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The ketchup principle

It’s happened to all of us: trying to get the ketchup out of the bottle, we turn it upside down and give the bottom a smack. Nothing comes out. We smack it again and again until, finally and all at once, too much comes out too fast. That’s the ketchup principle.

In the past few years, various parties have compared the surprising absence of inflation to this very ketchup principle though despite much smacking of the bottle, not much inflation has been produced yet in many places. But slowly it is creeping towards the neck of the bottle, especially in the US. Since the beginning of 2018, US inflation has been steadily climbing towards 3% (see Figure 1). Not only that, but at its current level of 2.4%, the core rate – which is more important for the central bank – has put some distance between it and the 2% mark. On the other hand, not much has happened yet in the eurozone (see Figure 2). The core rate is just above 1%; only inflation has topped 2% at this stage.

So where do things go from here? ECB President, Mario Draghi, spoke of a marked rise in inflation in a recent address. Does he perhaps have access to data we haven’t seen yet? Mind you, many parameters point to the fact that the risk of inflation has greatly increased. If nothing else, the sharp rise in the price of crude oil, which meanwhile has gained more than 60% year-on-year, will push inflation up. Figure 3 shows OECD inflation along with the annual percentage change in the price of crude oil (divided by 10 to aid presentation). The strong correlation in direction is plain to see. Naturally, crude oil inflation does not feed 1:1 into consumer prices. Figure 4 shows the components of inflation in the eurozone. The price of oil is indirectly reflected in the housing and transport components. These two components make up more than 30% of the inflation measurement, and they have risen sharply. The price of petrol and diesel alone, which is used to calculate the CPI, is currently at a 13% increase (see Figure 5).

However, not only the price of oil has an inflationary effect. Since this has been the longest economic growth phase of the post-war period, especially in the US, it is unsurprising that unemployment has fallen to a 50-year low (see Figure 6). More importantly for any statisticians out there, the figures for initial and continuing unemployment benefit claims have fallen to long-term lows (see Figure 7). This is building up wage pressures, which has even surprised the markets on occasion. Figure 8 shows that in the US, nominal wages have already increased by more than 3%. In the absence of data for Europe, we have taken the figures for Germany, and can see that despite record employment, wage growth is only at 2.5%. Given further expansion, wage pressures are likely to increase, which will then be reflected in the core consumer prices.

Another inflationary factor is increasing capacity utilisation in developed markets (see Figure 9). All industrialised countries except for Greece have regained pre-financial market crisis levels. In these times of globalisation, high capacity utilisation is not necessarily inflationary, but at least it does not exert any deflationary pressure on prices.

Last but not least, there is the trade war between China and the US. The short-term and direct effect of it is higher prices for imported goods, which, in many cases, will also result in higher prices for consumer goods. In the medium term and more indirectly, we will see substitution effects and/or a fall-off in demand, which may ultimately lead to a slowdown in economic growth as well.  

However, the market-implied forward inflation rate – a key figure for central banks – remains very modest on both sides of the Atlantic, at more or less than 2% (see Figure 10). From the looks of it, the potential for a big surprise could increase. If all of the aforementioned factors impact upon inflation, then the ECB, especially, might soon lag behind. Finally, the ECB’s announcements thus far indicate that the first interest rate hike will take place in summer 2019. Clearly, this might come many months too late, and would push inflation well over the 2% mark. 

Should that come to pass, yields in Europe would rise sharply. As we are seeing in the US at the moment, higher inflation seems unable to induce the US central bank to make greater interest rate hikes earlier. At present, we can expect a rate rise of one more percent, in four increments of 25 bp every three months. 

However, if the ketchup principle does apply and inflation exhibits a completely different growth dynamic – something that is quite possible in the current climate – then the next 6 to 12 months on the bond markets will be very interesting.

Figure 1: US headline and core inflation

Figure 2: Eurozone headline and core inflation

Figure 3: Inflation in OECD countries and the annual percentage change in the price of crude oil divided by 10

Figure 4: Consumer price components in the eurozone

Figure 5: Petrol and diesel price components in the CPI for the eurozone

Figure 6: US unemployment rate

Figure 7: Initial and continuing US unemployment benefit claims


Figure 8: Growth in nominal wages

Figure 9: Capacity utilisation

Figure 10: 5-year forward inflation rates

Positioning of the Ethna Funds


In September, Trump and his populist counterpart in Italy, the coalition government of Five Star Movement and Northern League, again ensured that things remained interesting on the financial markets. While POTUS slapped a further 10% tariff on USD 200 billion in Chinese goods, to which the Chinese directly retaliated, the Italian government surprised the markets by setting a high budget deficit target of 2.4% – for the next 3 years, no less. The ramifications were immediate, with yield spreads on 10-year Italian sovereign bonds widening more than 30 basis points in a single day. After China declared that it would not use the currency as a weapon, many emerging markets were able to breathe a sigh of relief. In addition, both the ECB and the Fed held meetings in September. While Mario Draghi announced a continuation of his course before speaking in surprisingly strong terms about inflation just a week later, the Fed implemented the anticipated eighth rate hike. Fed Chair Jerome Powell also paved the way for another rise in December, as well as for further rises in 2019. 

Wage costs in the US were very high and inflation, too, appears to be definitively stabilising above the 2% level set by the Fed. The consequences didn’t take long to materialise either. Yields on 10-year US Treasuries rose in September to the high for the year attained in May, of over 3.10%. This puts them well above the 2.40% level with which we started 2018. Losses for European investors who use futures to hedge the currency are therefore substantial. We also saw a similar movement in Bunds in September. However, at the end of the month the latest developments in the Italian crisis put the brakes on the rise in Bund yields. We had a net duration of 3.3 at the beginning of September, which was managed very actively over the course of the month. We are at 2.9 at the moment.

For most bond funds, high quality cash bonds in euro were down in September. Since the ECB’s asset purchase programme is ending at the close of the year, many companies have tried to bring their bonds to market before this date. Even though this is in no way a credit event, the risk premia still widened, similar to what occurred in August. However, this also means that we were unable to absorb this movement with our credit default protection. Amazingly, money is still flowing into emerging market ETFs and high yield bonds. Hang on to the bitter end seems to be the motto, because the fact is that the low interest rate environment is driving many investors into these products.

Equity indices moved sideways in September – both in Europe and in the US. Performance was mostly between +1% and -1%.

The average rating within the Ethna-DEFENSIV remained in the A+/AA- range. The sector breakdown, too, remained virtually unchanged in August. As recently reported, we have begun opening equity positions in the Ethna-DEFENSIV once again. We believe that the most unpopular bull market in equities is likely to bring about even higher prices. The allocation is just above 2% at the moment.

On the currency front, we took profits on our slightly long position in Swiss francs. We believe that the risk of an intervention by the Swiss central bank will rise substantially the closer we get to the 1.12 mark against the euro.


September lived up to expectations. Once again we have had a volatile month that brought a great deal of events with a bearing on the portfolio. Not only we, but the entire world, looked on anxiously as the latest rounds of tariffs were announced and imposed. Everyone knows that this is a lose-lose situation. Despite that, the trade war entered a new phase, albeit one not as severe as anticipated. This fact, coupled with China’s renewed will to negotiate, was enough to send the Chinese equity index in particular soaring up from the all-year lows. Even when the rhetoric later ratcheted up again, the index stayed surprisingly close to its highs for the month. We interpret this as a first sign that the overcorrection in this market segment could be over and therefore see further potential in our Chinese equity position. However, the publication of the Italian budget figures did not make for quite as good news as that. Literally at the last minute, the populist government managed, by publishing their 2.4% budget deficit, to catapult the 10-year yield, which had fallen last month from 3.2 to 2.8%, back up to 3.2% in the space of a day. A clash with the European Commission is therefore inevitable. The initially stronger euro subsequently lost 2%, down from its high for the month of 1.18. This currency movement was also supported by the US central bank’s decision on interest rates, which was to raise the key rate by 25 basis points, as expected. Something we found a little surprising was the steady rise in US Treasury and Bund yields throughout the month.

  • Ultimately, it was this yield increase that led to the portfolio’s negative return for the month, despite neutral to positive developments in all other segments. As reported, due to the high equity exposure, we didn’t maintain the duration reduction, so we lost out due to the movement in interest rates. On the other hand, we were well positioned for the fresh escalation of the situation in Italy. Both the dollar position – expanded to 7.8% while the euro was strong – and the short position in Italian bonds benefited strongly. Contrary to last month’s commentary, the latter position wasn’t built up to 10% but rather reduced to approx. 5% during the temporary rally. The 5% position in Swiss francs was closed out at a profit during the month.
  • The equity portfolio, too, exhibited a good deal of volatility. The exposure, which had been reduced in August, was bought back quite quickly at the beginning of September at slightly better prices. While the US indices lost the gains they made at mid-month, both the European and the Chinese market initially tested fresh lows before a rally set in, as described at the outset. In both markets, we took advantage of the weakness either to expand the exposure or, in the case of the DAX, to open a position. These measures led to a net equity exposure at month-end of 25%, which we intend to expand to 30% over the course of the rally we expect at year-end.


The month of September so dreaded by stock market participants turned out just fine this year, closing in slightly positive territory. The US and Europe developed in lockstep while, in Asia, mainly China and Japan were impressive all down the line. The trend towards growth equities and equities with higher valuations weakened somewhat last month. For this reason, technology stocks were mixed. However, it is too early to talk of any sustained weakness or crossing of important technical marks. The trend and the momentum in this sector remain intact. The situation in Europe appears to be more fragile once again. After debate about the Italian budget deficit grew louder, European equity indices nosedived for a few days and crossed important technical marks at the lower end. In keeping with falling stock prices, yields on Italian bonds rose. Not only sovereign bonds were affected by the rise; yields on financial issuers, such as Unicredit and Mediobanca, also widened. September seemed to live up to its modest reputation at the beginning of the month. The political tensions made the subsequent strong rally in the equity markets towards the end of the month all the more surprising. Europe, in particular, fared well despite the dark political clouds on the horizon, and kept pace with America. The real stars of September, however, were the Asian stock markets.

  • At the beginning of the month, the situation on the European equity markets was somewhat difficult. Budget discussions in Italy affected the equity markets badly. The equity allocation in the Ethna-DYNAMISCH had already been reduced to approx. 45% as a precaution. The US stock markets seemed largely unfazed by the events in the eurozone and continued the positive trend seen heretofore. Towards the middle of the month, Europe, too, managed to stabilise, and closed the month in positive territory. The rapid recovery in what were very difficult circumstances gives us reason to be positive about Q4 and shows that, especially in Europe, negative developments have been priced in. During the recovery, we dialled back the hedging component, so that the equity exposure is back above 50%.
  • In the Ethna-DYNAMISCH equity portfolio, the last-remaining European financials, such as ABN Amro, Lloyds Banking Group and the French insurance company AXA, were sold in September. This activity took several weeks and is now complete. These transactions came in response to the looming upheavals in Europe (Italy, Brexit), which may have adverse effects on financials in particular. On the other hand, we stocked up on solid quality names, such as 3M in the US and SMC Corporation in Japan. We reported on both of these names in a little greater detail last month.
  • The environment for bonds remained challenging in September, as mentioned at the top. Rising yields in the US and in Europe pushed prices down slightly. In Europe, in addition, the topic of Italy caused additional drama on the bond market. In the US, hedges against rising interest rates have reached values that can only be described as extreme. A near-term countermovement in yields seems realistic; we have reduced our hedging against rising interest rates.

The picture for the fourth quarter looks constructive, if not exactly rosy. In particular, the significant recovery in Europe after the difficult situation at the beginning of the month gives us hope that prices will continue to rise. The Ethna-DYNAMISCH will retain its focus on equities in the fourth quarter as well.

Figure 11: Portfolio ratings for Ethna-DEFENSIV

Figure 12: Portfolio composition of Ethna-DEFENSIV by currency

Figure 13: Portfolio structure* of Ethna-AKTIV

Figure 14: Portfolio composition of Ethna-AKTIV by currency

Figure 15: Portfolio structure* of Ethna-DYNAMISCH

Figure 16: Portfolio composition of Ethna-DYNAMISCH by currency

Figure 17: Portfolio composition of Ethna-DEFENSIV by country

Figure 18: Portfolio composition of Ethna-AKTIV by country

Figure 19: Portfolio composition of Ethna-DYNAMISCH by country

Graph 20: Portfolio composition of Ethna-DEFENSIV by issuer sector

Graph 21: Portfolio composition of Ethna-AKTIV by issuer sector

Graph 22: Portfolio composition of Ethna-DYNAMISCH by issuer sector


* “Cash” comprises term deposits, call money and current accounts/other accounts. “Equities net” comprises direct investments and exposure resulting from equity derivatives.

The investment funds described in this publication are Luxembourg investment funds (fonds commun de placement) that have been established for an unlimited period in accordance with Part I of the Luxembourg Law of 17 December 2010 relating to undertakings for collective investment (the “Law of 17 December 2010”). An investment in investment funds, as with all securities and comparable financial assets, carries the risk of capital or currency losses. The price of fund units and income levels will therefore fluctuate and cannot be guaranteed. The costs associated with fund investment affects the actual performance. Units should solely be purchased on the basis of the statutory sales documentation (Key Investor Information, sales prospectuses and annual reports), which can be obtained free of charge on the website or from the fund management company ETHENEA Independent Investors S.A., 16 rue Gabriel Lippmann, L-5365 Munsbach. All information published here constitutes a product description only. It does not constitute investment advice, an offer to enter into an agreement for the provision of advice or information or a solicitation of an offer to buy or sell securities. Contents have been carefully researched, compiled and checked. No guarantee for correctness, completeness or accuracy can be provided. All information published here constitutes a product description only. It does not constitute investment advice, an offer to enter into an agreement for the provision of advice or information, or an offer to buy or sell securities. The contents have been carefully researched, compiled and checked. No guarantee can be given for correctness, completeness or accuracy. The information includes past data which are no indicator of future performance. The management fee, custodian bank fee and all other additional costs are taken into account in the calculation of the unit price as stated in the provisions of the contract. Performance is calculated using the BVI method (German federal association for investment and asset management), which means that the calculations do not include an issuing charge, transaction costs (such as order fees and brokerage fees), custodian bank fees, or other management fees. Including the issuing surcharge would reduce performance. The performance shown is not a reliable indicator of future performance. Munsbach, 30/11/2018