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Mixed signals: Stocks are rallying on economic optimism, but bonds are telling a story of slowing economic growth. This divergence of views could lead to overall downside surprises in stocks if the bond market’s expectations prove correct.
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Are rate cuts on the horizon? The Fed is currently expected to cut rates by more than the ECB. Bond markets are expecting the Fed to cut rates more heavily next year, suggesting some concern about the economic outlook, but that seems odd when compared to the growth in the EU and the expected cuts from the ECB.
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US Dollar: The weakness of the dollar seems out of sync unless the US economy starts to slow down significantly.
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Market Mood: With stocks nearing their peak and bonds betting on a slowdown, it may be hard to get any more good news for stocks without clear economic gains.
- Stocks: May be very expensive unless the economy improves a bit.
- Bonds: Could be very bleak unless data starts to get really bad from here.
- US Dollar: In the absence of any significant economic slowdown, the recent decline in the dollar appears overdone. Interest rate differentials are already priced in at a reasonable amount.
This article was written by Arno V Venter on www.forexlive.com.
