Over the years, the US economy has shown a remarkable ability to absorb shocks of all kinds, to recover, and to continue to grow. – Ben Bernanke
Happy New Year to all of you!
I hope you all started the new year well and got some rest over the holidays. Before we jump in, I want to let you know about a minor tweak to the Weekly Wintersberger.
From now on, the weekly updates will be shorter, focusing on key events and sharing the charts or stories I find most compelling. Once a month, I'll dive into a longer piece like I used to. We'll cover everything from market history to current deep dives and economic theory, all with a nod to the Austrian School.
My goal here is twofold: to keep you well-informed with less fluff and to make those monthly deep dives even more engaging and thought-provoking. Please let me know your opinion about it in the comments.
Alright, let's get into this week's Weekly Wintersberger!
Overall, the first two weeks of the year have been nothing extraordinary. US stocks traded sideways and failed to reach their December highs, while the DAX touched its high in mid-December. The global rise in interest rates that continued into the new year could have contributed to that.
The euro has recently dropped below its 1.04 resistance versus the dollar as traders await the impact of the incoming Trump administration and tariff threats. In the commodity sphere, oil and copper prices have increased since the beginning of the year. Gold, on the other hand, is only slightly up but remains well below its highs.
As noted in my forecast for this year, the main sentiment is that traders are bullish going into the new year. Recession odds for the US dropped last year, and some say this might indicate the year won't go the way the majority thinks. Nevertheless, although this notion seems tempting, there are still a lot of bullish signs. This week's initial jobless claims recorded the lowest reading in history.
Thus, I would argue that growth is still too strong to support the thesis of a more significant market correction. One chart that I found particularly interesting is the balance sheet of households, which shows that households probably still have a large amount of money available for consumption.
Although one can argue that these gains are mainly concentrated among wealthier households, the conclusion remains that the US consumer is still in good shape on average. If that's the case, US economic growth will likely remain strong in Q1 this year, though it might gradually slow down.
Overall, the first economic data points underscore the robustness of the US economy. The latest Job opening numbers for November and December's ISM Services Index were better than expected. Now, one must see whether Friday's NFP report reflects a strong US economy.
One of the biggest movers this year has been interest rates. The US 10-year yield rose above 4.65% this week and is now around last year's highs. While that might seem like a good time to buy long-term bonds, my analysis suggests that yields could keep climbing, potentially reaching the 5% mark, as long as the economy remains strong. That supports the thesis that the 10-year yield isn’t restrictive so far.
Another contributor to the latest rise in US 10-year treasuries seems to be the recent increase in the strength of the US dollar. For the last two years, interest rates increased when the dollar strengthened, and vice versa. If you think the US dollar will strengthen even more, this supports the idea that US 10-year yields will also rise.
Looking at the bigger picture, remember that US-denominated debt depends on foreign buyers. While an imminent scenario seems unlikely, there are potential scenarios in which foreign selling could be triggered, such as when central banks have to start defending their currencies. This could push US rates much higher and the dollar lower.
As already mentioned, oil prices have risen recently while EUR/USD has fallen. That highlights a shift in global economic strength. During the 2010s, EUR/USD and oil were highly positively correlated, back when the German economic model of high wages and low energy prices was still in play.
The US government's response to the pandemic and geopolitical turmoil in Europe changed that dynamic. European energy prices are now much higher than in the US. While rising oil prices in the 2010s were due to increased energy demand from Europe thanks to a stronger Euro, today's increases reflect higher energy costs in Europe, leading to a weakening Euro.
However, with Trump's policy plans to increase the oil supply, oil prices could struggle to rise above $80, which might lead to a stronger Euro. Investors are still heavily bearish on the euro, suggesting it could temporarily strengthen in the near future.
For now, I believe the US will continue to lead the way in the global economy. A significant drop in stock prices will likely depend on whether long-term interest rates keep climbing and whether 10-year US treasuries hit 5%. The satellite to watch right now is the US dollar.
That's why we won't back down, we won′t run and hide
Yeah, ′cause these are the things that we can't deny
I′m passing over you like a satellite
So catch me if I fallRise Against - Satellite
Have a great weekend!
Fabian Wintersberger
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All my posts and opinions are purely personal and do not represent the views of any individuals, institutions, or organizations I may be or have been affiliated with, whether professionally or personally. They do not constitute investment advice, and my perspective may change over time in response to evolving facts. IT IS STRONGLY RECOMMENDED TO SEEK INDEPENDENT ADVICE AND CONDUCT YOUR OWN RESEARCH BEFORE MAKING INVESTMENT DECISIONS.
I fully support the shorter pieces!!! and I thank you. The longer pieces are fine and excellent, the only objection is one of time and limited cognitive bandwidth. Cheers!
I guess the question we are all asking right now is how far can 10-year yields rise before something more substantial breaks? and what will that be? stocks reversing lower? loss of broader economic or consumer confidence?
my take has been that the most likely outcome is regulatory changes requiring banks and insurance companies to hold more treasuries in order ensure they have a market