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Martin Schwoerer's avatar

the problem is, the historical analogies -- France 1989, or Volcker 1981 onwards -- are wack. Back then, trade unions had pricing power, and globalism was much weaker = weaker substitution effects, more powerful influence of inflation expectations. France had simultaneous high inflation and high unemployment. Today however, rising unemployment will kill labor's bargaining position. The bond market says demand destruction will lower energy prices and unemployment will kill labor quickly. I'm not arguing with the bond market.

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Alfonso Peccatiello (Alf)'s avatar

I totally agree, and that’s why I am comparing todays rate to todays neutral rates (which are indeed much lower than the 1980s because of what you mentioned and more)

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Christoph's avatar

Thanks for this clear and concise analysis 👌

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Alfonso Peccatiello (Alf)'s avatar

Welcome, Christoph!

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Vonnie's avatar

Thank you so much for this update Alf!

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Alfonso Peccatiello (Alf)'s avatar

Welcome!

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Matt Clifford's avatar

Great article thank you for sharing! Love the positive outlook.

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Alfonso Peccatiello (Alf)'s avatar

My pleasure, Matt!

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Emma's avatar

"When real yields decline, valuation intensive and risk sentiment driven asset classes generally tend to outperform.

That's because the marginal inflation-adjusted return for owning cash USDs (risk-free real yields) becomes less attractive and the (real) discounting rate for long-term cash flows becomes much less punitive.

Hence, the incentive to chase risk assets is larger - actually, following this narrative one could argue ‘‘the riskier the better’’.

This is why I follow you - you explain why the average person who may not invest in bonds should care about what the bond market is doing. You connect the dots to risk assets. You even clarify/summarize what your podcast guests are saying in a more understandable way for laypeople. Fantastic! I don't know of any other macro analyst who does that.

I just subscribed to Macro Compass and tweeted my appreciation for your work: https://twitter.com/4PFinance/status/1553116317330198528?s=20&t=78MtDdnkjJ_PVWAffxJ-4g

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Alfonso Peccatiello (Alf)'s avatar

Thanks, Emma. Very kind and nice endorsement

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CF's avatar

Hi Alf, thank you very much for sharing the analysis with us. Just wondering, how do you calculate the 5yr forward, 5yr real yield? I can find the USD I25 FORWARD RATE 5Y5Y on BBG terminal, but which inflation figure do you use to arrive at the real yield? Thanks a million!

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Alfonso Peccatiello (Alf)'s avatar

You’d have to do 5y5y OIS swaps minus 5y5y inflation swaps. And then adjust the latter by the CPI/PCE wedge (say -0.40 as an adjustment)

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Mard's avatar

Thanks Alf. But what is the CPI/PCE wedge? What does that mean?

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Brant Hammer's avatar

I’d also like to know where to find or calculate on the terminal.

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Radu's avatar

Thanks for the post

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Alfonso Peccatiello (Alf)'s avatar

Welcome, Radu

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Mig Moreno's avatar

As usual, excellent.

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Alfonso Peccatiello (Alf)'s avatar

Very kind

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Jon's avatar

Best analysis yet!

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Alfonso Peccatiello (Alf)'s avatar

Thank you!

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Jesper's avatar

Thanks a lot for your analysis Alf. Always clear and concise👏🙏

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Alfonso Peccatiello (Alf)'s avatar

My pleasure, Jesper!

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NickBanana's avatar

Thanks for a very clear and concise overview, showing in-depth understanding of the markets. Cheers!

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Alfonso Peccatiello (Alf)'s avatar

Welcome!

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Jeffrey's avatar

A well reasoned thorough analysis. Thanks!

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Alfonso Peccatiello (Alf)'s avatar

Glad you enjoyed it, Jeffrey!

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Chris's avatar

Thank you Alf. I appreciate that you share your knowledge.

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Alfonso Peccatiello (Alf)'s avatar

My pleasure!

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Cleve Bowie's avatar

Well done Alf... as always!

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Alfonso Peccatiello (Alf)'s avatar

Thank you!

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Christopher Potgieter's avatar

Very insightful. Picking up on the subtleties in a useful way. Thank you for sharing your work!

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Alfonso Peccatiello (Alf)'s avatar

Glad you enjoyed it!

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Gill's avatar

Great update. Thank you, Alf!!

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Alfonso Peccatiello (Alf)'s avatar

Welcome!

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