Specializing in economics, Macro, Portfolio Strategy, Bonds
Contributor Since 2017
Eric Basmajian is an economic cycle analyst and the Founder of EPB Macro Research, an economics-based research firm focusing on inflection points in economic growth and the impact on asset prices.
Prior to EPB Macro Research, Eric worked on the buy-side of the financial sector as an analyst at Panorama Partners, a quantitative hedge fund specializing in equity derivatives.
Eric holds a Bachelor’s degree in economics from New York University.
EPB Macro Research offers premium economic cycle research on Seeking Alpha.
I wanted to run through some data on my dashboard this weekend and remind you that you can sign up for EPB Macro Research for additional publications and data.
November was a strong month in terms of economic forecasting as well as the portfolio. There was a higher than normal level of volatility at the end of the month in both the stock and bond market due to political issues such as tax reform and other Washington related partisan games.
Bonds, on average, were down over the past week but the long end of the curve continues to rally, flattening the yield curve to decade lows.
Asset Class Performance:
Commodities were also down last week and are mixed over the past month.
Credit spreads widened for a week or so but have come down over the past several days. Credit spreads are extremely tight by historical standards which signal that the credit market is not pricing in high risk. This is not consistent with the rest of the data and a counterpoint.
High Yield Spreads:
I would expect credit spreads to be widening given the data I outlined about but they have remained tight. This is one data point that is contrary to my thesis.
Commodity prices have risen over the past few months but are more or less unchanged from one year ago.
On the margin, there will be no impact on growth or inflation due to commodities since they are flat year over year.
The US dollar is materially lower compared to one year ago. This will put upward pressure on inflation and corporate earnings from overseas profits. This is another data point that works contrary to my thesis.
US Dollar Trends:
The yield curve, a proxy for the profitability of bank loans and a leading indicator of economic growth has been contracting sharply over the past few years. The contraction has picked up momentum over the past several weeks and the spread is down to the lowest level since 2007.
Yield Curve (10s2s):
An inverted or negative yield curve is a likely indication of a recession and we are not there yet but the contraction of the spread will continue to pressure bank lending which will impact growth. If the Federal Reserve continues to raise interest rates, the curve will get increasingly flatter as the short-term rates will rise but the long-term rates will not as economic growth is still going to be muted due to the money supply growth and velocity growth.
Yield Curve (10s2s):
Source: FRED, YCharts
The yield curve is going to continue to pressure bank leading and put downward pressure on economic growth.
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