by Qontigo
- Slowdown in US job and wage growth eases inflation and interest-rate concerns
- Lower yields put downward pressure on dollar
- Flight to quality curbs portfolio risk increase
Slowdown in US job and wage growth eases inflation and interest-rate concerns
US Treasury yields recorded their biggest daily drop in four months on Friday, March 10, 2023, as traders significantly revised down their interest-rate expectations—both for the anticipated pivot point and year end. Fed funds futures now predict an average rate of 4.85% for the month of May—down from a peak of nearly 5.60% in July predicted only last Thursday—which is then expected to fall to around 4.15% by the end of the year, once more implying substantial rate cuts. The move was triggered by the release of the latest non-farm payroll figures, which increased by 311,000 in February. The number was higher than the consensus forecast of 225,000, but much lower than the downwardly revised 504,000 new jobs created in January. Average hourly earnings growth also slowed from 0.3% to 0.2%, alleviating inflation concerns and taking pressure off the Federal Reserve to tighten monetary conditions.
Please refer to Figure 4 of the current Multi-Asset Class Risk Monitor (dated March 10, 2023) for further details.
Lower yields put downward pressure on dollar
The dollar weakened against its biggest competitors in the week ending March 10, 2023, as declines in US government borrowing rates outpaced those in the Eurozone, the UK, Switzerland, and Japan, resulting in gains of more than 1% in the respective currencies. The areas with the lowest interest rates seemed to have been the biggest beneficiaries, with the Swiss franc and the Japanese yen appreciating 2.2% and 1.5%, respectively. This was in contrast to countries with traditionally higher expected yields, such as Australia, Canada, Norway, and New Zealand, which all saw their currencies devalue against the USD.
Please refer to Figure 6 of the current Multi-Asset Class Risk Monitor (dated March 10, 2023) for further details.
Flight to quality curbs portfolio risk increase
The predicted short-term risk of Qontigo’s global multi-asset class model portfolio climbed 0.7% to 8.9% as of Friday, March 10, 2023, boosted by a 1.7% surge in standalone equity volatility. The effect was most pronounced for US stocks, which saw their share of total portfolio risk jump from 46.2% to 52.6%. In contrast, the percentage risk contribution of non-US developed equities remained stable, as local stock-market losses were offset by exchange-rate gains against the dollar. On the flipside, the flight from risky shares into the relative safety of sovereign and high-quality corporate bonds meant that the latter experienced a combined reduction of 6.8% in their volatility-contribution weights.
Please refer to Figures 7-10 of the current Multi-Asset Class Risk Monitor (dated March 10, 2023) for further details.
