Macro

(New York)

As almost all investors are aware at this point, global markets, including the US, saw huge moves in yields yesterday. Trading of the 10-year US Treasury bonds saw yields as high as 3.22% today, sharply higher than just a week ago. The Dollar also soared. This led to a big selloff in stocks as well as major losses across emerging markets and US corporate bonds.


FINSUM: In our view, there are two ways to interpret this big move higher in yields. One is that it was just reactionary to new US economic data and that yields will stall again. The other is that the market has finally woken up to the reality that higher rates and yields are a certainty and that expectations need to be reset. We favor the latter view and think this could be a paradigm-shifting move that finally sparks losses in bonds and rate-sensitive stocks.

(Washington)

The Fed has hiked rates many times over the last couple of years, but the overall attitude of Fed officials has been very relaxed. They have been diligent to project a very mild outlook of rate hikes. However, that may be set to change, argues the Financial Times. The US economy is growing very strongly, and the odds that the Fed may have to adopt a much more hawkish position are growing. The Fed’s hikes, though frequent, have been small, meaning policy is still accommodative and pro-growth. However, given the state of the expansion, a sharp move higher in rates is looking increasingly necessary.


FINSUM: Given the Fed’s most recent statement, this argument carries some weight. We can see Powell and the team getting more hawkish. That said, the economic tailwind of tax changes is fading, so perhaps it won’t be necessary.

(New York)

Several Wall Street analysts are warning that the US will fall into a recession in 2019. Some are even pegging the odds as high as 100%. The reason for the recession will be the increasingly aggressive Federal Reserve, which yesterday adopted a more hawkish stance on the economy and rates (with a more aggressive dot plot and the removal of “accommodative” from its policy statement). The current trade war is the other big factor which could push both the US and global economy into recession, as international trade is already contracting.


FINSUM: Forecasting the timing of the next recession seems futile to us. However, we will admit that the Fed adopting a more hawkish stance (and the fact that the funds rates is now higher than inflation) worries us.

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