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MAC Monitor — January 16, 2024

Multi-Asset Class Risk Monitor Highlights | Week Ended January 12, 2024

  • US Treasury yields drop despite inflation uptick
  • Lower FX and equity volatility reduces portfolio risk

US Treasury yields drop despite inflation uptick

Borrowing costs for the US government declined across all maturities in the week ending January 12, 2024, despite a stronger-than-expected uptick in consumer-price growth. The Bureau of Labor Statistics reported an annual inflation rate of 3.4% in December on Thursday, up from 3.1% the month before and beating analyst predictions of 3.2%. The core CPI, which excludes more volatile energy and food costs, also rose slightly more than anticipated (3.9% versus a 3.8% consensus forecast), but crucially retained its recent downward trend.

Month over month, both headline and core prices were reported to have risen by 0.3%. However, these numbers are customarily presented on a seasonally adjusted basis, while in reality, the core index only gained 0.1% last month, whereas the headline CPI even declined by 0.1%. Both these figures are well below the monthly growth rate of 0.17% consistent with an annual inflation of 2%, thus keeping both timeseries on a trajectory toward the central bank target.

The notion of continuing disinflation was further underpinned by Friday’s producer price report, which showed an annual rate of 1%, compared with a consensus projection of 1.3%. This prompted traders to not only maintain their expectations that the Federal Reserve will lower its policy rate target by 25 basis points in March but even raise the implied probability to more than 80%. At the same time, the projected average federal funds rate for December dropped to 3.75% from 4.05% the week before.

Please refer to Figure 3 of the current Multi-Asset Class Risk Monitor (dated January 12, 2024) for further details.

Lower FX and equity volatility reduces portfolio risk

The predicted short-term risk of the Axioma global multi-asset class model portfolio plummeted from 10.2% to 8.7% as of Friday, January 12, 2024, due to a combination of lower FX-rate and share-price volatility. This meant that non-US developed equities experienced a much bigger risk reduction relative to their monetary weight than their American counterparts. But it was European government debt—both nominal and

index-linked—which derived the biggest benefit, as higher yields in the region meant that price declines there offset gains in local equity markets, thus resulting in a slightly less positive stock-bond correlation overall.

Please refer to Figures 7-10 of the current Multi-Asset Class Risk Monitor (dated January 12, 2024) for further details.