2014 started with high expectations on growth - IMF, World Bank and ECB was falling over themselves to upgrade growth forecast for 2014 in early January but by now Q1 growth in the US is expected to come in @ +1.9% after the initial +2.6% advertised by the pundits in late 2014 (Bloomberg December 12th, Survey) - This despite Q4 (the base line) being revised considerably down from 4.1% Initial, then to 3.2% in advanced and ending at 2.7% in final count. (37% drop from early to final number)...... This apparently is entirely due to weather....
But... fixed income market seems to have a different opinion:
This is my long term chart which have maximum one signal per year if that:
The model has been good in calling bigger trend changes, the last one being end of December 2012 where it bought on the close @ 2.94% yield. It's now getting ready to sell off indicating that the bond market "disagree" more and more with the assumption on weather....
Furthermore my gauge for central bank policy: The GDP weighted G-10 1 year interest is also making noises to the downside, although less so than long term interest rates....
The point here being that despite hearing daily from both investors and other strategist's that: "We are in clear recovery on growth and that 2014 will be a good year for stock market again".....I remain extremely disappointed on the REAL PROGRESS made in terms of structural and cyclical improvement in key indicators.
Housing market no longer supports growth - This is 30 Year mortgage rates inverted(down mean higher rates) vs. Building permits:
With the introduction of tapering - the FED indicated less willingness to expand balance sheet - this chart shows the NET % change year-over-year one year back. Looking further back will not work as it's the May 2013 Tapering indication by Bernanke which create the "macro impulse change":
It's still expanding the balance sheet, but the "momentum" is waning and fast.........
It's important for me to point out that seeing new lows in yield does not imply that I am a Super Bear on world as Ambrose Evans-Pritchard said in his blog the other day: Bond yield to hit fresh lows as world recovery wilts, growls Saxon Bear
It does mean that I believe the recovery or healing will be delayed into 2015 (It's a 2015 story not a 2014). Our model sees Q2-2015 as the real turning point, but more importantly presently the market is the most consensus it has been for the least amount of real data supporting it since crisis in 2009. (Where market was the other way around)....
The world is in rebalancing mode which hurts growth in most of the world:
· Asia and China needs quality growth to substitute nominal growth on over investment
· The US current account is falling mainly due to less energy import leaving massive "hole in the ground on consumption" for rest of world
· Europe has not even started to address it fundamental lack of reforms - presently Europe is trying to sell implications of low interest rates as recovery, a mistake similar made in Australia. Low rates are there for a reason or rather two:
1. Low growth and no visibility for improvement in business investment and consumer demand.
2. Deflationary forces of lack of technology/innovation (Link) and a global depression
If the recovery was real and deeply rooted unemployment would be dropping, business would be investing in further capacity and most certainly the consumer would be out buying goods. No, the bond market remains the most steady hands of all markets and assets, and my conclusion remains the same:
Fixed income will be only asset class giving a positive return in 2014 - leading to both inflation and growth from Q2- 2015 as our rule of thumb of nine month lag from interest to the real economy will mean that the low rates seen over this summer will be positive for Q2- 2015.
The world is barely growing at zero policy interest, if anything the disinflation says lower growth is coming, so the path of least resistance is lower rates first as policy makers continue to believe "guidance on interest rates" is more important than real changes.
Med venlig hilsen | Best regards
Steen Jakobsen | Chief Investment Officer
Saxo Bank A/S | Philip Heymans Allé 15 | DK-2900 Hellerup
Phone: +45 39 77 40 00 | Direct: +45 39 77 62 23 | Mobile: +45 51 54 50 00
Research: http://www.tradingfloor.com/traders/steen-jakobsen
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