Policy divergence is the driver of market vulnerabilities. The longer the US stands alone in tightening policy, the greater the stress on the financial system.
As good as the headline unemployment rate appears to be, we should worry that wage growth for the majority of Americans remains weak. The Federal Reserve, acting on the headline rate, will likely make a significant policy error and raise…
Job growth has now begun a slight re-acceleration. If this trend holds, the unemployment rate will drop into the mid 3% range and the Fed will move to a fourth rate hike. The mix of continued job growth, tightening monetary policy, and late…
I've talked about 12-18 between curve inversion and recession months as a rule of thumb. That gives you at least a year to rotate your portfolio and get defensive.
At least initially, rate increases can be procyclical. Moreover, in this particular cycle, fiscal and regulatory policy are acting procyclically too. That means you need a lot of rate hikes to get a big anti-cyclical effect.
The yield curve has steepened to where 10-year yields exceed 2-year yields by 52 basis points. While this may seem like a case of market whiplash, it's not. It's what should be expected in a late cycle rate hike regime.
We should expect the Fed's tightening to continue. But a lot of the recent incoming data has been soft. And while this may just be a blip, I expect the curve to flatten further by mid-year.
Given what I know about the Fed's reaction function, I believe pre-conditions favor Fed tightening irrespective of the slope of the yield curve.
When China builds a trade surplus, it accumulates dollars. And it has to do something with those dollars. That means its purchase of US dollar assets is non-discretionary unless it revalues its currency.