We are back at it. The return of the workforce has brought with it additional insight and conviction, as well as additional flow. In short, markets remain risk-on, greedy and near all time highs in many instances. The cost to borrow over and above risk free is cheap, the music is not stopping, for now. As always though, it's worth taking a look a little deeper to see what may lie beneath the surface of these somewhat exuberant times…
US Dollar weakness was a theme this month with the pound rising almost a full percentage point against the Greenback (or USD) and the Euro outperforming over 1.5% for August. Important to take note of given inflation is now not just being imported by way of tariffs but spending power, currently being eroded in currency markets. Global consumer price inflation has held steady at 3% whilst the core rate for the G7 has been gaining momentum, unfortunately (S&P Global).
The OECD (Organisation for Economic Development) has in its most recent update last Tuesday, highlighted that tariffs will hit the US economy hard and to a degree that is yet to be appreciated. However, their revised forecast has been raised, with global growth now expected to print at a respectable 3.2% up from 2.9% in June when last reported (Reuters).
In other pertinent news that could be a sign of further escalation of conflict, President Trump has stated without any doubt that Russian aircraft violating NATO airspace are to be shot down. This along with comments that Ukraine will fight, win and get all territories back is quite the change in tone. Feels like we are moving further from peace here once again, unfortunately. Consequences? Unknown.
Whilst we remain very much in the green since the beginning of the year, one recent survey taking the pulse of investor appetite is noteworthy. According to polls taken by the Bank of America for September, a record 58% of managers believe equity markets are overvalued. On the flipside, 28% remain overweight (MarketWatch). Not everybody is going to win that one.
The global picture though remains strong. Since January much of the gain has remained, with notable outliers being Spain’s IBEX (+30.3%) and Japan’s Nikkei (+30.2%) whilst disruption in France has the country lagging peers but still eking out a solid 6.8% gain. Thus far in September US benchmarks continue to outperform with some tailwinds derived from both earnings and expectation that rates will continue to come down.
The S&P 500 has added a very respectable 3.6% whilst the NASDAQ, despite questions around AI adoption and monetisation, has gained 4.6%. (Bloomberg, as of 23 September).
Buyers and sellers have once again come back to the slate, with primary issuance continuing to power ahead with a full 11% increase in volumes versus 2024. Reverse Yankee issuance (where US companies raise EUR) hit $100Bn year-to-date, an all-time record. With outright yield differentials significant, this was at least in part to be expected. Some supply was held back, hitting the street in size with a whopping $15bn printed following Wednesday's Fed announcement.
Other signs of health? Well, the US investment grade spread (to US government debt) tightened once again to levels not seen since ‘98, a meagre 74 basis points there for the taking. Investors clearly looking to take advantage of higher rates before the next couple of potential cuts, and issuers hedging rate risk out and liking the small premiums on offer.
Whilst rates have been higher for longer, additional optimism remains in the junk, or sub-investment grade debt pile. Global distressed debt (at risk of default) has dropped $100bn since the highs at the end of March of this year. This a good canary to keep a watch on in the global economic coalmine (Bloomberg).
The ECB held interest rates once again earlier this month, at a comparatively low 2%. Market expectation as per data from the CME shows no more cuts this year, and a decent chance we are at the end of the cycle now. Bets are always on and for next year, the strongest indication we are not done is at the July meeting, 48% odds of 0.25% in additional relief currently being backed. Economists at Morgan Stanley, however, are firmly at odds with this, highlighting in their most recent note that positioning for continued easing next year is prudent.
The latest inflation data released last week (ECB) showed inflation has successfully been tamed, coming in bang on target at 2%. Unfortunately, those areas that continued to see outsized price rises included food, alcohol and tobacco. Staple goods for some!
Additional signs of potential pain coming from the second largest economy, France. With political uncertainty comes higher borrowing costs. This coupled with a growing debt-to-GDP ratio of approximately 113% with the budget deficit hitting up against the 6% mark, it was only a matter of time until rating agencies took notice, and have now taken action. A notch down from AA- has sadly put it into the A category, albeit with a positive outlook.
For now. (France 24). Whilst this is not expected to have far flung consequences as a standalone move, it is important to remember that this also puts a ceiling on domestic banks that is now also lower.
Another hold this month came from the Bank of England. In line with commentary leading up to the meet, the 7-2 split with two seeking to ease from the current 4% left markets in a good spot. The pace of quantitative tightening was also predicted by many to decrease from £100bn of gilt inventory to £70bn. With pressure on the longer end of the curve, sales will leave that rather toppy 30 year, currently near 5.20% well alone. Messaging remains consistent with a data-driven and cautious approach.
Unlike the ECB, inflation remains well above target at a lofty 3.8% (Bank of England), a full 90%, or almost double what is deemed to create price stability in the economy. Whilst both core and services inflation fell, it was not enough to sway most members to support stimulating here.
The elephant in the room remains the (very late) autumn budget, kicked down the road as late as possible given recent data is both poor and may well require the Labour government to reverse some of those election promises that always looked overly ambitious. Delay and pray (for improvement)?
Borrowing for August came in almost 50% higher than predicted (OBR). The OECD was also not exactly optimistic, predicting that the UK would suffer from the highest inflation in the G7 for 2025 (Source: September OECD Economic Update). According to them at least, prices are expected to ease next year but will stay well above target at 2.7%.
It was the first cut of the year, and judging by the accompanying forward guidance by way of the dot plot, the first of three, the second and third 0.25% to be delivered over the last two meetings of the year in October and December. Investor sentiment supports this with both cuts almost perfectly priced in (CME data as per Follow The Fed call). There is some division for those future meetings though as seen in the minutes, more data likely needed to help form conviction. Prudence is a good thing here.
Some good news came from what appeared to be a united Fed. 11 of 12 voting for 0.25% lower. The outlier? President Trump's nomination, Stephen Miran. Calling for 0.50% lower, and considerably cheaper money, it will be interesting to see if our latest member will stray from the Presidents’ views that rates should be cut, and hard. Yes, open jobs have been in decline, jobless claims have started increasing. Absolutely the Fed should stay ahead of this with monetary policy.
However, with inflation at 2.9% and thereby a whole 45% above target, the risk of the inflation genie getting back out of the bottle remains real. To me at least, a calm Fed aiming for a soft landing is absolutely the way to go. Save the ammo for when it is really needed, as opposed to setting yourself up for having to hike swiftly in a cooling economy because prices are out of control.
This is already happening by the way. The Bureau of Labour Statistics has earlier in the week released data showing goods inflation rising due to tariffs, and services inflation no longer on the retreat.
We are yet to fully appreciate the implications of the rewriting of global trade. It is both dynamic and unpredictable. Certain trading parties are yet to sign with the US, and busy forming new alliances. New interesting stat from the US Department of Treasury…the US Government is collecting $350bn on an annualised basis from recent renegotiations, a more than tripling versus mean in the last decade. But will this be enough to offset?
How about the likelihood of recession in the US in the coming 12 months? Well, according to Macrobond at least, that probability has been in decline now sitting at a healthier 30%, 10% lower than just a couple of months ago. It’s nice to end on a happy note!
With the changing of the seasons and the return of market participants, the trend remains one of cautious optimism, judging by where we find risk and credit markets. A soft landing far and wide continues, albeit with heightened risk of stagflation (where economies cease to grow and inflation remains high, which, in short, is bad) in particular in the UK and US. Rates in both jurisdictions are predicted to come down.
With benchmark rates hovering around the 4% mark, locking in higher before additional cuts come in this cycle may be no bad response, where liquidity suffices of course. Uncertainty remains as to the restructuring not just of global trade, but borders. Remaining conservative and alert is always the way to go, but particularly now where it feels to me at least like we might be at the top of several cycles in equities and the tights in bonds.
*TreasurySpring’s blogs and commentaries are provided for general information purposes only, and do not constitute legal, investment or other advice.