In a prior post in August, we mentioned that economic data was being heavily influenced by the large swings up and down caused by the slowdown in response to the pandemic and then the rebound in activity as mobility and activity restarted. Until the economic data returns to more normalized comparison sets, we noted that it would be more helpful to monitor the market signals as a way of gauging the most probable outcome being discounted by investors.
On the fixed income side, 10-year interest rates are starting to increase again in the U.S. and other developed markets.
The 10-year and two-year yield curves are also steepening in the U.S. and other developed markets.
On the credit side, U.S. high yield OAS is back to cycle lows.
In the currency market, the U.S. Dollar ($US) has failed to break above levels reached in late 2020 and on a one-month basis, the $US is lagging cyclical currencies (New Zealand and Australia) and performing best against defensive currencies (Japan and Switzerland).
Gold can often act like a currency proxy and is a helpful gauge of investor expectations for real (inflation adjusted) yields, as gold benefits when real yields decline and underperforms when real yields increase. Gold is well below the price reached in early June and has been declining again in the current month. Real yields have started to increase recently (nominal Treasury yields increasing more than inflation) as have TIPS yields (higher growth expectations).
Equity volatility increased for a few days last week but there have been temporary increases in the VIX every month this year and each time the index has returned to below 20.
Small cap equities have started to outperform large caps, cyclicals are outperforming defensives, and high beta is leading.
The broad commodity index has continued to make new highs during the month of September while oil volatility remains below 40 and is close to a one year low.
For now, these market signals are suggesting that economic growth in the fourth quarter is likely to increase on a rate of change basis compared to the deceleration experienced in the third quarter.
The views expressed herein are presented for informational purposes only and are not intended as a recommendation to invest in any particular asset class or security or as a promise of future performance. The information, opinions, and views contained herein are current only as of the date hereof and are subject to change at any time without prior notice.
Senior Vice President, Investment Strategy
Boyd Watterson Asset Management, LLC