Real interest rates dropping back

Good news for tech stocks

Chart of the Day

Our chart of the day shows the yield on treasury inflation-protected securities has dropped back in the past week despite signs of optimism elsewhere. That has been due to a rise in inflation expectations which has not been matched by a rise in nominal bond yields, perhaps because traders remain convinced that the Fed will prevent yields from rising substantially. Either way, as we’ll see shortly, lower real interest rates have been good news for the high-growth tech stocks which rebounded on Friday.

Macro

The eurozone economic sentiment indicator dropped back in November and continues to point to negative GDP growth.

It is the economic sentiment indicators in France, Italy and Spain that have suffered the most - Germany’s remains relatively high.

In the UK, realtors’ house price expectations have dropped back recently, perhaps because the holiday for tax payments linked to house purchases is soon to expire.

Markets

Palladium is now the best performing precious metal year-to-date, up by 27% versus the 26% rise in silver, following the further slides in gold and silver at the end of the week. Palladium and platinum both benefit more from industrial demand, but in the case of palladium supply shortages are also at play.

While some have suggested that rotations into crypto are to blame for some of the weakness in gold and silver prices, the prices of bitcoin and ethereum also slumped last week, although stabilized on Friday.

While palladium has bested gold and silver YTD, it is the more traditional cyclical commodities like oil and copper that are outperforming over the past month.

While higher inflation expectations have reduced real yields, the 5-year/5-year inflation-linked swap in the US is still a bit lower than a few weeks ago at 2.17%. That is almost a full 1% above the EUR swap.

The decline in real interest rates appears to be helping tech stocks. The Nasdaq rebounded on Friday and the S&P 500 information technology sector also rose to its highest since the middle of October.

The relative strength of the tech stocks is also reflected in a rebound in the iShares Momentum ETF, which incorporates stocks that - until recently at least - had been experiencing very strong price momentum. It gained ground versus the dividend aristocrats ETF, which tracks those more steady established companies that consistently pay dividends.

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