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23 May 2013
Forex: Defining new normal: Societe Generale
FXstreet.com (Barcelona) - Kit Juckes, Global head of Currency Strategy at Societe Generale recalls that between 1991 and 2006 (i.e., avoiding the 1980s and the madness pre and post-08) US nominal GDP growth averaged 5.4%, 5yr Note yields averaged 5.2% and 2yr Note yields averaged 4.7%.
He asks, “So, where are “new normal” neutral rates and yields?” He feels that the question is whether 'new normal' implies a lower path for nominal GDP or a change in the relationship between interest rates and nominal GDP. Current US nominal GDP growth is 3.4%. Not fantastic but we are expecting that to pick up to something in excess of 4% in the years ahead.
He continues commenting, “On that basis, and if I use the long-term average of 5yr swap spreads (50bp) as a very rough guide, I might reasonably expect 5yr swap rates to average above 4% and 2yrs to average just below 4% 'through the cycles' if new normal is a new normal growth rate and an old normal spread between rates and GDP. The entire US forward swap curve is still below 3.75% on a 10-year horizon. In other words, the market may have moved but is a long way from pricing a move back to normal Fed policy on any imaginable time horizon. There is a further adjustment to be made.”
He asks, “So, where are “new normal” neutral rates and yields?” He feels that the question is whether 'new normal' implies a lower path for nominal GDP or a change in the relationship between interest rates and nominal GDP. Current US nominal GDP growth is 3.4%. Not fantastic but we are expecting that to pick up to something in excess of 4% in the years ahead.
He continues commenting, “On that basis, and if I use the long-term average of 5yr swap spreads (50bp) as a very rough guide, I might reasonably expect 5yr swap rates to average above 4% and 2yrs to average just below 4% 'through the cycles' if new normal is a new normal growth rate and an old normal spread between rates and GDP. The entire US forward swap curve is still below 3.75% on a 10-year horizon. In other words, the market may have moved but is a long way from pricing a move back to normal Fed policy on any imaginable time horizon. There is a further adjustment to be made.”