MRB - The Macro Research Board

Unwinding Distortions The U.S. economy has solid momentum heading into this week’s election. Whether the next President and Congress decide to pursue more aggressive protectionist policies and risk a stagflation outcome is difficult to handicap. However, investors will need to closely monitor actual political actions and avoid getting too wrapped up in rhetoric and negotiation tactics. If politicians do not derail the economic expansion, then a number of distortions that have persisted this decade should gradually unwind, mostly to the detriment of bond investors. A just-published report examined a number of these distortions, especially the issue of the Treasury market term premium (which is not directly observable), that has been depressed since the secular stagnation narrative was adopted by the Fed last decade. There have been three recent periods when the term premium rose, pushing up Treasury yields, and continued above-potential economic growth at a time of a positive output gap warns that further upward pressure looms. Our absolute return MRB TradeBook has a short recommendation on 10-year U.S. Treasurys and an overall moderate pro-growth stance, but is keeping tight stops. #fixedincome #bonds #interestrates #termpremium #macro #investmentstrategy

The Investment Implications Of The U.S. Election A just-published report was the latest in a series of reports this autumn on the capital markets impact of the upcoming U.S. election. The reports examined a wide range of potential policy changes depending on the election outcome. With just over a week to go, the race for the White House remains close. Former-President Trump has pulled ahead of Vice President Harris in the betting markets and the polls show him leading in the majority of battleground states. However, his lead is thin and within the margin of error. The report examined the potential sectoral implications of the candidates’ policies addressing issues such as housing affordability, immigration reform, trade and tariffs, and defense spending. It also provided some overarching conclusions about equity market trades linked to different election outcomes. #election #markets #uselection #investmentstrategy #investing

The Economy And Fed Policy: It Really Is Different This Time A just-published report updated our views on global asset markets and macro trends. While one is never supposed to claim that “it is different this time”, this has clearly been the case this cycle: U.S. financial conditions have diverged meaningfully from policy rates since the Fed began hiking in 2022, which has been supportive of economic growth. A rising policy rate would have normally underpinned tightening financial conditions; instead, and contrary to expectations, U.S. financial conditions became slightly easier between 2022-2024. That financial conditions have remained relatively easy underscores our view that the Fed funds rate never became truly restrictive. And now policy rates are being lowered in the U.S. and in most DM economies, which will provide further economic support and help to sustain risk-on. Net: above-potential economic growth in the U.S. will persist, which will ultimately prove bearish for Treasurys. #bonds #fixedincome #interestrates #fed #interestrates

The Fed's Job Isn't Finished A just-published report updated our outlook for the U.S. Treasury market and Fed policy in the near run and on a 6-12 month basis. While the Fed is still intent on lowering its policy rate, we anticipate that economic and inflation trends will force still aggressive rate-cutting expectations to steadily unwind. The expected march to a 3% or lower fed funds rate hit a hard bump with last month’s U.S. payroll report. Moreover, last week’s CPI report also showed a high-side miss. The consensus view held by both bond investors and the Fed is far too optimistic on the prospects for a return to a low inflation world, and thus will be repeatedly blind-sided by economic resilience and sticky underlying inflation. As our research has highlighted, Fed policy never entered restrictive territory, and now is retreating. The easing in financial conditions, along with the ongoing strength in corporate profits, will sustain the risk-on phase. For bond investors, conditions will steadily deteriorate, and we expect higher Treasury yields over the course of the next year. #fed #interestrates #fixedincome #bonds #capitalmarkets

Another Powell Pivot Is Inevitable The past few weeks has provided validation for MRB - The Macro Research Board non-consensus view that the Federal Reserve Board’s easing cycle is a dovish misstep, and that expectations for deep rate cuts through to the end of 2025 are not going to pan out: ◾ MRB’s outlook has been that the U.S. economy would continue to expand at a pace well above its long-term potential run-rate, and recent data supports this view. Aggregate financial conditions are supportive and higher-frequency indicators are pointing to strong, rather than weak, growth ahead. ◾ While the Fed pointed to a higher unemployment rate as justification for rate cuts, our research has shown that the rise has been largely driven by a sharp increase in immigration (which boosted the labor force) and not due to sizable layoffs or weakness in final demand. Last Friday’s very strong nonfarm payroll release was in line with our still upbeat macro view, and consistent with solid corporate profits. ◾ MRB’s view that inflation will remain sticky well above the Fed’s 2% target remains one of the most non-consensus views in the markets today. Critically, the secular disinflationary drags of the 2010s have faded, pandemic-related distortions have now unwound, and the U.S. economy has limited slack. Today’s higher-than-expected core CPI inflation print is consistent with our view. ◾ In terms of investment strategy, we warned that the first Fed rate cut would mark a “sell on the news” opportunity for U.S. Treasurys and recommended short positions. This has panned out, with 10-year Treasury yields surging back above 4%. If you would like to receive complimentary trial access to MRB’s non-consensus insights and top-down multi-asset investment strategy, please contact us at info@mrbpartners.com #macro #research #economy #policy #fed #yields #interestrates #inflation #employment

Another Powell Pivot Is Inevitable The past few weeks has provided validation for MRB - The Macro Research Board non-consensus view that the Federal Reserve Board’s easing cycle is a dovish misstep, and that expectations for deep rate cuts through to the end of 2025 are not going to pan out: ◾ MRB’s outlook has been that the U.S. economy would continue to expand at a pace well above its long-term potential run-rate, and recent data supports this view. Aggregate financial conditions are supportive and higher-frequency indicators are pointing to strong, rather than weak, growth ahead. ◾ While the Fed pointed to a higher unemployment rate as justification for rate cuts, our research has shown that the rise has been largely driven by a sharp increase in immigration (which boosted the labor force) and not due to sizable layoffs or weakness in final demand. Last Friday’s very strong nonfarm payroll release was in line with our still upbeat macro view, and consistent with solid corporate profits. ◾ MRB’s view that inflation will remain sticky well above the Fed’s 2% target remains one of the most non-consensus views in the markets today. Critically, the secular disinflationary drags of the 2010s have faded, pandemic-related distortions have now unwound, and the U.S. economy has limited slack. Today’s higher-than-expected core CPI inflation print is consistent with our view. ◾ In terms of investment strategy, we warned that the first Fed rate cut would mark a “sell on the news” opportunity for U.S. Treasurys and recommended short positions. This has panned out, with 10-year Treasury yields surging back above 4%. If you would like to receive complimentary trial access to MRB’s non-consensus insights and top-down multi-asset investment strategy, please contact us at info@mrbpartners.com #macro #research #economy #policy #fed #yields #interestrates #inflation #employment

Join MRB's upcoming webinar! Global strategist Peter Perkins will examine the outlook for capital markets over the next 6-12 months and MRB’s recommended asset allocation. Key issues to be addressed include: ◾ Will the Fed have to scale back its forward interest rate guidance following the latest strong employment data? ◾ Can the rest of the world gain economic momentum to complement the strength of the U.S.? ◾ Are G7 government bonds a buy on weakness, or sell on strength? ◾ Is a shift in equity market leadership from the U.S. and tech/A.I. stocks underway, and if so, who will be the winners? ◾ What is the risk of a breakdown in the U.S. dollar, and what would be the implications? ◾ How important for capital markets is the upcoming U.S. election outcome? Register here: https://lnkd.in/ecrQv3Hq

Join MRB's upcoming webinar! Global strategist Peter Perkins will examine the outlook for capital markets over the next 6-12 months and MRB’s recommended asset allocation. Key issues to be addressed include: ◾ Will the Fed have to scale back its forward interest rate guidance following the latest strong employment data? ◾ Can the rest of the world gain economic momentum to complement the strength of the U.S.? ◾ Are G7 government bonds a buy on weakness, or sell on strength? ◾ Is a shift in equity market leadership from the U.S. and tech/A.I. stocks underway, and if so, who will be the winners? ◾ What is the risk of a breakdown in the U.S. dollar, and what would be the implications? ◾ How important for capital markets is the upcoming U.S. election outcome? Register here: https://lnkd.in/ecrQv3Hq

Diverging Euro Area And U.S. Expectations A just-published report pointed out the significant divergences between growth expectations and bond spreads between the euro area and U.S., divergences which will likely cause spreads to further widen. Early signs of divergence are also beginning to appear in forward markets. There is room for the ECB’s dovish rhetoric to be sustained in the near run, given the building economic slack. The ECB may be considerably less eager than the Fed in committing to a more explicit dovish policy path by maintaining its stubborn gradualism. However, ongoing sluggishness in the economy and slightly faster easing in inflation pressures (including the latest flash reading of eurozone inflation) should prompt the ECB to cut at its upcoming meeting. #euroarea #rates #investmentstrategy #investing #ecb

DM Central Banks: Pro-Growth And Pro-Risk A just-published report updated our absolute return positions in the MRB TradeBook, which remain mildly pro-growth and pro-risk. Global monetary conditions have not been restrictive as is generally believed. Nonetheless the major central banks are providing additional reflation and have signaled that a lot more looms. The result will be a significant extension to the Goldilocks environment for risk assets that began with the Fed’s dovish pivot last October, at least until bond yields rise anew. We continue to favor corporate bonds and select equity markets. However, we also added short positions on U.S. Treasurys which are now priced for a weaker growth and lower inflation backdrop than is likely to develop. #interestrates #bondyields #yields #fixedincome #capitalmarkets