Economy

Our Treasury yield fair value model suggests that the 10-year Treasury yield has an additional +19bps of upside. Stay at below benchmark duration.

When earnings growth negatively diverges from GDP growth, the gap rarely closes <i>via</i> a rebound in profit growth. The most notable feature of prior episodes is weak corporate pricing power and the current period is no different; an ongoing profit margin squeeze means earnings in the next few months risk being a disappointment.

As the U.S. median voter is shifting to the left, redistributive policy could come into play. A strong dollar helps to achieve this goal as it results in a bigger share of labor income in the economy. EM and commodity currencies could bear the brunt of the pain. Favor the euro on its crosses. Stay short CAD/NOK, but tighten stops.

Our <i>Fourth Quarter Strategy Outlook</i> presents the major investment themes and views we see playing out for the rest of the year and beyond.

China's current capacity utilization does not look extreme both from a historical perspective and within the global context. The markets misperception about China's overcapacity issue has heavily punished Chinese equities, which is unjustified and unsustainable. Strategically it makes sense to overweight Chinese stocks and material/energy sectors against their global peers.

India's agricultural output per capita has not increased at all. Thus, food and headline inflation will remain structurally high, which will negatively impact savings and investment dynamics in the years ahead. With respect to cyclical growth, household spending is very strong, but investment expenditures are stagnant. Fixed-income traders should bet on yield curve steepening in India. A section <i>Brazil's Business Cycle Illustrated</i> highlights the cyclical profile of this economy.

This week, we are reviewing all of our active trades discussed in the last twelve months, which are intended to be an overlay to our recommended fixed income portfolio.

This week's <i>Special Report</i> looks at the three controversial predictions that I made at this year's <i>BCA New York Investment Conference</i>.

It's hard to make a case for attractive returns from any asset class over the next year. We dial down risk a bit but ending our overweight on junk bonds. Investors should pick up yield where they can but without taking excessive risk.

This month's <i>Special Report</i> looks at the Fed's policy options in the event that there is a negative economic shock while the policy rate is still very depressed. The Fed's "Plan A" is more QE and forward guidance, which are not up to the task. There is no "Plan B", which means that risk assets will be hit hard during the next downturn.