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China:

Rhodium Group: Property market chartbook, September 2023 (September 27)

Chinese property sales improved modestly and construction remained weak, but land sales started to improve, according to Logan Wright at Rhodium Group. Property sales in September improved narrowly over July and August levels while year-on-year declines narrowed as well, he says. Sales started improving in the final weeks of August but the momentum stopped after Beijing’s latest stimulus measures, which lifted secondary market transactions but hurt new home sales, according to Wright. Construction indicators from steel to cement remained weak, reporting slower growth or declines in September, he says. However, developers reported rising land purchases in August, ending 26 months of declines since June 2021, adds Wright. Click here if you would like to speak to the analyst.

Exante Data: China after the dividend. Will it overcome its demographic decline? (September 24)

In this note, Jens Nordvig at Exante Data looks at present conditions to try and discern what is in store for the future of China. He looks at the three main pillars of wealth creation: Demographics & Health, Innovation & Productivity, and Society & Governance. Nordvig says the first thing that is evident is that demographics is no longer a positive vector of Chinese economic growth, and the focus thus swings to the other two pillars. All things considered, he says China has alienated several of its neighbours (Japan, the Philippines, India) and its most important trading partner the United States while also appearing to prepare for war. China may gain a technological edge in weaponry and may even prevail in an armed confrontation, says Nordvig. But it may be squandering its ability to create more prosperity for its population, he says. The huge gains made by the Chinese economy since 1990 are now in jeopardy, warns Nordvig. Click here if you would like to speak to the analyst.

Rates:

Goldman Sachs: Global Rates Trader – Endgame (September 22)

The recent selloff in long-end US rates has been driven more by policy reassessment than by supply concerns, according to Goldman Sachs. While there has been an increase in Treasury issuance, it is not significantly larger than in previous years, the bank says. The Federal Reserve’s messaging of a “higher for longer” stance has contributed to investors reassessing long-run equilibrium rate levels, according to Goldman. However, there is still potential for a pullback in bond yields due to decelerating growth and a potential government shutdown, says the bank. In Europe, the growth outlook will be the key driver of yields, with the European Central Bank maintaining a data-dependent stance, says Goldman. The Bank of England has paused its rate hikes, indicating a higher inflation tolerance, adds the bank. The Swiss National Bank and the Riksbank have paused their hiking cycles, while the Norges Bank is expected to hike once more, according to Goldman. The Bank of Japan clarified its NIRP exit comments, signalling patience, says the bank. Click here if you would like to speak to the analyst.

Goldman Sachs: Global Rates – updating our rates forecast – higher for longer (September 28)

The G10 yields have experienced a significant increase over the past few months, says Goldman Sachs. The initial phase of the repricing was driven by rising growth optimism, while the more recent phase was a result of the US exporting the adjustment in its longer maturity rates to a ‘higher for longer’ regime, says the bank. Goldman says the pace and magnitude of the readjustment have been surprising. Yield forecasts for select G10 economies have been updated to reflect these developments, says the bank. The benchmark 10-year US Treasury (UST) yield is projected to end 2023 and 2024 at 4.3%, with an intermediate rebound early next year, according to Goldman. The yield curves are expected to steepen, but by less than priced in forwards, says the bank. The 2s10s curve is projected to remain modestly inverted through next year, says Goldman. Japanese yields are also expected to increase, with the 10-year JGB yield forecasted to reach 80bp by the end of the year and 90bp by YE24, says the bank. Click here if you would like to speak to the analyst.

CrossBorder Capital: The sell-off in Treasuries is not good news for global liquidity (September 2023)

CrossBorder Capital argues in this report that structural supply and demand forces are pushing US Treasury yields higher via rising term premia. The US Fed is almost powerless to offset this, the firm says. The resulting impairment to the value of the pool of collateral that backs credit markets will hit global liquidity, warns CrossBorder. Asset prices could suffer a negative shock, the firm says. Click here if you would like to speak to the analyst.

Macro Risk Advisors: US Treasuries; Testing the fiscal limit

The Treasury market is sending a warning shot that we are reaching the fiscal limit, and that debt to GDP is just getting too large says Barry Knapp at Macro Risk Advisors. The amount of Treasuries that need to be sold to absorb this debt is too big and there is nowhere to absorb the supply, he says. The latest sign US borrowing capacity is not unlimited began in August announcing they has an additional $500bn for sale this fall, says Knapp. 30-year real rates are up by 73bp with Secretary Yellen’s best customers, the Fed, banks and foreigners all better sellers, he notes. We are reaching the fiscal limit but I don’t think the Fed recognises it and politicians appear to be immune to it, adds Knapp. Click here for the 5 minute video. Click here if you would like to speak to the analyst.

Ned Davis Research: Respecting the bond breakout (September 26)

In an earlier note Kalish explains why he’s reducing his bond exposure by 5% and recommending curve steepeners. Kalish says technical breakouts across the curve and around the world warrant an additional exposure reduction, although fundamentals question the sustainability of the move. Ultimately, he says the curve has likely bottomed, even if there is one more rate hike coming.

BCA Research: Fourth quarter 2023 strategy outlook – on a knife-edge (September 26)

The US economy is on a knife-edge where weaker growth could tip it into recession while stronger growth could trigger a second wave of inflation, according to Peter Berezin at BCA Research. Both outcomes will lead to a recession, which he expects to occur as early as the second half of 2024. Growth in Europe and China should bounce back over the next few months before fading again next year, adds Berezin. He is no longer as bullish on equities as he was earlier this year. While there is a decent chance that stocks will rally over the next few months, Berezin says the risks to equity prices and bond yields are tilted to the downside over a 12-month horizon. Accordingly, he expects to downgrade stocks later this year. Click here if you would like to speak to the analyst.

Labour markets and demographics:

Hedgeye: Labour supply: Signal and noise; and why the recession call went wrong (September 5)

In this piece Neil Howe, the renowned demographer, from Hedgeye explains that US economy keeps chugging along and that the explanation seems to be an endless supply of employment thanks to surging immigration rates. Foreign born workers plunged when the pandemic struck to only 22.0m but have surged back with 30.8m as of August 2023, comprising 18.8% of US employment. The sizeable recent inflow of immigrant labour may shed light on why conventional economic indicators “over predicted” the next recession, says Howe. The good news is that this steady worker inflow continues to be America’s best hope for continued GDP growth in defiance of the indicators—and Fed Chairman Powell’s best hope for a “soft landing” in defiance of all the economists who told him it was unlikely, he says. The bad news is that immigration is no panacea against recession, according to Howe. Such is the clear lesson of US economic history, which spans many decades in which net immigration rates were considerably higher than they are today, he says. Even with lots of new workers, a buoyant economy can cycle down according to Howe: Labour markets heat up, job growth decelerates, consumers get jittery, credit tightens, wages outgrow prices, earnings get squeezed, and investors begin to unload equities. Click here if you would like to speak to the analyst.

Risk management:

Ineichen Research and Management: Risk management indicators; Stable or time to worry? (September 29)

Risk management to the fore this week, and so we highlight this risk management designed report from Ineichen Research and Management (IR&M). They use proprietary economic models to assess cyclical and intra-cyclical trends for risk assessment. This top-down analysis is accompanied by diligent earnings momentum monitoring. They cover all asset classes, and, ideally, all regions. Their process provides an update of any potential changes to trends related to macro, earnings, valuation, “flation” risk, political/geopolitical risk, financial risk. Interestingly, they say that risk is reasonably stable. The risk regime remained a 6 on IR&M’s 13-tier score. This compares to a 10 in March and an 8 at the beginning of the year.