Irene Webb:
Hi, everyone. Thank you for joining the WisdomTree Global Edge Office Hours, What Exactly Does Higher-for-Longer Mean? Where you'll hear from Kevin Flanagan, Head of Fixed Income Strategy, Aneeka Gupta, Director of Macroeconomic Research, Nitesh Shah, Head of Commodities and Macroeconomic Research, and Jeff Weniger, Head of Equity Strategy.

Kevin Flanagan:
Thanks, Irene. Good morning, everybody, here in the US, and outside the US, it's definitely good afternoon. I'm not quite sure if it's good evening yet. Aneeka and Nitesh, you can tell me in the time zones if good evening may be appropriate somewhere. But to Irene's point, we do want to make this interactive. We have gotten some questions. We will get to those. We don't want to speak for 40, 45 minutes, and say, "Okay, throw your questions in." So please, as we're speaking, something comes up, throw it in the Q&A, and we will certainly try to address any questions, concerns or thoughts or comments you may have as we're going along.
But usually what we like to do, there's three polling questions, and it's kind of a way of setting the table for our conversation. So Irene, if you could call up the first polling question, we will start there and begin the conversation, I think obviously, about Central Bank policy, because it's going to be a huge factor, once again, coming up in the new year. I mean here we are here in the US, and Aneeka, I'm going to turn to you in a second.
With respect to the Fed, obviously we had the Fed meeting, we had a little bit better than expected CPI. I'll touch upon that in a minute. It was almost a rounding error, but kind of showing the Treasury market's new sentiment, right? We went to 5% on a 10-year Treasury yield. Now we're below 4.5%. What happened? Well, part of it is this reassessing what the Fed's going to do, but we say here in the US you have to learn how to walk before you run. And you wonder sometimes does the market get ahead of itself? You don't want to stand in front of the market, but certainly some of the pricing we're seeing of late has become quite interesting, and you're seeing a dialogue beginning here in the US that the Fed doesn't need to wait to see inflation get closer to their 2% threshold, that maybe they can begin cutting rates beforehand.
So that's going to create a very volatile, I think, kind of backdrop, especially in the Treasury market. And I think, Aneeka, let me turn to you for a second here and talk about it from an ECB perspective. Is the ECB and the Fed, are they basically, you think, going to be moving together, that we'll have this period of Higher-for-Longer, hence the title of our Global Edge piece, but what does that actually mean? I think we're going to find out maybe early in the New Year depending upon forward guidance from Powell, from President Lagarde. So what are the thoughts in Europe on where the ECB is going? Is it similar to what we're thinking here in the US about the Fed?

Jeff Weniger:
Before Aneeka goes, what I'll do here is I'll operate a screen share for everyone inside the written doc that we put together, which is the Global Edge. Aneeka, I'll do a Control-F here on ECB and also Control-F based on the tenor of where I think you're going here. So please, proceed.

Aneeka Gupta:
Sounds good. Thank you, Jeff. Yes, Kevin, just coming back to your point, the trajectory for Europe's growth has been quite mixed in 2023. We started off the year on a very positive note, expectations were very low, and I think the market started to see that Europe had actually been able to take themselves out of the energy crisis fairly smoothly. But as we've seen, nearly 450 basis points of rate hikes take place over the past year. That is now starting to bite into the economic growth. Even if you refer back to the lending standards, we've seen that come out in April, we've also seen that come out in October, and it is showing you one very clear trend, and that is that banks are tightening their lending standards, and that is affecting consumers as well.
So I think those two points are extremely important, and they're essentially telling us the US has so far been on a much stronger growth trajectory. And if you compare that to Europe, Europe has actually been slowing materially from a growth standpoint. So while the ECB headed by Christine Lagarde has been maintaining a very hawkish front by saying that rates are going to remain higher for longer, I think of all the central banks we have been looking at, the ECB looks to be the first one to actually make that pivot owing to the fact that the economy is actually weakening.

Kevin Flanagan:
Yeah. It's interesting that when you're saying what we're looking at here, that will help in the decision-making process, and Jeff and Nitesh, don't worry, I'm going to bring you into the conversation in a second. Is the Fed, Powell and company, they certainly added financial conditions as a key monetary policy input of late, that rise that we talked about in Treasury yields where pretty much every Treasury was approaching or hit the 5% level. But you know what's fascinating? If you look at what's occurred over the last couple of weeks, financial conditions, as measured I think by what the Fed was looking at, so Treasury yields, credit spreads, the dollar, they all have loosened dramatically, so we're almost back to where we were in September. And the Chicago Fed puts out their own National Financial Conditions Index, which has 105 inputs to it, it dropped to its lowest level since before the regional banking crisis here in the US back in February.
So you're looking at this and wondering where we're going from here, and you wonder, "Who's going to be first?" So I'm curious to see, Irene, if we have answers to the question, "Is the Fed done raising rates, the ECB?" I think I know the answer to that question, right, from our vantage point and now from you as well. So Jeff, let me turn it over to you and bring Nitesh into the conversation here. What does this mean? I mean, this Higher-for-Longer, this restrictive policy, what does it mean, say, for equities? What about China? What about the Bank of China? Should we be talking about that and looking at that as well as a key input?

Jeff Weniger:
Yeah, and there were five pre-submitted questions here. Somebody's asking about the Scandies. What were they saying? "Give us a view for the Scandies outlook on policy rates, asset classes that do best when rates fall," and maybe that's very timely here. Thank you for asking that one, Stephen McKenna, in that we've had this rip-roaring rally here that's been going on since we decided to get this bond market back together about two or three weeks ago. And this is one of the conundrums, Kevin, that I think Jay Powell and others are facing is that here they are trying to go Higher-for-Longer, and that on account of perhaps this anticipation of rates being cut, which they haven't really guided towards, now you've got this furious rally in benchmark yields, and now suddenly we've taken 50 basis points out of things like mortgages or just intermediate to longer-term corporate bonds, that type of thing.
And I bring up mortgages, because it's a particular issue, well, the world over, but also because we did get the NAHB number this morning here in the United States, Kevin and I, being the Americans on this call. The NAHB, the National Association of Home Builders, this has, if you were to take a look at this time series on this one, and maybe I'll pull it up after I speak, it's a waterfall type chart. It had reached, I guess you could say, a crescendo there in, I believe, the fourth quarter of '22. It started to rebound a little bit into 2023, but now we've had several prints in a row on the NAHB headline that have been, let's say, just ugly. Same with home buyer traffic inside the bowels of that NAHB report.
And this is the lag effect here, Kevin, of the 525 that we got from the Federal Reserve thus far. My concern, and then maybe we'll toss over here to the Brits, is that perhaps the Fed isn't respecting its own lag effects. In those summary of economic projections that we had from the Fed, which was, when was that, mid-September, Kevin, I believe, and then we'll get the one more report in mid-December. I know Kevin waits all eight weeks for those types of things. They are still saying on headline unemployment, because we do have this labor shortage situation, but they have unemployment at 4.0 in 2024 in the FOMC projections, 4.1 in 2025, and back to 4.0 in 2026, if I have those three correct. Two of them are 4.0, and one is 4.1.
So the Fed is essentially saying, "We've hiked by 525 basis points," so is everyone else by some smaller order of magnitude, but notable restriction here, "and it is our prognostication here that there will be no deterioration whatsoever in the US labor situation." That might be a little bit of an ambitious setup for them. I don't know if that can be achieved. Let me read the questions off on the side, and we'll see as we go through the conversation if we can directly address these plus some of the ones that are popping into the Q&A.

Kevin Flanagan:
Jeff, let me just chime in here for a second, and Nitesh, I want to pivot to the PBOC off of this since we started the conversation talking about central banks. And a comment came in, "Too bad we lumped the Fed and the ECB together because they may not follow the same policy path." We chose that because they're two of the more obviously well-known drivers of what we'll be seeing. But Aneeka, for me, when I'm hearing those kind of comments, I'm thinking, and correct me if I'm wrong, in other words, will the Fed be Higher-for-Longer longer than the ECB? Is that, you think, what is being talked about right now that who's going to be the first to go, who's going to be the first to cut rates, the ECB or the Fed? I mean from your vantage point, do you think it will be the ECB? As the Fed led the way raising rates, will it be the ECB leading the way cutting rates?

Aneeka Gupta:
Well, absolutely. I think first and foremost, the Fed was the earliest to actually begin raising rates, and in sharp comparison, the Eurozone was actually a lot slower in increasing rates. But given the fact that when we started out, the economy was on a much more weaker footing, the fact that it has had to face 450 basis points of rate hikes, that is starting to bite into the economy. So you're right, the question is who's going to be pivoting first? And we do view it as the ECB having to move first, because inflation is making a headway on the downside, and at the same time we are seeing growth remaining fairly anemic.

Kevin Flanagan:
Now, Nitesh, see, I promised I'd bring you in. PBOC, it's weighing on a lot of questions, I know, here in the US and in Europe and just globally Asia as well. Where should we be thinking about China? What is the direction we could be going in? Is China right now the weak link from a macro from an economic perspective or not? Because it's interesting. Anecdotally, I've been reading that you tend to look at it that for the first time in I don't know how long, instead of China leading the way with strong growth, they're now the laggard. What are your thoughts on that?

Nitesh Shah:
Yeah. China is the laggard in this cycle and really contrasts what we saw, say, back in 2008 in that global financial crisis. China went big. It got out as bazookas and stimulated like crazy and lifted the global economy, probably as much as all the actions of other central banks around the world. China's huge infrastructure spending, especially around that time, was very beneficial. This time is very different. And despite our title, Higher-for-Longer, PBOC is clearly not in that bracket, really. It's been easing policy for the last few months, but it did it so belatedly. Despite opening up its economy at the end of 2022 and everyone expecting the Chinese economy to grow just like US and Europe had when they opened after COVID, China went on a sort of really steady and decaying path.
And part of it is intentional. China looked at the rest of the world and said, "Ooh, everyone's got an inflation problem. We don't want to have that ourselves, and therefore we'll open up with a lot of restraint." But restraint is one thing, but it's got a real estate problem, and that problem has dented confidence and didn't allow the economy to grow properly.
So since the summer, China has been stimulating, but in the least obvious way. There's been piecemeal stimulus, announcements every couple of days, either by the government or the PBOC, the Central Bank, on stimulus activity. Almost every one of those stimulus acts isn't headline worthy in of its own, but combined together, they've actually been meaningful. And since the summer, we've started to see upside surprises on retail sales, industrial production data, even GDP data for the third quarter was surprising to the upside. But it doesn't feel like we're out of the woods yet. The latest purchasing managers indices data, for example, came in below 50, so indicating contraction. So the PBOC and the government still need to do more.
And what we've seen is the government and the Central Bank are probably in a new phase of closeness, and that was really signified by President Xi, for the very first time, visited the Central Bank. It's never been done before. And what we're going to see in terms of stimulus, we believe going forward, is less of the obvious stuff, less interest rate cuts, less loosening of the reserve requirement ratio, but liquidity being injected into the banking system, so that the banking system can swallow much larger debts issued by the government.
And the government did something really strange, which was mid-budget, they increased their budget so that they could borrow an extra 1 trillion Renminbi, and that will take their deficits above 3%, way above the thresholds that they set earlier on this year. So they're doing a lot of things that are, I won't say unprecedented, but mid-budget reviews happen very rarely. Last time was in 2008 after the earthquakes, and the time before that was in the Asian financial crisis. So there's a lot happening, but in the least obvious way.

Kevin Flanagan:
So we've got a couple of questions coming in, talking about the Fed and perhaps them being late in terms of lowering rates. "What about extending duration?" One about the recent downgrade in the credit outlook from Moody. So Irene, let's go to the next question, and we'll try to wrap up, put a nice little bow on the Central Bank part of the equation and hopefully answer the questions that have been coming in and asking, "When do you think the Fed is going to begin to cut rates?"
And so let's take your pulse out there and temperature, see how you're feeling on that. We'll offer some of our insights. What's interesting is that up until, say, about May of this year, the thought process in the US Treasury market was the Fed was going to cut rates come July. Then we had this sea change in attitude where it got pushed back to maybe the first part of the third quarter of next year.
Now, post-November Fed meeting, post-Jobs Report here in the States, post-CPI Report here in the States, that timeline for Fed funds futures has pushed it up to May or June. And also the magnitude, being perhaps 100 basis points in rate cuts next year. I think the Fed making a move around mid-2024 would be a reasonable base scenario to talk about from here. Obviously, though, before we get there, and this goes back I think to Aneeka, what you and I were talking about earlier, you will see forward guidance, right? We're not going to go from the Fed raising rates in July, going on pause, and then cutting rates. There will be a transition period, and does it come as soon as December? That's going to be the big question.
So the December Fed meeting, everyone's saying they're not going to cut rates, I mean, raise rates, but the language that is chosen, not just in the policy statement, Powell's press conference, as well as the December dot plot, is going to be very important. So even though the Fed may not make an official rate move, what they talk about in the guidance is going to be really, really important. And that will be where we're going now to answer the duration, the curve. Because as we start moving in that direction, and you've seen it already in Treasuries, where the yield curve is steepened, and that is the next step, that is the next part of this equation. We had to get to peak conversion, got there. We've seen steepening. That steepening trend, as we hear more and more from the Fed, and the market thinking when they think the Fed's going to begin to cut rates, that steepening trend will continue, and that blends right in.
So I'm answering, I'm sorry, guys, for taking all the air out of the room, but this will answer all three questions hopefully in a couple of minutes. And that's when you have to start thinking on the duration side. Now, we have been proponents of your underweight-to-duration, making a deliberate move to come back a little bit more towards the core. And I think that's the way you need to think about it, to come back more to your core kind of allocation in duration, which is around a little over six years. Not quite ready to play Monte Carlo here and put the red chip out on the 30-year bond. That's going to have a lot of volatility to it. The curve still doesn't provide, even though it has steepened, that urgency. But should we be thinking about cutting that underweight duration to the benchmark? Yes, and in a deliberate fashion.
And the last thing I'll say, and then maybe I'll zip up for the next half-hour and let you all speak, is the Moody's action with respect to Treasuries, and I think that's important as well, because it was a outlook, right? So credit rating agencies, just as we saw with Italy and BTPs, they usually make those moves. You go from positive to stable to negative, then you get the actual downgrade, and it tends to be a notch. So as we've seen, when Fitch made the move for an actual downgrade earlier this year, and going back a decade ago with S&P, the global markets still view Treasuries as a store value, and we think that will continue to be the case.
I mean, think about it. Moody's did what we call their drive-by-drop in the rating outlook on Friday and hasn't hurt Treasuries at all, that the focus is still going to be more towards the fundamentals, but you are going to have still to underwrite baseline trillion-dollar deficits. We can talk about that later. So let me turn it over to you all, look at the answers to the polling question, and we'll come back to some other, I think, things we need to discuss from the global side. We did a lot on the US. I think we need to turn the page now and start looking at things on the other side of the Atlantic or the other side of the Pacific.

Nitesh Shah:
Yeah. Well, it's clearly an interesting poll result over here. Most people are expecting the rate cuts will be around third quarter of 2024. And I think it is clear that the economic data is now there to support the fact there's not going to be any more rate hikes. But getting to cuts, I think, requires that a little bit more weakness, and in the same way, we've been quite surprised on the resiliency of the US economy. I guess it'll require a bit more surprise on the downside to get cuts, I guess, in the first quarter. I don't really see that weakness coming in for the US.
But I generally agree with the comment Aneeka made earlier on. European data is a lot weaker. If we look at the third quarter GDP, it came in negative, -0.1%, largely driven by Germany, which was also its own GDP was -0.1%. Any extension of that would put Europe in a technical recession by the end of this year, and it's going to be hard for the ECB not to respond to that level of weakness.

Jeff Weniger:
I've got a few thoughts I'm going to try to see if I can ... Everybody, if I swing my head over here, it's because I'm trying to do a screen-share here and show you some exhibits. Let me just in a second here pull up the United States TPI and maybe put this in some context of this phraseology that continues to, at least from everything I've been reading and seeing in recent weeks. I'll start with the US here, and then we'll see if we can transition this concept overseas a little bit.
The street likes to come up with these cute little buzzwords here and there, and right now the one is "immaculate disinflation." And I'm going to say that the concept of immaculate disinflation I've seen more in the last two weeks than the entire prior 11 months combined. It's the new term floating around. Let's throw a few concepts out there. I believe, and I'll ask the three of you, that this is now street consensus, immaculate disinflation, because I can't get away from this phrase. So you'll see it later on as you're reading research, and you'll say, "Yep, this is what that guy was talking about earlier today."
Here we have the collapse, in this case, US PPI, and Kevin and I were doing an Office Hours two or three days ago, we were talking about a collapse in PPIs basically the world over. In Germany, it's a -14 handle on a year-over-year, down from the +46 on a German PPI chart not shown. Canadian PPI is down into 1.x. Chinese PPI, which is critical, and Japanese PPI is a zero-point-something as well. So here we're at a 1.3 year-over-year.
Now, one of the things I've been considering at great length in terms of US consumer price inflation, whether it's CPI or PCE or one of these concepts, I think it's shown nicely with the yen chart, as soon as I can find my yen chart, please just bear with me. Should be right there. Let know if you don't see this, everyone. The sheer magnitude by which the dollar has strengthened, and this is going to be a problem for the Japanese in trying to get back down to two, not perhaps as big of a problem for the Americans as with we are at a, where are at, 3.2 or 3.3, Kevin, on US CPI at this juncture.
Some of these currencies have absolutely died on the vine, relative to the United States. For example, the Canadian Loonie's at 138. Within recent memory for Americans, that was a parity situation 5, 10 years ago, the Loonie was over on the other side of parity, now at 138 on that pair. Here we are on the yen. This is a chart that just screams, I don't know if I want to use the D word, dumping, but at some point you start wondering whether or not Japanese goods will be dumped, goods and or services, on the Americans on account of this pair has gone from 104 to 150, and the other day it was looking around 152.
CNY as well, Nitesh. CNY was about 6.3. Where is it now? 7.26 or something. If you want, I will pull that chart. Could it be that the Chinese and the Japanese are exporting deflation to the Americans on account of the super strong USD? Something to consider as we ruminate on the immaculate disinflation concept for the US. So I will ask, let's take this back over to Europe. That German PPI print is starkly negative just because, well, we know what happened beforehand with the big super spike, but are we going to get immaculate disinflation in the Eurozone?

Aneeka Gupta:
Yes. With Germany being the main growth engine for Eurozone, I think that was the first sign that we began to see weakness starting to creep in. And that's because Germany's well-known model has been broken, where they obtain cheaper energy from Russia, and then they're able to produce goods at great efficiency and sell them off to the world. Europe is suffering right now, because as a manufacturing-based economy, they're starting to see demand actually slow down quite a bit. So we are actually seeing recent labor reports start to suggest wage growth, which has been one of the most important sources of higher inflation, now begin to decelerate. And I think that's one of the key sources and key friction points that the ECB is looking out for and hoping to see some deceleration in core inflation, and I think we're likely to get that in the following quarter.

Jeff Weniger:
And I'll populate the screen here with a German CPI that I pulled up in the background, with like a 3.8, if I have the correct series here. Go ahead, Nitesh.

Nitesh Shah:
Yeah. Maybe just to add to that, I mean I think you've touched on a point where yes, China could be sending out goods to the rest of the world more cheaply as its currency depreciated. But I think that will be good for, I mean, they'll reduce the price of a lot of finished goods, but at the same time, what we are seeing is potential issues that could trigger trade frictions once again. And in the context of Europe, you've got things like the carbon border adjustment mechanism, which basically is a tax on goods that don't meet Europe's carbon standards. So it can equalize, provide a level playing field for its industry, and that'll be rolled out by 2026. And concurrently, we've got something called the Critical Raw Materials Act where the European Parliament and the councilors just came to an agreement earlier this week, and that will also provide conditions on how much raw materials need to be manufactured, processed or recycled in Europe.
And countries like China will be seeing this as an act of trade aggression, really, even though Europe is being able to do this on environmental grounds. Now, that could lead to China restricting certain exports, and we've already seen that's the playbook that China offers, as already restricted exports of gallium, germanium, which are rare earths, and graphite. They're all very useful in the chips industry and in electric vehicles, and more, that's a retaliation against some of the legislation on chips, but it could use the same playbook here as well. And that could actually increase the price of a lot of raw materials and goods that are very important for economic growth and the energy transition.
So not something that we're seeing immediately, but that's something that could come down the pipe. So we may see that initial phase of goods price deflation to be met with quite a rampant inflation later on. And I guess our hope is that we don't have a repeat to 2018 with all the trade wars that were carrying at that point in time.

Kevin Flanagan:
So Nitesh, you opened the door for a little bit of a commodities discussion here, and I believe that's the topic of our third polling question. Irene, if you could call that up, and perhaps we could delve a little bit further into that. And then maybe end the call talking about stocks, equities, here and abroad. So here we are with this polling question about commodity prices using them in portfolio construction. So as we wait for the answer to this, Nitesh, Aneeka, Jeff, all of you, please chime in. You were talking about rare earths. Let's go to the big ones. Let's talk gold, let's talk energy. Nitesh, we're going to put you on the spot.

Jeff Weniger:
Nitesh, any particular chart in the Global Edge that you'd like me to pull on the screen?
Nitesh Shah:
Hold on.
Jeff Weniger:
Like the map of the world for –

Nitesh Shah:
Yeah. Let's put the map of the world and Central Bank gold holdings, basically. There's a couple of aspects to talk about on commodities. Let me firstly start off with we are very late in this cycle, economic cycle, and that's usually a good place for commodities, because commodities are late cycle performers. They tend to do the best in the latter phase of a recovery, and they still tend to perform quite well in the early phases of a recession. So in contrast, there's other cyclical assets, commodities can still do well in this phase. And the commodity complex is a great diversifier.
One of the questions that came in is, "What does well in periods of declining rates?" Well, declining rates, usually the precursor for declining rates is slowing growth and low inflation. Looking at those periods, we found gold to be one of the best performing asset classes. Looking back at data since the 1960s, we saw gold prices in periods where you've got low inflation, so if you run below 1.5%, and if you look at composite lead indicators as indicators of cycle point, if you look at standard deviation away from in the mid-band, that's when gold has performed the best, closely followed by Treasuries, but there's still a good sort of 5% gap between the two, gold with about 14% performance in those periods.
But what we may find as we move into that next phase of the cycle is that gold becomes increasingly in demand as it is a defensive asset. But not only investors are likely to look to gold, but we've got central bankers around the world buying gold at levels we haven't seen before. 2022 was the ultimate high point in central bank gold demand, and so far in 2023, we're on track to meet that same level, and it's really emerging market central banks are buying this gold, and what happened in 2022 basically spooked them. When dollar yen, euro, they're all weaponized in the sense that Russia's Central Bank assets in those currencies were frozen. Every other central bank is looking at that, and saying, "Oh, that could be us. We get on the wrong side of the G7, our assets could be frozen," and that's why they're buying so much gold, and there's a long way for them to catch up to the levels of gold holdings that developed central banks have.
So a couple of the key things, I think, that are very important for broad quantity marketing and gold, but I guess the other big area that everyone's looking at is oil, and we did see a bit of a spike in oil prices a few weeks ago with the Israel-Hamas conflict flaring up. But pretty much all of that geopolitical premium has evaporated from oil. I think the market's really looking at demand conditions weakening. But I think what a lot of people are missing at this point in time is OPEC is like the central banker of the oil market, and they're going to meet at the end of this month, 26th of November, and they're very likely to extend cuts. And I think that could be something that could catch people off guard.

Kevin Flanagan:
Irene, do we have the results up for that last polling question and see what you all are thinking about commodities in your portfolio construction. Aneeka, Nitesh, Jeff, any thoughts on the answers here?

Nitesh Shah:
Yeah. I mean the first answer has gathered the most responses, so 43% of people say they follow commodity trends, but it's not an input. Now, I can understand that. Commodities matter for everything, right? For corporates, commodities are generally an input price, and therefore, it matters in terms of cost margins. But it's also worth considering commodities as that diversifier. There is a lot of premium to be gathered just from investing in the commodity markets. Especially, it's slightly different behavior to other things you have in your portfolio that may make it somewhat worthwhile. But Jeff, Aneeka, I don't know if you've got any answer to that?

Aneeka Gupta:
Yeah, I think that's-

Jeff Weniger:
I've populated the screen with front month rent, and then over here on the left-hand side of the screen are the out months. Go ahead, Aneeka.

Aneeka Gupta:
Yeah, I think that's a great point, and I think especially at a time when we've seen a correlation between bond and equities actually rise, contrary to what we've learned in traditional finance, I think investors are now looking to diversify their portfolios by increasing their allocation to commodities. And I think also given the fact that investors are now being constantly being aware now of geopolitical risk rising, commodities as an asset class does give you that added ability to hedge those geopolitical risks. So I think that warrants added attention towards commodities as an asset class.

Kevin Flanagan:
I mean we have about 10, 15 minutes to go here, and kind of saving it for last, talking about a global equity conversation. Aneeka, let me start with you. You and I began this Office Hours talking about the ECB, talking about the Fed and where they could be going. Are we seeing that in, say, European equities? Are we beginning to see a reflection of this, let's call it, a Lagarde pivot, or do we have to wait for that?

Aneeka Gupta:
Kevin, it's funny you say that, because just the other day I was looking at the Q3 earnings results for Europe, and it is painting quite a negative picture where we've seen around 80% of companies report and earnings growth estimates actually down 13%. Now, obviously if you exclude energy, it's actually down only about 3%. So clearly, we are seeing that weakness translate into the earnings results.
But despite the weaker macroeconomic picture, I think a question everyone needs to ask themselves is how much of that is actually priced into equities? Because if you look at price to earnings valuations, and you compare Europe to the rest of the world, Europe is actually trading cheaper than emerging markets or even China from a price to earnings ratio. And I know we've seen nearly $100 billion worth of outflow from European assets, equity assets, be it mutual funds or ETFs or hedge funds, over this past year.
But I think one thing to consider is there a buyer for European equities? And this is where everyone needs to pay attention. Yes, there is a buyer, and that buyer is the European corporates. European corporates are actually increasing their buybacks, and we saw that right through the Q3 earning season. I think that is going to put a floor on valuations and help actually bring prices a lot higher moving forward. We're also beginning to see M&A activity increase in Europe, although the deals are a lot smaller. Now that the trajectory for rates is likely to be a lot lower, I think that should help spur M&A activity.
So I understand that a lot of the macro has been weak, but I think a lot of it has been priced in, and I think given the fact that valuations are already very low, Europe is known to be a steady dividend payer. You have a higher margin of safety investing in European equities compared to the rest of the world, where valuations are expensive.

Kevin Flanagan:
So Jeff, I don't know, did you see the question come in about destocking/overstocking during the COVID/post-COVID? Do you want to take that question, as it reflects here in the US? And then I wanted to ask you something we haven't really talked a huge amount about, and I know you've done some work on this, on the Japan side, so take it away.

Jeff Weniger:
Well, yeah. Okay, Matthew Scott, thank you. Yes, we have strong opinions on this matter with the supply chain issues that we had, and we've seen in recent months a lot of the regional Fed surveys with, when I say recent months, more like last 12 months, some collapses in the new orders expectations subcomponents. The Richmond Fed comes to mind immediately when I think about that. And we've seen it inside the CPI report. The best example here, Kevin, is of course the big spike up in used cars and then the collapse as we are now hitting this situation where shortages have turned into abundance. The question is whether or not that happens in the labor market. Labor market shortages turn into abundance after you get a 525 basis point tightening. So we will see.
There is a lot of that evidence. I suspected last fourth quarter that we were going to have considerable discounts in retail merchandise, because we were starting to see that a lot of that stocking up that was occurring in 2021 and into 2022 in the back half of 2022 seemed to be abundant. However, I was wrong. When the holiday shopping season came, and we did not see so many discounts, I thought some of that retail inflation stuff would come tumbling faster.
And I was thinking, Aneeka, when you were talking about multiples in Europe, my mind reflexively went to the death of the TINA trade, certainly in the United States, to a smaller extent in Europe, and to no extent in Japan. The TINA trade in a place, in let's say core Europe, TINA being, of course, There Is No Alternative to a zero bond yield world, so therefore I will buy commercial property equities and so forth. Where are we on a 10-year boon? Give me a quote here. What's a 10-year boon at this juncture?

Kevin Flanagan:
215, 220, maybe.

Jeff Weniger:
215, 220. If I was to take a broad basket of German equities at this point, what's a forward multiple on that for a PE basis? Like…

Aneeka Gupta:
For Germany?

Jeff Weniger:
Yeah.

Aneeka Gupta:
Yeah. Around 11, yeah.

Jeff Weniger:
Like an 11-ish, and so what we could argue is that, and of course I'm picking a very moribund economy, maybe the most pessimistic of the economies, Europe's largest, but at 11 multiple, that is a 9% earnings yield, and if we're over here at two-and-a-quarter, 215, 220 on a German boon, let's call that 675 basis points worth of margin of safety for engaging German equities, that would be materially different from the situation in the United States, where, in anticipation of this call, I figured I'd be talking TINA Trade in Japan, Kevin, I can get a three-month bill in the United States, and I can get 5.4 on that. If I want to take a dividend yield plus a buyback yield in the United States, it's going to be a three-handle. The combination of those two, it's going to be a 1.6 only if I just take a dividend yield on something like an S&P 500, so it's the death of TINA in the United States.
The situation, Aneeka, that I think is particularly notable for DM outside of the United States on a relative play, overweight this, underweight that, is, well for one, and we haven't gotten to it, was there was a lot of fear in this market inside the last 30 days or so that the DOJ was going to be bumping up against one. And we had that really fuzzy, fuzzy chart from the DOJ telling us at what point they may intervene, where you had to hone in on that bar chart, they're going to intervene at 1.1 or 1.2 or what have you. But there's no possible risk right now, at least in today's session, for what it's worth. I think I saw 76 on a 10-year JGB this morning. No threat whatsoever on the one handle.
And so if we have 10 years at 76, and we have money markets at zero in Japan, and it's the same type of 11 or 12 forward multiple on broad equities with catalysts, with catalysts. So if you're 900 over on an earnings yield relative to overnight money in Japan, we also have, let's let the theory go, we'll see if it plays out, a January 2024 catalyst for Japanese equities in the form of the Name and Shame List being published. For those not aware of the Name and Shame List, essentially, if you haven't been able to get your profitability metrics up, despite the Tokyo Stock Exchange warnings, ever since the first quarter, your company's name is going on the Name and Shame List, and that should be something that I think is positive.
One of the major shops recently put out a piece where they anticipate that the aggregate return on equity for broad Japan may tick up two percentage points by, I believe, calendar '25. That may be a catalyst there. So people are looking to put on some beta-type trades. Maybe the rotation is out of the United States and into a long Japan. 48 past the hour, let me pause on my speaking, and let somebody else pick up from here.

Kevin Flanagan:
Yeah, an interesting question came in, and it said, "Jeff, you had mentioned on previous Office Hours that Nordic banks could cut rates first." Aneeka, let me pose the question to you. Is that what we're thinking? Could they lead the way, right? We were talking about the ECB and the Fed. Could the Nordic banks be the first to the party?

Jeff Weniger:
So that could tie in, because we had ... Okay, those were both ... Oh, it was Eric Johnson both times. This gentleman is very interested in the Scandies, please.

Kevin Flanagan:
Yeah, so that's why we have to talk about it.

Aneeka Gupta:
Yeah. So I would still agree with Jeff's view, barring Sweden. So what we've seen so far for most of the Nordic countries is that inflation has been coming down meaningfully. We have seen most of their mortgage market, which is very heavily based on floating rate mortgages, now being impacted by the sharp rise of interest rates. We have seen a meaningful slowdown in their economies. We've seen Norway slow down by 0.9%, we've seen Denmark coming in much lower by 0.2% GDP growth in Q3. Sweden, on the other hand, has actually risen by 0.2% in Q3 of 2023. At the same time, we have seen their inflation level actually rise, so headline inflation rose to 4.2%, and I think that's going to keep the Ricks Bank on edge. And so we do believe we do have one more rate hike for the upcoming November meeting next week. But as far as the other Nordic states are concerned, we are likely to see them begin to cut rates. So alongside the ECB, we do see the Nordic banks being amongst the main first central banks to begin to pivot.

Kevin Flanagan:
So just real quick, because I know we only have a few seconds left, what about on the periphery? What about Swiss National Bank? Anything on the Swiss side we should be thinking about, or not really?

Aneeka Gupta:
Well, typically, if investors are expecting a much more uncertain environment, if we do get this global slowdown, one of the best places to hide out would be amongst Swiss equities. So that's where we typically tend to see investors flock to when there is a lot of uncertainty. Just during, in 2022, when we had the war take place alongside energy prices spiking, that was the refuge for most investors within the European space. And if you look at the flip side of that argument, if you do expect to see oil prices actually come down, we've seen the DAX actually now be the most negatively correlated to energy prices. So if you expect the trajectory of oil actually to come down, the best way to play that amongst European equities would be via the DAX.

Jeff Weniger:
…so messy, yeah.

Kevin Flanagan:
We're coming up against ... Go ahead, Jeff. Coming up against time, you want to prioritize just one or two more questions?

Jeff Weniger:
Yeah. One gentleman, Charles Manthey, is talking about a specific ticker. Because we have our European colleagues on, we won't speak to tickers on this call. Eric Johnson, take a look at Mexico Central Bank. You want to talk about an 11 handle on overnight money against a four, a four, on Mexican CPI, 700 basis points worth the differential. That could be your cutter there. Bitcoin, no time for Bitcoin. Thank you, Jonathan. Debt downgrade, we think we got enough on the debt downgrade. Right, Kevin?

Kevin Flanagan:
Yeah, for now.

Jeff Weniger:
Recession, tune into another Office Hours for recession. It's just 52 past the hour. Let me just see if we can, and I appreciate that question. Extending duration, I think you hit earlier in the call. The piece that we wrote, which is published in both the EU and the US Business, is called the Global Edge. It was written by the four of us. It's about, what is it, 15 or 20 pages. We do this quarterly. If you like what you saw here and what you heard, please read the piece and send it along to your peers and hopefully not to your enemies, because we think it's a fantastic piece.
Let us go ahead and end this right here for the Americans. Our colleagues are Nitesh Shah and Aneeka Gupta for the Europeans. I'm Jeff Weniger, my colleague Kevin Flanagan on the fixed income side. Let's wrap it right there. Thank you, Irene Webb. Thank you everyone who participated in the poll questions and who asked all of these questions. We unfortunately couldn't get to all of them, but that means we had a good, robust participation, and we appreciate that. We appreciate your business. Have a nice evening in Europe, morning in the United States.

Kevin Flanagan:
Take care, everybody.

Irene Webb:
Thank you.

Nitesh Shah:
Thank you, everyone. Bye-bye.

Aneeka Gupta:
Take care.