Capital Economics Sees More Late-Cycle Warning Signals in US Equities

what happened

Capital Economics chief markets economist Jonas Goltermann, in a note cited by Market Talk, says the recent equity selloff may prove temporary, but a growing number of late-cycle signs are emerging in the U.S. stock market. He expects a more sustained drawdown over the next year or so, which would be accompanied by lower Treasury yields. Strong U.S. inflation data from the past few days has been overshadowed by doubts about the durability of the artificial-intelligence boom. A sharp simultaneous drop in equities and Treasury yields, the first since the U.S.-Iran war began, is the pattern he would expect if the AI boom started to unwind.

In Asia, Bitcoin rose 0.2% to $82,162.05 ahead of Fed Chair Kevin Warsh's comments at an IMF event in Bangkok. XS.com's Antonio Di Giacomo said easing rate-hike expectations could help stabilise cryptocurrencies, since higher rates typically weigh on risk appetite. Japan's Nikkei Stock Average rose 1.0% to 65,085.40 in early trade, after closing 4.9% lower on Thursday, as falling U.S. Treasury yields eased worries that high rates would hurt AI stocks. Most JGBs gained, though BOJ board member Koeda's warning against excessive caution on rate hikes may limit the advance, with the 10-year yield down 0.5 bp at 2.915%.

why it matters

U.S. Treasury yields and equity moves are closely tied to rate-hike expectations, so the direction of U.S. yields this week will feed into Japanese stocks, the yen and crypto assets. Investors are watching how the Fed and the Bank of Japan frame their policy outlook.

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