Weekly Market Recap

The flat of the land

20/12/2021

Week in review

U.S. FOMC doubles pace of taper to US$30bn per month
Australia business confidence drops to 11.5
Australian unemployment rate falls to 4.5%

Week ahead

Australia private sector credit
RBA minutes of monetary policy meetings
U.S. PCE deflator

Thought of the week

Policy normalisation from the U.S. Fed and elevated rates of inflation have not been enough to convince the bond market that longer dated bond yields should be higher. The spread between the 2-year and the 10-year has done a round trip since January even as many economic indicators have improved. The flatter yield curve may reflect that tighter policy will undermine the economic recovery. Alternatively, it could be that short-end yields are too high and that tightening happens much more slowly, resulting in a terminal interest rate that remains depressed compared to the state of the economy. A pattern that has repeated in the U.S. for a number of decades. However, it is likely that the steady rise in the cash rate and an inflation rate that settles somewhere closer to 3% than 2% once the distortions pass, will drive up yields on longer dated bonds. The result should be a steepening of the yield curve and favourable view on growth that supports risk assets.

Flatter yield curves can’t last

Yield on U.S. government bonds and spreads

Source: FactSet, J.P. Morgan Asset Management. Data reflect most recently available as of 16/12/21.
All returns in local currency unless otherwise stated.
Equity price levels and returns: Levels are prices and returns represent total returns for stated period.
Bond yields and returns: Yields are yield to maturity for government bonds and yield to worst for corporate bonds. All returns represent total returns. AusBond Comp is the AusBond Composite 0+ Yr, AusBond IG is the AusBond Credit 0+ Yr both provided by Bloomberg.
Currencies: All cross rates are against the Australian dollar. An appreciation of the foreign currency against the Australian dollar would be positive and a depreciation of the foreign currency against the Australian dollar would be negative.

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