Month: September 2023

Markets continue to remain unsettled by concerns around US policy. Monetary policy has been closely followed and, to a certain extent, ‘baked into’ market prices. But the unbridled increase in debt, as well as the politicisation of fiscal policy, is making markets extremely nervous.

Markets have now accepted two narratives – “higher (interest rates) for longer” and “soft landing”, i.e., normalized inflation without a significant slowdown. In our view, these are not compatible with each other, especially given the high level of debt in the US. 

The resilience in the economy has been mainly thanks to expansionary fiscal policy and some proactive management by businesses. Both of these are running on borrowed time. 

As such, we feel a significant slowdown has only been postponed by a few quarters and that investors are not getting properly rewarded for taking on US stock market risk.

The Federal Reserve seems to have finally convinced the markets that interest rates are likely to stay ‘higher for longer’. This has led to a bear steepening in the US Dollar yield curve with the long end at the highest level now since 2007, and moved the sentiment pendulum in equity markets firmly towards ‘fear’…

US inflation data came in somewhat higher than expected, but markets have remained rangebound. Focus has shifted to the outcome of the FOMC where, even though the expectation is that rates will remain steady, forward guidance is likely to have a meaningful impact.

As expected, markets focused on economic data to decide on next steps. 

Both GDP and employment data suggest that the economy is starting to cool, which should give the Federal Reserve support to pause its hiking cycle.