Weekend Dashboard: Managing Conflicting Signals by Eric Basmajian

8 months ago
3 Min Read
630 Words

Summary

  • Risk assets are sending a bullish signal that has yet to be confirmed by a broad basket of economic data.
  • Inflation expectations remain elevated as oil prices move above $60 and leading indicators of inflation stabilize. An inflation upturn is not yet in the cards but the downturn has moderated.
  • Corporate credit remains extremely strong relative to the economic risks, with the exception of the CCC market. CCC spreads remain in a bearish trend.
  • Real interest rates remain depressed as the prospects of future rate hikes remain dim.
  • A breakdown of the USD has implications for both global growth and inflation. A growing divergence between global growth and domestic growth could pressure the USD, aiding an existing bounce in inflation expectations.
  • I do much more than just articles at EPB Macro Research: Members get access to model portfolios, regular updates, a chat room, and more. Get started today »

Weekend Dashboard: Managing Conflicting Signals

Note: The [Weekend Dashboard] report is published to members of EPB Macro Research every other weekend. Click the link at the bottom of this article to learn more about our first Quarterly Webcast Presentation.

This week ended with what we now believe to be the culmination of a "Phase 1" Trade Deal with China. Risk assets enjoyed another trade fueled rally as tensions eased and market participants believe that global growth will be positively benefited from these new developments.

Cyclical equity sectors rallied the most on the week with oil and gas (XOP), regional banks (KRE), and technology (XLK) posting the largest gains. Defensive and interest rate sensitive sectors were flat to down.

Emerging market bonds, investment-grade bonds, high yield bonds, and Treasury bonds all gained on the week despite significant volatility.

Commodities and precious metals broadly gained on the week as real interest rates declined.

Asset Class Performance Table (Stocks & Bonds):

Source: Bloomberg, EPB Macro Research

International equities outperformed the S&P 500 this past week as the USD declined against both major currencies and emerging market currencies.

The average international equity ETF in the table below was up 2.0% on the week, compared to 0.8% for the S&P 500. Europe (EZU) rose by 1.5%.

Asset Class Performance Table (International Stocks & Currencies):

Source: Bloomberg, EPB Macro Research

The USD has fallen again major currencies over the past one week, one month and three month time periods. A continued breakdown of the US dollar would confirm the short-term divergence developing between the US and global growth.

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