Vantage Point: Defensive playbook
Welcome to another edition of Vantage Point. The world economy is in a precarious situation. There are a number of pressing issues but three stand out: the ongoing energy crisis, high core inflation, and the situation in China. Each affects the major economic regions differently. But together warrant a very defensive approach to investing.
An Unwelcome Inflation Surprise, and Strong Market Reaction
Find out our commentary on the inflation print, market reaction, and implications for Fed policy from the week of September 16, 2022.
Japan: Yen in a Free Fall, but a Policy Pivot is Nearing
Describes how global policy divergence and other macro-drivers of large-scale Yen depreciation are still intact, but these are now starting to discernably raise inflation pressure in Japan.
Elevated Sino-US Tension over Taiwan to Accelerate Economic De-Coupling
The Taiwan related tension may not go away quickly with the upcoming quinquennial transition in China and US mid-term elections. We cover more in this note.
Food Price Shocks: Macro and Investment Implications
This note details our latest analysis of prolonged food price shocks and their impact on macro and investments.
Bear Markets: More Pain, Then Gain
The history of bear markets makes for gloomy reading. However, this brief note focuses on what we might expect once the -20% threshold has been crossed. How has the market (S&P 500) performed after entering a bear market?
Don’t Blame China for Inflation Damage in the U.S.
The state of global supply chains are widely seen as heavily influenced by developments in China. While it is true that China accounts for a large (nearly 30%) share of global manufacturing and shipping, we believe that it is far from obvious that it “causes” U.S. inflation. We cover some highlights and metrics in this note.
Super-Sized Hike Shifts Fed Hiking Cycle into Higher Gear
The Federal Reserve (Fed) raised the Fed Funds rate by 75 basis points (bps) on June 15th, to a range of 1.5-1.75%, the largest hike since 1994. The below highlights the takeaways from Chair Powell’s press conference and the updated Summary of Economic Projections (SEP).
A Deep Dive into QT
In this third note of three, we review the arguments behind these opposing views in the previous two, in the hope to provide some clarity for investors as they attempt to navigate markets in the challenging times ahead.
China’s Growth Woes Deepen, Structural & Fiscal Easing to Intensify
Chinese annual growth is set to soften further - with growth to contract in Q2'22 and slow recovery for the year. We elaborate within this note.
Could QT lead to a steeper yield curve?
In the first note in a series of three on QT we argued that QT will most likely contribute to a flattening of the yield curve. Instead, many financial market participants tend to associate Quantitative Tightening (QT) with a steepening of the yield curve.
The Impact of QT on Financial Markets
We have written extensively on our expectations for future rate hikes and the peak in US rates. In this paper, the first in a series of three on Quantitative Tightening (QT), we summarize our thinking on QT and its implications for markets.
Quarterly Stock and Bond Returns in Historical Context
During the first quarter, the main US benchmarks for equity and bonds both declined. During the past several decades, concurrent declines in stocks and bonds are relatively infrequent. This short note puts the recent quarter in historical context.
Drivers and Implications of a Depreciating Yen
Since the Ukraine conflict began, the Japanese Yen has underperformed all major currencies. See the latest analysis on the drivers.
Yield Curve Inversion... This Time Is Not Different
We believe the possibility of a recession in the US over the coming two to three years is increasing. As such, we take a strong signal from the recent (albeit brief) yield curve inversion and in this note, address how our analysis led to this conclusion.
China’s Growth, & Global Supply-Chain, Woes to Mount on the Covid Surge
The growth forecast downgrade was prompted by a slew of weakening macro indicators in March -- which we elaborate on in the pages of this note.
Monthly Market Roundup
- The summer bounce abruptly ended during the second half of August as financial conditions began re-tightening and stiff economic headwinds came into focus.
- After surging by +9.2% in July, the S&P 500 fell back -4.1% in August.
- The restrictive stance of global monetary policy pressured markets as the inflation battle continued.
- At the annual gathering of central bankers in Jackson Hole, Wyoming, hawkish sentiment prevailed, underpinned by extreme utility prices in Europe, sticky core inflation in the US, and generally tight labor markets.
- Market expectations of a near-term dovish pivot in policy from the Fed were dashed as Chair Powell’s keynote speech highlighted a history lesson: policy must avoid loosening too early.
- The Fed appears set to hike by at least 50 bps, and possibly 75 bps, in September.
- Headline inflation in Europe and UK surprised to the upside, on severe droughts and the energy supply squeeze from Russia, and now exceeds the US inflation rate.
- Activity gauges deteriorated in Europe, UK, Japan and China, pulled down mainly by service sectors.
- Sovereign bond yields pushed higher throughout the month.
- Equity markets belatedly acknowledged that further monetary policy tightening was coming, and growth concerns re-emerged, sending stocks lower.
- Overall, global equity markets declined -3.6% led lower by poor performing European equities.
- Crude oil prices remained volatile, caught between tight supply and economic growth concerns, but ended lower for the third straight month.
Points of View
Fed Meeting Highlights, March 2022
As widely expected, the Federal Reserve increased policy rates by 25 bps, the first hike since 2018. We go into further detail on the highlights.
Fed Hike is First Step on Long Road
As the Federal Reserve (Fed) is widely expected to raise interest rates for the first time post-Covid following its March 15-16 meetings, we look some important questions.
ECB Policy: Hawkish but Flexible
The ECB delivered a hawkish surprise, during its March 10th policy meeting, despite the Ukraine conflict. We review the implications for macro & markets outlook.
China Juggles Growth, Reform & Geopolitics
China sets an ambitious growth target for 2022, and policymakers may need to make some compromises.
The Russia-Ukraine war, European energy markets and ECB policy
The Russia-Ukraine war sadly continues. This constitutes the most serious security crisis in Europe in decades and the full repercussions will likely be immense on the global geopolitical landscape.
Macro/Markets Impact of Russia’s Ukraine Invasion
The Russian invasion of Ukraine has begun. This constitutes the most serious security crisis in Europe for decades. Markets are responding.
Markets after Corrections
Following a recent note on market corrections, this note focuses on the historical rebounds of the S&P 500 from those pullbacks.
Market Corrections in Historical Context
Since the market has been flirting with a market correction in recent days with a >10% decline from the recent peak. We provide a few quick stats to put the decline in a historical context.
Global Economics and Investment Analysis Group