InfraCap New York, NY ~ The global bond market is rallying today on weak Eurozone GDP results for Q3. Eurozone GDP printed at negative .1% for Q3 and only .1% growth year over year.
At the ECB press conference, President Lagarde acknowledged that the Eurozone economy was weakening and cited the October Eurozone composite PMI at 46.5 with any reading below 50 indicating a contraction in economic activity. She also implied that the ECB would lower its economic forecast when it provides an update in December.
The ECB raised rates twice during the third quarter and most long-term bonds in the Eurozone, increasing in yield by over 60bp. Since the Eurozone has 45% floating rate mortgage debt, the impacts of the intra-quarter rate increases are likely to deepen the Eurozone recession during the fourth quarter.
Updated Projections from InfraCap:
We continue to believe that global bond prices will stabilize in the 5% area and eventually rally as the Eurozone recession continues, US growth decelerates and US reported inflation declines lead by plunging wholesale and retail gasoline prices.
We expect that the decline in long-term rates will support a stock market rally. We have revised our target on the S&P for 2023 to 4,500 (from a range of 4,500 to 5,000) to reflect the elevated risks of the Middle East war and the impact of higher long-term interest rates.
We expect a major bond rally in 2024 as the ECB and other central banks are forced to cut rates in response to recessions.
We continue to project that US growth will decelerate into the 1-2% range but will not enter into a recession due to a resilient housing market.
We have established a 5,000 2024 target on the S&P based on an 18.5x multiple of 2025 earnings estimates of $270. This target assumes that the US 10-year rallies into the 3.5%-4% range, supporting a higher S&P multiple.