The 2020 OUTLOOK: >>YIELDS|STOCKS|FED Policy & GOLD>> Part(1/4)
Analysis on Treasuries in 3 detailed bullet points; Series on fixed income and the 2020 outlook - 21st of December 19'
Before I get into the analysis, wishing you all Happy holidays!
1. What's the outlook for 2020? Compared to the summer of 2019, the recession fears have somewhat phased out. Nevertheless, weak global macros(PMI's, Growth) and the plateau in earnings, increase the overall systematic risk. 2020 will be a volatile year for all markets, and yields should mostly follow the policy path that the FED will be implementing. So far, the "Not QE" plan by the FED(being very sarcastic here), which by some estimates 500 Billion $ liquidity injection into the markets, is on track to set a record high above 4.5 T on the FEDs balance sheet, by the time the program is finished(Ref #2). Moreover, as the FED currently seems very confident in the market, we know Powell's stance can change at any point(i.e late 2018). My guess would be that, as soon as the current "Not QE" program ends, the lack of liquidity and more importantly lack of GC(General collateral) will reappear, which would lead to the official ONSET of QE-4, starting Q2-Q3 of 2020.
2. Furthermore, since September and the repo market frenzy, we've seen simply just how crucial is ample liquidity to the cycle. Yields have managed to recover from the late summer lows, and are currently on track to test the 2% resistance target #1. More on the chart technicals can be found from my previous idea that's turning out very well thus far.
![10Y US TREASURY NOTE|PREMIUM[LONG-TERM]YIELD ANALYSIS|PART 2/2"](https://s3.tradingview.com/k/kH1DVEC1_mid.png)
Intuitively, as the monetary base/FED balance sheet value increases we should see a decrease in yields and vice versa in the case of quantitative tightening(QT:10/2017-08/2019). Due to inflated growth expectations from QE, thus far this hasn't been the case. Instead, as the QT unraveled the balance sheet yields collapsed, and as the "Not QE" program unfolded, yields are climbing higher again. In case QE-4 is announced, I'd expect yields to climb to at least to target 2, around 2.4-2.5%.
3. Yield curve analysis. It's good that it's not inverted, but if the yield curve is flat persistently, that's obviously not something good either. Tight spreads imply lower profit margin on loans, meaning you need to increase your volume when providing loans as a bank in order to make the same margin. Lower rates have been the nemesis for small banks in the U.S, as they are not as well diversified as large banks. These are the banks, that are crucial to the small economy. On this point that has affected returns in the Russell 2000, I will make a separate analysis.
To sum up this analysis on yields, the expectations should be that we should have even more accommodative policies from the FED in 2020. If the economy ins't doing well, Trump's almost surely not going to win the 2020 election. In a way, it can be said that the FED is buying Trump's way to the 2020 election win. Contrary to the latest FED survey, which currently sees no rate cuts for 2020, I think there is a high probability that we will at least get two rate cuts for 2020 (down to 1%, Ref #1). Weaker dollar of course, lowers the recession probability(ref #3).
This is it for yields, I tried to keep it short, hope it's useful. Will attempt to post parts 2-4 as soon as they're finished. Feedback and comments are always welcome!
-Step_ahead_ofthemarket-
________________________________________________________________________________________
>>I do not share my ideas for the likes or the views. This channel is only dedicated to well informed research and other noteworthy and interesting market stories.>>
However, if you'd like to support me and get informed in the greatest of details, every thumbs up and follow is greatly appreciated!
References & Disclosure:
1. FED rates Super-cycle 1980's-
2. FED Balance sheet: fred.stlouisfed.org/series/WALCL
3. Dollar/Yuan breakdown, trade progress and tariffs:
Disclosure: This is just an opinion, you decide what to do with your own money. For any further references or use of my content- contact me through any of my social media channels.
Before I get into the analysis, wishing you all Happy holidays!
1. What's the outlook for 2020? Compared to the summer of 2019, the recession fears have somewhat phased out. Nevertheless, weak global macros(PMI's, Growth) and the plateau in earnings, increase the overall systematic risk. 2020 will be a volatile year for all markets, and yields should mostly follow the policy path that the FED will be implementing. So far, the "Not QE" plan by the FED(being very sarcastic here), which by some estimates 500 Billion $ liquidity injection into the markets, is on track to set a record high above 4.5 T on the FEDs balance sheet, by the time the program is finished(Ref #2). Moreover, as the FED currently seems very confident in the market, we know Powell's stance can change at any point(i.e late 2018). My guess would be that, as soon as the current "Not QE" program ends, the lack of liquidity and more importantly lack of GC(General collateral) will reappear, which would lead to the official ONSET of QE-4, starting Q2-Q3 of 2020.
2. Furthermore, since September and the repo market frenzy, we've seen simply just how crucial is ample liquidity to the cycle. Yields have managed to recover from the late summer lows, and are currently on track to test the 2% resistance target #1. More on the chart technicals can be found from my previous idea that's turning out very well thus far.
Intuitively, as the monetary base/FED balance sheet value increases we should see a decrease in yields and vice versa in the case of quantitative tightening(QT:10/2017-08/2019). Due to inflated growth expectations from QE, thus far this hasn't been the case. Instead, as the QT unraveled the balance sheet yields collapsed, and as the "Not QE" program unfolded, yields are climbing higher again. In case QE-4 is announced, I'd expect yields to climb to at least to target 2, around 2.4-2.5%.
3. Yield curve analysis. It's good that it's not inverted, but if the yield curve is flat persistently, that's obviously not something good either. Tight spreads imply lower profit margin on loans, meaning you need to increase your volume when providing loans as a bank in order to make the same margin. Lower rates have been the nemesis for small banks in the U.S, as they are not as well diversified as large banks. These are the banks, that are crucial to the small economy. On this point that has affected returns in the Russell 2000, I will make a separate analysis.
To sum up this analysis on yields, the expectations should be that we should have even more accommodative policies from the FED in 2020. If the economy ins't doing well, Trump's almost surely not going to win the 2020 election. In a way, it can be said that the FED is buying Trump's way to the 2020 election win. Contrary to the latest FED survey, which currently sees no rate cuts for 2020, I think there is a high probability that we will at least get two rate cuts for 2020 (down to 1%, Ref #1). Weaker dollar of course, lowers the recession probability(ref #3).
This is it for yields, I tried to keep it short, hope it's useful. Will attempt to post parts 2-4 as soon as they're finished. Feedback and comments are always welcome!
-Step_ahead_ofthemarket-
________________________________________________________________________________________
>>I do not share my ideas for the likes or the views. This channel is only dedicated to well informed research and other noteworthy and interesting market stories.>>
However, if you'd like to support me and get informed in the greatest of details, every thumbs up and follow is greatly appreciated!
References & Disclosure:
1. FED rates Super-cycle 1980's-
2. FED Balance sheet: fred.stlouisfed.org/series/WALCL
3. Dollar/Yuan breakdown, trade progress and tariffs:
Disclosure: This is just an opinion, you decide what to do with your own money. For any further references or use of my content- contact me through any of my social media channels.
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