There has been some volatility across asset markets in the fourth quarter. Reviewing the market signals across multiple asset classes could provide some insight into the likely direction of economic activity for the remainder of 2021 and into 2022.
On the negative side, gold has been rising since the end of the third quarter (remains below prior highs), as real interest rates have declined (inflation rising faster than nominal interest rates).
Source: Koyfin.
Source: NDR.
Treasury inflation protected securities yields have also been declining since the start of the fourth quarter.
Source: NDR.
The dollar index (DXY) has been steadily increasing since the summer and is at the highest level since July 2020. Since the start of the fourth quarter, most of the weakness has come from the Euro, Yen, and the British Pound, which are the largest components of the DXY. More commodity sensitive and cyclical currencies like New Zealand, Australia, Canada, Norway, and Russia are flat or positive compared to the $US. Over the last month, the $US has rallied against all major and commodity currency pairs.
Source: Koyfin.
These signals suggest growth and inflation are likely going to slow into the end of 2021. However, the other major asset classes are not confirming that view.
On the fixed income side, two-year Treasury yields have accelerated higher since the start of the fourth quarter and are at the highest level since March 2020.
Source: Koyfin.
10-year Treasuries have also started to increase after declining during the summer.
Source: Koyfin.
The intermediate part of the Treasury curve has increased as well, which has contributed to an acceleration in the MOVE (Treasury volatility) Index. Treasury yields and volatility typically increase when investors are expecting economic growth and inflation to accelerate.
Source: Koyfin.
Source: MOVE Index.
The 10s-2s yield curve has flattened in the fourth quarter but is up from the recent low and is far from inverting or suggesting a significant decline in growth or inflation.
Source: Koyfin.
High yield corporate OAS continues to decline and is near the cycle lows. This suggests investors are likely not concerned about corporate profitability or credit risk in the near term.
Source: Koyfin.
Some of the major US equity indexes made new highs last week and have increased significantly during the fourth quarter.
Source: Koyfin.
Within equities, cyclical industries and high beta are outperforming defensives and low volatility.
Source: Koyfin.
The volatility level of the major equity indexes has declined in the fourth quarter. The performance and volatility trends within the equity market suggest investors are likely anticipating an improvement in economic and corporate fundamentals.
Source: Koyfin.
The broad commodity index has continued to increase and is close to a new cycle high. At the same time, oil volatility has mostly remained under 40. Rising commodity price and falling volatility are typically signs of positive economic environments.
Source: Koyfin.
The market signals away from the US dollar and gold are suggesting that economic growth and inflation will continue to accelerate in the fourth quarter. If these trends continue, gold and the US dollar will likely start to decline and confirm what the other market signals are suggesting.
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
