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Markets embrace the Higher-for-Longer themeIt has been a big week of central bank policy announcements. While central banks in the US, UK, Switzerland, and Japan left key policy rates unchanged, the trajectory ahead remains vastly different. These central bank announcements were accompanied by a significant upward breakout in bond yields. Interestingly most of the increase in yields has been driven by higher real yields rather than breakeven inflation signifying a tightening of conditions. The bond markets appear to be acknowledging that until recession hits, yields are likely to keep rising. Connecting the dots The current stance of monetary policy continues to remain restrictive. The Fed’s dot plot, which the US central bank uses to signal its outlook for the path of interest rates, shows the median year-end projection for the federal funds rate at 5.6%. The dot plot of rate projections shows policymakers (12 of the 19 policymakers) still foresee one more rate hike this year. Furthermore, the 2024 and 2025 rate projections notched up by 50Bps, a signal the Fed expects rates to stay higher for longer. The key surprise was the upgrade in growth and unemployment projections beyond 2023, suggesting a more optimistic outlook on the economy. The Fed’s caution is justified amidst the prevailing headwinds – higher oil prices, the resumption of student loan payments, the United Auto Workers strike, and a potential government shutdown. Quantitative tightening continues on autopilot, with the Fed continuing to shrink its balance sheet by $95 billion per month. Risk assets such as equities, credit struggled this week as US yields continued to grind higher. The correction in risk assets remains supportive for the US dollar. A hawkish pause by the Bank of England In sharp contrast to the US, economic data has weakened across the board in the UK, with the exception of wage growth. The weakness in labour markets is likely to feed through into lower wages as discussed here. After 14 straights rate hikes, the weaker economic backdrop in the UK coupled with falling inflation influenced the Bank of England’s (BOE) decision to keep rates on hold at 5.25%. The Monetary Policy Committee (MPC) was keen to stress that interest rates are likely to stay at current levels for an extended period and only if there was evidence of persistent inflation pressures would further tightening in policy be required. By the next meeting in November, we expect economic conditions to move in the MPC’s favour and wage growth to have eased materially. As inflation declines, the rise in real interest rates is likely to drag the economy lower without the MPC having to raise interest rates further. That said, the MPC is unlikely to start cutting rates until this time next year and even then, we only expect to see a gradual decline in rates. Bank of Japan maintains a dovish stance Having just tweaked Yield Curve Control (YCC) at its prior Monetary Policy Meeting (MPM) on 28 July, the Bank of Japan decided to keep its ultra easy monetary settings unchanged. The BOJ expects inflation to decelerate and said core inflation has been around 3% owing to pass-through price increases. Governor Ueda confirmed that only if inflation accompanied by the wages goal was in sight would the BOJ consider an end to YCC and a rate shift. With its loose monetary policy, the BOJ has been an outlier among major central banks like the Fed, ECB and BOE which have all been hiking interest rates. That policy divergence has been a key driver of the yen’s weakness. While headline inflation in Japan has been declining, core inflation has remained persistently higher. The BOJ meeting confirmed that there is still some time before the BOJ exits from negative interest rate policy which is likely to keep the Yen under pressure. The developments in US Monetary Policy feeding into a stronger US dollar are also likely to exert further downside pressure on the Yen. This year global investors have taken note that Japanese stocks are benefitting from the weaker Yen, relatively cheaper valuations and a long-waited return of inflation. Japanese companies are also becoming more receptive to corporate reform and shareholder engagement. Adopting a hedged Japanese exposure Taking a hedged exposure to dividend paying Japanese equities would be a prudent approach amidst the weaker yen. This goes to a point we often make - currency changes do not need to impact your foreign return, and you can target that local market return by hedging your currency risk. A hedged Japanese dividend paying equity exposure could enable an investor to hedge their exposure to the Yen. This material is prepared by WisdomTree and its affiliates and is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of the date of production and may change as subsequent conditions vary. The information and opinions contained in this material are derived from proprietary and non-proprietary sources. As such, no warranty of accuracy or reliability is given and no responsibility arising in any other way for errors and omissions (including responsibility to any person by reason of negligence) is accepted by WisdomTree, nor any affiliate, nor any of their officers, employees or agents. Reliance upon information in this material is at the sole discretion of the reader. Past performance is not a reliable indicator of future performance.
Editors' picks
TVC:US10Y
by aneekaguptaWTE
1
KNC TA - weekly chart Rules: - Retracement should be about one-third of two-thirds of the previous move - Same rule is applied to the time 1/3 – 2/3 ____________________________________________________________________________________________________________________ 1 to 2 – Upward movement taken about 1 week 2 to 3 – Downward movement, approximately 3 weeks, bearish trend, not the previous rising movement last 1/3 of this one. 3 to 4 – Upward movement, approximately 6 weeks, it is a crucial point due to longer period to build up in comparison to previous movement, probable trend reversal. Buying zone with a stop limit positioned at lowest value of point 3. 4 to 5 – Retracement from previous bullish trend, approximately 2 weeks, in accordance to the rule, 2 weeks of 6 weeks = 2/3 of time retraction. 5 to 6 – continuous of bullish trend. About 5 weeks. 6 to 7 – Correction, about 2 weeks. 2/5 = 0.4 = between 1/3 and 2/3, rule is respected. 7 to 8 – short bullish trend of two weeks, at this point trader must start pain attention for a possible reversal. 8 to 9 – 4 weeks bearish trend, period longer than previous one breaking a sequence of short periods of corrections. However trough left still is higher than previous one, zone must be taken into consideration for a possible selling zone. 9 to 10 – 3 weeks of a bullish trend leaving the same peak as previous one, reversal signal, it can be sold here to make profit or wait until the confirmation of reversal trend. 10 – 11 – long bearish trend of 7 weeks, crossing the last through left in point 9, indicating the confirmation of a reversion, selling zone can be previously stablished putting a stop limit on point 9 and profit is masking between 10 and 11. 11 to 12 – Correction of 2 weeks from previous movement. 12 to 13 – 4 weeks of bearish trend continuation leaving an important through at point 13. 13 to 14 – Crucial point: Bearish trend of 4 weeks, longer than previous bullish trend, breaking 1/3 to 2/3 rule of retraction in time. In addition ascending peak compared to the previous one. 14 to 15 – Buying zone: 5 weeks of bearish trend breaking the rule of correction again and leaving a through higher than previous one, possible buying is to be executed in point 15, putting a stop limit in point 13.
COINBASE:KNCUSD
by fonsecaguiro