by Qontigo
- Weaker-than-expected economic data depress short Treasury yields
- Persistent price pressures prop up the euro
- Positive cross-asset correlations squeeze portfolio diversification
Weaker-than-expected economic data depress short Treasury yields
Short-dated US Treasury yields closed the month of August at a 3-week low, amid a flurry of weaker-than-expected economic data. The U.S. Bureau of Labor Statistics reported on Tuesday that the number of job openings had declined by 338,000 to 8.827 million in July, significantly undershooting the consensus forecast of 9.465 million. Americans also seemed less optimistic about the economy in general, as measured by the Conference Board Consumer Confidence index, which declined from 114 in July (already revised downward from 117) to 106.1 in August, again widely missing analyst predictions of 116. The week was rounded off by the monthly non-farm payroll report, which showed 187,000 new positions, this time beating market expectations of 170,000. However, the good news was partly spoiled by a downward revision that shaved a combined 110,000 jobs off June and July’s figures, while the unemployment rate climbed from 3.5% to an 18-month high of 3.8%.
Please refer to Figure 3 of the current Multi-Asset Class Risk Monitor (dated September 1, 2023) for further details.
Persistent price pressures prop up the euro
The euro strengthened slightly against the US dollar in the week ending September 1, 2023, as traders speculated that persistent price pressures in Europe’s largest economy could impel the European Central Bank to raise interest rates again at its upcoming governing council meeting on September 14. Germany’s Federal Statistical Office estimated on Wednesday that consumer prices in the country had risen by 6.4% in the 12 months ending this August, which was only marginally lower than the 6.5% reported for July. More importantly, month-on-month growth remained at 0.4% or higher for the third time in a row, which is more than twice the rate of 0.17% required for annual inflation to revert to the 2% central bank target.
Please refer to Figure 6 of the current Multi-Asset Class Risk Monitor (dated September 1, 2023) for further details.
Positive cross-asset correlations squeeze portfolio diversification
The predicted short-term risk of Qontigo’s global multi-asset class model portfolio climbed half a percentage point to 8.5% as of Friday, September 1, 2023, with positive correlations across all major risk factor types and asset classes severely limiting diversification opportunities. Bond prices rose in tandem with stock markets for a second consecutive week, as yields continued to fall, following a 3-week streak of losses for both asset classes. Returns—and with them portfolio volatility—were further amplified by gains across all major currencies against the US dollar. A bit of diversification could be gained by investing in high-quality non-USD corporate bonds, which exhibited the smallest percentage risk contributions relative to their market value weight, due to investment grade credit spreads currently being uncorrelated to most other risk factors.
Please refer to Figures 7-10 of the current Multi-Asset Class Risk Monitor (dated September 1, 2023) for further details.
