Are you so sure that interest rates will rise in 2014?

Posted on 20. Jan, 2014 by Jean Jacques Ohana in Weekly Focus | Comments Off

Judging from the trends on sovereign bonds, the Radar is increasingly constructive on bonds (figure 1) beyond corporate bonds where we have maintained a positive view since mid-2013. Besides Italy and Japan, Canadian and French bonds are flipping to positive trends while the dynamic of US and UK sovereign debts is improving.

The situation in Canada is very illustrative of the situation faced by developed countries:

  • Canadian inflation stands below 1% at 0.9%
  • The industrial cycle is sluggish driven down by depressed commodities (figure 2). As a matter of fact, the Ivey Purchasing Managers Index fell to 46.3 in December 2013, the lowest since May 2009.
  • Last but not least, the employment report was disappointing in December showing net destruction of jobs.

For sure, the US economy is consensually forecast to speed up in 2014. This positive view on the US economy is consistent with an extreme short positioning on US T Notes which has started to reverse (figure 4). Yet, the last employment report cast a doubt on the vigor of the US recovery. As pointed by Bill Gross from PIMCO, the profit warning of US bellwether companies like UPS is not consistent with 3% GDP growth. Nouriel Roubini and Joseph Stiglitz both think that the positive consensus on US growth has gotten ahead of itself and that wages are unlikely to rise. Jan Hatzius expresses a similar point of view highlighting the contrasting trajectories between the standard measure of unemployment (U3) and the broadest measure (U6). Krugman concludes that “the US economy still has a lot of slack confirmed by low inflation”.

It is often forecast that inflation is on its way in the US. Judging from sluggish trends on commodities (figure 2), inflation won’t come from commodities at least. It is still not clear how inflation will eventually build up in the US. Last but not least, as France is the last euro zone country to adopt supply side policies, deflationary pressures will intensify in the broad euro zone. As deflation threat is getting more acute on developed countries (figure 3), anticipations of rises of interest rates may not realize.

Figure 1: Riskelia’s trends on worldwide developed countries sovereign bonds

Figure 2: Riskelia’s trends on commodities GSCI indices

Figure 3: Inflation on G7 countries (ex Japan)

Figure 4: Long/Short Net Non-Commercial Positions on US T Notes 10 Yrs

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