Hold onto your yields
Article last updated 19 February 2023.
US Treasury yields soared last Wednesday in a truly astonishing 12-basis-point one-day jump. The move was triggered by ADP employment figures that smashed expectations and was given extra fuel by US Federal Reserve Chair Jay Powell saying rates were still a way off “neutral”.
The US 10-year yield continued to rise in the days afterward, closing the week at 3.23%, its highest level since 2011. UK and European yields rose sharply alongside. Some low-growth companies that walk and quack like bonds – utilities and consumer staples – dropped, as did technology. But overall US stocks managed to shrug off the significant increase in borrowing costs. That’s because yields were sent higher by stronger growth forecasts, rather than because inflation estimates are ratchetting upward or because of higher economic risks. A red-hot economy is good for business, after all.
It’s not just employment figures that paint this picture, either. The ISM non-manufacturing soared from 58.5 to 61.6 and small businesses have been especially confident over the past year or so. In fact, the US NFIB Small Business Optimism Index hit an all-time high of 108.8 last month. It is expected to go even higher when the next reading is released on Tuesday. Despite this, the Russell 2000, a barometer of small companies has actually underperformed the wider market recently.
All of this surging growth will boost inflation at some point, but exactly when and by how much is the billion-dollar question. For now, investors believe US CPI will decelerate from 2.7% to 2.4% on Thursday’s print. If it surprises higher, expect another sharp uptick in treasury yields.
Fiery growth isn’t the only thing that could push prices higher. US wage growth has been improving, but remains miserly in real terms. Amazon’s decision to hoist its minimum wage in the US to $15 from November and lobby Congress to boost the federal minimum wage from $7.25 may have an impact here. The move has been widely lauded as a giveaway to workers, but it is more than likely a savvy corporate move. Amazon’s ultra-efficient system is based mostly on its superior technology. Also, it pits itself against the brick and mortar high street – retailers who tend to employ more people. Higher wages will hurt Amazon’s competitors more and potentially increase its competitive advantage even further while also “leading” on giving workers a fair deal. It’s a masterstroke by the disruptor-in-chief.
Source: FE Analytics, data sterling total return to 5 October; *closed from 1-7 October, so numbers to 28 September.
More than US can chew?
US Vice President Mike Pence harangued China last week, leading many to believe that the White House isn’t really trying to get back to the negotiating table anytime soon. Instead, it seems happy to keep the tariffs on for the longer term and drag as much manufacturing back to North America as possible. Bloomberg’s revelation that China has allegedly been spying on almost 30 US technology companies, including Apple and Amazon, by installing an almost microscopic chip on their hardware during production should bolster the White House’s hand here.
While the companies have vehemently denied the suggestion, Bloomberg’s in-depth reporting begs to differ. It says the supply chain of one of the world’s largest producers of server motherboards was compromised by Chinese-made components, and that it allowed spies to monitor and change computing code remotely. The US has long complained that China follows global trade rules when it suits it, while erecting barriers to foreigners on its own turf that keep them at a disadvantage. And that leaves aside the bit where Chinese companies are allowed to cheat and steal intellectual property. If the Bloomberg investigation is correct, they were encouraged and directly aided by the state …
The US government is riding high on trade at the moment. After arm-twisting Mexico into a renegotiated NAFTA agreement with ease, it also managed to force the much larger Canada into submission too. Now, President Trump appears to have his eyes set on prying open the EU. He will not be so successful here. There are three markets that are far and away bigger than the rest: China, the US and the EU. The US is squeezing China on trade, with arguable evidence of short to medium-term victory. That’s because China exports a phenomenal amount to America; it’s not too much to say it lives and dies by trade. Meanwhile the US is, to a large degree, an autarky. It imports and exports a lot, but as a proportion of its GDP, it’s relatively small. The EU trades a lot with the world, but it’s more widely spread among regions and countries. It’s a much tougher nut to crack – as the UK government can attest.
Bonds
UK 10-Year yield @ 1.72%
US 10-Year yield @ 3.23%
Germany 10-Year yield @ 0.57%
Italy 10-Year yield @ 3.42%
Spain 10-Year yield @ 1.58%
Economic data and companies reporting for week commencing 8 October
Monday 8 October
UK: BRC Sales
EU: Sentix Investor Confidence Survey; GER Industrial Production
Trading update: Codemasters Holdings, City of London Investment Group, easyHotel, Reach RPC Group
Tuesday 9 October
US: NFIB Small Business Optimism Index
EU: GER: Trade Balance
Final results: Ceres Power Holdings, Mysale Group, YouGov
Trading update: Greggs, Robert Walters
Wednesday 10 October
UK: Trade Balance, Industrial Production, Construction Output, GDP, Index of Services, RICS House Price Balance
US: MBA Mortgage Applications, Producer Price Index, Wholesale Inventories
Final results: The PRS REIT
Interim results: Vertu Motors, Walker Greenbank
Quarterly results: Pagegroup
Trading updates: Hollywood Bowl Group, Liontrust Asset Management, Marston’s, Scapa Group, Telford Homes, Whitbread
Thursday 11 October
UK: BoE Credit Conditions & Bank Liabilities Surveys,
US: Monthly Budget Statement, CPI, Real Average Earnings, Initial Jobless Claims,
Final results: Volution Group, WH Smith
Interim results: Brown (N) Group
Trading update: Countryside Properties, Dunelm Group, Discoverie Group, Hays, Jupiter Fund Management, Mondi, Moneysupermarket.com Group
Interim management statement: Hargreaves Lansdown
Friday 12 October
US: Import Price Index, Export Price Index
EU: Industrial Production; GER: CPI,
Final results: Produce Investments
