“Bad news" on growth has become "good news" for rates, with a positive correlation between macroeconomic surprises and 10-year yields across regions, including the UK, Goldman Strategists said Monday.
Since the end of May, markets have added approximately 40 basis points to the expected cumulative Federal Reserve cuts over the next 12 months, highlighting how growth concerns have overtaken inflation as the primary driver for the timing and size of rate cuts, with markets now anticipating more disinflation than current macro fundamentals suggest.
“As a result of falling yields, bad news has also been good news for US equities, which have been negatively correlated with macro surprises,” analysts said in a note.
“This negative correlation is not just driven by the recent strength in large-cap tech stocks, which led the recent S&P 500 rally, but has been even more negative for the equally-weighted aggregate or for small-cap stocks which tend to benefit the most from a decrease in financing costs due to falling yields,” they added.
The sensitivity to surprising macro data has been more mixed in other regions, especially Europe where it has been more positive.