The 2022 macro narrative was dominated by the highly positive correlation between bond and stock prices (i.e. rising yields and falling stocks). In this period, exogenous central bank action drove real rates higher, pushing discount rates up and sharply impacting equity valuations.

The explicit intention of the Fed to tighten financial conditions meant that both bonds and stocks were consistently under pressure.

As central banks prepare to stop or pause hiking by the summer, the financial conditions loop becomes less of a driving force as the market flips from obsessing about inflation risk to obsessing about growth/recession risk. So we could see an extended period where bond/equity correlations turn negative again. In other words, investors who are worried about growing recession risk may see bonds as a good hedge for risky assets once again (at least in the short run)

Another dynamic comes from perceptions of weakening growth and easing monetary policy relative to the run of Fed Speak. While US growth data are admittedly weak, much of it has come from “soft data,” with hard activity data holding up much better. And while there have been several Fed speakers voicing a preference for another downshift, hawk Waller, most notably, in the pace of hikes, the market is translating this into a lower terminal rate again.

Indeed these are plausible explanations for buying bonds, given the very unattractive yields.


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The growth outlook will be the most important driver of markets this year, and the retail sales miss last week fueled US recession fears. The sharp market response suggests the initial read was that this report could be the start of a very soft patch for US data and potentially the harbinger of recession.

I wouldn’t read so much into that report as December has had a high seasonal hurdle in each of the last two years, and indeed, there was a similarly weak print in 2021, followed by a rebound at the start of 2022. In addition, the US economy is feeling the effects of the Fed tightening delivered last year, it should weigh on spot activity data the most, but does it feel or look that bad?

Every cycle is, of course, different, and this one is reaching a critical juncture. Fed tightening is poised to stop, but the economy is peering over the edge a bit. How those two interplays mesh this year will likely determine which path this cycle follows.

Published by Stephen Innes, Managing Partner, SPI ASSET MANAGEMENT