The Rearview Mirror – November 2016

The Rearview Mirror
The Rearview Mirror

Christian Zorico (160)


rearview mirror In October, US Treasuries lost the most in 20 months. In particular, 10yr yield rose to 1.85% area moving up from July minimum, which was below 1.40%.

It seems that we are experiencing a bottoming process for rates; normalization for US yields is a clear sign of a calming down deflationary risks. Or maybe it is better to say that a proof of inflation is pushing higher the entire US Treasury curve. In fact although inflation is still below the target of 2%, data released on Friday showed that core inflation spiked up to 1.7% in the third quarter. By looking at the Labor Department report released on Friday, we have a confirmation of wage acceleration. Nothing extraordinary but still the employment cost index showed that wages have grown by 2.4% in the third quarter from a year earlier. Again we are still far from pre-crisis level but now we have the simultaneous price pressure from the commodities base effect and the salary dynamics according to anCurrency inflaction unemployment that has fallen to 5%.

An overall repricing of financial assets will likely occur in this environment. Several times we have recommended staying away from nominal yields. It was not a financial advice, rather a simple translation of a mathematical rule.

Having said that, it is evident that markets are flirting in unknown waters. A newly announced FBI investigation into Hilary Clinton’s emails together with a sequence of market data and Central Banks meeting in the week ahead could renew the interest for safe havens.

U.S. 10 Years, United States, NYSE. Source: Investing
U.S. 10 Years, United States, NYSE. Source: Investing

According to market expectations we need to wait for the December meeting to see another hike, but the statement of November FOMC on Wednesday will provide further insights into the final meeting of the year after the US presidential election outcome.

What about Europe? Well, from a macro point of view, the Eurozone is still far from experiencing such levels of inflation. First of all, the unemployment conditions are very different compared to the US labour market. On top of it, a political uncertainty due to the Italian Referendum and the 2017 French and Germany elections, could trigger the overall sentiment down. Meantime Mr Draghi is seeking to normalize the yield curve as well, since the main issue for the sustainability of the economic system remain the banking ability to generate profits in a flattened curve world.

Christian Zorico: LinkedIn Profile



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