Weekend Premium article published . This time, a more substantial set to chew on regarding recent interest rate movements. The main focus is on interest rates acting as the gravitational force of the financial market, i.e., long-term US interest rates, which are pulling upwards as lenders become more skeptical of the federal governmentâs indebtedness towards indifferent economic policy.
But this is not the only change. Long-term interest rates have risen everywhere, reflecting inflation and economic growth prospects. But not just those: risk premiums are rising everywhere.
When you can get returns from interest rates here and there, lending to the United States is no longer the only option.
For stocks, the current situation is not yet a drama, but it raises eyebrows. Rising interest rates are good when they include the aforementioned elements of strong economic growth. But if the risk component swells further, pushing up interest rates, they offer an increasingly challenging alternative for shareholders. Then, especially growth companiesâ valuation multiples face growing pressure.
I wouldnât speak of a debt crisis yet, as the United States has so many trump cards in its economyâs (though not its politicsâ) hands. But even that distant possibility glimmers on the horizon, and itâs worth monitoring.
Excellent text! The article discusses the bond term premium, or risk premium, which has not risen, at least on paper, despite increased uncertainty in US Treasuries. I find this an interesting observation, as the media constantly repeats that investors (in this case, asset managers of large financial institutions and their clients) are moving their assets out of the USA:
Investors are concerned about increased political risk and indebtedness and are looking for alternative destinations, especially in Europe. German, French, and perhaps somewhat surprisingly, Spanish and Italian bonds are mentioned in the FT article. But this âshiftâ is not yet reflected in a rise in the term premium, as noted earlier. After a moment of pondering, I remembered that the biggest buyers of US bonds are Japan and China, not so much local investors. Is there really so much demand for US bonds from Asia that concerns about tariffs and indebtedness are not yet weighing heavily (except perhaps a little, as seen in the last 20-year bond auction)? And if they do start to weigh at some point, could Europe really offer a viable alternative (or perhaps somewhere else; I read somewhere that, for example, Japan is also attracting bond investors right now as inflation concerns have turned around there)?
Good morning! Iâm linking here the macro articles, which compile the latest turns in tariff discussions and a bit about the Eurozone economy. Trump is at it again
Bessentâs recent interview is interesting to hear, as he is good at arguing and painting black white and red green.
Questions about the rise in term premia are dismissed by commenting something about interest rates, that they havenât risen that badly since the beginning of Trumpâs term compared to the rest of the world.
An interesting development is this deregulation of banking. Especially the reduction of capital requirements for federal bonds on bank balance sheets. This would allow more bonds on bank balance sheets, which might lower their interest rates. If we ever go into interest rate control (a situation where the central bank, under the guidance of the treasury, locks interest rates in the market at a desired level, and which I have touched upon over the years here and in Varteissa), it would be nice to first get banks full of these bonds.
The Eurozoneâs industry seems to be recovering, unless a trade war throws a wrench in the works.
For industry-driven stock exchanges, especially the Helsinki Stock Exchange, this would be celebratory news. Stock exchanges are already somewhat anticipating it, as even the Helsinki Stock Exchange has risen 11% since the beginning of the year. The Eurostoxx600 Industrials index is hovering near its ATH.
This is a terrible chart Iâve occasionally presented over the years, but it shows how industrial development has at least somewhat correlated with small stock market indices, such as our HEX (our large companies are quite small on a global and even European scale, with the exception of something like Nordea) or, for example, SDAX. Itâs not illogical, because even though industryâs share of the economy is smaller, industryâs share is still strongly represented in the stock market.
Better performance in industry should give more fuel for the sentiment to pick up.
Other aspects are also covered there. Confidence in the development of oneâs own economy is growing, while confidence in the development of the state economy is declining.
Note: Approximately 60% of the sales of Helsinki Stock Exchange companies (when was the last time someone checked this figure? ) come from Europe, and Finland has a rather limited significance. Many goods go for export directly or indirectly. Therefore, monitoring European and global economic indicators is more sensible from the perspective of the Helsinki Stock Exchange.
On the other hand, domestic macro data applies variably even to domestic market companies. Based on the development of purchasing power and consumer confidence, one would think, for example, that the restaurant group Noho would be doing poorly, but people apparently go to restaurants to worry about their weakened purchasing power over 10-euro pints of beer and 25-euro main courses, and Noho is achieving record results.
Even during recessions, the pubs filled up. A Finn drinks both in joy and in sorrow. Weâre not so poor a people that we wouldnât get those last pennies down our throatsđ Nothing else but for the people to go Nohoilemaanđ
These should be approached with caution nowadays. Social media etc. has messed with peopleâs heads when it comes to these question-based indicators. Itâs much more reliable to follow what people actually do with their money.
Behind a paywall, but fortunately these language models can bypass that too. Just as a side note, what it also does to their businesses.
âAn article in The Economist, published on September 7, 2023, discusses how the COVID-19 pandemic has undermined the reliability of the University of Michigan Consumer Sentiment Index, a widely followed economic indicator. Since the start of the pandemic, American consumer confidence has been exceptionally pessimistic, reaching its lowest level in June 2022, even though the economy appears healthy. This contradiction has given rise to the term âvibecession,â where the general perception of the economy is gloomier than economic figures suggest. The article emphasizes that consumer confidence no longer closely tracks economic realities, such as low unemployment or rising wages, as it did before the pandemic. Inflation, supply chain issues, and corporate pricing strategies during the pandemic have possibly contributed to this change, and the general mood reflects broader dissatisfaction despite positive economic indicators.â
The same applies in Finland. The discussion is very pessimistic, even though Finlandâs problems are mainly related to public finance management. The national economy is doing quite well, at least for now.
That savings rate doesnât seem particularly high, even though it has grown. Itâs at the same level as it was in 2018-2019, when things were quite okay by many measures.
It somehow feels like Covid disrupted many others, as well as the Leading Economic Index (LEI).
The LEI has been declining for years, but no downward correction is visible in the Coincident Economic Index (CEI).
(CEIâs four component indicatorsâpayroll employment, personal income less transfer payments, manufacturing and trade sales, and industrial production)
Good insights, and itâs absolutely true that confidence doesnât automatically correlate with consumption. I personally like to follow surveys regarding my own finances, as one knows their own pockets and bank account balance best. Finnish economic confidence figures, on the other hand, can be weak due to, for example, negativity bias. Negative news sells, so it dominates the field, including in economic journalism. I touched upon these topics in yesterdayâs macro overview.
@Alex_af_Heurlin1 an article in Helsingin Sanomat about the rise in long-term interest rates. Itâs probably behind a paywall.
While in 2022 the blow came from inflation, central bank policy rates, and economic recession, this time investorsâ eyes are fixed elsewhere: on governmentsâ reckless economic management.
The US 30-year bond yield was still at four percent in the autumn, but has climbed to five during the spring. The change has occurred despite the fact that the US central bank Fed has lowered its policy rate.
Macro Outlook reports offer investors a comprehensive overview of key economic indicators. Reading the overview requires an Inderes Premium subscription (link).
Our key observations from this report are:
Signs of recovery in eurozone industrial production, with purchasing managers also less negative than before.
A clear gap has grown between short- and long-term inflation expectations in the eurozone and the United States. In the USA, expectations show a clear increase.
On the US housing market, the key 30-year interest rate is still around 7%, meaning it has remained at its highest level since the early 2000s.
The dollarâs slide is visible in currencies: the euro has strengthened by almost 10% against the dollar this year.
. This time, a more substantial set to chew on regarding recent interest rate movements. The main focus is on interest rates acting as the gravitational force of the financial market, i.e., long-term US interest rates, which are pulling upwards as lenders become more skeptical of the federal governmentâs indebtedness towards indifferent economic policy.
industry seems to be recovering, unless a trade war throws a wrench in the works.
