August saw the Norges Bank and BoE raising rates further by 25bp apiece. However, with cooling data, and rates in restrictive territory, the remaining G10 central banks have softened their narrative to a pause, albeit with a close eye on any reacceleration in inflation measures. Most of those measures are drifting lower, with supply based constraints now reduced, corporate profit margins in political focus and tailing off, the last remaining driver is consumer demand. This demand continues to surprise with its latent strength, however with some early cracks appearing in labour hiring intentions, we may eventually see this wane.
Bear steepening was the trend in the early part of the month as Fitch downgraded the US debt from AAA to AA+, combined with ongoing QT and increased auction supply, driving the UST10Y yield up to a high of 4.35%. This in turn elevated real yields putting pressure on other asset classes. Only the wonder of AI related stock results saving the day and preventing a cruel summer. All the hype about moving the inflation target or reviewing R* ultimately was a damp squid at the Jackson Hole Symposium, as Chair Powell repeated his mantra of “proceeding carefully” as he had said at the prior Fed meeting, which all but confirmed a policy rate pause for the near future.
The PAM G10 Macro Rates portfolio is positioned to benefit from steepening yield curves, a dynamic that tends to happen in the late part of the business cycle. The recent normalisation of G10 rates, on interpreted final phase of hikes, have benefited a number of mean reverting trades in our portfolio. The continued softening in data from the lagged impact of monetary tightening gives us confidence in the future opportunities for healthy returns.
The US 10y closed the month 17.5bps higher and 5s-30s swap was 10.3bps steeper.
