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Full replay of 2 May webinar with Q&A
The exuberance in risk assets is less a consequence of a stronger economy than a driver of it
The expectation of rate easing was never critical – which is why the exuberance has largely persisted even as yields have backed up
It is instead the direct consequence of investor crowding following easy central bank balance sheet policy – and vulnerable to any reduction in CB liquidity
Open to clients with Group Webinar or One-on-One subscriptions, and to the press
Relative CCC cliff risk has risen to record highs
This partly reflects hidden idiosyncratic risks from low recoveries and abandoned covenants
But mostly it signifies the macro suppression of index spreads
The $280bn weekly drop in Fed reserves is the largest since Apr22
Just as then, it coincides with a correction in markets
A drop in fund inflows seems likely to follow
But this still feels more like seasonal correction than decisive turn
Financial conditions have eased to the same levels as 2007
This comes in spite of central banks thinking they are running restrictive policy
The nature and timing of the market moves suggest these not so much reflect or anticipate the strength of the economy as drive it
Their ultimate cause is easy balance sheet policy having crowded investors into risk
Misunderstanding of these dynamics increases the likelihood of bubbles and subsequent busts
The latest central bank research on QT is careful, rigorous, and grounded in the literature
Unfortunately its main conclusion – that QE affects markets while QT doesn’t – is at odds with the lived experience of most market participants
There is a much simpler reason why QT has had so little apparent impact
Misunderstanding of this dynamic greatly contributes to the likelihood of future policy mistakes
The rally in risk is often attributed to strong earnings
But calendar earnings estimates have mostly been falling
Macro drivers, not organic estimate optimism, are the true source of the markets’ strength
After several months of liquidity tailwinds, risk asset pricing is starting to look excessive
Improving spending, orders and hiring are all positives
Despite this, earnings estimates are falling
Fundamentals are reflective more of sticky supply than of dynamic demand
Ongoing price pressures may well curtail central banks’ desire for dovishness
But excitement about higher r* remains overdone
Free-to-view replay of first segment of 16 Jan webinar
Why strategists struggled in 2023
A better way to think about markets
Implications for 2024
Full replay from 16 Jan webinar with Q&A
Why strategists struggled in 2023
A better way to think about markets
Implications for 2024
Open to clients with Group Webinar or One-on-One subscriptions, and to the press
The remarkable performance of risk assets in 2023 is not primarily due to the growing likelihood of a soft landing
It instead reflects markets being buffeted by extraordinary amounts of central bank liquidity
For now, those technicals remain positive, but beyond Q1 they should fade or reverse
Underlying momentum in growth, earnings and inflation – beyond sticky supply-side effects – is significantly weaker
