Momentum Models Return Net-Bearish on US Rates

When evaluating the performance of our momentum models we are considering the average performance across the one-, three-, and 12-month momentum models.

Summary

• Momentum models delivered their first positive week of returns in three weeks, with a strong performance in FX outweighing negative returns in equities.
• Overall, returns remain far better in the FX carry strategies we follow.
• Bullish equity momentum models have returned while they have turned bearish in rates. Fewer changes were seen for FX momentum models but turned bullish on USD/JPY.

Latest Signals

Equity momentum models are net-bullish across all four indices we cover, with the one-month lookback models for the Nikkei and DAX flipping to signal ‘buy’ (Chart 1 and Table 1). New ‘buy’ signals for the FTSE-100 have turned it net-bullish from bearish.

Momentum models returned net-bearish on rates as three-month lookback models for US rates joined 12-month equivalents in signalling ‘sell’ while one-month lookback models flipped to signal ‘sell’ for JGBs, bunds and gilts.

Momentum models shift more bullish on USD/JPY – the one-month lookback model flipped to signal ‘buy’ (Chart 2 and Table 2). They also flipped net-bearish on USD/CAD.

Model Performance

Momentum models (+0.1% WoW) delivered their first positive week of returns in three weeks as positive FX performance (+0.3%), and split rates performance (0.0%), managed to offset negative equity returns (-0.4%) driven by the FTSE momentum model (-2.2%).

Our Views

March employment and inflation reports are in, Dominique thinks it will more likely than not force the Federal Reserve to hike interest rates once more. The March NFP proved as expected with continued strong expansion while March CPI showed no incremental progress on disinflation as a smaller decrease in used car prices offset a slower increase in shelter costs. The 75% risk of a 25bp hike at the 3 May FOMC meeting appears right to Dominique. However, Dominique disagrees with market pricing of 75bp of cuts by yearend.

Turning to markets, Richard expects the recent ranges in the DXY and major USD pairs to hold in the coming weeks. Yet, after the Fed, ECB and BoE rate decisions next month, we expect more downside in the dollar.

*The basic strategy is to use returns (lookback windows) to give buy/sell signals. So, if the US stocks are up over the past three months, you buy, otherwise, you sell (note I use excess returns).

Bilal Hafeez is the CEO and Editor of Macro Hive. He spent over twenty years doing research at big banks – JPMorgan, Deutsche Bank, and Nomura, where he had various “Global Head” roles and did FX, rates and cross-markets research.

Ben Ford is a Researcher at Macro Hive. Benjamin studied BSc Financial Mathematics at Cardiff University and MSc Finance at Cass Business School, his dissertations were on the tails of GARCH volatility models, and foreign exchange investment strategies during crises, respectively.

Photo Credit: depositphotos.com

(The commentary contained in the above article does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs.)