The macro playbook: when recession?
Paid subscriber analysis
Dear subscribers,
in today’s long analysis you’ll get a detailed insight into our macro playbook, and how we see it unfold over the next few quarters. We’ll take you through five steps explaining how higher for longer impacts bond and equity markets, both thus far and down the road. And, of course, how we position for it.
We’ve talked about some of these things before - higher for longer has been our baseline in 2023, as we estimated the impact of inflation expectations and warned that a bull trap was happening. Finally, as usual, it all came down to the bond market.
Let’s jump in.
(NOTE: In next week’s paid analysis, we’ll discuss the probabilities of a potential “Santa rally” - an equity rally into the year-end that sometimes happens. Bulls are currently betting heavily on a Santa rally, so it’s worth giving it serious consideration.)
The macro playbook has been unfolding in the following 5 steps (we examine each below):
Fed keeps interest rates higher for longer - this has been the baseline for this entire year, and is likely to continue into the next one. The soft landing narrative has been defeated.
Bond yields keep rising, despite inflation easing - fully aligned with the FOMC rates. The yield curve remains inverted: short duration yields still higher than long duration yields.
A supply catalyst on the bond market pushes long duration bond yields up to new highs, triggering an equity sell-off - the dominant scenario of Q3 (Aug and Sep sell-off). After bonds sell off, their even higher yields become more attractive to investors. Yields stay high (interest rates are still high, duh!) and equities reprice relative to bonds.