Senior Fixed Income Strategist
Summary: There is potential for rates to fall before they resume their rise later in autumn. Ten-year yields rose this week in the wake of the Jackson Hole Symposium, but a death cross is about to form. In technical analysis, a death cross sends a strong bearish message which could anticipate rates falling; thus US Treasuries rising. If that were the case, the bond bull market has the potential to continue until September's FOMC meeting. However, in autumn, we'll see a strong reversal as tapering becomes necessarily more aggressive.
The Bond market is signalling that Jackson Hole may be a "buy the rumour, sell the fact" kind of event. Indeed 10-year, US Treasury yields rose roughly 9bps since the beginning of the week. Still, we see a death cross forming with the 50 days Moving Average (MA) about to fall below the 200 days MA.
A death cross is usually a strong bearish sign, which in this case could drive yields lower, thus the value of US Treasuries higher. It goes hand in hand with what we have identified earlier this week in our "Fixed income market: the week ahead": the massive liquidity in money markets can still compress rates in the short term. Indeed, the Reverse Repurchase (RRP) facility continues to receive record-high volumes in demand daily, showing there is too much cash chasing fewer assets.
We believe that before 10-year yields resume their rise in the fall, they can test support again at 1.12%. In the most bearish scenario, yields could fall as low as 1%. However, the bond bear market will be back in October/November when it becomes evident that inflation remains high and a more aggressive tapering is needed.
Therefore, it may be too early to short TLT and IEF. We need a strong hawkish surprise at today’s Powell’s speech and Jackson Hole symposium to see rate resume their rise. However, that hawkish sign that bears (including myself) are expecting might not arrive until the September FOMC meeting.
Suppose you are looking to trade the Jackson Hole event today. In that case, it may be useful to know that the monthly standard deviation for 10-year yields is 6bps. However, yields have been quite volatile this year. There have been instances where we have seen the 10-year rise as much as 15bps at the end of February as the reflation trade unfolded. Therefore, it can be safe to say that a strong market reaction would see yields moving 5bps upwards or downwards, but we need a surprise to see yields moving more than that.
We remain of the opinion that there is a low probability for a hawkish Powell today as there is still a lot of focus on Delta (the conference is going to be held online), and labor market is not where the Fed wants it to be.
AI: The good, the bad, and the bubble
While a deep recession may not be iminent thanks to central bank policy, interest rates will have to stay high for longer, and this will be accompanied by volatility risk from the unwinding of bubbles, especially within AI.
Steen Jakobsen,
Chief Investment Officer
The emergence of advanced AI systems is by far the most surprising event this year, turning everything upside down, while risks and benefits are debated. AI will also become an arms race between the US and China.
Peter Garnry,
Head of Equity Strategy
As China navigates global fragmentation, its cycle of technology application, productivity enhancement, and growth is threatened by US breakthroughs in generative AI, limited computing power, and geopolitical tensions.
Redmond Wong,
Market Strategist
Japan’s expertise in semiconductors and robotic integration could be the foundation of AI dominance. Combining two of this year's themes, Japanese equities and artificial intelligence, brings a wave of opportunities.
Charu Chanana,
Market Strategist
The AI fever has turned the technology into a darling, pushing crypto further into no-man’s-land. There are striking similarities between AI and crypto, and if these are to come full circle, AI won't be spared for bubbles.
Mads Eberhardt,
Cryptocurrency Analyst
Stocks related to artificial intelligence (AI) have appeared on investors' radars. Expectations are high, but it may be necessary to consider how to get exposure to AI in a diversified way.
Hans Oudshoorn,
Trainer Academy
The USD is on its back foot as markets celebrate an eventual Fed rate peak and steady long US yields. The stakes are even higher for the Japanese yen if longer major sovereign yield curves have to price in economic acceleration.
John J. Hardy,
Head of FX Strategy
While commodities, broadly speaking, have faced some tough months, a partial reversal during June could signal that the asset class is getting back on its feet with energy holding up and precious metals with upside potential.
Ole S. Hansen,
Head of Commodity Strategy
As inflation remains high central banks face hard decisions about whether they should keep hiking interest rates or stop. Meanwhile, the rise of AI creates bubble-like conditions that only make the decision harder.
Althea Spinozzi,
Senior Fixed Income Strategist
