Exposure rates of the Dorval Asset Management Range – 16th April 2021

Recent economic indicators attest to the robust world recovery taking place on several fronts, although this flurry of good news has not triggered tension on long-term yields, and this is shoring up investor optimism. However, real rates will probably rise gradually out to the end of the year.

With US retail sales hitting fresh record highs in March, surging 9.8% vs. February (cf. chart 1), a spectacular leap in automotive sales in Europe the same month (+63% over the month, with sales at their highest since June 2019) and consumer spending picking up in China, the scenario priced in by the markets over the past several weeks is materializing without a hitch. This upturn is set to continue extending to the services sector, including in Europe from May onwards with the economy poised to open up again.


Retail sales soaring in the United States


The question now is whether more successful efforts to get the virus under control will drive an even more broad-based recovery that will swiftly trickle through to the labor market. The number of job-seekers entitled to benefits fell significantly again in the United States last week, but it is still too early to draw any conclusions. However, in Australia, where the economy recovered at an earlier stage due to a better grip on the virus and the country’s proximity to China, we can observe that the shock on the job market is easily reversed (cf. chart 2). This is an encouraging trend for all developed economies that have rolled out massive support packages. Stats from Korea and New Zealand are pointing to the same message. 


Sharp recovery on labor market in Australia is a positive sign for other advanced economies

Employment in Australia


We can envisage a clear drop in unemployment in the US, but the Fed will not stop there. The central bank has more ambitious goals as it targets substantial further progress towards a strong, deep and sustainable recovery on the labor market, and will not merely seek to revisit pre-Covid unemployment levels: rather it is aiming for real full employment that would support a rise in wages and prices for the long term. Investors are beginning to listen to this oft-repeated message, and this has no doubt pushed long-term rates down again over recent days, after an upsurge in the first quarter (cf. chart 3).


Long-term yields are easing again slightly

10-year Treasury yield / Real rates (=inflation-linked 10-year Treasury yields)


However, Jerome Powell wants to avoid repeating Ben Bernanke’s mistake in May 2003, when the Fed announced a forthcoming reduction in its asset purchases, taking everyone by surprise and triggering a phase of severe volatility on the world markets. This time, the Fed is preparing the markets for the next stage, even if it is not on the cards yet. Its attitude is promoting a scenario for a gradual rise in long-term real rates out to the end of the year. In our global funds (Global Convictions range), we maintain near-zero bond duration, in keeping with our stance since February.



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