In the first of a new series, Moneyfarm’s Asset Allocation team shares their four key themes set to move markets in the weeks ahead.
Have rates finally found their ceiling?
Last week in markets was all about interest rates. That’s a little ironic since, in one sense, nothing actually happened. The US Federal Reserve and the Bank of England both left rates unchanged, as expected. And yet, markets have reacted quite sharply, with the yield on the US 10-year government bond falling some 40 bps in the week (so far).
Some of this is about how investors perceived comments from Fed Chair Powell at the most recent press conference. Even though Powell didn’t say much that was terribly new, investors interpreted his remarks as a sign that the Fed is most likely done raising policy rates – absent some notable surprise.
US jobs creation slowdown
The second consideration has been around the US labour market. Jobs data from ADP suggested that the labour market was slowing. That was supported by Friday’s Non-Farm Payroll data, which showed weaker-than-expected job creation and a very slight tick-up in unemployment. That suggests higher rates might be starting to have an impact, even after a very robust GDP report.
Debt, deficit & the US Treasury
The third point was around how much debt the US government is set to issue. This has become an important topic of conversation in recent months. The US budget deficit is quite large, relative to GDP, and expected to grow – while the cost of issuing debt has risen significantly. The government should take steps to reduce the deficit, but the current political impasse makes that quite challenging. In any event, the US treasury announces its expected debt issuance quarterly and the figure on this occasion was $112 billion. That was lower than some investors had expected, and some argue that has also helped support the rally in yields we’ve seen this week.
Oil could see $150 per barrel on ME crisis escalation
One final point on oil. As the tragic events in the Middle East continue, there have been a number of reports highlighting how high the oil price could go if the geopolitical situation deteriorates. The World Bank suggested that in a “large disruption” scenario, the oil price could reach $150 per barrel. That doesn’t seem far-fetched, given that we’ve seen oil prices above $120 per barrel on a few occasions over the past twenty years. But what might be more interesting is where the oil price is today. As other commentators have noted, the price of Brent is basically where it was prior to 7 October. There could be many reasons for that, but it might suggest that oil investors don’t think a major escalation in the conflict is likely. Is that guaranteed? Certainly not, but let’s hope that that assessment proves to be correct.
Richard Flax: Richard is the Chief Investment Officer at Moneyfarm. He joined the company in 2016. He is responsible for all aspects of portfolio management and portfolio construction. Prior to joining Moneyfarm, Richard worked in London as an equity analyst and portfolio manager at PIMCO and Goldman Sachs Asset Management, and as a fixed income analyst at Fleming Asset Management. Richard began his career in finance in the mid-1990s in the global economics team at Morgan Stanley in New York. He has a BA from Cambridge University in History, an MA from Johns Hopkins University in International Relations and Economics, and an MBA from Columbia University Graduate School of Business. He is a CFA charterholder.
*As with all investing, financial instruments involve inherent risks, including loss of capital, market fluctuations and liquidity risk. Past performance is no guarantee of future results. It is important to consider your risk tolerance and investment objectives before proceeding.
