Reserve Bank Governor Glenn Stevens recently said he thinks the market for stocks and the Aussie dollar will look very different when the Fed moves from the taper to tightening.
Part of the recent stock market ructions are a direct result of this type of thinking weighing on traders’ minds and the outlook for stock valuations and bond rates.
But two charts from the ANZ’s Macro Strategy team suggest that the US and global economy is gaining enough traction to push US 10 year rates, and likely the Fed funds rate, higher.
The ANZ’s global leading indicator (GLI) which peaked in 2013 before pulling back this year is on the march again suggesting global industrial production is about to rise as well. The ANZ is expecting a “pick-up through H2 2014”.
But the key for markets, the US dollar and US stocks in particular is that the ANZ’s GLI has a great correlation with US 10 year bond rates.
The story it is telling is bonds are heading higher and the ANZ has a scary forecast for just how high 10 year treasuries will rise:
Before June, the rally in US yields through 2014 was broadly in line with the easing in economic momentum. However, the recent turn in momentum as captured by the inventory pulse, suggests upside risks to yields.
Further, we expect that solid momentum will remain over coming months and inflation will lift towards the Fed’s 2% objective, albeit gradually. Therefore, we see near-term upside risks to US 10-year yields and forecast a rise to 3.10% by year-end.
It’s a warning not a fait accompli but it’s a headwind for stocks in the US, Australia and around the world. And it’s just another reason why my super is still 100% cash.
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