Model Signal Alert

August 9, 2023

A glorious good morning to all of you. Welcome to all the new followers. I am honoured and blessed that you have joined the pack.

With the market in flux, it is only appropriate to revisit some of the most important parts and see how the model is fairing in these choppy times. The confluence of events over the past week has shaken up markets a bit. In reality, however, I would argue it has just woken them up from very sleepy July conditions.

Taking a step back, it is, however, quite interesting to see that over the past week, US spot and forwards are actually lower, thanks to a swift turnaround over the past few trading sessions.

Yes, we had an overall steepening trend with the 1y1y rate rallying 25 bps, but the long end of the curve is virtually unchanged.

Hoisington is renewed to be very bullish on longer-dated treasuries. It is always worth reading their quarterly notes, which you can find here. Unsurprisingly they are still very much bullish on Treasuries. Here is their conclusion:

“Other major considerations indicate that the U.S. economy is far weaker than recognized. Productivity, or output per hour in the nonfarm sector, declined by a record pace over the past ten quarters. Neither a rising standard of living nor increasing corporate profitability are achievable over time without higher productivity.

For the eleven quarters since the pandemic/recession ended, real average hourly earnings (which cover 119 million full time wage and salaried workers) fell at a 2.9% annual rate. This is the largest decline registered in any economic expansion of comparable length since the earnings series originated. While firms continued to add employees, the rate of increase in wages have lagged inflation. Moreover, while establishments have continued to add employees, they have simultaneously reduced the number of hours that their staff are working.

Since January, non-farm payrolls have increased by 1.2 million, but the average workweek has dropped from 34.6 hours to 34.4 hours, leaving aggregate hours worked virtually unchanged. To restore productivity, firms will need to rationalize their workforce, which will simultaneously reduce labor costs, inflation and household purchasing power.

The continued tightening of financial cycle conditions with lower inflation and poor economic performance will mean that long dated U.S. Treasury yields will continue to trend lower.”

Now, let’s have a look at the charts next.