BLUE QUADRANT CAPITAL MANAGEMENT BLOG
Corporate bond yields in the US remain near or close to historical lows (or at least since the 1950s), with the average yield on AAA rated debt trading at roughly 4%. Although we focus on US corporate yields and data in this article, the same trend is reflected across all major developed economies. Even in many emerging-market economies, despite the correction in late 2015 / early 2016, general corporate yields still remain well below the levels that prevailed prior to the Global Financial Crisis (GFC) in 2008.
One of the conundrums of the current economic expansion in the United States has been the tepid wage growth evident in the recovery thus far. Although wage growth has picked up somewhat over the past year, it remains in a band between 2.5% and 3% and below the levels of wage growth seen prior to the last recession in 2007. This conundrum is all the more perplexing, given that the official unemployment rate has continued to decline to a new cycle low of 4.4%.
The South African Rand (ZAR) is one of the most liquid emerging market currencies in the world, but is arguably also extremely volatile, particularly in recent years. This volatility is underpinned by the sentiment-driven ebb and flow of international capital flows and tends to make forecasting the currency a notorious challenge. As such, some investors may even suggest that it is impossible or hopeless task to try and forecast the currency
US oil production has recovered notably since bottoming in September 2016 at an average daily production rate of 8.5mn barrels per day (bpd). US oil production (excluding Natural Gas Liquids or NGLs) is now averaging around 9mn bpd, although still below its cyclical peak recorded in early 2015 at around 9.5mn bpd. Nevertheless, the rapid recovery in output in just six months coupled with the sharper rebound in the oil rig count (Baker Hughes data) as illustrated below, suggests that US oil production will continue to climb throughout 2017 and may eventually exceed its former cyclical production peak of 9.5mn bpd.
According to the latest quarterly report on Household Debt and Credit compiled by the New York Federal Reserve, US Household debt increased at a fairly robust pace in the final quarter of 2016, rising by 1.8% q/q or USD 226bn to USD 12.58trn. Despite the sharp increase in 2016, the total amount of household debt outstanding still remains some 0.8% below the prior cyclical peak of USD 12.68trn registered in Q3 2008. As such, growth in overall GDP and nominal disposable income has easily outstripped the growth in overall household indebtedness. When coupled with still very low financing rates, this has ensured that the overall household financial obligations ratio of household debt service payments as % of Disposable Personal Income remains at or near a multi-decade low.
US equity markets have rallied strongly since the election of Donald Trump as the 45th president of the United States, with investors largely choosing to focus on the prospective positive aspects of his administration and the scope for large corporate tax cuts, as well as a reduction in regulation. However, as we have detailed in previous articles, given Trump’s apparent protectionist instincts and anti-immigration views, there are also potential negative aspects associated with his presidency- which, broadly speaking, financial markets have chosen to ignore.
The recent rise in US bond yields, coupled with the likelihood of a further 25bps increase in the Federal Reserve’s targeted policy rates in December, has changed the conversations regarding the long-term outlook for US interest rates. The embedded narrative in recent years has been one in which the US economy would never reach a sufficiently sustainable level of economic growth or ‘escape velocity’ in order to warrant an end to the so-called ‘zero interest-rate’ paradigm.
The 2016 US elections, Q&A with Blue Quadrant Capital ManagementDonald Trump has won the presidency of the United States and financial markets in general have not reacted well to this development. What are the implications of this surprise event for investors and specifically, global investors?
US GDP 2Q16
Cyclical Factors weigh on US GDP but the foundation is laid for a powerful acceleration going forward
US GDP grew at a disappointing 1.2% (q/q, annualised) in the second quarter of 2016, well below consensus forecasts of 2.6% (Reuters). The main negative contributors, as has been the case in recent quarters, were a continuing reduction in inventory levels and weak non-residential investment spending. The change in inventory levels during the second quarter, subtracted 1.2% from overall GDP, while non-residential fixed investment subtracted a further 0.3%.