle—Giving The Bull The Benefit Of The Doubt?
We are again impressed by the pattern’s predictive ability as most equity markets tracked their respective patterns quite well in 2014. Another banner year seems to be in store for the S&P 500. The exceptionally favorable pre-election year is the main reason, but we cannot be too complacent.
Risk Aversion Index—New Higher Risk Signal
Despite strong performance for stocks, the RAI ended the year at its highest level. While we are in a very favorable seasonal window, we recommend taking a more defensive stance for now.
U.S. 10-Year - All About Inflation
The collapse in oil prices has brought down inflation expectations dramatically. Inflation will likely be the single most important driver of interest rates in the next 6-12 months.
QE Success Limited - A Transmission Channel Check
Perhaps the most important is the credit channel; the substantial curve flattening that happened recently in anticipation of the Fed hike next year has made lending standards tighter for small businesses.
Risk Aversion Index Stays On “Lower Risk” Signal
Continued strength in equities offsets the weakness in credits and commodities to arrive at an essentially flat reading.
U.S. Investment Grade Corporates: Favorable
Record issuance and oil-related weakness combined to drive the spreads wider but we remain Favorable on these bonds for now.
Interest Rates Range Bound—Can’t Be Too Bearish
The sell-off in risky assets in early October promptly led to expectations of a more dovish Fed.
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