“A few weeks back, I doubted US 10-year yields could reach the lofty heights of 1.50% without equity markets imploding. I was wrong,” begins the latest missive from SocGen’s Albert Edwards.
Albert was too hard on himself. He wasn’t entirely “wrong.”
Whenever you employ bombast (e.g., “implode”) you’re likely to be at least a little bit “wrong,” but equities most assuredly weren’t amused with the rapid selloff in bonds.
In fact, big-cap US tech briefly fell into correction territory, due almost entirely to the backup in yields. Some of the most speculative corners of the US market suffered grievous losses. And the Hang Seng Tech index fell into a bear market.
Indeed, the backup in rates reverberated across global equities, prompting a deluge of despondency.
“The 10-year bond yield at around 1.6% is not good for asset valuations and there is no prospect that the yield increase will stop in the near-term,” one Hong Kong-based PM told Bloomberg last week.
So, while the world didn’t end, benchmark US yields at 1.50% (and beyond) didn’t exactly get a warm greeting from stocks, especially not those trading at stretched multiples.
But, Edwards’s point was simply that the S&P didn’t fall off a cliff, and while the Nasdaq 100 did de-rate, there was nothing apocalyptic about it. In fact, big-cap US tech was still trading at 26X coming into this week (figure below).
The lack of any real chaos (or, more to the point, still loose financial conditions) spared the Fed the trouble of having to jawbone the market prior to the March FOMC. “The Fed has been able to resist the bond market’s invitation to intervene,” Edwards went on to say Thursday, before cautioning that “the invitations will continue to arrive on its doormat and ultimately they will be forced into accepting by the weakening equity market.”
Maybe. But that generally assumes bond yields keep rising and in disorderly fashion. Yields need to spike enough to undermine not just “FOMO” (and there’s an ETF for that now, by the way) but also “TINA.”
In his latest, Albert cited his fixed income colleagues, who upped their 10-year forecast to 2% last week. “I hesitate to claim again that the equity market will slump before we get to 2%, but the real and present danger is of a reversal of the TINA sentiment that drove up equities as bond yields fell,” he wrote.
Of course, Albert recently suggested 10-year US yields could still dive below zero, the recent backup notwithstanding. Apropos (sort of), he took note of February’s lackluster (or “benign” if you were hoping for a cool print) February core CPI read from Wednesday. He likes “hard core” inflation better, and it’s below 1% — annually.
“Core CPI is very weak, especially if you exclude the summer 10% pop in second-hand car and truck prices,” Edwards said Thursday, adding that, if you ask him, “the blue line best represents underlining inflationary pressures.”
If that’s the case, core is near record lows, and in Albert’s view, is poised to “fall much further [as] always happens coming out of a recession when productivity surges.”
The paradox is that if this prediction pans out, and the Fed decided to obsess over perpetually “limp” (as Edwards describes it) core inflation, that would be justification for more easing and the persistence of accommodation, especially when considered in the context of a policy regime that now aims to overshoot.
So… buy stocks?