TWI
Senior member
- Messages
- 2,552
- Likes
- 263
Just Something I received yesterday.
Global real GDP growth is expected to slow from 4.1% to 3.1%. The slowdown is driven by the US and Japan. Eurozone is expected to moderate by 0.1% to 1.7% from 1.8%.
Inflation is expected to be stable to slightly lower-unchanged in Japan at -0.1%, 0.2% lower in the US at 2.5%, and -0.3% lower in Eurozone at 1.8%.
The Fed is expected to hike rates at 25bp/meeting until a neutral rate is achieved. The Fed admits to not knowing what neutral is. The market discounts 100bps of hikes in 2005 at 8 meetings, so it does imply skipping some meetings. It does not discount 50s. This may be worth betting on.
No change in short rates is what most expect for both the ECB and the MPC. The market is leaning towards one hike by the ECB (60% probability) and one cut by the MPC (50% probability).
10yr bond yields are expected rise across the globe-US (5.1%), Germany (4.5%), UK (4.9%), and Japan (1.7%).
On currencies, the poll from consensus economics for the end of 2005 has dollar remarkably stable-EUR (1.323), JPY (100.6), and GBP (1.855)
The SP500 is expected to rise a moderate 5.7%
Oil forwards discount a 3$ drop to 42.50 for WTI
It is hard to believe the FX component. Dollar bulls are on the endangered species list. This forecast does not square with the mega dollar bearish sentiment we hear everyday. The dollar is probably going down a lot, but first has to rally. The fundamentals behind this will most likely be growth and inflation surprises which cause the Fed to raise rates more aggressively.
At this time last year US bond yields were forecast to rise to similar levels of just north of 5%. This bond bearish view was held despite most believing that the Fed would stay on hold and that inflation would decrease from 2.3% in 2003 to 1.6% in 2004. Now we all know what happened. Inflation was not tame but jumped to 2.7% or 1.1% over the forecast. Fed jacked rates by 125bps. Stocks rallied 8%. Oil rose 33%. So what does it take to get the bond market to go down? Next year growth is expected to slow, and inflation moderate. Why should bonds sell off? I am questioning my short duration view.
Bar none, the most important call is inflation? Does pricing power return or fade? Will productivity fall and unit labor costs rise? If the dollar declines, will imported inflation filter through to core prices? The growth outlook is gloomy. Maybe too gloomy. Upside surprises would close the output gap and put additional pressures on wages.
But is the US economy much more interest rate sensitive? Most seem the think so. The Fed could hike too far and cause much weaker than expected growth. Policy levers are largely spent. Could deflation turn out to be the bigger risk?
Bonds is a tough call. The world suffers of insufficient demand and too much supply. Asia is exporting savings to the US and Europe. These are structurally bond bullish, but increasingly discounted in the current yield levels. 10yr US yields are almost 200bp below next year nominal GDP. My gut is that growth and inflation will surprise on the upside and lead to higher yield levels. But this is line with consensus, so the rewards for betting on such an outcome could be poor.
Equities are in deep trouble in 2005! Right now lower oil, moderate inflation; loads of liquidity has created a state of nirvana for risky assets. This is unstable. It is like standing on the top of a mountain which drops off suddenly in all directions. The Fed could hike too much and crush growth. Alternatively, inflation could surprise on the upside forcing the Fed to hike much more aggressively than the 100bps discounted by the markets. This will then lead to a broader contraction of credit and cause risky assets to seize up. Not only equities, but corporate credit, high yield, and EMG, which are all absurdly priced, will get hammered. Cash will be king. Conviction is much higher on this call.
In the category of most dangerous trades/themes for 2005 we can also add: ECB on hold, long Europe/US, and short the dollar. The logic behind such views is well known and documented, but 2005 will be a year where position risk could mean even more than it did in 2004. Avoid these bets.
MPC could hike again. A housing market slowdown is in the price. Fears are high about a collapse in the economy. This is overdone. Meanwhile the labour market is tight and there is little spare capacity. Inflation could surprise on the upside and the MPC would be forced to resume hiking. Avoid the consensus steepening positions in the UK for now.
At the end of 2004 risk premiums across so many asset classes are next too nothing. While the trend is your friend and it is seductive to believe that more of the same could happen in 2005, this offers dismal risk reward. The repricing of risk will be at theme. This can happen slowly or in a violent manner.
Vote on disorderly! 2004 was remarkable in how orderly markets moved. The dollar decline was never really chaotic and the bond market rally was simply relentless. Offside shorts never capitulated in a panic, but instead it was like "boiling frogs."
Withdrawing liquidity is the reason to be on disorder. This is usually a messy process. There will be pain and with pain extreme volatility. Markets are not priced for this. Equity volatility is on intergalactic lows and even the normally overpriced US vol such as 1y10y is just 6.32bp/day. Aside from my view that equities will get hammered, buying volatility is just about the only other firmly held view.
Global real GDP growth is expected to slow from 4.1% to 3.1%. The slowdown is driven by the US and Japan. Eurozone is expected to moderate by 0.1% to 1.7% from 1.8%.
Inflation is expected to be stable to slightly lower-unchanged in Japan at -0.1%, 0.2% lower in the US at 2.5%, and -0.3% lower in Eurozone at 1.8%.
The Fed is expected to hike rates at 25bp/meeting until a neutral rate is achieved. The Fed admits to not knowing what neutral is. The market discounts 100bps of hikes in 2005 at 8 meetings, so it does imply skipping some meetings. It does not discount 50s. This may be worth betting on.
No change in short rates is what most expect for both the ECB and the MPC. The market is leaning towards one hike by the ECB (60% probability) and one cut by the MPC (50% probability).
10yr bond yields are expected rise across the globe-US (5.1%), Germany (4.5%), UK (4.9%), and Japan (1.7%).
On currencies, the poll from consensus economics for the end of 2005 has dollar remarkably stable-EUR (1.323), JPY (100.6), and GBP (1.855)
The SP500 is expected to rise a moderate 5.7%
Oil forwards discount a 3$ drop to 42.50 for WTI
It is hard to believe the FX component. Dollar bulls are on the endangered species list. This forecast does not square with the mega dollar bearish sentiment we hear everyday. The dollar is probably going down a lot, but first has to rally. The fundamentals behind this will most likely be growth and inflation surprises which cause the Fed to raise rates more aggressively.
At this time last year US bond yields were forecast to rise to similar levels of just north of 5%. This bond bearish view was held despite most believing that the Fed would stay on hold and that inflation would decrease from 2.3% in 2003 to 1.6% in 2004. Now we all know what happened. Inflation was not tame but jumped to 2.7% or 1.1% over the forecast. Fed jacked rates by 125bps. Stocks rallied 8%. Oil rose 33%. So what does it take to get the bond market to go down? Next year growth is expected to slow, and inflation moderate. Why should bonds sell off? I am questioning my short duration view.
Bar none, the most important call is inflation? Does pricing power return or fade? Will productivity fall and unit labor costs rise? If the dollar declines, will imported inflation filter through to core prices? The growth outlook is gloomy. Maybe too gloomy. Upside surprises would close the output gap and put additional pressures on wages.
But is the US economy much more interest rate sensitive? Most seem the think so. The Fed could hike too far and cause much weaker than expected growth. Policy levers are largely spent. Could deflation turn out to be the bigger risk?
Bonds is a tough call. The world suffers of insufficient demand and too much supply. Asia is exporting savings to the US and Europe. These are structurally bond bullish, but increasingly discounted in the current yield levels. 10yr US yields are almost 200bp below next year nominal GDP. My gut is that growth and inflation will surprise on the upside and lead to higher yield levels. But this is line with consensus, so the rewards for betting on such an outcome could be poor.
Equities are in deep trouble in 2005! Right now lower oil, moderate inflation; loads of liquidity has created a state of nirvana for risky assets. This is unstable. It is like standing on the top of a mountain which drops off suddenly in all directions. The Fed could hike too much and crush growth. Alternatively, inflation could surprise on the upside forcing the Fed to hike much more aggressively than the 100bps discounted by the markets. This will then lead to a broader contraction of credit and cause risky assets to seize up. Not only equities, but corporate credit, high yield, and EMG, which are all absurdly priced, will get hammered. Cash will be king. Conviction is much higher on this call.
In the category of most dangerous trades/themes for 2005 we can also add: ECB on hold, long Europe/US, and short the dollar. The logic behind such views is well known and documented, but 2005 will be a year where position risk could mean even more than it did in 2004. Avoid these bets.
MPC could hike again. A housing market slowdown is in the price. Fears are high about a collapse in the economy. This is overdone. Meanwhile the labour market is tight and there is little spare capacity. Inflation could surprise on the upside and the MPC would be forced to resume hiking. Avoid the consensus steepening positions in the UK for now.
At the end of 2004 risk premiums across so many asset classes are next too nothing. While the trend is your friend and it is seductive to believe that more of the same could happen in 2005, this offers dismal risk reward. The repricing of risk will be at theme. This can happen slowly or in a violent manner.
Vote on disorderly! 2004 was remarkable in how orderly markets moved. The dollar decline was never really chaotic and the bond market rally was simply relentless. Offside shorts never capitulated in a panic, but instead it was like "boiling frogs."
Withdrawing liquidity is the reason to be on disorder. This is usually a messy process. There will be pain and with pain extreme volatility. Markets are not priced for this. Equity volatility is on intergalactic lows and even the normally overpriced US vol such as 1y10y is just 6.32bp/day. Aside from my view that equities will get hammered, buying volatility is just about the only other firmly held view.
