Weekly Good Reads: 5-1-1
Jobs Data, Sahm Rule, Financial Pitfalls, Carry Trade, and Self-Reliance
Welcome to Weekly Good Reads 5-1-1 by Marianne O, an investment practitioner and author of
about investing, economy and wellness ideas. Every week I include 5 links to relevant economic and investment, finance and wellness/idea pursuit as well as 1 important chart and 1 term to know. All the Weeklies are here and here is the index of charts and terms. You can easily subscribe to my newsletter by clicking below.Thank you for reading this Weekly and supporting my work 🙏.
Market and Data Comments
The U.S. market participants tend to (over-) emphasize the monthly jobs numbers which are not always properly understood. The stronger-than-expected November job reports (nonfarm payrolls up 199,000 (49k more than in October), the unemployment rate dropped 0.2% to 3.7%, and hourly earnings rose 0.4%) reveal labour market robustness, somewhat reducing the market’s hope that the Fed will cut interest rates in early 2024 (market pricing now a 100bp cut in interest rates in full-year 2024 from 120bp). As The Big Picture pointed out, the most important trend to watch is not the monthly nonfarm payrolls but the trend that the US has added 5 million jobs to 157 million fully-employed people since January 2020. Consequently, bond yields from 2Y to 10Y rose 14bp and 10bp on Friday and 18bp and 3bp respectively during the week.
One of the biggest economic debates this year has been on the level of the neutral rate (see #1 article in Economy and Investments). If the Fed believes the neutral rate should be higher (and the deteriorating fiscal fundamentals in the US point to it being higher than before), then there is a risk the Fed will over-tighten, and vice versa. More tightening means more volatility/drawdown in both the bond and stock markets.
Since the recent peak of the US 10-year bond yield on October 18 at almost 5%, the yield has dropped 76bp to 4.23% now while the S&P 500 has risen 8% as the market becomes more convinced the Fed is done cutting rates. From the chart above, Bloomberg data shows since 1980 there have been 33 times when 10-year Treasury yields fell 50bp or more within a month, the median subsequent forward 3-month return for the S&P 500 was nearly 8% (is that a coincidence?)
With the November inflation data coming out next week, the Fed will make the most market-moving call for 2024 at its December FOMC meeting. The market will pay attention to the Fed’s tone and the updated Summary of Economic Projections, especially the Fed Funds rate and the median projection of core PCE inflation during 2024. Currently, the market is pricing in about a 1% cut in interest rates.
Two pieces of news out of Asia are worth pointing out. Moody’s, the rating agency, cut China’s credit outlook from stable to negative, citing China’s property market problems and the structurally lower level of economic growth in the medium term. The greater fiscal support of the central government to its local governments and SOEs meant a rising fiscal deficit amidst rising central debt as a % of GDP (from an average of 37% from 1995-2022 to a peak of 77% in 2022).
With the Bank of Japan’s recent review of monetary policy, the market is also preparing for the BOJ to end negative interest rates and is pricing in a higher chance of a rate hike on December 19, causing the Yen to jump about 4.6% in the past month vs. the US dollar. The BOJ governor will likely monitor wage pressure and any spillover to prices before moving its interest rate policy.
This coming week, we will monitor China’s inflation data on Saturday, the US November CPI and PPI on Tuesday, the FOMC rate decision and Powell’s press conference on Wednesday, the ECB rate decision and the US November retail sales on Thursday as well as China’s November retail sales on Friday. Watch how the COP28 wraps up and the final announcements about “unabated” fossil fuels.
Economy and Investments (Links):
Higher Interest Rates Are Here to Stay. What It Means for the Economy (Barron’s or click here.)
Markets are Counting on Central Banks Riding to the Rescue (Bloomberg or click here.)
The Sahm rule: step by step (@Stay-At-Home Macro Substack by (
)With Friday’s jobs report, for sure, we are not in the territory of recession according to the Sahm rule. Have a read.
+ Who Read What in 2023 from Leaders in Business, Science and Technology (WSJ or click here.)
Finance/Wealth (Link):
Mike Tyson Would be a Financial Planning Genius (VettaFi | Advisor Perspectives)
Responses to dealing with the 10 discussed financial pitfalls would include the usual planning to work for longer, reducing expenses or saving the differences between earnings and spending, and downsizing and monetizing something (e.g. home), more importantly:
The best plans account for the possibility of financial pitfalls….As such, planning is best done regularly, perhaps annually, or if materially different information is available. Being able to robustly measure one’s probability of outliving their money easily and regularly gives advisors and their clients the tools to make subtle course corrections along the way.
Wellness/Idea (Link):
A lot of things are getting cheaper. Here's why you probably haven't noticed (Business Insider)
+ The Power of Self Reliance (@A Day Well Spent by
)Have you been following the wonderful writing by
, a travel and food presenter and food critic at BBC? Her first piece How to Slow Down the Passing of Time has won over many followers.
One Chart You Should Not Miss: Charlie Munger Manifesto
While technically this is not a chart, I know I have to share it when I see something visually clean and meaningful. Your wisdom lives on, Mr. Munger!
One Term To Know: Carry Trade
Carry trade means one borrows in a lower-yielding currency or instrument and reinvests the proceeds in another currency or instrument that carries a higher rate of return or yield.
A typical example is borrowing in Japanese Yen (which historically has low or negative yields) and reinvesting in higher-yielding deposits, currencies, or dividend stocks in other countries.
This type of trade is for more sophisticated investors because the currency and interest rate are extremely dynamic and a good understanding of the macro policies, environments of the countries involved, the investor flows as well as the risk involved are needed.
While the investor may think they lock in the high-interest rate (or return) differential between the 2 instruments (usually 2 countries) in carry trade, this predicates a stable interest rate and currency environment of both countries. If the interest rate shoots up or the currency appreciates in the currency you borrowed (like the Yen in 2008) and/or the currency you invest in starts to depreciate rapidly (e.g. Thai Bhat in 2008), you are forced to quickly close the trade at a loss. Moreover, investors use leverage on the carry trade and losses can be magnified.
Please do not hesitate to get in touch if you have any questions! If you like this weekly, please share it with your friends or subscribe to my newsletter.
It's so kind for you to mention me here Marianne, thank you!