All around the world, government bond yields are on the rise and hitting some significant levels. In many cases, the rapid increase in yields over the past month has resulted in multi-month, if not multi-year, highs. For Spain and Italy, today’s level of yields are the highest since May and June 2020, respectively. The 10 year US Treasury yield has reached the highest level since January 2020 as Canada, France, the UK, and Germany meanwhile have the highest yields since the spring of 2019. In the case of Germany, the bund yield even moved back into positive territory for the first time since 2019.   As the 10-year yield on Swiss bonds has reached the highest level since the fall of 2018, it too has moved back into positive territory in recent weeks.   While it has also seen a big rise in yields, Brazilian bond yields remain further off of prior highs.

As previously mentioned, the broad move in yields in the past month has been rapid. In the charts below, we show the one-month change in the 10-year yields for these countries’ bonds going back over the past five years. In most cases, the current run has been the sharpest increase since around the time of the COVID crash. For each country shown, those one-month changes also rank in the top few percent of all monthly changes over the past two decades. In fact, for Canadian bonds and UK Gilts, the moves rank in the top 1% of all monthly moves over the past twenty years. In today’s Fixed Income Weekly, we take a closer look at the moves in yields for a range of countries, and the implications for foreign exchange.  Click here to view Bespoke’s premium membership options.

To help get a gauge on which sectors are out- or underperforming the broader market, in the charts below, we show the relative strength lines of each of the eleven sectors versus the S&P 500 over the past year from our Sector Snapshot. Market trends in the prior days and weeks have resulted in some notable moves across these relative strength lines.

With Consumer Discretionary one of the weaker sectors of late as high growth areas have gotten hit hardest, its relative strength line has broken below its most recent low. While Consumer Discretionary has broken down on a relative basis, Communication Services, which has seen a massive string of underperformance since the summer, has seen a modest reversal higher, although the steep downtrend of the relative strength line is still in place.

The Tech sector has also seen a breakdown in its relative strength line recently with a collapse in the past month. Conversely, Real Estate has held onto its uptrend with its relative strength line bouncing over the past couple of days.

Consumer Staples, Financials, and Industrials, meanwhile, have been in downtrends over most of the past year. The recent strength of Staples and Industrials have broken those downtrends materially while Financials have failed to break out in the past several days after a big leg higher in the preceding weeks. Utilities similarly has failed to move out of its downtrend.  At that same time, Energy has essentially made a vertical move higher after what was generally a sideways move in the past year.

The last couple of years has certainly seen a strong run for the Energy sector, but taking a longer-term look at performance relative to the broader market it is hard to tell.  In the chart below, we show the relative strength line of the Energy sector versus the S&P 500 starting on 7/1/08, when the ratio of the sector to the S&P 500 hit its all-time high. As shown, there has been secular underperformance from Energy stocks since the Global Financial Crisis which hit its most extreme level during the COVID crash.  Since the lows in the spring of 2020, the Energy sector has rebounded, and the relative strength line is at some of the highest levels in the past couple of years, but there is still a long way to go in order to break the longer-term downtrend. Stay on top of market trends by becoming a Bespoke subscriber today.  Click here to view Bespoke’s premium membership options.

The new year’s first regional manufacturing reading came out of New York this morning. Covering the month of January, today’s Empire Manufacturing report was outright bad at the headline level. While the December reading was at the high end of the post-pandemic and historic range (in the 95th percentile of all months), the January reading was far weaker falling into the bottom quartile of historic readings. At -0.7, it was the first contractionary reading for Empire Manufacturing in eighteen months (since June 2020).  That 32.6 point drop was also the third-largest month-over-month decline on record behind March and April 2020.

Looking under the hood of the report, the massive drop in general business conditions is to a certain extent misleading and there is nuance to the various categories.  Breadth was in fact bad indicating a broad deceleration in activity across categories, but the massive drop in general business conditions was largely due to a massive slowdown in demand.  Like the headline number, both the indices for New Orders and Shipments fell dramatically. Alongside General Business Conditions, only New Orders saw a contractionary reading on that move. Again, other areas of the report did not help the headline index with only Inventories rising month over month. That being said, current levels remain far more elevated for those other categories with many in the upper decile of their historical ranges.

The decline in New Orders points to demand falling for the first time since August 2020. As a result, Unfilled Orders also fell significantly as Inventories rose, but the readings remain much healthier in the 93rd and 95th percentiles, respectively. In other words, even though there wasn’t the same massive inflow of orders as we’ve seen over the past year and a half, there is still plenty of demand left to be fulfilled. Unfortunately, Shipments decelerated sharply and only increased slightly which could be a result of higher COVID case counts holding back production/fulfillment.

One interesting aspect to note for demand and shipments (and this also applies to the headline index) is the huge disconnect between the moves in current conditions and expectations. Expectations indices remain far healthier in comparison to current condition indices, and the drops, if any, were much more modest this month. In fact, in the charts below showing the month-over-month changes of all months on record between the two series, January was certainly an outlier month. A heavy burden from absentees as a result of COVID could be extrapolated as a reason for this disconnect. In other words, New York area firms were hit hard by COVID in January but they do not expect the current wave’s impact to last out through six months.

Even though New York area manufacturers were not seeing growth in the pace of getting products out the door as in past months, working in their favor has been a significant improvement in supply chains. Delivery times remain well above any period prior to the pandemic, but the index fell for the third month in a row.

Another more welcome sign of the report was that Prices Paid and Prices Received have both peaked.  The drop in Prices Received was more significant of the two. On the downside, expectations have continued to rise unabated with each index hitting a record high.

Hiring pulled back in January as did Average Workweek with the weakest readings since last August. Expectations for Number of Employees hit its lowest level since last February. Meanwhile, manufacturers plans for spending on Tech and Cap. Ex. is far more optimistic with January readings in the top 1% of all months on record.  Click here to view Bespoke’s premium membership options.