Everyone Wins For Now – March 18, 2024

A just-published report highlighted that easing financial market conditions at a time of rising corporate earnings have created a fertile backdrop for risk taking. And, indeed, investors have acted accordingly, helping to spark a huge run-up in risk asset prices and a surge in the global stock/bond ratio.

The peak in Treasury yields last October and Fed Chair Powell’s dovish pivot have provided additional stimulus to an already solid economic expansion. While it seems that “everyone” wins in such an environment, recent inflation data warn that the risk-on period will not last. Underlying inflation in the U.S. has proven sticky and has recently levelled off near 4%, not 2% as the Fed and bond-bulls had hoped.

The implication is that financial conditions are destined to deteriorate again, once bond investors realize that the return to a low and stable inflation world is not in the cards. Stay tuned.


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