In case you didn’t notice, interest rates rose pretty much everywhere in February, possibly responding to some recent inflation figures in excess of expectations. I might add that annualised three-month CPI figures show far lower inflation than the standard 12-month figures, but the market does not seem to care about that for now.
Short rates rose more than long rates, meaning that the already negative term spread widened. This was most pronounced in the US, where the yield on 2-year Treasuries reached 4.8%, roughly 0.9 percentage points above the yield on 10-year Treasuries. Such term spreads have traditionally been regarded as fairly reliable indicators of an impending recession.
On a more bullish note, high-yield credit spreads fell in February, after falling even more in January. In Europe, high-yield spreads are down a full 2.4 percentage points since last summer. In the US, they have declined by 1.7 percentage points. Such drops are rather typical of a risk-on market sentiment.
They are also a reminder that interest rate risk may come to dominate credit risk. Over the past 18 months, the Bloomberg Global Aggregate index (investment grade) is down approximately 20 per cent (total return), while the Bloomberg Global High Yield index (well, yes) is down 13 per cent.
The S&P 500 lost 2.4 per cent this month, but both Nordic and broader European indices rose in value. And I dare say there is fundamental support. Stock market pricing is notably lower than at the end of 2021 and, especially, 2020. The much-predicted earnings recession certainly has yet to materialise. Euro STOXX EPS estimates for the next 12 months rose in February, reaching a level more than 60 per cent above the end of 2020. Similar estimates for the S&P 500, while somewhat weaker, are still 37 per cent above their December 2020 level.
Mixed signals, then – apparently strong bearish indicators against surprisingly bullish numbers. What to make of it?
Perhaps just this: Don’t make too much of it. Remember that in a well-functioning market, buyers and sellers can always find something to justify their decisions. Was there ever a market with all indicators pointing in the same direction?
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