For those with children, I hope back to school was everything you dreamed of. Great to get back into a pattern.
A few charts to review this weekend (perhaps with your kids?):
1. Inflation in Japan is becoming real and ingrained
This is what the Bank of Japan has been trying to accomplish for 30 years. We’ll likely see further relaxation of yield curve controls and possible repatriation of Japanese wealth. This puts upward pressure on yields around the world (although the absolute impact is likely in the 10s of basis points).
2. The 2 Year US Treasury is signaling peak of Fed rate hikes
The 2yr has effectively moved sideways for several months. Where the 2yr goes, policy rates tend to follow.
3. Chinese economy continues to deteriorate with big declines in exports and imports
4. What comes after the inverted yield curve?
After a period of inversion, one might expect the curve to steepen again. This can happen in two ways: 1) Short term rates fall (bull steepener) or 2) long term yields rise (bear steepener).
Bull steepeners coincide with economic contraction, with short yields falling as the Fed adds liquidity.
Bear steepeners are typically aligned with stronger and more inflationary economic growth.
The charts below compare how stocks and bonds do in each scenario:
5. While the global economy remains in limbo, oil is rallying. What gives?
Bottom line: supply is tight, China is still buying.
6. Is Saudi Arabia shifting away from American influence?
The quiet arrangement between the US and Saudi Arabia was that in exchange for US protection, oil revenues would be recycled into US dollars. Recent data shows this relationship may be waning.
7. September is historically the worst month for stocks
Autumn is well known to be historically the worst period for stocks. Why? One theory suggests this pattern began (100+ years ago) because the fall is when seasonal demand for credit rose to pay for the harvest, forcing interest rates up and reserve-deposit ratios down. Contracting credit conditions increase the vulnerability of the financial system.
This is not an issue anymore, but the ‘ghosts’ of that seasonality remain.