Summary
- Since early May, the markets traded as if the Fed inflation target can be reached without a recession. Bond risk premia gradually rose while equity markets performed well.
- That relationship changed dramatically in early August with concerns about Chinese growth. Bond yields are still rising but equities are going south.
- We think while the problems in China are of a long-term nature, the ‘Goldilocks trade’ will return as China worries get offset by the strong US economy. However, the real risk is that the Fed will restarts the hiking cycle.
- UK data this week provided hawkish headlines, but dovish detail. We see good value in continuing to fade the market’s pricing for BoE terminal rate (versus Fed and ECB).
- Meanwhile, the BoE will decide on its pace for QT in September. Given the dynamics of their holdings, we see a risk that they skew sales more towards the short-end (3-7Y) bucket.
Summary
- Since early May, the markets traded as if the Fed inflation target can be reached without a recession. Bond risk premia gradually rose while equity markets performed well.
- That relationship changed dramatically in early August with concerns about Chinese growth. Bond yields are still rising but equities are going south.
- We think while the problems in China are of a long-term nature, the ‘Goldilocks trade’ will return as China worries get offset by the strong US economy. However, the real risk is that the Fed will restarts the hiking cycle.
- UK data this week provided hawkish headlines, but dovish detail. We see good value in continuing to fade the market’s pricing for BoE terminal rate (versus Fed and ECB).
- Meanwhile, the BoE will decide on its pace for QT in September. Given the dynamics of their holdings, we see a risk that they skew sales more towards the short-end (3-7Y) bucket.
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