MAC Monitor — September 20, 2022

Multi-Asset Class Risk Monitor Highlights | Week Ended September 16, 2022

  • Inverted Treasury curve reflects worries about long-term monetary-policy costs
  • UK inflation eases…and so does the pound
  • Stock-market sell-off heightens portfolio risk

Inverted Treasury curve reflects worries about long-term monetary-policy costs

Short-term US Treasury yields climbed to their highest levels in almost 15 years in the week ending September 16, 2022, as traders once more ramped up their interest rate predictions. The 1-year maturity now constitutes the highest point on the curve, after surpassing the long end amid speculation that the Federal Reserve might raise its target policy rate by a full percentage point this week—a move not seen since the early 1980s. The renewed upward revision of monetary-policy expectations followed the release of the latest inflation data for August on Tuesday. Even though headline prices were slightly lower compared with the previous month, core inflation which excludes more volatile food and energy costs reversed its earlier downward trend.

Short rates rising above long yields has customarily been seen as a sign that market participants expect the economy to fall into recession in the near future, and the current inversion certainly reflects increasing worries about the long-term economic costs of tighter monetary conditions.

Please refer to Figure 3 of the current Multi-Asset Class Risk Monitor (dated September 16, 2022) for further details.

UK inflation eases…and so does the pound

The pound sterling dropped to a 27-year low against the US dollar in the week ending September 16, 2022, as consumer-price growth eased back into single digits in August, defying analyst predictions of a small uptick. As in the United States, the decline in British headline inflation was primarily driven by lower fuel prices, whereas core inflation edged slightly higher from 6.2% in July to 6.3% in August. The latter is likely to maintain pressure on the Bank of England to lift its base rate at the (postponed) MPC meeting this Thursday, although punters appear to be undecided whether borrowing costs will go up by 50 or 75 basis points. In any case, given recent trends and correlations between the GBP/USD exchange rate and short-term interest-rate expectations, more aggressive tightening by the BoE could well result in further weakness for both the pound and the UK stock market.

Please refer to Figure 6 of the current Multi-Asset Class Risk Monitor (dated September 16, 2022) for further details.

Stock-market sell-off heightens portfolio risk

Predicted short-term risk in Qontigo’s global multi-asset class model portfolio soared 2 percentage points to 14.6% as of Friday, September 16, 2022. The increase was mostly due to a surge in equity volatility, as US and European stock markets recorded their worst weekly sell-off since the middle of June, when the Federal Reserve implemented its first ‘jumbo’ rate hike of 75 basis points in the current monetary-policy cycle. Increases in risk contributions were most pronounced for the equity holdings (developed and emerging markets), which saw their combined share of total portfolio volatility rise by 3.7 percentage points to 71.6% (compared with a market-value weight of 50%).

Please refer to Figures 7-10 of the current Multi-Asset Class Risk Monitor (dated September 16, 2022) for further details.