C8’s Weekly Bulletin: Giving Investors an Edge

20 September 2022

Welcome to our first issue of the C8 Weekly Bulletin. With many years of market experience across all major asset classes, we at C8 believe there are real benefits from having a concise overview of key economic and policy developments, whatever the specific investment approach. We are happy to share this overview with our clients and partners, and, when appropriate, highlighting indices on C8 Studio which resonate with the current market environment. We hope that you find this useful, and we look forward to receiving feedback.  As it may not be for everyone, we have an unsubscribe option at the end

Central banks meet amid forecast failures

Two major central banks – the US Federal Reserve and Bank of England – meet this week to recalibrate policy rates in the context of persistent upside inflation surprises in headline inflation. FOMC projections for PCE inflation at the end of this year had doubled in H1 2022 (to 5.2%) but the still lags well behind the latest reading of 6.3% y/y. Perhaps more remarkably, BoE forecasts for CPI inflation in late 2023 (when Ukraine-linked price volatility should have dropped out of the calculation) have climbed from 2.4% to 3.25%…….to 5.9% and then to 9.5% over the past four monetary policy reports! Both central banks are likely to boost rates this week (by 75ps and 50bps, respectively) and the lack of visibility on inflation creates substantial uncertainly over the extent of further policy tightening.

Fed Chair Powell recently argued that in tackling inflation the Fed “must keep at it until the job is done” – a phrasing which echoed Paul Volcker’s memoir title “Keeping at it”. While the Fed may be successful in avoiding the necessity of Volcker-style interest rates, the Fed policy required to prevent that outcome may be a threat to global risk appetite, and risky assets, in coming quarters.

Short Rates portfolio as diversification

Rates Momentum – Short Rates portfolio may offer valuable diversification in this context. The portfolio trades short interest rate futures across three markets – EuroDollar, Euribor and Short Sterling (and across second to eighth nearby contracts in each market). It assess momentum based on relative strength indicators and overall market directional exposure reflects the balance between positive and negative signals. Amid central bank policy divergences the net directional exposure would tend to be modest. Given this construction, it is not too surprising that the portfolio has prospered amid the unexpectedly aggressive tightening of monetary policy across the Fed, ECB and Bank of England. After failing to make net headway during unconventional monetary policy/COVID, the portfolio’s total return has climbed by 26.9% year-to-date.

If sustained, this extends a 20Y pattern of large annual gains in the right policy context (and modest losses in unfavourable ones). Note that individual futures positions are risk/volatility adjusted to improve the stability of overall portfolio outturns.

Other posts

Thoughts From The Divide: Les Bons Temps

BY JON WEBB
It may be only January, but this week, both markets and data appear to be running with the Mardi Gras slogan, “laissez les bons temps rouler!”. While they haven’t broken out the beads and the hurricanes/Sazeracs just yet, everything is coming up roses. Read more →

C8 Currency Compass – October 2024

BY JON WEBB
A strong start from Currency Compass last month, where we called for a 50bp Fed rate cut camp but noting our currency models point to EURUSD and GBPUSD weakness, so any bounce is a good opportunity to add EUR and GBP hedges.  Indeed it was, with EURUSD hitting 1.12 and GBPUSD 1.34 before falling back.  Stronger US data, in particular the employment report, helped cement this view, the chart below illustrates  how recent US data has pushed up the Atlanta Fed Q3 GDPNow forecast from 2% to above 3%. Read more →

Thoughts From The Divide: Relatively Speaking

BY JON WEBB
In the second half of last year, as we continued to ponder the ever-impressive strength of the US consumer, we highlighted research on the subject of “excess” saving (which still seems a misnomer), noting JPM’s analysis that saw the consumer that had exhausted the various stimmy payments. Soon after, we discussed research from the San Francisco Fed that argued “a larger fraction of aggregate savings remains in the economy than previously expected”, thanks in part to “a comprehensive data revision”. The piece concluded that those savings would last until “the first half of 2024”. Well, while tomorrow may never truly arrive if free beer is involved (a medical concept?!), the future is now, and the SF Fed has bad news: “Pandemic Savings Are Gone”. As ever with economic research, this comes with a list of caveats, the jist of which are captured in the note accompanying the Fed’s chart below, i.e. savings are gone, relatively speaking. Read more →
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