Gov Sovereigns/Treasurys

Stocks will only get temporary relief from gridlock. Inflation will abate but then remain sticky. US and global policy uncertainty and geopolitical risk will remain historically high.

Central banker messaging after the latest rate hike announcements in the US, UK and Australia indicates a shift in focus from the pace of hikes to how high rates must rise to slow growth and bring down inflation. This represents the next stage of the global tightening cycle, where rates will go higher in countries where neutral rates are higher, like the US, compared to countries with lower neutral rates like the UK and Australia.

This week we present our Portfolio Allocation Summary for November 2022.

Europe is hampered by a lower trend growth rate, but has room to grow faster than the US over the next two years. How can investors profit from this outlook?

As the FOMC explicitly acknowledged this week, monetary policy operates with substantial lags. We see the risks to stocks as tilted to the upside over the next 6 months but are neutral on global equities over a 12-month horizon.

This week’s report examines the state of the global monetary tightening cycle and addresses some frequently asked questions about the Fed’s QT program. New yield curve trades are recommended for the US and German yield curves.

The ECB increased interest rates and announced the start of its balance sheet wind down; yet, markets took the news as a dovish outcome. Are we really getting close to the end of the ECB’s tightening campaign? How asset prices will react?

Falling inflation will allow bond yields to decline in the major economies over the next few quarters. As such, we recommend that investors shift their duration stance from underweight to neutral over a 12 month-and-longer horizon and to overweight over a 6-month horizon. Structurally, however, a depletion of the global savings glut could put upward pressure on yields.

This week’s report takes a look at risk-adjusted return opportunities in US spread product.

The Fed’s asset sales are unlikely to lead to an additional outsized impact on long-maturity government bond yields beyond what expectations for the path of the fed funds rate would justify. However, the stance of monetary policy has tightened substantially over the past year, and is set to tighten even further over the coming several months. As such, investors should be focused less on the ostensibly unknown risk from the Fed’s balance sheet reductions and more on the known risk of conventional policy tightening, which is currently quite acute.