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David Fuller and Eoin Treacy's Comment of the Day
Category - Fixed Income

    Fed Will Wait See the Whites of Inflation's Eyes

    This article by Yelena Shulyatyeva for Bloomberg may be of interest to subscribers. Here is a section:

    A brighter economic outlook was not paired with any pulling-forward of rate-hike projections -- in fact the opposite. The FOMC is signaling via projections and upgraded forward guidance that it does not expect to raise rates even if the jobless rate hits 4%. When unemployment hit that mark during the last expansion, the funds rate was already above 1% and steadily rising.

    The Fed updated policy guidance after adopting its new inflation-targeting framework. New guidance entails achieving both inflation and the full employment targets.

    The Fed’s assessment of “considerable risks” surrounding the economic outlook over the medium term remained in the statement, signaling that officials have not taken much comfort from recent better-than-expected activity and labor market data.

    The Summary of Economic Projections, which extended forecasts into 2023, included an upgrade to GDP growth in 2020 and a downgrade to the unemployment rate throughout the horizon. The lack of action on the fiscal-aid front likely led to less optimistic projections for 2021 and 2022. The fed funds rate central tendency forecast indicates rates remaining at the zero-lower bound in 2023.

    Assuming the economy rebounds by 28% annualized in the second quarter, as we project, U.S. GDP will need to grow by 3.4% in the fourth quarter to achieve the Fed’s forecast of -3.7% for the full year. This is slightly above our projections for growth of 2.5% in the fourth quarter and -4.0% for the year.

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    12 frightful slides before Halloween: Stocks boil and bubble, investors toil and trouble

    Thanks to a subscriber for this report from Stifel which contains a number of insightful charts and may be of interest. Here is a section:

    Industrials Conference: Strategy Sector Views + Analyst Stock Picks

    Thanks to a subscriber for this report from Morgan Stanley which may be of interest. Here is a section:

    The Age of Disorder

    Thanks to a subscriber for this report by Jim Reid from Deutsche bank. Here is a section:

    Email of the day - on private equity growth opportunities

    Recently Mr. Treacy mentioned that most of the growth and yield opportunities are currently in the Private Equity. I would appreciate Mr Treacy's view on UK tax efficient Venture Capital Trusts. I am considering them as they provide exposure to early stage companies and provide tax efficient investment. Does Mr. Treacy deem this a good vehicle or would he suggest any other investment instruments?

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    A Red-Hot Treasury Trade Starts to Unwind Every New York Morning

    This article by Stephen Spratt and Edward Bolingbroke for Bloomberg may be of interest to subscribers. Here is a section:

    One trader in New York, who asked not to be named as he isn’t authorized to speak publicly, said the buying earlier this week was dominated by accounts taking off bets against long-maturity debt, as popular so-called steepener trades are pared down. A flurry of Treasury futures action on Thursday offers further evidence that investors are unwinding these wagers or calling it quits.

    Positioning for a steeper yield curve, where rates on long-dated debt rise more than those on shorter Treasuries, has been a hot strategy in bond markets in recent months on the expectation the Federal Reserve would take a more relaxed approach on inflation -- something that came to fruition at a virtual Jackson Hole confab on Aug. 27. Yet even as Wall Street strategists reiterated their “steepener” recommendations, 30-year yields have fallen more than 15 basis points to 1.35% Thursday, having risen from 1.22% at the start of April.

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    Bridgewater's Risk-Parity Shift Jolts a $400 Billion Quant Trade

    This article by Justina Lee for Bloomberg may be of interest to subscribers. Here is a section: 

    “It is pretty obvious that with interest rates near zero and being held stable by central banks, bonds can provide neither returns nor risk reduction,” a team led by Co-Chief Investment Officer Bob Prince wrote in the July report.

    Bridgewater’s famous All Weather portfolio has therefore been moving into gold and inflation-linked bonds, diversifying the countries it invests in and finding more stocks with stable cash flow.

    The idea is to replicate the long-term positive returns typically generated by bonds while finding alternative ways to hedge a downturn in stocks, especially if higher inflation upends low-yielding nominal debt.

    Risky Business
    Bridgewater’s conviction that ultra-low yields are a game-changer for risk parity will resonate with many on Wall Street, who have also been fretting over the fate of traditional portfolios that allocate 60% to stocks and 40% to bonds.

    According to the firm, about 80% of local-currency government bonds have been trading below 1%, which limits the room for such notes to rise in value during a bout of risk aversion since investors can simply hoard cash instead. That, combined with the potential for losses if yields jump from record lows, means that the world of government debt is potentially losing its function as a safety valve in portfolios.

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    BOJ Is Said to See No Change in Policy Stance as Abe Quits

    This article by Toru Fujioka for Bloomberg may be of interest to subscribers. Here is a section:

    While the announcement of Abe’s resignation caused the yen to gain as much as 1% in the evening in Tokyo, the BOJ will continue to closely watch market developments, according to the people. The bank maintains its pledge that it will act without hesitation if necessary, the people said.

    With the economy still healing from the biggest contraction in the post war era in the second quarter, an excessively strong yen will put pressure on the central bank to act if sustained. Abe came to power in 2012 pledging aggressive monetary easing and handpicked Kuroda to deliver it. Kuroda soon launched the “shock and awe” monetary bazooka, which increased asset purchases, leading the BOJ’s balance sheet to swell significantly larger than its global peers.

    BOJ watchers will be closely monitoring who will replace Abe, because Kuroda is seen to have coordinated well with the government under the premier. The latest symbolic move was a joint statement between Kuroda and the government as the pandemic battered the economy.

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    U.S. soy rises for 5th day; profit taking pressures corn, wheat

    This article from Reuters may be of interest to subscribers. Here is a section:  

    “The lack of rain in August - plus extended heat - clipped the top end of soybean production for many areas,” Bob Linneman, broker at Kluis Commodity Advisors said in a research note. “There are many operations that watched a potentially record crop turn to a hopeful average crop.”

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    Powell Fed Shift Allows for Higher Employment and Inflation

    This article from Bloomberg may be of interest to subscribers. Here is a section:

    The new strategy is being undertaken to tackle years of too-low inflation. It hands the central bank flexibility to let the job market run hotter and price pressures float higher before taking action as it may previously have done.

    “They really, really, really are not going to be raising interest rates any time soon,” said James Knightley, chief international economist at ING Financial Markets. “The Fed is saying rates will be lower for longer, but don’t worry inflation is not going to be picking up.”

    While it doesn’t target a specific rate of unemployment broadly or for certain demographic groups, the approach may help address other weaknesses in the economy.

    During the longest U.S. economic expansion on record until the pandemic hit earlier this year, many groups benefited -- including minorities and women. With millions out of work and unrest flaring up across the U.S. over racial inequality, questions about how the Fed’s policy helps diverse communities have been raised.

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