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观点 | 美股和美债,哪一个更好?

Opinion | Which is better, US stocks or US bonds?

滄海一土狗 ·  12/07/2023 12:59

Source: Canghai One Earth Dog

On December 6, 2023, the US released the November ADP employment data:

The number of ADP employed in the US increased by 103,000 in November, and is expected to increase by 130,000. The previous value was revised from an increase of 113,000 to an increase of 106,000.

The key data continues to show a “bad number”.

When “bad numbers” came out before, interest rates on two-year US bonds declined along with interest rates on 10-year US bonds; interestingly, interest rates on 10-year US bonds continued to decline, but interest rates on two-year US bonds did not change much.

As a result, we saw a sharp decline in US bond maturity spreads, reaching -48bps.

Here, there is a very important question: under what circumstances do you get a “bad number” and the term interest spread decreases; under what circumstances do you get a “bad number” and the term interest spread rises?

This issue is very important for both US debt investment and US stock investment. In this article, we will focus on this issue.

How fast and how low

In the article “Major Adjustments to the Narrative Paradigm of the Federal Reserve's Monetary Policy”, in addition to discussing the paradigm shift in narrative paradigm, we also discussed two patterns of movement of term interest spreads on US bonds under the interest-rate cut paradigm: 1. Based on how fast, term spreads are rising; 2. Based on how low, term spreads are reduced;

1. Based on how fast

As shown in the chart above, under the interest-rate cut paradigm, when the interest rate on two-year US bonds falls, and the forward two-year US debt is fixed, interest spreads on US bonds will rise.

2. Based on how low

As shown in the chart above, under the interest rate cut paradigm, when interest rates on two-year US bonds are fixed and interest rates on two-year US bonds in the forward period decline, interest spreads on US bonds will decrease.

In fact, what changed last night was the “how low”, that is, the market is beginning to worry about the prospects of a recession in the US economy.

The division of labor market conditions into financial market patterns

So, when does a “bad number” mean that the money supply curve shifts to the left, and when does a “bad number” mean that the prospects for a recession are deepening? One way is to look at the state of the labor market.

1. Full employment scenario

As shown in the chart above, when the labor market is in a full employment scenario, a contraction in demand will lead to a decline in wages and a reduction in vacant positions, and will not lead to a reduction in employment.

In other words, under these circumstances, the main part of the contraction is prices, and stocks and bonds will rise together after the “bad numbers” are implemented.

For example, the number of job vacancies from December 5 to October 2023: In the US, there were 8.733 million JoLTS job vacancies in October, with an estimated 9.53 million, compared to the previous value of 9.553 million.

This number is also a “bad number,” but the result of it is a sharp rise in stocks and bonds.

As shown in the figure above, in the money supply and demand curve, the main moving body is the currency supply curve. On the one hand, interest rates on long-term bonds declined; on the other hand, M1 increased, and the stock market rose. That is, stocks and bonds are rising. This is a wonderful time.

2. Scenarios of incomplete employment

As aggregate demand shrinks, the labor market will eventually enter a scenario of under-employment. Under these circumstances, a contraction in demand will lead to an increase in the unemployment rate, but it will not contribute much to lower prices.

This is a terrible scenario. When demand contraction contributes less to commodity prices, the Federal Reserve will slow down the pace of decline in interest rates on two-year US bonds. However, the market will give a lower expectation of interest rates on two-year US bonds in the future. Therefore, interest rates on ten-year US Treasury bonds will fall, and interest spreads on US bonds will drop sharply; the stock market will give direct feedback on rising unemployment rates.

As shown in the figure above, in the money supply and demand curve, the main moving body is the currency demand curve. On the one hand, interest rates on long-term bonds declined; on the other hand, M1 declined, and the stock market fell. That is, a seesaw on stocks and bonds. This is a scene we are familiar with, but it is not a good time to make decisions.

Phillips curve area

For the current US capital market, the unemployment rate data is extremely critical.

When the unemployment rate remains low, the movement pattern of the capital market is that “bad numbers” come out, and stocks and bonds rise together; when the unemployment rate exceeds a certain threshold, the movement pattern of the capital market is that “bad numbers” come out, stocks and bonds are on a seesaw.

The latter region is what we know as the Phillips Curve region. In order to contain inflation, we have to tolerate a certain amount of unemployment. This is going to be a very difficult choice.

Outside of the Phillips curve region, the Federal Reserve can be drastic. The main result of cutting aggregate demand is falling prices; within the Phillips curve region, the Fed has to be careful. The main result of cutting aggregate demand is a rise in unemployment.

In this region, we have to focus on unemployment and inflation at the same time. If the Federal Reserve insists on achieving the 2% target, but the inflation rate falls slowly, the risk of a hard landing for the US economy will increase greatly, and US stocks will face a difficult period.

Closing remarks

Based on the above, we have found the perfect soft landing scenario: before the unemployment rate rises rapidly, the Federal Reserve is already close to reaching the 2% inflation target.

Using this as a reference, we can compare our current position. The unemployment rate has just risen and reached 3.9%; inflation is a certain distance from the Fed's target position, falling back to 3.2%. It's not particularly good, and it's not very bad.

Looking ahead, there are two exports. First, a soft landing. If inflation meets the standard, the economy will not be too bad; second, a hard landing, it will be difficult for inflation to meet the standards, and the risk of a recession will increase.

No matter what kind of export it is, it is extremely beneficial to long-term debt. Therefore, looking forward to the future, US long-term bonds are more certain than US stocks, even though the 10-year US Treasury interest rate center has reached around 4.10%.

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