FICC

A look at how US bond yields responded to yesterday’s strong economic data and this morning’s soft inflation print.

China’s economic and diplomatic interests in the GCC region will expand, as will its military presence. Whether or not this stabilizes the region is yet to be determined, particularly if tensions in the South China Sea and other international waters traversed by both the US and China escalate. Underlying risk in energy markets will remain elevated. We remain bullish energy generally, and continue to favor equity ETF exposure to energy (XOP and XME), and commodity exposure via the COMT ETF.

Special Report

This week’s Special Report updates our US default rate forecast and considers whether corporate bond spreads offer value given the trend in credit fundamentals. We also consider the relative value proposition between investment grade and high-yield credit and between European and US corporate bonds.

The attempted coup in Russia produced subdued short-covering rallies in oil, gas, and grains markets, as markets over time have observed that coups, rarely result in loss of production and exports. Markets await Putin’s next move. Unless and until a viable threat to the Putin government emerges, markets will continue pricing in fundamentals prevailing prior to Saturday’s attempted coup. We are keeping our base case brent and henry hub natgas price expectations unchanged.

The Bank of England delivered another outsized rate hike this week, as the central bank remains focused on overshooting inflation and not the weakening economy. The BoE now knows that it must push the UK into a deep recession to cool off inflation, which should now be considered the base case scenario for the next 6-12 months. A major cyclical buying opportunity for UK Gilts is approaching for patient investors.

Machine learning has made significant progress in the physical sciences, although it has some ways to go in the social sciences. When asked to make predictions on oil markets, ChatGPT's responses lack in-depth analysis given its inability to understand the language and think critically. While in its current form, AI cannot replace forecasters, its wide breadth of 'knowledge' makes it useful in developing forecasting frameworks in unfamiliar domains.

This week’s report examines three potential catalysts that could push Treasury yields meaningfully higher within the next few months. We also consider the rebuild of the Treasury’s cash holdings and its implications for the Fed’s balance sheet policy and financial markets.

In this Insight, we discuss the currency and bond market implications of last week’s ECB and Bank of Japan policy meetings. The conclusion: the ECB is on a path to an overly hawkish policy mistake, while the Bank of Japan’s dovish stance is growing more unsustainable.

In this Insight, we discuss the currency and bond market implications of last week’s ECB and Bank of Japan policy meetings. The conclusion: the ECB is on a path to an overly hawkish policy mistake, while the Bank of Japan’s dovish stance is growing more unsustainable.

The normalization of oil storage markets in the Northern Hemisphere; strong demand, aided by China stimulus this year; and continued production discipline supports our view Brent prices likely have bottomed, and will move higher from here. We raised our 2023 Brent forecast $2/bbl to $92/bbl. Our forecast for next year is revised upward by $5/bbl to $120/bbl. Price risk remains to the upside, particularly if KSA exercises its option to extend production cuts of 1mm b/d.