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Image: What a difference USD76bn make?


What a difference USD76bn make?

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USD76bn is not a small amount. This is the downward revision of the US Treasury issuance programme for Q4, (from USD852bn to USD776bn, link).

In relative terms, this is nonetheless relatively minor, as it represents less than 4% of the net issuance of Treasuries over the past twelve months (USD2,000bn!).

  • But, coupled with: 1) a balanced FOMC statement; and 2) weaker-than-expected job creation in October, this has helped to ease market concerns over fiscal discipline and drag Treasury yields substantially lower. This was a tailwind for equities and growth stocks that suffered in October.

A market rebound ahead? Yes, but. There are several reasons to expect a near-term market recovery, although the medium term is likely to be more challenging in our view.

  • Easing fiscal concerns in the US. The US economy is robust, with private consumption a key driver of the stellar growth rate registered in Q3. Strong growth also helps to contain budget deficits as fiscal revenues are highly correlated to the health of the economy and the deficit-to-GDP ratio is contained by the denominator. Falling Treasury yields have positive global market implications.
  • US labour productivity growth was quite impressive in Q3, a tailwind for the growth potential. We show in the report that this is likely to continue. There is mounting evidence that AI will be a game changer for productivity.
  • Our technical analyst sees the S&P 500 reverting to the late-July highs (see link).
  • In the medium term, we nonetheless expect the macro landscape to be challenging. We forecast 0.5% GDP growth in the US in 2024, versus 1% for consensus and 1.5% for the Fed. The strong GDP print in Q3 was partially related to the build-up in inventories, which is unlikely to last. In the euro area, we forecast 0% real GDP growth in 2024 versus 0.8% for consensus and 1% for the ECB.
  • Therefore, we stick to our slight Underweight on equities from a strategic standpoint, although from a tactical perspective we are more sanguine.

In Europe, weaker growth and falling inflation are fuelling expectations that the ECB will cut rates in early Q2 2024, a tailwind for curve steepening trades. Inflation in countries such as the Netherlands and Belgium has already fallen into negative territory in recent months. We believe the ECB has terminated its rate hike cycle. 

  • The yield curve has experienced a dramatic turnaround, although the 2s10s or 2s30s segments remain inverted. Since end-June, the steepening has been on the order of 50bps and 80bps, respectively. We expect this to continue.

In European equities, we still prefer defensive sectors.

  • The tumble in bond yields has provided welcome relief for equities and for beat-down cyclical growth sectors (notably Luxury Goods, Autos, Medtech, Semis, Chemicals).
  • However, leading indicators are weakening again, and we expect cracks in economic activity to deepen in the coming months.
  • In short, the case for a cyclical slowdown is alive, as we still expect very high borrowing rates and tight credit conditions to keep working their way through to the European economy.
  • Therefore, we continue to advocate a defensive portfolio heading into year-end, with notably an OW on Food, Beverages & Tobacco, Telecommunication Services, Utilities, Pharmaceuticals.
  • In terms of style, we also reiterate our call for a balanced portfolio in terms of Growth/Value (though we are slightly more Value than Growth in our OW ratings).

Week ahead: Both the macro and corporate earnings newsflow will shift into a lower gear in developed countries, but the focus will move to China.

  • Retail sales in the euro area and industrial production in Germany will be the key highlights. In the US, the University of Michigan consumer sentiment survey will be released.

In China, a spate of data releases will be available for October: FX reserves, international trade, CPI, credit growth. The consensus expects further weakness.

Asset classes performance (1 week)

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