What a difference a month makes, as sentiment seems to be shifting quite quickly regarding duration and inflation. In any case we would like to begin this note by pointing out that we still think the short end of MXN linkers offers good value. We bought the 3 year linker at the end of September as mentioned here and our position is very much onside:
Whilst we fully expect a quick pullback in rates over the next few days, we believe these are still good value for money given the breakeven levels:
Moving on to some liquid assets, we want to bring up the gold to bonds ratio, as it seems like it has finally topped, although we thought so back in August which proved to be a bit early, should the rally in bonds prove to actually have legs, we would expect the next move in this ratio to be consistent towards .80>
Regarding equities we have seen the small caps lead the latest leg up, this after the inflation and jobs data that came out over the last few days. While we think it is indeed healthy to finally see a rally in anything other than the mega caps, the multiple has expanded just a bit much to chase in our view.
Since our last note the market has priced back one full cut for next year, at the moment SOFR futures price just over 100 bps of cut spread almost evenly with 40bps during the first half of 2024 and the remaining between June and Dec.
As we have mentioned some times before, namely on the last chart of “Bankers blink”, we think inflation will continue to trend lower; wage pressure has eased, prices received continue declining, agricultural stocks are lagging significantly behind the broad markets, etc. if our humble and simple leading indicator proves right, we can expect PCE to be below 2% in 4-6 months time.
Finally and despite the rally in duration, we have seen the CMBS-High yield spread breaking out above the previous high. We do recommend to keep a close eye on this and while we are no experts on CMBS products, we would assume that rolling issuance at current levels is rather complicated, particularly if cashflows are constrained by low occupancy rates.
This is for informational purposes only, it should not be considered as investment advice and does not constitute any offer or solicitation to subscribe or redeem. Investment involves risk. Please consult a licensed investment professional before taking investment decisions.
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Solid charts lads