Dear Investors,
Raymond James – (13 Macro Updates) Market’s Highlights
The fed wants to avoid shipwercking the economy
“Inflation has declined considerably from last year’s peak of 9.0% to 3.7%.”
“However, policymakers still think they have more work to do and have signaled that one additional rate hike is likely.”
“Stronger than expected growth and rising oil prices remain near-term risks;”
“Restrictive policy rates and tight lending standards should cool down the pace of economic activity and keep the disinflationary trend intact.”
“We do not agree with some market pundits’ assessments that the economy is less interest rate sensitive than it has been in the past.”
“And as a result, we think it is premature to predict a soft, non-recessionary landing.”
“With multiple headwinds building on the horizon, a mild recession is more likely.”
Equities in 2024
“Earnings will need to move higher from here for equities to deliver the next big uptrend in the market.”
“However, our call for a more challenging macro environment over the next few quarters suggests that earnings are more likely to tread water in 2024 ($220 EPS forecast).”
“As a result, companies are likely to have difficulty maintaining their top line sales growth and delivering improving margins in a mild recessionary environment.”
“The good news: earnings are not likely to fall precipitously from here.”
Fixed income update
“The unrelenting rise in Treasury yields continues, with the 10-year yield up ~48 bps MTD – on track for the largest monthly increase in nearly a year.”
“The initial leg higher in yields has been driven by stronger growth momentum and from the fallout of the Fed’s recent meeting where policymakers drove home the ‘higher for longer’ messaging with upward revisions to their 2024 rate projections.”
“The speed of the upward move in yields has been unnerving, particularly given the bear steepening in the yield curve.”
“We suspect that the move higher in yields is overdone, particularly given consumer spending saw a big downward revision in this week’s GDP report.”
Russell Investments – (8 Macro Updates) Government bonds are attractive as most central banks are near the end of their rate hikes
Government bond
Government bond valuations are attractive. U.S., UK and German bonds offer reasonable value.
They have the potential to rally as investors become confident that central banks have finished tightening, inflation has peaked, and economies are slowing. It is likely the U.S. yield curve can steepen in coming months.
The spread between the 2-year and 10-year bond yields is close to an extreme. The yield curve tends to steepen after the Fed has completed raising interest rates and markets start looking toward monetary easing.
Japan remains the exception, where the 10-year yield is around 70 basis points and still expensive.
USD Dollar
The U.S. dollar (USD) has strengthened over the past couple of months as investors speculate the economy could have a soft landing that would delay rate cuts.
The dollar is expensive in real trade-weighted terms and will be under downside pressure if markets lose faith in a soft landing. The Japanese yen is attractive from a cycle and value perspective.
At 147 versus the USD, it is significantly undervalued relative to its purchasing power parity valuation of 92. Japanese inflation pressures mean the Bank of Japan is likely to eventually move away from yield curve control monetary policy.
The euro at 1.07 is also significantly undervalued relative its purchasing power parity value of 1.36. It will appreciate, however, only if markets expect that recession and ECB rate cuts can be avoided.