1. This week's theme in focus: Medium- and long-term U.S. Treasuries
Fosun Wealth Products recommended medium and long-term U.S. Treasury bonds this week. There has been a massive sell-off in Treasuries recently, with the yield on the 10-year Treasury note breaking above 4.9% for the first time since 2007 on 18 October, approaching 5%. As the anchor of global asset pricing, the surge in yields will, on the one hand, hit risk appetite and put pressure on the prices of major asset classes; On the other hand, it will raise the cost of borrowing, driving up the mortgage interest rate and the interest rate on the issuance of corporate bonds.
In this regard, Fed Chairman Jerome Powell said that if the long-term US Treasury yields continue to rise recently, it may marginally reduce the need for further interest rate hikes. The rise in the 10-year Treasury yield means that financial conditions have tightened, and combined with the neutral dovish statements of most Fed officials, no rate hike in November is a high probability.
Looking back at this surge in bond yields, the main reason is the supply-side shock. In August this year, the U.S. Treasury issued more than $2 trillion in U.S. bonds, second only to the early days of the pandemic in 2020. At present, the Fed is in the stage of shrinking its balance sheet, so the issuance of a large number of U.S. bonds at this time is more dependent on the digestion of the market; Secondly, the U.S. economic data exceeded expectations and the hawkish economic forecast released at the previous September Fed interest rate meeting, the effect of the excessively long interest rate hike cycle on the global liquidity crunch gradually emerged, and the risk of the spread of the recent Palestinian-Israeli conflict also raised the uncertainty of the global economy, resulting in an increase in market risk aversion, and many factors caused the market to be unable to form a consensus expectation on the expected path of the Fed's monetary policy in the future.
History shows that in the upward phase of the financial cycle, the impulse of credit expansion is stronger, coupled with the frequent supply shocks after the epidemic and the rising risk of inflation, the need for greater monetary tightening and greater upward pressure on market interest rates, so it is not ruled out that the long-term U.S. Treasury yield interest rate remains high is the new normal in the future; In addition, in the case of the typical risk asset S&P 500 Index, the difference between its return and the 10-year Treasury Bond is currently less than 0.4%, which means that the yield of the S&P 500 Index (a risky asset) is almost the same as the expected yield of the 10-year Treasury note (a risk-free asset). Grasp the investment will brought about by the rise in the yield of medium- and long-term U.S. Treasury bonds, and use the Star Wealth APP to quickly place orders for U.S. bonds, and it is the right time to invest in medium- and long-term U.S. bonds.
CME predicts a 99.9% chance that the Fed will not raise interest rates in November
2. The U.S. and China are both facing a flood of bond issuance and tightening liquidity, calling for further easing by central banks
The United States is not the only country that has issued a large number of government bonds in the market, and China is currently doing the same. The more aggressive fiscal expansion policy suggests that the Chinese government is not satisfied with the current stability of the economy. Bond issuance inevitably absorbs liquidity from the banking system. This may require the PBOC to reduce the reserve requirement ratio to offset the tightening of liquidity.
China's bond market has also been under supply pressure recently, with the 10-year Chinese government bond yield rising to a five-month high. China has stimulated the economy with a rare move, announcing that the central government will issue an additional 1 trillion yuan of 2023 treasury bonds in the fourth quarter of this year for post-disaster recovery and reconstruction. The move would push China's budget deficit to a three-decade high of 3.8 percent, signaling more than it did.
3. U.S. retail sales in September beat expectations and spending remained strong
U.S. retail sales in September grew by 0.7% month-on-month, expected to be 0.3%, the previous value was revised upward from 0.6% to 0.8%, excluding automobiles and parts, core retail sales increased by 0.6% month-on-month, the previous value was 0.9%. Structurally, grocery stores, online shopping and auto retail sales all performed strongly, of which grocery stores rose nearly 3% month-on-month, online shopping and automobiles rose more than 1% month-on-month, and the growth rate of retail sales at gas stations fell sharply from 6.7% to 0.9% in the previous month, but remained at a high level.
The median price of existing homes in the United States fell to $390,000 in September, falling for three consecutive months, the interest rate of the 30-year fixed mortgage rose 6BP to 7.63% throughout the week, and the 440,000 new homes for sale increased from August.
4. The outlook for the Eurozone economy remains subdued, and inflation in the UK has slowed down
The Eurozone composite PMI fell back to 46.5, the manufacturing PMI fell to 43, and the services PMI continued to slide to 47.8, with the outlook remaining subdued. The downside risks to the economy from monetary policy tightening may be becoming a reality. In September, the year-on-year growth rate of CPI in the United Kingdom was 6.7%, which was the same as the previous value, and the rate of decline was less than expected. Core inflation grew at 6.1%, lower than expectations of 6%, and structurally the goods sub-item grew by 0.7% month-on-month.
5. The performance of major asset classes last week
Global equities: Major markets around the world fell across the board, with Asia-Pacific markets leading the decline. Bond market: Medium- and long-term Treasury yields rose, with the 10-year Treasury yield rising above 5% and the 10-year Treasury yield soaring 30bp to 4.93% throughout the week. Commodity performance: Risk aversion pushed up the prices of most commodities, and oil prices and gold continued to rise. Foreign exchange market: The traditional safe-haven currency Swiss franc strengthened, and non-US currencies such as the euro and the yen continued to depreciate.
ETF fund flows in major countries and regions: In the past week, the top three countries/regions for ETF fund inflows are the United States, South Korea, and Canada, with inflows of 20.04 billion, 620 million, and 530 million US dollars, respectively, and the top three countries/regions for ETF fund outflows are China, Japan, and Europe, with outflows of 1.21 billion, 730 million, and 180 million US dollars, respectively.
6. Risk Warning
Periodic Sino-US tensions, policy weaker-than-expected risks, and the risk of monetary tightening spillovers in advanced economies.
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