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Weekly Investment Update – Should We Listen to the Bond Market?

Since the beginning of the year, 10-year US Treasury yields have risen to an almost 11-month high as markets anticipate a normalizing economy and further, massive fiscal stimulus.

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This article was originally published by Investors Corner.

Since the beginning of the year, 10-year US Treasury yields have risen by 25bp to an almost 11-month high as markets anticipate a normalising economy and further, massive fiscal stimulus.

The 10-year Treasury yield hit 1.17% on 8 February, marking its highest point in nearly a year. In the eurozone, the benchmark 10-year Bund yield now stands at around -0.45%. That is about 12bp above where it stood at the end of 2020 and a level not seen since last September. The yield on the 10-year UK Gilt jumped from 0.32% in early February to 0.48% the day after the latest Bank of England monetary policy meeting.

Theory and practice

These higher yields reflect an environment that economic textbooks tell us justify upward pressure on long-term rates: widening budget deficits, accelerating inflation, and accommodative monetary policy.

In the US, the budget resolution approved last week authorises a USD 1.9 trillion coronavirus relief bill. This very large fiscal package could be passed quickly and without much change if the Biden administration chooses to proceed by the way of the reconciliation process. A bipartisan bill, which would need at least 10 Republican Senators supporting it, would likely be much smaller, but still significant in historical terms.

Eurozone bond yields reacted to news of an acceleration in core inflation from 0.2% year-on-year in December to 1.4% in January. Primarily idiosyncratic factors are behind the surge: base effects, the adjustment of the basket of goods and services used to measure price levels, and a VAT rise in Germany. Investors will nonetheless be taking a close look at the detailed inflation numbers due out over the next few days.

Gilt yields rose after more-positive-than-expected Bank of England comments on the economic outlook and indications that a move to negative interest rates was not imminent.

Unresolved questions

There are also inflation concerns in the US with surveys are pointing to upward price pressures. Market watchers have begun looking for clues in central bankers’ comments on when asset purchases by the Federal Reserve could be tapered.

Fed chair Jerome Powell had indicated that such action would be premature in the current environment. The central bank’s message has been clear: Monetary policy support remains in place.

The ECB has been equally transparent on its stance. In a recent press interview, President Christine Lagarde repeated: “Our commitment to the euro has no limits. We will act for as long as the pandemic is causing a crisis situation in the euro area.”

The crisis is not over

The encouraging progress on vaccination campaigns (at least in some countries) has raised hopes that a return to ‘normal’ life will be possible in a few months’ time. A cyclical recovery would follow for the rest of 2021. We share this view, but would caution that investors not get too far ahead of themselves. The strong 5.5% rebound in global growth expected by the IMF, after a 3.5% contraction in 2020, does not mean that the scars of the crisis will suddenly disappear.

Take the labour market. The US unemployment rate dropped to 6.3% in January and is now at less than half the 14.8% level from last April. Before the pandemic, however, the rate was only 3.5%. Adjusting the current figure for fluctuations related to temporary layoffs and discouraged workers and the unemployment rate is closer to 8%, little changed since last spring.

Conclusions

An old investment adage says, “Don’t fight the Fed.” Indeed, we expect central banks to continue with their massive asset purchases until there is clear progress on growth and inflation.

However premature expectations for much higher inflation and other growth-related concerns may now seem, we believe a short-duration position in eurozone and US benchmark bonds could be opportune at this point. The same goes for a long position on break-even inflation.

We also remain overweight the Italian BTP bond market as the chances of Mario Draghi leading the next government appear to have increased and the risk of early elections has fallen. Investors’ search for yield should provide further support.


Any views expressed here are those of the author as of the date of publication, are based on available information, and are subject to change without notice. Individual portfolio management teams may hold different views and may take different investment decisions for different clients. This document does not constitute investment advice.

 The value of investments and the income they generate may go down as well as up and it is possible that investors will not recover their initial outlay. Past performance is no guarantee for future returns.

Investing in emerging markets, or specialised or restricted sectors is likely to be subject to a higher-than-average volatility due to a high degree of concentration, greater uncertainty because less information is available, there is less liquidity or due to greater sensitivity to changes in market conditions (social, political and economic conditions).

Some emerging markets offer less security than the majority of international developed markets. For this reason, services for portfolio transactions, liquidation and conservation on behalf of funds invested in emerging markets may carry greater risk.

Writen by Nathalie Benatia. The post Weekly investment update – Should we listen to the bond market? appeared first on Investors' Corner - The official blog of BNP Paribas Asset Management.

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Economics

NYC Office Space Glut Made Worse By Remote Work As Older Towers Face High Vacancy

NYC Office Space Glut Made Worse By Remote Work As Older Towers Face High Vacancy

Is New York City’s central business district finally recovering…

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NYC Office Space Glut Made Worse By Remote Work As Older Towers Face High Vacancy

Is New York City's central business district finally recovering after Covid-19? The simple answer is no. Although residential rents in Manhattan were inflated to record highs, the rise of remote work quelled any recovery for the office space market in the borough. 

Bloomberg reported blocks of decades-old office buildings sitting partially empty are becoming a multibillion-dollar problem for building owners. 

Even though Goldman, Morgan Stanley, and other Wall Street firms have pushed for a return to the office after the Labor Day holiday, NYC's office-occupancy trends are still below half, according to card-swipe data provided by Kastle Systems. 

Office vacancy rates have skyrocketed in NYC and other major cities worldwide, though it appears the US will have a slower office-market recovery -- this is likely due to persisting remote working trends. 

Columbia University and New York University released a report that found remote work trends could force companies to reduce office space. They said lower tenant demand could result in a 28%, or $456 billion loss in the value of offices across the US. About 10% of that comes from NYC. 

Partially empty office towers are leading to slower economic recovery in NYC. Many buildings with high vacancy rates were constructed between 1950-80 and had no meaningful upgrades. 

The area is clustered with buildings from the 1950s to 1980s, many of which haven't been meaningfully upgraded in decades. The few that have been renovated struggle to compete with counterparts in tonier addresses on Park, Fifth and Madison avenues and new mega-developments on Manhattan's far west side.

The Third Avenue buildings have become "leave-behind space" rather than the types of offices that attract world-class tenants, said Nick Farmakis, vice chairman at Savills. -- Bloomberg

The picture remains cloudy for NYC because converting office space buildings to residential is challenging and expensive. Manhattan has had some conversions, but owners and developers are met with many challenges of zoning and architectural restrictions. 

"The problem with Midtown is a lot of buildings need air and lights that the city requires, and you don't always get that," said Ran Eliasaf, founder and managing partner of investment firm Northwind Group, which is exploring residential conversions in the city. "Not every Class B building is an ideal target for conversion."

Older buildings are also being left behind as businesses desire newer ones or relocate out of the city. This leaves NYC with a rising number of older office buildings with high vacancy rates and has begun to impact how much property taxes the city brings in. 

New York, like other cities, relies heavily on property taxes to fund schools, police and firefighters, as well as other services. Property taxes are the biggest source of revenue for the city, delivering about $1 out of every $3 taken in. And offices account for about a fifth of that.

Before the pandemic, the levies had climbed by about 6% a year on average, driven by rising property values. That helped finance new programs and services, as well as keep up with rising labor costs, said Ana Champeny, the vice president for research at the Citizens Budget Commission, a nonpartisan budget watchdog and research firm.

Manhattan's major office districts were no exception, generating steadily more revenue. But, in the fiscal year that ended June 30, the first to take into account the impact the pandemic had on real estate, tax levies from those areas declined by 11% to $5.24 billion.

The biggest drop was in a part of Midtown East north of Grand Central that the city's Department of Finance calls "Plaza," which contains some of the Third Avenue properties.

-- Bloomberg 

The takeaway is that NYC has too many old office buildings that are no longer appealing to companies because of various factors due to remote working and the desire for new shiny new towers with top-of-the-line amenities. 

Remember, we've pointed out There's An Amazing Glut Of Office Space In Every Major Metro Area and Office Space Market Faces "Economic Downturn" Due To Perfect Storm Of Factors

Tyler Durden Mon, 09/26/2022 - 20:40

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Economics

American Cancer Society Introduces New Gala in West Michigan

American Cancer Society Introduces New Gala in West Michigan
PR Newswire
GRAND RAPIDS, Mich., Sept. 26, 2022

GRAND RAPIDS, Mich., Sept. 26, 2022 /PRNewswire/ — The American Cancer Society (ACS) along with local partners Huntington Bank, American C…

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American Cancer Society Introduces New Gala in West Michigan

PR Newswire

GRAND RAPIDS, Mich., Sept. 26, 2022 /PRNewswire/ -- The American Cancer Society (ACS) along with local partners Huntington Bank, American Culinary Federation, Meijer, Lake Michigan Insurance, and WoodTv8 announce the launch of Taste of Hope: A Chefs Competition. A foodie's dream event, involving chefs competing, guests sampling foods, and auction packages, will be held on November 7, 2022, at Frederik Meijer Gardens. The 2022 inaugural event is presented by Huntington Bank.

"We are thrilled to offer this exciting opportunity to our community to meet the chefs and sample their incredible foods, all to raise money for the American Cancer Society." Said Ken Jansen, President of Lake Michigan Insurance Agency and Chair of the 2022 Taste of Hope event. "This year all the funds raised will go toward researchers in Michigan working to find answers to end cancer. We have the talent to find the answers here. We are confident this investment in Michigan research will pay off in the long run."

There will be 16 Chefs competing for awards including: Best Taste, Best Display, Best Presentation, People's Choice, and Top Chef. Chefs include:

  • Chef Phong Nguyen, Monsoon Grill
  • Chef Balal Darwich, Shkode' Gun Lake Casino 
  • Chef Danielle Nicole Garlock, Lucy's
  • Chef Joseph VanHorn, YoChef's Catering
  • Chef Alan Thompson, Apache Trout Grill
  • Chef John Taylor, Red Water Grill
  • Chef Oscar Moreno, MEXO
  • Chef Mick Rickerd, Spectrum Health
  • Chef Stephan VanHeulen, MDRD
  • Chef Bryan Nader, Trinity Health
  • Chef Lucas VerHulst,  Reserve
  • Chef Jennifer Struik, Private Chef 
  • Chef Trimell Hawkins, Private Chef
  • Chef Michael Santo, River & Odi
  • Chef Spencer Drudy, Terra
  • Chef Maggie Thiel, Beacon Hill

Taste of Hope Culinary Chair, Shawn Kohlhaas, Owner of Culinary Cultivations and President of the American Culinary Federation (ACF) said "ACF is honored to work with these talented chefs for the event and be able to highlight their skills at this meaningful event. About 60% of our Chefs have had their own personal experiences with cancer in their families, so they are happy to give back to American Cancer Society."

In 2021, the American Cancer Society in Michigan raised $6 million. In turn, ACS invested over $13 million into Michigan's cancer research, programs, grants, and services. $2.4 million has been directed to West Michigan partners including Spectrum Health, Trinity Health, University of Michigan West, Michigan State University, Van Andel Institute, and more to help implement the best care, top notch programs, and impactful research.

Over 6,000 Michigan residents called ACS' National Cancer Support line in 2021. Locally, ACS' Road to Recovery program, put on hold during the pandemic, is slated to begin offering rides to residents this winter or in the first quarter of 2023. Locally, ACS staff members serve on several area cancer support collaborations, cancer committees, and programs.

"We believe that through research, patient support and advocacy we can change the way West Michigan residents experience cancer in our community. And we could not do any of this without the support of our amazing volunteers. They are the key," added Susan Brogger, ACS Associate Director of West Michigan.

Sponsors for Taste of Hope: A Chefs Competition is presented by Huntington Bank. Additional sponsors include: Meijer, Lake Michigan Credit Union and Lake Michigan Insurance, Mercantile Bank, Montell Construction, Priority Health, Alliance Beverage, Serendipity Media, Wood TV 8, American Culinary Federation and Culinary Cultivations. To learn more about the event visit www.acstasteofhopewmi.org or email susan.brogger@cancer.org.

About the American Cancer Society

The American Cancer Society is on a mission to free the world from cancer. We invest in lifesaving research, provide 24/7 information and support, and work to ensure that individuals in every community have access to cancer prevention, detection, and treatment. For more information, visit cancer.org. 

Media Relations Contact:
Ginger Feldman
1 (616) 550-4995
ginger.feldman@cancer.org

View original content to download multimedia:https://www.prnewswire.com/news-releases/american-cancer-society-introduces-new-gala-in-west-michigan-301633620.html

SOURCE American Cancer Society Michigan

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Bears Remain In Control as King Dollar Rallies to Record 20-Year High

Last week was particularly tough for investors as all 11 sectors experienced losses of some extent. The S&P fell 4.6% after the Fed telegraphed that…

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Last week was particularly tough for investors as all 11 sectors experienced losses of some extent.

The S&P fell 4.6% after the Fed telegraphed that more tightening of short-term rates lies ahead by year’s end, when it was thought that the Fed would “hike and hold,” allowing the three 75-point rate increases of June, July and September to work through the system. It is well understood that any rate increase takes about six months before its full effect is felt in the economy, and the market soured on the notion that the Fed might overshoot.

The S&P has now shed 23% year to date and came within 10 points of the June 3,647 low as the third quarter comes to a close. This kind of price action puts pressure on fund managers trying to window dress portfolios to show they have the right blend of risk and cash, which just happens to be at an extreme level that has historically defined a market bottom going back to the dot-com crash.

The S&P 500 ended Friday’s session at 3,693.23, down from last Friday’s closing level of 3,873.33. This follows a 4.8% tumble the previous week ahead of the Federal Open Market Committee (FOMC) meeting last week that pushed the market benchmark’s slide during the last two weeks to 9.2%. With just one week remaining in the month, this puts the S&P 500’s decline for September to date at 6.6%.

The Dow took out its low for 2022 but doesn’t carry the same technical implications as a priced weighted index. The Nasdaq and Russell 2000 also tested their June lows last Friday.

A view of the five-year chart of the S&P shows the long-term uptrend line coming in to play at 3,570 or roughly 3.6% below where the market closed Friday. Looking at the breach of this line in May 2020 was due to panic selling from the Covid-19 outbreak that quickly repaired itself when emergency stimulus was enacted. The previous test in November 2018 was brought on by the market’s “taper tantrum” when the Fed threatened to hike rates back then.

The current Fed Funds rate stands at 3.00%-3.25% with the Fed laying out a dot-plot plan for a year-end target of 4.4% that would take 30-year mortgage rates above 8.0% by some estimates. It now appears that after the Fed has popped the equity balloon, the U.S. central bank now is targeting the housing market to bring down rent inflation as well as the labor market where wage inflation has been very prominent.

Both forces will be harder to conquer than deflating the stock market. Record housing prices could easily give back 10% on a national basis and as much as 25% in some of the hottest and most overpriced markets such as Boise, Idaho; Austin, Texas; Charlotte, North Carolina; Nashville, Tennessee; Phoenix, Arizona; San Diego, California; and Tampa, Florida.

Bringing wages down will be near impossible without widespread layoffs. With the labor market staying tight with net new jobs created each month, inflation may be long lasting.

Other central banks outside the United States raised rates in lock step with the Fed, even after data showed a significant decline in economic activity in Europe that portends of a hard landing for the region. Energy prices pulled back further in reaction to the data.

That drop in energy prices is somewhat counterintuitive to the headline that Russia’s President Vladimir Putin is calling up 300,000 reservists to fortify his forces in Ukraine, sending a clear signal he is digging in and not in willing to negotiate or submit to calls by global leaders to stop the war he started on Feb. 26.

Inflation is clearly coming down across the commodity markets. Everything from crude, natural gas, gasoline, wheat, corn, soybean, sugar, lumber, cotton, copper, cattle, lean hogs and copper prices are pulling back with the CRB Index returning to levels not seen since this past March. These broad price declines will certainly show up in the forthcoming inflation data.

This week, investors will receive key data on the housing market, economic growth and inflation. Tuesday will feature releases of August new home sales, as well as the S&P Case Shiller US home price index for July, followed by the pending home sales index for August on Wednesday.

Thursday, Q2 revised gross domestic product will be released, followed by the Friday release of the Personal Consumption Expenditures, or PCE, price index, a closely watched inflation reading, for August. That price index is the Fed’s preferred inflation barometer.

The market is grasping for any hints of inflation ebbing from the June peak, but much of the current downturn in commodities took place in September. In this regard, the large basket of housing data (FHFA Housing Price Index for July, Case-Schiller Home Price Index for July, New Home Sales for August, MBA Mortgage Applications Index for the week ending Sept. 24 and Pending Home Sales for August) will likely matter the most when weighing the huge influence housing has on gross domestic product (GDP).

Sources: www.bea.gov

The biggest headwind for the market continues to be the powerful rally in the U.S. dollar against all developed and emerging market currencies. Charts of the pound sterling, euro, yen, looney, krona and yuan are in protracted downtrends. The combination of the Fed’s monthly quantitative tightening (QT) of $95 billion coming out of the financial system and the flight to safety is fueling a major upside move in the greenback.

One wonders what sort of headline it will take to turn the tide and bring confidence back to the market. It will take probably several headlines about inflation being on the decline, some better-than-expected earnings from companies of market leading stocks and a change in the makeup of Congress come election time. With stocks in extreme oversold territory, a 7%-10% rally is probably in the cards near term that gets the S&P back up to 4,000 where the 50-day moving average lies overhead. From there, Mr. Market will have a lot of wood to chop to break the dollar and bring back the bulls.

The post Bears Remain In Control as King Dollar Rallies to Record 20-Year High appeared first on Stock Investor.

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