THIS WEEK there’s no sign of volatility slowing down.
But something strange happened in the past few days: equity weakness finally seemed to give bonds a slight bid.
Normally equity weakness means worries about a slowdown — which means a bid for bonds. But with high inflation as the driver they have largely been moving together this year.
So what has gone on the past few days?
Well, there have been a few very early green shoots of easing pressure on inflation. Not enough to change the narrative, but enough to question the relentless moves higher in rates.
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Firstly, Friday’s US job numbers showed that Average Hourly Earnings had a modest 0.3% increase in April. The last 3 months have now had an annualised equivalent rise of 3.7% — the lowest since March 2021 and down from a 6.3% pace late last year.
Secondly, commodity prices have started to better reflect the lockdowns in China.
Thirdly, the Goldman Sachs Financial Conditions index has finally hit 99 — the level where it spent most of 2018 and 2019.
This is a lot higher than the 97 last year which triggered the Fed’s concerns of conditions being too loose at the start of 2022, as this Bloomberg graph shows:
Clearly these do not represent an about-turn, but rather a moderating of what has been a relentless pace of bearish bond news so far in 2022.
This week’s US CPI numbers will be watched closely.
With the market pricing cash rates in Australia at 2.75% by the end of this year — and 10-year bonds at 3.5% — there is a lot priced in. So any signs central banks can ease the pace of tightening will lead to a significant fall in yields.
We will keep a close eye on equities and commodities in the week ahead to see if this is just a correction or has more legs.
Tim Hext is a Pendal portfolio manager and head of government bond strategies in our Income and Fixed Interest team.
Tim has extensive experience in banking, financial markets and funding including senior positions with NSW Treasury Corporation (TCorp), Westpac Treasury, Commonwealth Bank of Australia, Deutsche Bank, Bain & Co and Swiss Bank Corporation.
Pendal’s Income and Fixed Interest boutique is one of the most experienced and well-regarded fixed income teams in Australia.
The team won Lonsec’s Active Fixed Income Fund of the Year award in 2021 and Zenith’s Australian Fixed Interest award in 2020.
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