Post FOMC: Stay engaged in risk assets


Our analysis of the US global cyclicals over non-cyclicals ratio vs the UST 10-year yield suggests that the bond market has overpriced US recession risk.
Chief Investment Office01 Nov 2019
Photo credit: AFP Photo


What happened?

Federal Reserve’s “hawkish” rate cut and positive US earnings season. In October’s Federal Open Market Committee (FOMC) meeting, the Federal Reserve cut the Fed funds rate by 25 bps, as expected. This brings total cumulative rates cut to 75 bps in the current mini-easing cycle. Fed Chair Jerome Powell struck a hawkish tone in his latest statement, signalling the end of policy easing, for now.

On the corporate front, the US’s third quarter earnings season continues to progress steadily with c.80% of the companies reporting positive earnings surprises (vs 76% in 2Q19), led by Technology. Despite frequent talks that the positive US earnings is due to shares buyback, data suggest otherwise. To nullify the “impact” of buybacks, we look at the proportion of companies reporting topline revenue growth instead – it is positive at c.71% in 3Q (vs 66% in 2Q19).

What does this mean?

Inflection Point: Steepening yield curve and positive earnings are constructive for risk assets. Back in August, the inversion of US Treasury (UST) 2s/10s yield curve triggered concerns over a broad-based recession. In CIO Perspectives: Yield curve inversion – Much ado about nothing?, we argued that the yield curve has lost its predictive power as the long-end has been artificially suppressed by quantitative easing measures and weak bond yields outside the US.

More importantly, we believe that the bonds market has overpriced US recession risks as the US-China trade war lingers. This is evident in Figure 1, which shows US global cyclicals vs non-cyclicals and the UST 10-year yield. The UST 10-year yield has currently overshot the former (on the downside) and a similar occurrence in mid-2012 saw the 10-year yield rebounding sharply after. 

In any case, the yield curve has since widened from -0.79 bps back in end-August to the current level of 15.23 bps. A steepening yield curve points to rising confidence in the domestic US economy. And despite the recent softness in US manufacturing (partly as a result of trade concerns), we expect domestic consumption to stay resilient given the robust job market and stable consumer confidence.

What should you do?

Maintain Overweight stance in US equities. We have adopted an Overweight stance on US equities since the start of 2018 and our view remains unchanged. The sectors we favour are Technology, Communication Services, Health Care, Real Estate, Energy, and Consumer Staples.

Figure 1: The bond market has overpriced US recession risks

Source: Bloomberg, DBS

The information published by DBS Bank Ltd. (company registration no.: 196800306E) (“DBS”) is for information only. It is based on information or opinions obtained from sources believed to be reliable (but which have not been independently verified by DBS, its related companies and affiliates (“DBS Group”)) and to the maximum extent permitted by law, DBS Group does not make any representation or warranty (express or implied) as to its accuracy, completeness, timeliness or correctness for any particular purpose. Opinions and estimates are subject to change without notice. The publication and distribution of the information does not constitute nor does it imply any form of endorsement by DBS Group of any person, entity, services or products described or appearing in the information. Any past performance, projection, forecast or simulation of results is not necessarily indicative of the future or likely performance of any investment or securities. Foreign exchange transactions involve risks. You should note that fluctuations in foreign exchange rates may result in losses. You may wish to seek your own independent financial, tax, or legal advice or make such independent investigations as you consider necessary or appropriate.

The information published is not and does not constitute or form part of any offer, recommendation, invitation or solicitation to subscribe to or to enter into any transaction; nor is it calculated to invite, nor does it permit the making of offers to the public to subscribe to or enter into any transaction in any jurisdiction or country in which such offer, recommendation, invitation or solicitation is not authorised or to any person to whom it is unlawful to make such offer, recommendation, invitation or solicitation or where such offer, recommendation, invitation or solicitation would be contrary to law or regulation or which would subject DBS Group to any registration requirement within such jurisdiction or country, and should not be viewed as such. Without prejudice to the generality of the foregoing, the information, services or products described or appearing in the information are not specifically intended for or specifically targeted at the public in any specific jurisdiction.

The information is the property of DBS and is protected by applicable intellectual property laws. No reproduction, transmission, sale, distribution, publication, broadcast, circulation, modification, dissemination, or commercial exploitation such information in any manner (including electronic, print or other media now known or hereafter developed) is permitted.

DBS Group and its respective directors, officers and/or employees may have positions or other interests in, and may effect transactions in securities mentioned and may also perform or seek to perform broking, investment banking and other banking or financial services to any persons or entities mentioned.

To the maximum extent permitted by law, DBS Group accepts no liability for any losses or damages (including direct, special, indirect, consequential, incidental or loss of profits) of any kind arising from or in connection with any reliance and/or use of the information (including any error, omission or misstatement, negligent or otherwise) or further communication, even if DBS Group has been advised of the possibility thereof.

The information is not intended for distribution to, or use by, any person or entity in any jurisdiction or country where such distribution or use would be contrary to law or regulation. The information is distributed (a) in Singapore, by DBS Bank Ltd.; (b) in China, by DBS Bank (China) Ltd; (c) in Hong Kong, by DBS Bank (Hong Kong) Limited; (d) in Taiwan, by DBS Bank (Taiwan) Ltd; (e) in Indonesia, by PT DBS Indonesia; and (f) in India, by DBS Bank Ltd, Mumbai Branch.