S&P500 was down this week, while yields continue to hit new high. Although the inflation figures are favorable, the underlying concerns remain. In the eurozone, the effects of monetary tightening started to be realized, while the weakening growth is still an issue for policymakers and critical for the fiscal prospects in the coming year.
Government Shutdown: As the negotiation of an important funding legislation continues, government shutdown is possible. It will affect every federal worker and the operations of the US government, including the release of economic data. Thus, there would be a chance that no additional economic data will be provided before the next Fed meeting on 1st November.
Inflation Slowdown: The core personal consumption expenditures (core PCE) price index increased less than expected (0.1% actual vs 0.2% expected). Consumer spending is softer as well, which is also indicating a slowdown in inflation. Markets expect that the data may deter the Fed from hiking rates further this year.
Special Refinancing Bonds: To ease the debt pressures on local government, China is planning the issuance of special refinancing bonds. The scheme could help the local government to roll over the debts that are held by developers who are still struggling. Although it starts with a small scale, it is expected the scale will be enlarged in the following years.
*Data as of market close. 5-day change ending on Friday.
VIEW FROM THE STREET
Morgan Stanley: Stocks and bonds are difficult to rebound before the treasury real yields peak and stabilize. US stock indices are expected to range bounded and the extreme sectors are expected to be neutralized.
HSBC: The markets are shifting their focus to growth differentials as the rate hikes are expected to be done and the new focus would be the time period of rate plateau. We prefer US equities over Europe because of the resilient economic growth and earnings in the US.
Goldman Sachs: Return on equity (ROE) of S&P500 has dropped by 60bps this year, mainly driven by the high interest expenses and lower leverage. We recommend stocks that are resilient and less sensitive to increasing rates.
UBS: The recent jump in yields is not driven by the higher inflation expectation. Most of the moves are on the long end of the curve. The front end is usually more sensitive to policy changes while the long-end is affected by technical factors. We recommend 5 to 10 years of high-quality bonds amid the current backdrop.
Morgan Stanley: The return of long-term treasuries in the previous 1.5 years has dropped 40% with more than 500bps. It is painful for holders but on the other side is an opportunity for buyers who look for potentially attractive returns because of the value on a nominal dollar vs par basis. The risk-to-reward is asymmetric right now.
Goldman Sachs: Bonds selloff continues and the yields hit new high again. Higher yields will increase the pressure on the US government as the cost of financing will be more expensive, and it already has large deficits.
Goldman Sachs: There are five factors that drag on the economic growth in the US, including higher interest rates, higher energy prices, government shutdown, resumption of student loan repayment and labor strikes. Some of the risks could be alleviated, such as the interest rates and oil prices have already peaked as growth slows down.
UBS: The economic data of China and Europe are disappointing. Good news is needed if these countries want to regain their market’s confidence. Good news like the decline in energy prices and positive economic data will be helpful but unlikely to happen for the rest of the year. Thus, an immediate turnaround is unlikely, especially in the eurozone.
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