Not a great week for bald white men

Aug 25, 2023

Foul play has been the dominant theme over the last few days.

Key points

  • The sense that rates will stay higher for longer has seen the curve bear steepen, with long end rates hitting 15-year highs.
  • Softer PMI data have hinted that economic activity may slow, as monetary tightening takes its full effect.
  • European yields also moved lower on the week, as economic activity data continues to disappoint.
  • The sharp slowdown in China has weighed on European exports and the fundamental backdrop in China continues to look challenged.
  • With central banks in data-dependent mode, there will be plenty more to digest before we get to meetings in September.


Recent upward pressure on yields appeared to ease somewhat, in the run-up to Powell’s speech at the annual Jackson Hole meeting. The narrative that rates are set to stay higher for longer has seen the curve bear steepen over the past several weeks, with long end rates hitting 15-year highs.

However, softer PMI data have hinted that economic activity may slow, as monetary tightening takes its full effect. Meanwhile, hopes persist that incoming inflation data will move lower. In this context, 5-year 5-year forward rates above 4.1% could suggest that the sell-off in rates has gone far enough for the time being. That said, consensus positioning already appears to be long in duration.

Strength in equities and credit in recent months mean that the Fed won’t feel any pressure to alter its messaging in a more dovish direction. Elsewhere, the recent hurricane in California represents a short-term upside risk to incoming inflation data, in the context of fresh food prices.

Consequently, we continue to be content sitting with no directional view in US rates for now. A capitulation in rates, which forces 10-year yields towards 4.5% could represent a more interesting entry point. But for the time being there is no compelling reason to want to own duration and it seems to make more sense to sit and wait and see.

European yields also moved lower on the week. Activity data continues to disappoint, with PMIs slipping on weak demand. The sharp slowdown in China has weighed on European exports for some time, while consumer sentiment appears muted, notwithstanding a relatively healthy labour market backdrop.

Next month’s data will determine whether the ECB is now on hold, or if there is still one more hike in store. Spreads across the Eurozone have traded in a rangebound fashion, though in the EM space, Romania underperformed on elevated fiscal concerns. Meanwhile, soft data in the UK has seen front end rates rally. UK rate expectations had pushed higher last week on inflation fears linked to wage gains.

However, we are inclined to think that the BoE is more focussed on downside risks to growth than it is to inflation continuing to run in excess of the Bank’s target. From this standpoint, we continue to see UK rates peaking around 5.5%-5.75%.

In Asia, Chinese authorities have been intervening to stop further weakness in CNH. However, the fundamental backdrop continues to look challenged, and there is a sense that there is little that Beijing can do to brighten the broader macroeconomic outlook. The bust in the property market could take years to run its course and this will constrain local government finances.

Arguably, more could be done to boost growth by helping to stimulate consumption, but a consumption-led growth approach goes against the instincts of Chinese policymakers. Under Xi, state control over the economy has increased over the past several years and part of the weakness of the growth model stems back to decisions to try to exert more central control over the factors of production by the Chinese Communist Party.

Simply banning the publication of economic data – as they fail to paint a picture which one wants to see – is unlikely to be a recipe for success. Meanwhile, we would express concerns for the future of Hong Kong, inasmuch as it is uniquely exposed to a strong US dollar and tighter US monetary policy, at a time when it is being subsumed into Shenzen and is feeling the downdraft being felt across all of China at this time.

Geopolitical tensions in Asia can also be elevated towards the Taiwanese presidential elections in January 2024. Our reflection has been that Russia’s failings in Ukraine have served as a reminder to Beijing of how difficult it would be to pursue a military push to Chinese unification, regardless of sabre rattling and last week’s military exercises around the island.

Instead, we feel that it is Beijing’s desire to try to influence domestic politics in Taiwan. Yet we see these efforts meeting with relatively little success for the time being, only raising frustration amongst the Han tribe on the mainland.

Meanwhile, on a more hopeful note, in a week when India has landed a craft on the moon, the divergence between prospects in India and China is attracting increased attention. We have had a constructive stance on the Indian rupee, though have been paring this following recent outperformance.

Demand in credit markets has remained relatively robust in recent weeks, notwithstanding relatively quiet summer markets. It is true that rates markets have seen most of the activity of late, though at a time when we normally see investors stepping back and raising cash in anticipation of strong seasonal supply on the return from summer, there has been evidence of yield-targeting buyers happy to add exposure as absolute yields have climbed.

Equity markets have been broadly range bound this month, though it continues to remain striking how sectors such as technology, which have a long duration, have not really underperformed in a period when rates have moved higher, with the Nasdaq up some 30% on the year.

Looking ahead

After Jackson Hole, a quiet last week of summer beckons, notwithstanding the focus returning to payrolls next Friday. With central banks in data-dependent mode, there will be plenty more to digest before we get to central bank meetings later in the month.

Broadly speaking, we see investor positioning relatively long in duration and with respect to credit exposure. Consequently, the pain trade looks like it would be towards higher yields and spreads, which one could imagine occurring, should inflation data disappoint.

With Wagner’s Prigozhin meeting an untimely end this week, it will also be interesting to monitor events within Russia in the coming days. In hindsight, the attempted revolt staged by Prigozhin seems to have sealed his fate.

Yet it seems to be a moment in time when he is not alone in coming to regret his past actions. Watching the Spanish FA President ‘taking the kiss,’ with his actions following his team’s victory at the Women’s World Cup, one wonders objectively what on earth were they thinking at the time. It has certainly been a hairy week for those two bald white men.

In this sense, as investors, it is important that we don’t do things which we end up regretting at a later point as well. It’s sobering to think how just a short time ago, market participants were happy to buy 30-year bunds at a yield of less than 0%, or how Argentina was able to raise 100-year debt to widespread acclaim just a few years before that.

One wonders whether JGBs close to 0% will end up being viewed in a similar light. Moreover, focussing on fundamentals and respecting valuations will always be important in terms of trying to avoid making mistakes. It can be easy to get sucked in by market momentum and maintaining discipline is always paramount in the pursuit of success. It may be summer, but this is no season for complacency….

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