Week End Blog – US inflation, the low volatility saga and Chinese house prices

Ms. Yellen took center stage this week as the Fed again trimmed its bond buying program. The Fed cut its estimate for this year’s US economic growth, after a dismal first quarter in which GDP is expected to contract by 2% (annualized that is). In the press conference following the FOMC announcement Yellen spoke ‘dovish’, emphasizing that rates could stay low, way after QE ends. The initial market reaction was firm, as bond yields came down sharply.

Click to Enlarge

 g1

However, as the week progressed, the ‘Yellen’ effect was reversed. That should not have come as a surprise. Earlier this week, US inflation came in higher than expected. Both the core and headline CPI number are now at or above the 2%-threshold. Together with the recovery in employment and some, although minor, indications that wages may be about to increase, could push yields higher going forward.

Click to Enlarge

g2

More on central banks. There was a very cool graph circulating on Twitter this week, showing the immense amount of QE that has been applied globally. The central bank balance sheets of the US, the UK, the Eurozone, and Japan have expanded by a mind-blowing $ 4.7 trillion since 2007. Wow!

Click to Enlarge

g3

What has this balance sheet expansion brought us? Apart from soaring equity markets, volatility has declined to multi-year lows. This week the VIX-index tried to break 10, and although it didn’t succeed, the chart below shows we are currently experiencing one of the most tranquil periods, ever.

Click to Enlarge

g4

Volatility is not just extremely low in equity markets. Bond market risk is also at extreme levels and extraordinary things can happen. High yield bond volatility is now below that of credits, despite their lower credit ratings. Duration is part of the explanation, but it sure looks as if high yield bond investors want to forget about possible defaults for now. To read more about the low volatility saga, click here.

Click to Enlarge

g5

Now, unfortunately, there was some negative news as well. In Germany the leading ZEW-index declined for the sixth month in a row. Also the ZEW-index showed that, while investors have become more optimistic about the current situation, they are less enthusiastic about the future.

Click to Enlarge

g6

China is experiencing its own difficulties. The slowing of the economy was reaffirmed by this week’s numbers. In May foreign direct investment declined by 6.7% compared to the same period a year ago.

Click to Enlarge

g8

Also, house price data showed that the Chinese property sector is weakening. For years the majority, if not all, of the 70 cities that are included in the house price data revealed rising home values. But in recent months this has changed dramatically. Last month, only in 19 of the 70 cities did prices of existing homes rise.

Click to Enlarge

g9

Thank you for reading. You can now go back to the only thing that matters these days, the World Cup!

One response to “Week End Blog – US inflation, the low volatility saga and Chinese house prices

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s