Chart of the Week -- Bond Yields vs Cash Rates

Where-to from here for developed market government bond yields?

Ponder the policy path... Last week we looked at a few different indicators, but one of the more interesting charts is this one here showing developed market 10-year government bond yields vs monetary policy rates.

Fed Catch-Up From Behind the Curve...

The chart below shows the implied path of the Fed funds rate based on a broad composite of inflation expectations and labor market indicators

(over 20 individual data series — which serve to amplify the true signal vs noise) We can clearly see how it was justified for the Fed to cut rates into the pandemic (perhaps even more than it did)… but that they should have removed the emergency measures shortly after reopening

Chart of the Week: Bear Market Seasonality in Year-3 of the Election Cycle

This chart follows up from our post last year which differentiated seasonality analysis based on whether the stockmarket was in a "bear market" vs "bull market" (vs the usual all-markets analysis)... Before we get into this chart, check out the original post here, for reference: topdowncharts.substack.com/p/chart-of-the…

Charts from the weekly surveys by @Callum_Thomas -- slight tick lower in technicals sentiment, but more interestingly: sharp drop lower in "fundamentals" sentiment to a new all time low... This is the result of both "Bearish (Fundamentals)" reaching a new high, and "Bullish (Fundamentals)" reaching a new low.

It's remarkable to reflect on the development of the "Bearish (Fundamentals)" line, which has become the dominant mood in the survey.

Chart of the Week - Mortgage Shock in Context

Explains... 🧵👇 It’s remarkable to note how the inflation-adjusted servicing cost indicator for new mortgages (after rising 3x off the lows) is now on par with levels seen during the 80’s …back when housing market valuations were slightly cheap vs record expensive now

Chart of the Week - Credit Spread Complacency

Credit Markets and Bank Loan Officers have a very different opinion on the credit risk outlook... The just released quarterly bank loan officer survey showed banks continuing to tighten lending standards across the board and likewise expecting lower demand for new loans as economic storm clouds loom...

Charts from the weekly surveys by @Callum_Thomas -- equity sentiment stalling, down slightly on the week for both technicals + fundamentals sentiment Bond fundamentals sentiment sharply lower (thanks to strangely resilient economic data e.g. payrolls, ISM services)

This chart is fascinating

As of the latest data, the Energy Sector has an earnings weighting *twice* that of its market cap weighting.

This is what happens when no one wants to buy energy stocks anymore... I could probably leave it there as the chart itself speaks volumes, but a few points to ponder…

Chart of the Week - Investors Abandoned EM!

Emerging Market equity funds have seen record redemptions by investors... and that came just as EM equities reached their nadir and subsequently turned sharply higher When sentiment gets that depressed it doesn't take much of an excuse to turn things around, even at least if just short-term (and risks do remain).

The excuses or catalysts in this case came in the form of China reopening and a rapidly weakening US dollar.

Double Trouble.

Funding conditions have tightened on both ends — banks are becoming more stringent and stingy in their lending decisions, and the interest rate on those loans is now a lot higher... So it's a situation of even if you can get a loan, you might not be able to afford it!

Global Recession 2023: One of the most interesting pieces of work I undertook in 2022 was to perform a sort of meta-analysis on all the leading indicators I’ve developed over the years... The key takeaway from that is whether you group leading indicators by type/factor, geography, or forecast window — they are all unanimous in pointing to a sharp downturn heading into early-2023.

New Bull Market(s)?

An intriguing pattern is showing up in my global equity breadth charts.

The chart below shows the proportion of countries whose main benchmark is up at least 20% off the low point… or aka what some people call a “bull market“ By itself it is an interesting observation, and it’s quite a mix of countries too (from LatAm, Europe, Middle East, Asia)

But what is especially intriguing is how this type of pattern in the indicator has historically flagged the beginning of new bull markets in global equities

Chart of the Week - Bond Yields Going Down!

As noted in the section on treasuries in our latest report, one impact of a weakening growth outlook would be relief for bonds (our base case is a sharp global recession into early-2023).

But let's dig into this a little further... The latest developed markets flash manufacturing PMI

[Purchasing Manager’s Index — a good real-time gauge of the economic pulse]

...dropped further into contractionary territory during November, which is a clear indication that the economic slowdown is already underway.

Be Greedy When Betting on Others’ Fearfulness??

We’ve seen a steady lift in trading activity in inverse equity ETFs as traders look to turn a quick buck betting on bear... The chart shows aggregated trading activity in inverse/short equity ETFs which seek to benefit from declines in stock prices.

Aside from the general uptrend in trading action across these ETFs this year, we can see clear spikes and climaxes around short-term market bottoms.

Chart of the Week - Bear Market Seasonality

You’ve probably heard some of the sayings
-Santa Claus/Year-End rally
-"Sell in May“, October Effect, etc

But what if I told you........... 🤫😲🧵👇 All of those sayings are based on statistical analysis of historical movements in stock prices..

And the data certainly seems to show some repeatable and even perhaps reliable seasonal patterns

Studies have even been done which confirm some of the intuitions, market aphorisms

60/40 Resurrection 🧵

Several rounds of shock therapy have brought the 60/40 portfolio investing approach back from the dead… You might recall I shared a chart a couple of weeks ago which showed the 60/40 weighted average valuation indicator going from record expensive in December last year to now slightly cheap.

The Stock Market script is Changing... 😲

but should we care? 🤔

Thoughts... 🧵👇 (1/x) The typical tendency for stocks is to rally in Q4.

But as I have previously pointed out, there are many exceptions to the seasonal rules in markets,

and indeed, markets happily ignored the usual seasonality trends in H1...

Chart of the Week - Silver ETF Flows

Silver bulls have completely capitulated... 🧵 Silver Shock: As you might have seen, silver had a dream run in 2020. And well, to be fair, most markets mooned back then riding the tides of extreme monetary stimulus and a hoard of newly minted day traders...

Charts from the weekly surveys by @Callum_Thomas -- fundamentals sentiment back to the lows following Powell's J-Hole speech. Technicals sentiment also making its way towards the bottom end of the range... Bond survey saw fundamentals sentiment dip on tighter Fed, inflation risk, but technicals sentiment ticked up (and trending higher).

USA vs The World — Valuations: following 15 years of outperformance, US equity valuations are nearly twice that of the rest of the world...

Or in other words, the market is *very* confident in the USA vs the rest of the world! This chart shows the price vs trailing 10 year average earnings (in order to smooth out the distortive effects of cycles and shocks) for the USA, and for the median of the 46 countries I keep track of.

Aside from the big gap between US vs global, another thing sticks out…

Chart of the Week: topdowncharts.substack.com/p/chart-of-the…

Backlog Backdown and Inventory Increase: this intriguing chart shows our global PMI backlogs indicator falling to the lowest level in almost 2 years --meanwhile inventories are surging to record highs.

Something is afoot... Part of this may well be a transition from the old “Just in Time“ method of inventory management, which was one of many reasons/vulnerabilities that contributed to the chaos and disarray of the pandemic supply chain hell… to more of a “Just in Case“ inventory management strategy