Sure, Halloween's here, but forget ghosts and ghouls. Here are the charts--and economist predictions--that are really scaring the industry.
1. Commercial real estate prices
JPMorgan Chase chief US economist Michael Feroli found commercial real estate values to be soaring (no surprise there), but perhaps a little too much so, catching the recent attention of regulators. "It looks frothy," he says.
2. Inflation over the next few years
Renaissance Macro Research head of US economics Neil Dutta is spooked by a market unprepared for interest rate hikes that'll come in from inflation. "What scares me is that the market is barely priced for five rate hikes over the next several years," he says, thinking inflation will be above 2%.
3. Treasury yields
Deutsche Bank's chief international economist Torsten Sløk also fears a rate hike. "Since the October FOMC statement came out we have seen a solid move up in rates and the pain trade in markets at the moment is if rates continue to trend higher going into the December FOMC meeting," he says. Many investors aren't prepared for this and may be in for a scare, he adds.
4. Equity illiquidity index
"While market liquidity has reverted back to pre-global financial crisis levels, liquidity risk has actually increased, resulting in wider bid-ask spreads and an inability to easily sell a position," Credit Suisse Asset Management's head of fundamental strategies alternative fund solutions Kelsey Deshler says. "In other words, liquidity is there but when you (and everyone else) need it, it may cost you. A scary thought indeed!"
5. Inflation expectation rate
Forex.com senior market analyst Matt Weller bets this chart gives Janet Yellen nightmares, which shows that the market should expect the inflation rate to average over a five-year period, starting in five years.
"In the most recent Fed minutes, the central bank noted that '… inflation was running below the Committee’s longer-run objective, but longer-term inflation expectations were stable,'" he says. "If this measure of long-term inflation expectations continues to fall however, we could be in a low interest rate."
6. Lending in Europe
Société Générale global strategist Kit Juckes is fearful of the economy abroad, worried that the European Central Bank's stimulus won't have the necessary efficacy to kick-start credit growth. Although its balance sheet is growing, it's hard to find evidence that bond buying is reviving private sector lending.
"There is little leeway for adverse shocks from, say, China," he says. "As for the ECB, its most effective policy tool is the Euro. If QE only works by boosting asset prices, it won’t do much for growth, but a weaker currency can help exporters. Only problem—Europe’s not alone in wanting a weaker currency these days."
Anyone else going to have trouble sleeping tonight? [Bloomberg]
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