Higher Inflation Target –> Even More Mispriced USTs

A discussion of late has been whether the Fed should raise its inflation target.  We think this would be a bad idea.  Currently, with a 2% target, the Taylor rule implies the Fed Funds rate should be closer to 2%. With a 3% inflation target, the Taylor rule would...

Bond Yields Diverge from Inflation

Bond yields are currently diverging in a very big way from economic fundamentals, and our valuation tools point to a rise in yields.  Normally, there is a very tight correlation between the change in the ISM prices paid survey and the changes in the 10 year yield. ...

Financial Conditions Ease, but Growth to Remain Weak

Two of the best global leading indicators tools we have are VP’s Business Cycle Financing Index (BCFI) – which tracks financial conditions, eg are central banks easing or hiking, credit spreads widening or tightening (first chart) –  and the global yield...

More TED Spread Widening on the Way

(from our Tactical report of 26th July) One of the early warning signs of the 2008 crisis was the widening in credit spreads such as the Ted spread and the Libor-OIS spread.  There was a run on the shadow banking system as the credit-worthiness of many financial...

USD to Continue Weakening Bias as Risk Recedes

Brexit predictably caused the USD to rally, as any global risk-off episode will do.  However, we reiterate our view that the USD will have a tendency to weaken, after the current rally dies out (which it already appears to be doing, with the DXY basically going...

Smaller Impact on USD from Fed Rate Rises

(from our Tactical of 31st May) We have long argued of a dovishly leaning Fed with Janet Yellen at the helm. The market eventually got the Fed’s message.  The total hikes priced in over the next 6 months were stable at around 80-90 bps for the last 2 years of...

More Negative Outlook for the US Economy

Just as the Fed looks like it’s gearing up for its second rate hike in ten years, we get some disappointing news from the US economy.  Building permits in the US, whose growth has been trending down, are now contracting on an annual basis (we look at the 3m average...

Peak in Heavy Truck Sales Point to Cyclical Pain

Heavy truck sales are oddly a good leading indicator for the economy.  It is odd because a lot of industrial production is coincident with the business cycle.  However, if you go back over forty years, you can see that recessions have always been preceded by a decline...

USD Positioning Supports Weaker Dollar

In January and February we discussed our view that we thought the dollar would find it difficult to rally further and would instead display a modest weakening bias.  The initial leg up of the rally in 2014 was not due to higher yield differentials with the US, or the...