QE ending

This is the battle in financial markets at the moment. The economic and earnings data are still strong pointing to higher Treasury yields, narrow credit spreads, and higher equities. But ending easy money and more signs of inflation should raise Treasury yields, widen IG credit spreads, lower equities, and boost VIX. So far, stocks and credit are trading well, but with peak QE, peak fiscal boost, and peak disinflation we are priced to perfection, in particular as Treasury yields continue to rise on the back of higher US inflation and the unsustainable US fiscal situation. Tensions are building, including in US Treasury auctions, Libor-OIS, and repo markets, and we will have a problem once the grind higher in Treasury yields begins to have a negative impact on consumer spending and capex. Put differently, we better not have a slowdown in the economic data because the conclusion from yesterday’s conference is that once the next recession comes central banks will be out of ammunition, and in that situation, we will go back to the zero lower bound with lower long rates, wider IG credit spreads, lower equities, and higher VIX.

Deutsche Bank