Global

We propose a unified framework for predicting the direction of short-term interest rates and long-term bond yields that brings together three approaches: 1) the saving-investment approach; 2) the Taylor rule approach; and 3) the portfolio balance approach. Our analysis suggests that bond yields in the US and many other countries have increased mainly because of a higher neutral interest rate and a larger term premium. Given the risk of a further rise in inflation expectations, investors should overweight inflation-linked bonds.

MacroQuant recommends a slight underweight position in equities, counterbalanced by a slight overweight to bonds, and a significant overweight to cash. The model is positive on the US dollar, modestly negative on gold, and bullish on copper and oil.

The Goldilocks environment for US profit margins should start to sour next year. Contrary to conventional wisdom, AI could end up eroding margins for both producers and consumers of artificial intelligence.