Financial Assets Are Running Out Of Steam For Now

Authored by Simon White, Bloomberg macro strategist,

The impressive rally in stocks and bonds over the last week or two is likely to take a breather, with both assets now overbought in the short term.

Bonds have been deeply oversold since last year, but the latest rally to ~4.5% in the 10-year has taken Treasuries to only one standard deviation below their long-term mean growth level (back towards the range they normally inhabited before the extremes of the pandemic).

The stock rally in recent months has taken the S&P back to near its long-term average growth level of 10% on an annual basis.

Overall this leaves the stock-bond ratio a little overbought, so it may come off a little more.

But it is looking less likely the NBER will call a recession for most of next year, meaning the stock-bond ratio should resume its rise.

Not much from a data perspective is likely to move the dial for the balance of this week, with only initial jobless claims today and University of Michigan’s consumer survey on Friday.

In China overnight we got the latest deflation data. Focus was on the disappointing deflationary print in October’s CPI (-0.2% year-on-year versus -0.1% expected). But given the industry-orientated nature of China’s economy, it is in PPI, not CPI, we are first likely to see a recovery in China’s economy.

PPI’s slow recovery stalled (October’s was -2.6% versus -2.5% the previous month), but the rise in China’s bond yields anticipates PPI should continue rising in the coming months, as both fiscal and monetary stimulus take further effect.

Tellingly, China’s stock market did not sell off on the data, closing up on the day. As discussed Wednesday, Chinese stocks may be putting in a bottom.