Jeroen Blokland

Powell opens the door to a 50-basis-point rate hike, interest rates shoot up and equities crash. And yet, at the time of writing, the VIX index is below 20, raising the question of whether equities are not a bit complacent.

You can probably already hear a little from my tone what my answer is going to be. Still, there is a good reason why implied volatility looks relatively low.

My column last week, titled ‘Cash is king,’ showed that both cash and bonds are again competing with equities. After years of being saddled with TINA - There Is No Alternative - there again is something for investors to choose from.

Investing is a game of relative things, at least if you do it right. Whether you have a short or long horizon, somewhere the question arises as to which asset classes are actually the most attractive. And since central banks have made it a sport since 2008 to keep inflating their balance sheets, the answer to that question was rarely, if ever, cash. Until now!

I show two charts below that show the amount of ‘yield’ for the main asset classes, adjusted for duration (interest rate sensitivity) on the one hand and volatility on the other.

There you are with all those fancy indicators like yield curves, ISM Manufacturing, and housing markets. They all point in the same direction, down! But the incoming US macro numbers are in no way pointing to a recession, nor to a soft landing. Spend it!

The US economy created more than half a million jobs in January. That was almost three (!) times more than expected. Most importantly, such a job growth figure does not fit with a coming recession, but neither does it fit with a much hoped-for soft landing. On the contrary.

It indicates that the US labour market is still glowing even after 450 basis points of tightening.

The latest ‘chart of the week’ shows a difference between market expectations of what the Federal Reserve will do and what the central bank wants, a fascinating development, says True Insights’ Jeroen Blokland. The Fed as well as the European Central Bank will update their views on interest rates later this week.

A post recently appeared on my Bloomberg timeline that headlined: ‘BoE’s Bailey Says Truss Risk Premium on UK Assets is Gone’. Being overweight in some UK assets, I wondered what Bailey bases this on.

So I look at some asset classes that were hit hardest by the panic sell-offs caused by then finance minister Kwasi Kwarteng’s mini-budget. Just a refresher: that mini-budget consisted mainly of tax cuts for high-income earners that were not compensated elsewhere in the budget.

No, this is not a column about the Netherlands’ performance at the World Cup. Although, of course, the title fits this seamlessly. This column is about China and its Covid issues.

As might be expected, the US 10-year - 3-month yield curve has also turned negative. This inversion means that the two traditional yield curves with the longest and most reliable track record as recession predictors are now negative. By itself that’s is no reason to sell equities, or any asset class for that matter.

Corporate profits will not fall even if economic growth declines, because of inflation. That is the thinking many investors have when it comes to expected earnings growth for the next 12 months, which is still positive. But I think we are now past the stage where profits are still driven by inflation.