The US 10-year Treasury yield continues to fall, which is narrowing the gap between the higher market rate and a lesser “fair-value” estimate, based on the average of three models run by CapitalSpectator.com.
Macro Briefing: 12 January 2024
* US and UK launch retaliatory air strike on Iranian-backed Houthis in Yemen
* US government shutdown risk is rising ahead of Jan. 19 deadline
* China deflation persists: consumer prices fell for third straight month
* US credit card delinquencies rise to highest level since 2012
* Some firms on Wall Street block new bitcoin ETFs on their trading platform
* Hope for 2024 revival in value stocks springs eternal… again
* US consumer inflation’s 1-year change ticked up in December, but…
* Core CPI eased below 4% year-over-year for the first time since May 2021:
US housing costs continued to post the biggest impact on consumer inflation in December, but as Yahoo Finance reports: “There seem to be some hopeful signs in the latest data, experts said.” Meanwhile, “On a year-over-year basis, shelter inflation remained high — up 6.2% over the last year. The optimistic take: that’s lower than November’s 6.5% year-over-year figure and March’s peak of 8.2%.” Omair Sharif, president of Inflation Insight, predicts: “We’re on the cusp of another step down in shelter inflation.”
Research Review | 11 January 2024 | Fat Tail Distributions
Optimal Portfolio Choice with Fat Tails and Parameter Uncertainty
Raymond Kan (U. of Toronto) and Nathan Lassance (LFIN/LIDAM)
December 2023
Existing portfolio combination rules that optimize the out-of-sample performance under estimation risk are calibrated assuming multivariate normally distributed returns. In this paper, we show that this assumption is not innocuous because fat tails in returns increase the out-of-sample mean and variance of sample portfolios relative to normality. Consequently, portfolio combination rules should allocate less weights to the sample mean-variance portfolio and the sample global minimum-variance portfolio, and more weight to the risk-free asset, than the normality assumption prescribes. Empirically, accounting for the impact of fat tails in the construction of optimal portfolio combination rules significantly improves their out-of-sample performance.
Macro Briefing: 11 January 2024
* No rate cuts until inflation at 2% on ‘sustained basis’: Fed’s Williams
* SEC approves rules to permit bitcoin ETFs
* China will make foreign investment easier, says vice premier
* US consumer spending growth will slow in 2024, economist predicts
* Google and Amazon announce layoffs
* Copyright challenges threaten to create serious headwinds for OpenAI
* Global renewable energy capacity rose 50% in 2023, but more is needed: IEA
Managing Expectations For December’s Consumer Inflation Report
There’s a lot riding on tomorrow’s US consumer inflation report for December for markets, which are pricing in relatively upbeat news. Quite a lot of the stock market’s upbeat profile recently is closely linked to forecasts that the worst has passed for inflation, which leaves room for the Federal Reserve to start cutting interest rates. In that case, the market has a green light to reprice equity prices up, which it’s been doing in no trivial degree in recent months. Meanwhile, US Treasury yields have fallen recently, largely for the same reason. Tomorrow’s CPI report will provide a reality check on the rosy assumptions of late.
Macro Briefing: 10 January 2024
* Houthi militias launch biggest attack to date on ships in Red Sea
* US inflation expected to ease further in Thursday’s report for December
* Will politics be a factor for Fed policy this year?
* World Bank forecasts slowest growth since pandemic in 2024
* BlackRock, world’s largest asset manager, announces job cuts
* U.S. trade deficit unexpectedly narrowed in November:
Still Waiting For A Clear Risk-Off Signal At 2024’s Start
There’s no shortage of reasons to be cautious on the near-term outlook for markets, but reviewing trend behavior via several sets of ETF pairs continues to reflect a positive trend for risk assets through yesterday’s close (Jan. 8, 2023).
Macro Briefing: 9 January 2024
* Deal to avert US government shutdown faces precarious path
* Investors warn governments about high levels of public debt
* China is now world’s top exporter, thanks to surging sales to Russia
* US small business owners remain “very pessimistic about economic prospects”
* Labor market will be “first and most important clue” for Fed’s next move
* US consumer credit surged in November–biggest rise since March 2022:
Desperately Seeking Yield: 8 January 2024
The runup in yields for most of the major asset classes has peaked, based on a trailing 1-year payout rates for a set of ETFs through Friday’s close (Jan. 5, 2024). That’s hardly surprising, given the slide in government bond yields in recent months, but it’s a reminder that the low-hanging fruit of relatively rich yields is increasingly in the rear-view mirror.
Macro Briefing: 8 January 2024
* House and Senate leaders announce deal to avert government shutdown
* Expected decline in US core inflation for December supports Fed easing outlook
* China shadow bank Zhongzhi files for bankruptcy
* Will Xi’s new economic plan for China trigger a new trade war?
* US payrolls rose more than forecast in December
* S&P 500 earnings growth is expected to slow to a crawl for Q4:
