Going to Zero

Interest Rates are going to zero in Western economies. The fears of a recession on 'my watch' will and has been met with aggressive rate cuts and prolonged forward guidance. The preservation of spectacular equity market gains (due mostly to the demand for higher yield) also appears to have been behind the synchronized move lower.

Attempts at Interest Rate normalization have been laid by the wayside in order to quash any implied threats to the current global expansion. With inflation stubbornly low and expected reflation not occurring despite the sustained period of global expansion, the current stance on rates is easily justified.

While indicators of employment are by historical terms 'healthy' it is underemployment coupled with stagnation in wages that is restricting consumer spending. This, in turn, has led to softer readings in output. The US-China 'trade war' and ongoing Brexit turmoil are further deteriorating confidence and a resolution, or even an end to the uncertainty is still some way off.

The Bond (US) market has hinted at a 'chance' of recession with the recent inversion in the US Yield Curve. These fears have been allayed since with a the 2Y/10Y spread shifting back to positive territory. If not a recession, the Bond market is signaling a slowdown with 10Yr UST falling to 1.58% (-48 bps in the last month) and the 10Yr AGB falling to 0.91% (-44 bps in the last month).

 

What I'm watching:

  • Does inflation make an uninvited comeback in the US?
  • Will the Fed stand up to the Equity markets (provided the reads are still strong prior to the September FOMC)?
  • How long can the Labour market in Australia remain resilient?
  • Who blinks first in the polarising Equity vs. Bond market rally?

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