DeepSummary
The episode discusses the current transition period in the stock and bond markets, with inflation no longer being the primary driver of market volatility. Kamakshya Trivedi, head of global foreign exchange, interest rates, and emerging market strategy research at Goldman Sachs Research, explains that the market had overreacted to the Federal Reserve's projections last December, pricing in more rate cuts than intended. However, recent strong economic data and hawkish comments from Fed officials have led to a rebound in yields.
Trivedi emphasizes that although inflation fears have eased, investors need to navigate this transition phase cautiously, as growth shocks could become the primary driver of market volatility. He suggests that once inflation is under control, stocks and bonds could potentially move in tandem again, as the Fed would have more flexibility to cut rates in response to growth shocks.
Looking ahead, Trivedi highlights the potential for a broadening of the equity rally beyond the US, driven by an improving global industrial cycle. He also notes that the upcoming US labor market report for February could provide important insights into inflationary pressures and the Fed's policy path.
Key Episodes Takeaways
- The stock and bond markets are in a transition phase, moving from inflation-driven volatility to growth shocks becoming a significant driver.
- The market had initially overreacted to the Fed's projections for rate cuts, but recent strong economic data and hawkish Fed comments have led to a rebound in yields.
- Once inflation is under control, stocks and bonds could potentially move in tandem again, as the Fed would have more flexibility to cut rates in response to growth shocks.
- There is potential for a broadening of the equity rally beyond the US, driven by an improving global industrial cycle.
- The upcoming US labor market report for February could provide important insights into inflationary pressures and the Fed's policy path.
- Investors need to navigate this transition phase cautiously, as both inflation and growth shocks are driving market volatility.
- The historical relationship between stocks and bonds has changed, moving from a period where they both rose together to a period where they moved in opposite directions due to inflation concerns.
- The Fed's ability to respond to growth shocks (the 'Fed put') is expected to return as inflation comes under control.
Top Episodes Quotes
- “Look, I think one way to address that question is that back in December, the Federal Reserve told us that under their baseline forecast, three cuts would be appropriate for 2024. I think the markets got carried away a little bit and went on and priced six plus cuts coming into this year.“ by Kamakshya Trivedi
- “I think where we are now is in a kind of transition phase. A transition phase from where inflation shocks were the main driver of Fed policy and market volatility, to one where both inflation and growth shocks matter and are driving markets, and eventually towards a phase where growth shocks will take over as being the primary driver because inflation is at or close to target.“ by Kamakshya Trivedi
- “As you look further out, as inflation starts to get under control, we do think once again we could go back to a phase where stocks and bond prices could go up together, or at least the bonds start to provide a good hedge to long equity portfolios.“ by Kamakshya Trivedi
- “And if that has legs, that typically tends to come with a broadening of the equity rally. So you can imagine a situation over the next three to four months where, together with any inflation relief that we get on the us side, this better environment for global manufacturing provides a tailwind for a broadening of the equity rally beyond just large cap us tech to places like small cap stocks, european and emerging market equities ex China, as well as some of the cyclical and higher beta currencies in both the g ten and the emerging market world.“ by Kamakshya Trivedi
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Episode Information
Goldman Sachs The Markets
Goldman Sachs
3/1/24