RESEARCH CONTENT SUMAMRY
Recent data over the summer has surprised to the downside and inflation has been well behaved, justifying the rally in yields.
The expectations for rate cuts are high, which is a good thing given the current private sector deleveraging trends as new lending is hampered by high interest rates.
If it was not for the much larger than expected government deficits, recent growth could have been a lot lower. There is a possibility that the change in deficits going forward will not be enough to add to growth, and in some countries (e.g. Germany and UK), a reduction in deficits could be a further headwind to growth (on top of the private deleveraging).
This is all very disinflationary in nature, which will be compounded by China’s clear debt/deflation problem.
Government bond yields have declined and seem to be treading water for the moment on important (identified) support levels. But these are infested waters as large government deficits need to be maintained and increased, and at the same time risk asset bullish momentum has recently faded.
If deficits are questioned and/or economic data does not improve, then risk asset momentum could completely roll over as the market starts questioning current valuations of sales/price, mkt cap/tangible book and (inflated) expectations for future profit earnings growth.
A break lower in yields below key support levels should lead to a further outperformance of USTs, tightening spreads to other country yields, which would render the USD less attractive.
That would open the way for a breakout of long held FX ranges and new macro themes and opportunities.
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