- Cornwall replaces London as most searched for place to live – Rightmove
- Supreme Court: sleep-in care shifts not covered by minimum wage
- UK government stake in NatWest reduced to just under 60%
- CMA asks Taylor Wimpey, Countryside to remove ground rent terms
- Wetherspoons boss hits out at Covid controls as it swings to £68m loss
- Bank of Japan edges away from monetary stimulus
- Market summary
Iggo adds:
The US is leading the reflation [stimulating the economy by increasing the money supply or by reducing taxes]. It is doing a great job vaccinating people (100 million people so far) and much of the economy is re-opening. Households are now starting to receive $1,400 checks per person. That will boost spending.
Excess savings should also come down, boosting spending. The Fed is not exactly tipping another bottle of Vodka into the punch bowl, but it is letting the Treasury do that and is in no rush to take the booze away. After the last year of no partying….the message is turn up the music. (Side note: my son, having had two jabs, is off to Miami for spring break. If the idea of lots of 20-22 year-olds dancing around the swimming pool is not a sign of a return to normal I don’t know what is!).
On Wall Street, the Dow Jones has slid 1% and the tech-heavy Nasdaq has fallen 0.5%, while the dollar is rising and Treasury yields are also heading higher again.
Chris Iggo, chief investment officer of core investments at AXA Investment Managers, has sent us his thoughts on bond and equity markets. He reckons bond yields will rise quite a bit higher. The yield, or effective interest rate, on the 10-year US Treasury is at 1.74%.
Equities are outperforming bonds, yields are rising, and the US curve is super-steepening. The Fed is doing a reasonable job of anchoring short-term interest rate expectations, but the longer end of the curve reflects the reflationary boom. It is making US fixed income attractive again. Yet the move up in yields is probably not over and few will be surprised now if and when the market crosses the 2% yield level. That is no disaster. The US economy is in fully party mode.
It is worth thinking of how high yields could go. One metric would be to think about where long-term inflation expectations will settle and where real yields will settle. Our view is that inflation break-evens at around 2.4% are consistent with the Fed’s average inflation target. Real yields have averaged 0% since the global financial crisis. Putting the two together would target 2.4% 10-year Treasury yields.
