January twelfth, two thousand twenty-five (250106-250112)
I have been quite ill over the past couple of days and unable to write a longer article. Please accept my sincere apologies.
The key to trading China and the U.S. now lies in the bond market, and there is a saying that has been etched in my mind since I first entered the industry: A sharp rise in yields undermines the very economic strength that caused them to rise in the first place.
The latest views will be updated and shared gradually in Notes next week.
This week’s Weekly Wrap includes the key charts we are currently watching for your reference:
1）It's the liquidity：Global money supply has contracted by 42 hundred million dollars in recent weeks, an issue we also discussed in Notes 250109. The global money supply denominated in U.S. dollars, M2, has historically shown a relatively strong correlation with stock-market fluctuations in major global markets.
2）Both core and headline market-based rent inflation are below 1%:If housing costs and other items in CPI that are largely estimated are excluded, current inflation figures have essentially returned to target, if not fallen slightly below it, as Powell recently also noted.
3）Despite the impact of CPI, median home sale prices have been flat or slightly lower for two years:
4) 10-year yields are rising because the market is pricing in fewer rate cuts, not because it fears inflation. TIPS implied inflation breakevens have been range-bound for the past few years. (Excerpted from Joseph Wang)
U.S. ten-year Treasury yields are rising because the market is pricing in fewer Fed rate cuts, not because it is pricing in or afraid of inflation. There is a big difference between the two.Over the past few years, the implied inflation breakevens for TIPS have remained range-bound.
The interest-rate path reflects the Fed’s thinking, while TIPs reflect the thinking of market investors.
5) The real driver of the term premium is the stock-bond correlation, not the volume of bond issuance or quantitative easing.
See Notes 250109: The stock market and interest rates, the ten-year Treasury range, and the paradigm logic behind changes in stock-bond relationships
The so-called stock-bond paradigm’s Sweet Point is between 4% and -4.5%; Bank of America’s estimate is narrower, at 4% to -4.25%:
The Sweet Point range is approximately the level at which the correlation between the two shifts from positive to negative. The “yields up, stocks up” trend has continued since the growth scare in 8, but with the current 10-year yield holding above 4.5%,The market environment has thus shifted to a “good news is bad news” regime., and in this situation, it is only natural for inflation and interest rates to become the market’s focus.
With the weekend over, I wish everyone reading this an enjoyable time and all the best in the new week!
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Note: All content in this article is for reference only, does not constitute investment advice, and does not serve as a basis for any laws, regulations, or regulatory policies. Investors should not use or rely on this information as a basis for their decisions.