We do not claim to know what inspired the lyrics used by Talking Heads in the song “Once in a Lifetime” (which serves as inspiration for our monthly), but perhaps the translated French proverb (plus ça change, plus c'est la même chose) was in the back of their minds. So, you may be asking, how did we get here (oil higher, stocks lower, curves steeper and the dollar up), but as the saying goes, “the more things change, the more they stay the same.”
In our view, it’s the “same as it ever was” for markets and the economy, it’s just that normal outcomes are delayed (and/or distorted). We still believe the full impact of tightening lies in the quarters ahead. We don’t see the US decoupling from a weaker global backdrop. We still doubt the sustainability of the economic expansion lasting at these (or even higher) rate levels. Yet, navigating this is difficult as the Fed wants rates to stay “higher for longer.”
What does this all mean for markets? In our opinion, we believe the mid-year risk rally was a bear market rally. US rates and the dollar are at levels that will serve as a pin to trigger risk-off. Risk markets won’t go down in a straight-line, but as year-end comes into focus, position squaring along with profit harvesting opens the door to a larger down-draft throughout Q4.
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U.S. Rates Forecast
With the bond market tightening financial conditions for the Fed (as longer-term rates normalize) and the US landscape fraught with uncertainty (given fiscal budget tensions, lack of data, liquidity risks) we continue to believe that the Fed will not hike in November. And even with the higher than expected dot path for 2024, we only tweak our rate path up for various tenors (up slightly – by 12.5-25bps) but widen our range for Q4 as the bond market tries to find a steady state.