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Summary
- The peak of the Fed hiking cycle has historically been a good time to buy bonds, but is that true today?
- A shift in consumer behaviour towards specific durable goods may reflect long-term lifestyle changes in the post-pandemic world.
- Despite headline declines, the US still has an inflation problem – core and services are still too high for the Fed.
- We are bearish GBP but show patience when considering three crosses to enter.
Peak Fed, Buy Bonds?
Historically, the peak of the Fed hiking cycle has been a great time to buy bonds. In the 12 hiking cycles since July 1973, 10Y Treasury yields have fallen 50bps on average 60 days after the last hike (‘T’), with a hit ratio of 90%. For the 2Y, yields declined 90bps with a 100% hit ratio (Charts 1 and 2).
However, this cycle is an exception. After the SVB crisis in March, the market thought tightening was over, but May saw another hike. Since the last FOMC on 1 November, front-end SOFR contracts have again priced out further hikes, concluding 26 July was the cycle’s last hike. As Mirza argues, the 50bps rally in 10Y since 1 November is on par with the historical mean, while the rally in front end can run further.
The Changing Face of US Consumption
Since the pandemic, durable goods (cars, furniture, consumer electronics, etc.) consumption has surged. By contrast, non-durable goods (food, clothes, toys, gas, etc.) consumption is stagnating.
Could this imply broader lifestyle changes? Computers and software are driving the durables spend, whereas other components of durables spending like cars and household furnishings have been stabilizing. As Dominique argues, surging IT and sluggish car purchases could reflect the shift to working from home since the pandemic.
The US Still Has an Inflation Problem
Even though it has fallen this year, US core CPI remains elevated (Chart 4). True, lower energy prices have dragged headline inflation lower, and goods prices have also slid materially this year. Yet services inflation remains elevated and far above the Fed’s 2% target for the aggregate inflation measures (Chart 5).
Three Attractive GBP Shorts, But Be Patient
We are bearish GBP but show patience when considering three crosses to enter.
- GBP/AUD: we are bullish AUD and bearish GBP. However, since early September, GBP/AUD has been stuck in a ~1.8950/1.9350 range (Chart 6). We wait to sell either nearer the top of the range or a break of the lower end.
- GBP/NOK has traded between ~12.90 and ~13.90 since late May (Chart 7). The pair is currently trading very near the middle of the six-month range. However, we see better value being long NOK versus SEK.
- GBP/NZD: we are bearish GBP and bullish NZD. Since early September, the pair has traded sideways within a ~2.03/2.10 range, currently trading near the middle. We wait for a good entry point.
Matthew Tibble is Commissioning Editor at Macro Hive. He has worked as an editorial consultant and freelance editor for companies such as RiskThinking.AI, JDI Research, and FutureScape248.