Finance

2023

August

• Rates

  • US Rates: The Federal Funds (FF) rate currently stands at 5.25%.  Meanwhile, the yield on the US Treasury 10-year note has surged above 4%. The decline in the US Consumer Price Index (CPI) suggests that inflation pressures may be easing, providing room for the Fed to take accommodative measures. I expect the Fed to cut the policy rate soon but I am not an expert to tell the exact timing.

  • Japan Rates: In July, Japan's Yield Curve Control (YCC) policy was adjusted to include a range of ±1%. This alteration demonstrates the Bank of Japan's commitment to maintaining a flexible approach to its monetary policy, seeking to strike a balance between economic stability and inflation control.

• Equity Market

  • US Equity: The prospect of Fed rate cuts in the near future bodes well for US equities over the next year. However, caution is advised due to the already substantial 20% rise in equities this year, largely driven by the top 20 tickers, particularly in the semiconductor and technology sectors. Investors should remain vigilant for signs of market correction.

  • Japan Equity: Japanese equities have also seen a significant uptick, surpassing a 20% increase in 2023. Given the relatively rich valuation and diminishing growth prospects, the probability of further substantial gains in the next year appears limited. Prudence is essential for investors eyeing the Japanese equity market.

• Fixed Income Market

  • US Investment Grade Corporate: The expected rate cuts by the Federal Reserve have a positive outlook for US investment-grade corporate bonds. Currently offering yields above 5%, these bonds also present an opportunity for capital gains once the Fed initiates its rate-cutting cycle. However, it's worth noting that the JPY-hedged yield remains negative, which could affect overall returns for international investors.

• FX

  • USDJPY: The USD/JPY exchange rate currently hovers around 146. I see more room for JPY to strengthen for the next 1 year (maybe the range is 115~160) because the Japanese Ministry of Finance is willing to intervene if the JPY depreciates too sharply.

June

• Rates (limited room to rise): The Fed chose to skip a rate hike, keeping the Federal Funds (FF) rate at a range of 5% to 5.25%. Projections, however, indicate a potential uptick, with the FF rate expected to reach 5.6% by the end of 2023. I think the maximum number of hikes will be limited to 2 and that means the upside for the US rates is limited. Once the Fed started cutting rates, risk assets should rally even if the economy slows down. (though a lot of it is already priced especially in equity so the FI will probably rally more.)

• Equity (too expensive): Equity markets have seen impressive gains so far in 2023, with the S&P up 15%, and the NASDAQ and Nikkei soaring by 30%. The big question now is whether these upward trends can be sustained until the end of 2023 because the economy is feeling the negative effect of tightening. I don't see any attractive opportunities in equities. 

• USDJPY (too high): At around 140, the USDJPY exchange rate is notably high. It is not attractive for Japanese investors to sell JPY and buy USD.

• Events: UBS and CS merger was completed

May

• US Economy: Inflation is declining but still sticky

• Rates: US 10y rose

• Spread: US IG Spread little changed

• Equity: US Equity rallied, Japanese equity rallied too

April

• US Economy: The fear of bank crisis receded, labor market is solid, inflation is going down but still high

Mar

• US Economy

  • • I assume something will start breaking out toward the end of 2023. 

    • The US economy will very flexible and resilient against economic shocks.

• Rates

  • • The FF rate can reach 6% because of strong inflation and economic data.

  • Equity

    • It is going to be hard for Equities to go up too much until inflation declines and we can confirm the Fed pauses rate hikes. > (June) I was wrong. Equity is still going up.

    • Equities rose around 10% YTD already. 

• USDJPY

  • • I assume USDJPY will eventually decline to the 115 level after BoJ starts adjusting YCC.

Jan 2023

• • Top-Down

    • Economy

      • Possible Mild recession

      • Inflation will cool down but stays above 3% till end of 2023

    • Rates: Dec 2022 FF 4%, UST10y 3.9% -> Outlook Dec 2023: FF 4.5%

      • Central banks are pivoting to be more dovish. FF Rate stays at 4.5~5% till the end of 2023

    • USDJPY Dec 2022 133 -> Outlook Dec 2023: Not sure but probably JPY with appreciate 110?

  • Bottom-Up

    • US Equity: Outlook Dec 2023 +20~50%

      • In the first half of the year, equity won't do well because central banks remain hawkish while the inflation rate is high. 

      • In the second half of the year, equity can gain +20-50%

    • USIG: Outlook Dec 2023 120~150bps

      • Spread won't widen too much and stay in the range of 120~150bps

• Main Themes: Inflation & Rate hikes

• • The market has been pricing more rate hikes from the beginning of the year because inflation has been stickier than expected. 

  • October CPI was lower than expected but it is only one data point before we can believe inflation is going down. 

  • Financial Condition is tightening because of the rate hikes. Especially rate sensitive sectors such as Real Estate Market are suffering from higher rates. 

• Performance: 

  • • • Equity: Negative because of higher interest rates 

      • Fixed Income: Negative because of higher interest rates

• Risk Factors: 

  • • • China vs US

      • Ukraine War

      • Deep Recession if Fed slams the break too hard

      • Inflation can be stickier than expected

      • Iran