Let's first decompose the move: changes in real yields and changes in inflation expectations.
Real yields are 11 bps higher YTD, hence explaining >90% of the nominal yields move.
Inflation expectations are unchanged.
What does this mean?
2/10
Real yields move higher for 2 main reasons: real growth is repriced higher, or risk premia get built in assets as financial conditions are unduly tightening (e.g. policy mistakes, major liquidity distress, credit crunches)
Today, it's a cyclical real growth re-rating story
3/10
Curves are bear steepening as real rates move higher: the market is now more comfortable assuming 3 hikes in 2022 won't derail the economy that bad.
Investors are indeed re-rating growth to be cyclically a bit stronger than before.
4/10
More evidence of this: forward real yields are moving higher (+23 bps YTD!).
The market is pricing in the possibility medium term real yields can be sustainably a bit higher: as the Fed ''gently'' tightens monetary policy on a backdrop of still decent growth, why not?
5/10
As showed in The Macro Compass newsletter, today's real rates are still far below equilibrium (r*).
My estimate for equilibrium real interest rates in US is around 0.00-0.25%. Market-implied real yields are still around -1.00%.
6/10
The broad macro picture and cross-asset class behavior reinforces the positive growth re-rating thesis: Financials, Energy, Russell have outperformed low-beta and secular trends (e.g. Utilities, Healthcare, Nasdaq).
Can this continue?
7/10
I am inclined to fade this relatively aggressive move, which comes also on the back of ''the pandemic is over because of Omicron'' enthusiasm and ''the Fed is not gonna spook markets'' mantra.
Credit is not flowing yet and the Fed will announce QT soon - ouch.
8/10
How do I position for this?
Treading lightly for the moment, with the below tlts:
Short TIPS, Gold and Bitcoin.
Looking to move long low-beta + Nasdaq against the high-beta and Russell side of the coin.
30y bonds start to look good, but no rush.
9/10
So, you follow me here on Twitter. Cool!
But if you like this sort of macro commentary and investment ideas and you are not subscribed to The Macro Compass newsletter...
The chart below shows the US Wilshire 5000 total return index (incl. reinvestments of dividends) against gold, both rebased at 100 starting 40 years ago.
The stock market has obviously outperformed gold over the last 40 years, and it's likely to do so in the future.
Why?
1/4
Stock market total returns are mostly driven by dividend yields, earnings growth and changes in valuations.
The distribution of dividend yields and earnings growth are skewed to deliver positive returns on average (dividend yields are positive, and earnings tend to grow).
2/4
Changes in valuations can be very volatile, but the real return on risk-free rates alternatives (bond real yields) tend to influence BOTH valuations in stocks and gold prices.
Basically, gold gets a tailwind from lower real yields.
Stocks too, but also from DY + EPS growth!
3/4
The prevailing narrative regarding the pandemic seems to be that Omicron will turn it into a harmless endemic straight away in 2022
Peer-reviewed pieces in The Lancet and Nature partially confirm this thesis, but on a big picture basis we are heading in the right direction
1/5
The Lancet piece shows how effective antibodies to C-19 have a median life of around 165 days - that means the median person infected with Omicron today should get ''natural immunity'' until summer.
Sometimes, antibodies can last much longer though.
2/5
Research continues, luckily
C-19 pills (e.g. Pfizer or Merck) are being approved, and they seem to be able to reduce severe symptoms by 90% or so - that's great
The not-so-good news is that large scale production will only happen in 2023, so benefits for 2022 are limited
3/5
While US mid-term elections draw quite a lot of attention, market commentators often overlook one of the most relevant political events: the Chinese Politburo meeting.
In Oct/Nov 2022, the CCP Politburo will hold its 20th National Party Congress.
A short thread.
1/6
To Xi or not to Xi?
Chinese officials are generally asked to retire when they reach 65-68y of age - this rule is often applied for some but not for others, and for sure Xi will not be upheld by this.
But there are other relevant CCP members who could be influenced.
2/6
Assuming we get another 5y of Xi, how will he handle the inevitable real GDP per capita slowdown China is and will be facing?
Even if you are China, you can't fight demographics: labor supply growth will turn negative (!) in this decade and real GDP growth converge to 3%
The most important thread of mine in 2021: the 5 must-follow food laws in Naples (mostly applicable throughout Italy).
I am from a small town close to the Amalfi Coast, where GDP per capita is $20k/year and youth unemployment rate is >30% but we know how to make a pizza!
1/6
Rule #1
NO cappuccino or any other types of coffee containing milk after 11am (the strictest Italians would say this is not allowed after 9am).
Milk after 11am is for kids, and adults are allowed to drink it in any format only early in the morning.
Later?
Just. Don't.
Rule #2
Pizza is not crispy, not crunchy, not <1mm thin
The proper Neapolitan pizza has a fluffy & airy outside crust, it gets thinner towards the center and it melts in your mouth
Looks different than what I described?
Then it's NOT Neapolitan pizza