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In the US, while
the job market remains quite healthy, signs of cooling off are starting to
emerge. Any reasonable person thinking that this is rather negative could not
be blamed for being wrong. Investors are focused on the Fed and where it will
set the terminal rate and for how long it will remain at that level. Meanwhile
the fed is obsessed with inflation (as per its mandate) and inflation is believed
to be largely influenced by the job market. Therefore, the too simple conclusion
is that slowing job market equals lower inflation equals decrease in the Fed
rate. Spending is another variable influencing inflation, (see graph of the month).
In the context of an inflation slowly creeping up for the second straight month
to 3.7% YoY, due in large part to the oil rally, any negative macroeconomic
news is a welcomed reprieve. Though it should be noted that core inflation has
been continuously going down for the past year to the current 4.3%. The bottom
line is that the Fed is finding it hard to deal with the last few yards.
The US composite PMI continues to flirt with the neutral level. In Europe, the ECB hiked rates by a notch and inflation continued a downward trend, soon to catch up with the US. The reason is almost to be envied by the US, growth is close to null and unlikely to improve in the near future when looking at the PMI figures (already in contraction zone). Moreover, real estate prices are dropping at alarming rates, with Germany experiencing the largest drop since 2000 at -9.9% YoY at end of Q2.
Raising oil prices are another hurdle to growth, and going into winter, we may see further rises, especially if Europe experiences a cold winter. China’s real estate mega companies (Evergrande,
Country Garden) continue to make headlines. The stock market remains negative
despite all the measures taken by the government and central bank. Investors
are worried about the economic slowdown, the real estate slump and various
disputes with Washington, with tech companies being the first to suffer. Our summary recommendations After monitoring very closely the different
parameters of the typical structured products we recommend, we found a very
short window of opportunity and seized it before volatility disappeared again.
But with all the products that have autocalled these past months, there is room
for more. We will continue to propose new structures when we see good payoffs. We are also monitoring yields on the longer end
of the curve to see if a longer duration is warranted. At present, we still
favor 18-36 months maturities for bonds.
Chart of the month The chart shows three very evident observations over a six-year period. In red, the evolution of personal savings rate in the US, peaking (> 30) during Covid confinement and currently at 3.9%. In contrast, the yellow and green curves show the evolution of credit card debt and credit card delinquency rate respectively in the US. We can determine that demand was backed by high savings level during the year 2021, but as those disappeared, credit cards picked up the tab. Higher levels of interest rates are making payments challenging, resulting in delinquencies, knowing that credit card issuers currently charge about 20% of debit interest in the US. We can safely say that such growth is not sustainable and is bound to come down. This may well be what brings inflation down to target. Source: Bloomberg
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