Five bullet points, no more! (#13)

… a series to track the global macro cycle and asset allocation

Demand for US Treasuries was disappointing last week, both for the 10-year and the 30-year, with bid cover ratios of 2.35 and 2.27, respectively, compared to long-term averages of 2.6 and 2.4. Importantly, so-called indirect bids, which come from foreigners, were at low levels, reflecting the current reluctance to finance U.S. sovereign debt and the fiscal deficit. The impact on the USD and yields has been relatively subdued. We do not comment on the labor market report, everything has been written, and this publication had warned about the surprising strength of the NFP data – so downward revision is not a surprise. It triggered a 10bp bull steepening move in the 10y2y curve, with no change since then despite the latest auction.

Sources: U.S. Treasury, SARIM

The nomination at the Fed of Mr. Miran to replace Mrs. Kugler, and will probably be the next Fed chair, will not take pressure off the greenback, and even the opposite. A weak USD and low long-term rates rank top on his agenda, objectives he is ready to impose on “allies” by forcing them to buy perpetual bonds at (very) high prices—low yields—in exchange for military protection. We do not question the morality of the “deal,” but its feasibility. The path is more than narrow. Yields should be determined by the markets—supply from the government and demand from investors—and a much sounder way to rebalance the U.S. economy would be a consumer diet.

In Canada, one of our long-time favorites for investing in duration among DM countries, employment contracted in July, and the country is probably already in a mild recession, as the monthly gauge of GDP growth shows—and the local surveys on business conditions. Headline inflation is on target, but not the core (at 2.7%) nor the trimmed measure (at 3%). The central bank lowered its rates from 5% to 2.75% but has been on hold since March and looks cornered at this stage. Like all the others, where stagflation looms.

For months, services have been the main tailwind for growth. According to some surveys, a deceleration is noticeable among various countries, in Europe (France, Sweden), and in the emerging market sphere (Brazil). Many are still booming, like India or Spain. The U.S. case deserves attention as the PMI and the ISM diverged significantly for the July survey. Everything is going fine according to the former (at 55.7), whereas the service sector is close to contraction according to the latter (at 50.1), with employment sinking and prices soaring. This publication has historically had a positive bias toward the ISM measurement.

Surveys are one thing, but at the end of the day, hard data matters. Where does the manufacturing sector stand as of the end of June? In volume, industrial production is near stagnation year-on-year in the developed world, whereas it still grows slightly above 5% in Asia (excluding India). The decomposition of Asia is particularly insightful. Over the last three months, the ASEAN block and South Korea have dangerously dipped—and contracted in June—whereas the Chinese overproduction boom continues (at 6.7% y-o-y, vs. a 5.9% historical average), and Taiwan's stratospheric flight, partially thanks to AI chip demand, maintains its pace (around +20% year-on-year). But PMIs deteriorated and turned below 50 almost everywhere in Asia, including Taiwan.

Sources: LSEG, SARIM