Inflation
In this report, we follow up on the upgrade to our US duration stance from last week with a review of our rates views and government bond allocations outside the US. We conclude that while we now find US Treasuries to be more attractive from a value perspective, even better value is available in euro area and UK government debt.
Expectations for oil demand growth through 2023-24 are way too optimistic. Until these expectations fall to -0.5-1 percent, the oil price has further downside. Plus: collapsed complexity confirms that AI is in a mania, while basic materials stocks and ZAR/EUR are rebound candidates.
The Reserve Bank of New Zealand hiked rates this week to 5.5%. There are many reasons to expect that to be the last rate hike for this cycle – a development that is positive for New Zealand bonds but bearish for the New Zealand dollar.
The Reserve Bank of New Zealand hiked rates this week to 5.5%. There are many reasons to expect that to be the last rate hike for this cycle – a development that is positive for New Zealand bonds but bearish for the New Zealand dollar.
The debt ceiling game’s endpoint will avoid default only if it implies economic pain. For the Republicans, the best strategy is not to lift the debt ceiling unless the Democrats cut spending a lot, or unless the economy starts to tank. Plus: there are signs that the mania in ‘AI’ stocks has gone too far too fast.
Financial commentators, politicians and policymakers have increasingly been blaming stubbornly high inflation on companies pursuing aggressive pricing strategies to boost earnings and margins. In this Special Report, we investigate the concept of “greedflation” – companies persistently raising prices faster than costs are increasing to pad profit margins - and see if the associated conclusions about corporate pricing power and inflation are borne out by the data in the US, euro area and UK.
There is a 50:50 chance of experiencing a major deflationary shock in the next two years, and an even greater likelihood on a longer timeframe. The good news is that several assets provide a good insurance against this risk, and that this insurance is now cheap. Plus we highlight a compelling commodity pair-trade.
Indian EPS growth is set for major disappointments vis-à-vis the lofty expectations. Weak domestic demand amid tight fiscal and monetary policy entails more downside in stock prices. Stay underweight.
As the Fed meets today, we explain what it did wrong in 1970, 1974, and 1980 that prevented inflation from being exorcised, and the lessons for 2023-24. Plus, we identify a currency cross that could rebound in the next year.
In Section I, we discuss why the rally in stock prices over the past month reflects the soft-landing view, and why that is not a likely economic outcome. US inflation is slowing, but target inflation remains elusive. Meanwhile, cracks in the US labor market are already apparent, and there is strong evidence against the view that US stocks are appropriately priced for an eventual US recession. This underscores that conservative investment positioning is still warranted. In Section II, we check in on the indebtedness risk of several major economies, and examine whether these risks exist primarily in the household, nonfinancial corporate, or government sectors. While there are limited cyclical implications of recent trends in global indebtedness, there are several problems that will eventually “come home to roost” – particularly in the US and China.