Developed Countries

Highlights Portfolio Strategy The Fed’s extremely easy monetary backdrop along with easy fiscal policy remain the dominant macro themes, and they will continue to underpin the equity market. We remain constructive on the equity market’s prospects on a cyclical 9-12 month time horizon. While the path of least resistance remains higher for the S&P biotech index, we do not want to overstate our welcome and are putting it on downgrade alert and instituting a 5% rolling stop in order to protect profits. Relative supply/demand dynamics, social distancing, the pendulum swinging from renting to owing and enticing relative technicals and valuations, all signal that a long S&P homebuilders/short S&P REITs pair trade is primed to generate alpha.   Recent Changes Initiate a long S&P homebuilders/short S&P real estate trade, today. Table 1 Feature The SPX had a bumper week last week, but failed to pierce through the 200-day moving average. A flare up in the US/China trade war, a barrage of positive coronavirus vaccine news and Jay Powell’s 60 minutes interview brought back some volatility in trading, however, the VIX remains in a steady downturn. Importantly, investors are nowhere near as complacent as during the 2018/19 or early 2020 SPX peaks, judging by VIX futures positioning (net speculative positions shown inverted, Chart 1). Chart 1Positioning Is Far... In other words, there is still room for equities to rise before sentiment reaches greedy levels. A number of other indicators we track confirm that recent SPX trading is associated more with panic than with euphoria. Namely, Chart 2 shows that our Complacency-Anxiety, Capitulation and Equity Sentiment Indicators, all corroborate that investor confidence is far from previous exuberant peaks, and signal that there is scope for additional equity gains on a cyclical 9-12 month time horizon.  Delving deeper into investor psyche, our sense is that there are three distinct camps of investors at the current juncture, two of which are fiercely battling it out in the stock market. Chart 2…From Complacent First there are the pessimists that we call “second wavers” that are more often than not also “Fed non-believers” or “Fed fighters”. They argue that stocks are extremely expensive and if a second wave of the corona virus hits, then stocks are going to plunge anew given the lack of a valuation cushion, as all the money in the world (Fed QE5) cannot cure the virus (top panel, Chart 3). Second, there are the optimists that are hopeful that a vaccine/drug cocktail discovery is looming to effectively eradicate the coronavirus. These investors also believe in the smooth reopening of the economy. But, even if there were a second wave, their thinking goes that our societies/governments/health care systems are all going to be more prepared and effective to deal with a second viral outbreak in the fall. In addition, they are in the “do not fight the Fed” camp. Finally, there are the more moderate investors that lie somewhere in between these two camps. They sat tight and held on to their stock positions during the 36% peak-to-trough SPX drawdown and have likely been on the sidelines lately (bottom panel, Chart 3) awaiting a catalyst to either deploy fresh capital or raise some cash. We are in the more optimistic camp and while a vaccine may be months away, we will have to figure out a way as a society to more effectively protect the elderly that are most at risk from the virus and continue to live on, as we first posited in the March 23rd Weekly Report when we outlined 20 reasons to buy stocks and reprint here: "20. Social-distancing measures in the West will ultimately break the Epidemic Curve first derivative and arrest the panic. Even if COVID-19 comes back in force, the fact is that most of the patients who succumb to it are elderly. In Italy, the average age of death is 80 years old. As such, the final circuit-breaker ahead of a GFC would be desensitization by the population, as selective quarantines – targeting the elderly cohorts – get implemented in order to allow other people to return to work. Furthermore, two “silver bullet” solutions remain as tail risks to the bearish narrative. First, a biotech or pharmaceutical company may make a breakthrough in the fight against COVID-19. Not necessarily a vaccine, but a treatment. Finally, upcoming warm weather in the northern hemisphere may also help the fight against the virus."1 Chart 3Cash Hoarding Is Associated With Market Troughs Chart 4Loose Monetary Policy… Moreover, we definitely refrain from fighting the Fed as we outlined in our recent “Fight Central Banks At Your Own Peril” Weekly Report2 and reiterate that view today (Chart 4). While some investors were surprised by Jay Powell’s 60 Minutes interview remarks on the way the Fed digitally creates money, Ben Bernanke in another 60 Minutes interview in March 20093 made a similar comment that we cited in our March 23 Weekly Report (please refer to reason number 6 to buy equities).4 Importantly, we felt that Jay Powell’s demeanor was more like “please test our resolve Mr. Market if you reckon the FOMC is out of ammunition”. As a reminder, the Fed is in a position of strength: devaluing a currency is easy, revaluing/defending a currency is difficult and at times impossible as FX (and gold) reserves eventually run dry. In sum, the Fed’s extremely easy monetary backdrop along with easy fiscal policy (Chart 5) remain the dominant macro themes, and they will continue to underpin the equity market. Eventually, a liquidity handoff to growth will take root, and the SPX will no longer require the immense fiscal and monetary supports. As a result we continue to believe that stocks will be higher in the coming 9-12 months. Chart 5…And Easy Fiscal Policy Are Underpinning Stocks Biotech Delivers We have been overweight the S&P biotech index and adding alpha to our portfolio in the double digits, however we do not want to overstate our welcome and are putting it on downgrade alert and instituting a 5% rolling stop in order to protect profits. While a few technology sectors and subsectors have come close to vaulting to fresh all-time highs, none other than the S&P biotech index has managed such an impressive feat. The stealthy advance in biotech stocks has been earnings driven and is not only confined to the narrow based Big-Pharma lookalike S&P biotech index (Chart 6). The broader-based NASDAQ biotech index comprising 209 stocks has also quietly sprang to uncharted territory. True, relative share prices have yet to make the all-time high leap, but have bested the market roughly by 30% year-to-date irrespective of the biotech index or ETF tracked (Chart 6). Importantly, growth stocks in general and biotech stocks in particular perform exceptionally well in a disinflationary growth environment. Therefore biotech stocks are the primary beneficiaries of the Fed’s QE5 and NIRP policies at a time when inflation is missing in action (top panel, Chart 7). Chart 6Earnings-Led Advance This goldilocks backdrop is also evident in the US bank credit impulse that has gone parabolic. When there is flushing liquidity and growth is scarce and declining, investors flock to any growth they can get their hands on (bottom panel, Chart 7). Chart 7Goldilocks Backdrop US dollar based liquidity, also underpins biotech stocks. In recent research, we have been highlighting that the Fed is indirectly targeting the debasing of the greenback. All this excess US dollar liquidity will eventually boost global growth, and reflate corporate earnings via the export relief valve. Biotech stocks will also get a fillip from a depreciating US dollar (Chart 8). Our overweight thesis in biotech was predicated – among other things – upon Big Pharma taking out biotech players and acquiring their coveted drug pipelines. We continue to side with the potential M&A targets, rather than the acquirers. The number of industry M&A deals has reached fever pitch and deal premia are still averaging over 60% (Chart 9). Chart 8Dollar Flooding Is A Boon For Biotech Equities Currently, the global race to find a coronavirus vaccine has further propelled biotech stocks. Indeed, investors are voting with their feet and are betting on a vaccine breakthrough. Thus, the allure of biotech stocks has also increased a notch as the possibility of a vaccine makes their earnings streams even more valuable and desirable to Big Pharma. A mega M&A deal in the space would not take us by surprise. Chart 9M&A Activity Will Remain Robust A few words are in order on the earnings, valuation and technical fronts. While relative share price momentum is galloping higher, it is moving in lockstep with rising earnings estimates (second panel, Chart 10). We would be extremely concerned if this were a multiple expansion driven relative share price advance. In fact, the biotech forward P/E trades both below the historical mean and at a 39% discount to the broad market hovering near an all-time low (Chart 10). Even on a dividend yield basis, biotech stocks are cheap sporting a higher (and safer) dividend yield than the SPX (bottom panel, Chart 10). Chart 10Biotech Stocks Are As Cheap As They Have Ever Been Chart 11Earnings Hurdle Remains Low Finally, relative long-term profit growth euphoria reaching astronomical levels, preceded previous S&P biotech index peaks: three times in the past two decades biotech stocks were projected to surpass SPX profit growth by roughly 10%. The current reading has plunged to negative 1.2% (Chart 11). Netting it all out, the global race for a coronavirus vaccine, robust earnings growth, ample US dollar liquidity and generationally low interest rates suggest that the path of least resistance remains higher for the S&P biotech index.   Bottom Line: Stay overweight the S&P biotech index, but put it on downgrade alert and set a 5% rolling stop in order to protect profits. The ticker symbols for the stocks in this index are: BLBG: S5BIOT – ABBV, ALXN, AMGN, BIIB, GILD, INCY, REGN, VRTX. Intra-Real Estate Trade Idea There is an exploitable trade opportunity in the real estate market, preferring residential real estate to commercial real estate (CRE). The cleanest way to play this is via a long S&P homebuilders/short S&P REITs pair trade, and we recommend initiating such a market-neutral trade today. Relative performance remains below the upward sloping time trend and at least a mini overshoot phase is in the cards in the coming quarters (Chart 12). One of the key drivers for this pair trade is the ebb and flow of owning versus renting and the current message is positive for homebuilders at the expense of REITs (Chart 13). Chart 12Looming Overshoot Phase Chart 13Own Versus Rent Upswing Is Bullish For The Pair Trade Home ownership has suffered a setback and never reclaimed its pre GFC highs. However, there is pent up demand for single family homes, especially given the recent drubbing of interest rates which should bring first time home buyers back into the market. Millennials up to now have been more of a renter generation, but as household formation increases for the largest cohort in the US, homeownership will make a comeback. One can argue that both real estate segments are interest rate sensitive and that they should benefit from lower rates. However, banks are more willing to lend to consumers in order to buy a home rather than to investors for CRE properties/projects by a factor of 2:1 according to the latest Federal Reserve Senior Loan Officer survey.5 Similarly, whereas demand for CRE loans has collapsed according to the same survey in April, demand for residential real estate loans spiked (top panel, Chart 14). In times of coronavirus-induced social distancing there is a lot more risk associated with CRE versus residential properties. Apartment REITs for example have an element of density-related risk versus the allure of a single family home in the suburbs. Likely social distancing will place a premium on single family homes in coming quarters at the expense of living in high rises in the city. This backdrop bodes well for home prices, but ill for CRE prices which according to Green Street Advisors contracted by 9% in April.6 Keep in mind that residential real estate price only very recently surpassed their 2006 zenith whereas CRE price are still hovering at one standard deviation above the previous peak (Chart 14). Debt deflation is a real threat for CRE prices and given that REITs are at the bottom of this levered asset’s capital structure it is last to collect.  Also the long-term ramifications to demand on CRE are grave compared with residential real estate. On the office REIT segment as an example, we deem that corporations will rethink their often expensive downtown office space requirements and likely downsize, as working from home has become mainstream. The unintended consequence of this realization is that demand for (larger) single family homes will also increase as workers opt to set up more comfortable working spaces at suburban homes. Chart 14Homebuilders Have The Upper Hand Shopping mall REITs are under relentless attack from the Amazonification of the economy and now have to contend with social distancing. The retail shopping experience will never be the same again sustaining the threat of extinction for shopping centers. On the construction front, single family housing starts are breaking ground at the historical mean and way below the 2006 peak run-rate, however, multi-family supply has gone parabolic (Chart 15). These diverging supply conditions are a harbinger of rising relative share prices. Finally, with regard to technicals and valuations homebuilders have the upper hand. Our Technical Indicator is in the neutral zone and relative valuations have collapsed near all-time lows offering a compelling entry point to the pair trade (Chart 16). Chart 15Supply Dynamics Favor Homebuilders Chart 16Relative Pessimism Is Contrarily Positive Netting it all out, relative supply and demand dynamics, social distancing, the pendulum swinging from renting to owing and enticing relative technicals and valuations, all signal that a long S&P homebuilders/short S&P REITs pair trade is primed to generate alpha.  Bottom Line: Initiate a long S&P homebuilders/short S&P REITs pair trade today. The ticker symbols for the stocks in the S&P homebuilding and S&P REITs indexes are: BLBG: S5HOME – LEN, PHM, NVR, DHI, and BLBG: S5REITS – AMT, PLD, CCI, EQIX, DLR, SBAC, PSA, AVB, EQR, WELL, ARE, O, SPG, ESS, WY, MAA, VTR, DRE, PEAK, BXP, EXR, UDR, HST, REG, IRM, VNO, FRT, AIV, KIM, SLG, respectively.   Anastasios Avgeriou US Equity Strategist anastasios@bcaresearch.com     Footnotes 1     Please see BCA US Equity Strategy Weekly Report, “The Darkest Hour Is Just Before The Dawn” dated March 23, 2020, available at uses.bcaresearch.com 2     Please see BCA US Equity Strategy Weekly Report, “Fight Central Banks At Your Own Peril” dated April 14, 2020, available at uses.bcaresearch.com. 3    https://www.cbsnews.com/news/ben-bernankes-greatest-challenge/2/ 4    Please see BCA US Equity Strategy Weekly Report, “The Darkest Hour Is Just Before The Dawn” dated March 23, 2020, available at uses.bcaresearch.com 5    https://www.federalreserve.gov/data/sloos/sloos-202004.htm 6    https://www.greenstreetadvisors.com/insights/CPPI             Current Recommendations Current Trades Strategic (10-Year) Trade Recommendations Size And Style Views June 3, 2019 Stay neutral cyclicals over defensives (downgrade alert)  January 22, 2018 Favor value over growth May 10, 2018 Favor large over small caps (Stop 10%) June 11, 2018 Long the BCA  Millennial basket  The ticker symbols are: (AAPL, AMZN, UBER, HD, LEN, MSFT, NFLX, SPOT, TSLA, V).

Highlights Duration: The easing of shelter-in-place restrictions and resultant improvement in economic growth will cause US bond yields to rise somewhat during the next couple of months. However, the magnitude of economic improvement will be modest, and the Fed’s dovish rate guidance will temper the severity of any yield back-up. Municipal Bonds: The less-than-generous pricing offered through the Fed’s Municipal Liquidity Facility will not help push muni yields lower from current levels. However, very attractive valuations and the expectation of federal government relief justify an overweight allocation to the sector. Inflation & TIPS: We are not worried about significant inflation pressures any time soon. But equally, we don’t see 12-month headline CPI falling much below zero this year. This means that TIPS are cheap relative to nominal Treasuries. Treasury Yield Outlook Chart 1Taking A Breather Bond yields have been relatively stable since early April, and the Treasury index has performed roughly in-line with cash for most of the second quarter. This of course follows on the heels of massive outperformance in Q1 (Chart 1). Nonetheless, the recent stabilization in yields raises the question of whether bond returns are approaching a cyclical peak, or merely experiencing a temporary lull. Yields Are Biased Higher In The Near-Term … Our view is that a modest bond sell-off is likely during the next couple of months for four reasons. First, high-frequency global growth indicators are finally starting to hook up (Chart 2). Specifically, we like to track the CRB Raw Industrials commodity price index, emerging market currencies and the relative performance of cyclical versus defensive US equities. All three indicators track bond yields closely, and all three are showing signs of bottoming. Chart 2High-Frequency Global Growth Indicators Second, FLASH PMI estimates for May showed broad-based improvement compared to the April lows. Specifically, FLASH Manufacturing PMIs for the United States, Euro Area and United Kingdom all increased compared to April (Chart 3A). Of countries that have FLASH PMI estimates, only Japan saw a continued decline in May. If these numbers are to be believed, they suggest that April might indeed represent the global economic trough. We are still waiting for May data from China and the rest of the emerging world, important economic blocs that together account for 47% of the Global Manufacturing PMI. But China’s PMI, at least, has already rebounded off its February low (Chart 3B). China’s number will likely pressure the global index higher when it is released next week. Chart 3APMI Estimates For May Chart 3BChina's PMI Is Close To Neutral Third, high-frequency US economic data are consistent with an economy that is close to, or perhaps already passed, its economic trough. Initial jobless claims are still very high but have printed successively lower since peaking seven weeks ago. Similarly, the New York Fed’s Weekly Economic Index remains at its all-time low but is no longer in free fall (Chart 4).1   Chart 4US Economic Indicators Finally, but also most importantly, the slightly better data noted above are the result of economies that are slowly starting to re-open as daily new COVID cases roll over. This is particularly the case in Europe and North America (Chart 5). Restrictions will probably continue to ease during the next couple of months, meaning that both the economic data and bond yields are biased higher. Chart 5Global COVID-19 Cases … But Don’t Expect Anything More Than A Modest Sell-Off Chart 6Fed's Forward Guidance Quickly Dampened Vol However, there are also a few reasons to not get too bearish on US bonds. First, it is entirely possible – and even likely – that COVID cases will start to increase as shelter-in-place restrictions are lifted. If these second waves of the infection aren’t adequately suppressed via testing and contact tracing then restrictions could be re-instated by the fall, putting renewed downward pressure on bond yields. Also, while new COVID cases are declining in many parts of Europe and North America, several large emerging markets are still seeing cases accelerate. Brazil and India, for example, have yet to see a peak in new cases, while Russia’s new cases have just started to roll over (Chart 5, bottom 2 panels). Together, Brazil, Russia and India account for 8% of the Global Manufacturing PMI. Slow growth in those nations will significantly dampen any global economic recovery. On top of uncertainty surrounding the speed of any nascent global economic recovery, bond yields will also be held down by the Fed’s highly credible zero-lower-bound interest rate guidance. As we discussed in last week’s report, large bond sell-offs are almost always associated with a significant hawkish shift in monetary policy.2 This will not occur any time soon. In fact, the New York Fed’s latest Survey of Market Participants, taken just prior to the April 28-29 FOMC meeting, reveals that the median market participant expects the fed funds rate to stay at its current level at least until the end of 2022!3 On the one hand, such depressed expectations suggest scope for a massive re-pricing at some point in the future, but this will not occur until inflation forces the Fed to act. We agree with the survey respondents that this is a long way off. While new COVID cases are declining in many parts of Europe and North America, several large emerging markets are still seeing cases accelerate. It’s also interesting to note the speed at which the market has bought into the Fed’s zero-lower-bound rate guidance during the past two months. Chart 6 shows that after the Fed first cut rates to zero in December 2008, it still took several years for implied interest rate volatility to reach historically low levels. That is, the market was not initially convinced that rates would stay at zero for the long haul. In contrast, interest rate volatility has plunged dramatically since the Fed cut rates to zero on March 15. This time around, the market has been quick to buy into the Fed’s dovish message. Bottom Line: The easing of shelter-in-place restrictions and resultant improvement in economic growth will cause US bond yields to rise somewhat during the next couple of months. However, the magnitude of economic improvement will be modest, and the Fed’s dovish rate guidance will temper the severity of any yield back-up. Additionally, we can’t rule out the resumption of lockdown restrictions in the fall, should COVID cases rise during the summer. In terms of strategy, nimble investors may want to position for higher yields in the near-term. However, given the risks involved, we prefer to keep portfolio duration close to benchmark while implementing duration-neutral curve steepeners that will profit from rising yields. Specifically, we recommend going long the 5-year note and short a duration-matched barbell consisting of the 2-year and 10-year notes.4 Munis Carry Some Risk, But Offer A Lot Of Value Chart 7Munis Cheap Versus Treasuries Our spread product investment strategy during the recession has been to favor those sectors that: a)  Offer attractive yields/spreads b)  Benefit from one or more of the Fed’s emergency lending facilities Municipal bonds check both of those boxes. In terms of value, Aaa-rated municipal bond yields are consistently above Treasury yields across the entire maturity spectrum (Chart 7), a yield advantage that becomes especially pronounced when you factor in munis’ tax-exempt status. There is even a strong case for tax-exempt municipal bonds relative to corporate bonds. Table 1A shows the yield differential between tax-exempt municipal bonds and corporate bonds that carry the same credit rating and maturity. Not surprisingly, municipal bond yields are below corporate yields in most cases, with A-rated yields and longer-maturity Baa-rated yields being glaring exceptions. To put those yield differentials in context, Table 1B shows the breakeven effective tax rate for each muni/corporate combination. For example, the breakeven effective tax rate between Aaa-rated 5-year municipal and corporate bonds is 23%. This means that an investor will earn more after-tax yield in the municipal bond if his effective tax rate is above 23%, and less if it is below. It is apparent that breakeven effective tax rates are quite low, especially at the bottom-end of the credit spectrum. Table 1ASpread Between Municipal Bonds & Credit Index Yields* (BPs) Table IBMuni/Credit Breakeven Effective Tax Rate* (%) As for our second criterion, the municipal sector clearly benefits from the Fed’s Municipal Liquidity Facility (MLF). Through this facility, the Fed lends directly to eligible state & local governments for up to three years.5 However, there is a problem with the MLF: The cost. The Fed recently revealed that it will charge a rate of OIS + 150 bps for new loans taken out by Aaa-rated issuers through the MLF. That fixed spread rises as the issuer’s credit rating declines. Aa2 issuers are charged OIS + 175 bps, A2 issuers are charged OIS + 250 bps, etc…6 Chart 8MLF Pricing Doesn't Help Muni Investors For each credit rating, the rate available through the MLF is significantly higher than the actual market yield (Chart 8). This means that the MLF currently places a cap on how high municipal yields can rise, but it doesn’t actively pressure them lower. This stands in stark contrast to the rates offered through the Term Asset-Backed Securities Loan Facility (TALF) that are considerably below market yields on Aaa-rated CMBS and similar to market yields on Aaa-rated consumer ABS. Uncharitable MLF pricing structure aside, we think there are several reasons to remain overweight municipal bonds within US fixed income portfolios. First, the Fed is already facing criticism about the MLF rates and it could lower them in the near future. It has already shown a willingness to alter its facilities in response to market pressure. The MLF initially only made loans with maturities of 2 years or less, now it offers loans of up to 3 years. Second, direct federal aid to state & local governments was the centerpiece of the relief bill that recently passed through the House of Representatives. That bill will not get through the Senate in its current form, but another federal government relief package is forthcoming and it will almost certainly include money for state & local governments. There is even a strong case for tax-exempt municipal bonds relative to corporate bonds. Third, despite the massive challenges ahead, state governments entered the present crisis with relatively strong budget positions and well stocked rainy day funds (Chart 9). State & local governments will obviously be forced to make some tough budget decisions in the coming months, but there is no doubt that they are in a better position to do so than they were prior to the last two recessions. Chart 9State Rainy Day Funds Bottom Line: The less-than-generous pricing offered through the Fed’s Municipal Liquidity Facility will not help push muni yields lower from current levels. However, very attractive valuations and the expectation of federal government relief justify an overweight allocation to the sector. Deflation A Bigger Risk Than Inflation, But TIPS Still Make Sense Chart 10Energy Inflation May Have Troughed April’s CPI report saw year-over-year headline inflation fall to 0.4%, the lowest level since 2015. Deflation is clearly a bigger risk than inflation this year, but we would argue that TIPS prices are so beaten down that the sector still offers value. This is true over investment horizons as short as one year. We calculate that headline CPI inflation would have to come in below -0.85% over the next 12 months for a hold-to-maturity position in TIPS to underperform a similar position in nominal Treasuries (Chart 10). Could we actually see that much deflation during the next 12 months? It is possible, but we’d bet against it. First, the collapse in oil prices and energy inflation has been an important driver of falling inflation during the past couple of months (Chart 10, panel 2). But with oil prices having already dipped into negative territory and massive production cuts about to come on board, energy inflation may have already troughed for the year.7 At the very least, with oil prices already so low there is much less room for them to decline and thus less scope for further energy CPI deceleration. Second, the Great Financial Crisis (GFC) was the last time that headline CPI inflation went significantly below zero. Year-over-year core inflation had to get to 0.6% for that to happen. This year, 12-month core CPI dropped to 1.4% in April from 2.1%, but the trimmed mean measure only fell from 2.4% to 2.2% (Chart 10, bottom panel). During the GFC, both core and trimmed mean inflation fell in tandem. This gives us some reason to doubt the persistence of core CPI’s recent drop. Headline CPI inflation would have to come in below -0.85% over the next 12 months for a hold-to-maturity position in TIPS to underperform a similar position in nominal Treasuries. Finally, shelter accounts for roughly one third of headline inflation. Year-over-year shelter CPI troughed at -0.6% during the GFC. It also dropped sharply in April – from 3.0% to 2.6% – but it still has a long way to go to get back to GFC levels (Chart 11). We don’t think that shelter inflation will move back into negative territory, and without that drag it is hard to see 12-month headline CPI falling much below zero. Chart 11Shelter Is One Third Of CPI Rental vacancies are the number one driver of shelter CPI. The rental vacancy rate has only been updated through the end of March, and April’s data will definitely show a spike. However, the vacancy rate is starting from below 7%. The vacancy rate needed to spend several years hovering around 10% or higher before shelter CPI saw its big drop in 2008/09 (Chart 11, panel 2). The National Multifamily Housing Council (NMHC)’s Apartment Market Diffusion Index also does a good job predicting shelter inflation. Shelter inflation tends to fall when the index is below 50 and rise when it is above 50 (Chart 11, bottom panel). The Diffusion Index experienced a massive drop in April, back to GFC levels. However, it remains to be seen whether it will recover rapidly or remain below 50 for ten consecutive quarters like it did between 2007 and 2010. In fact, there is some reason to believe that the recovery might be fairly quick. Other data released by the NMHC show that as of May 20 2020, 90.8% of renters had made their monthly payments for May. In April 2020, 89.2% of renters had made their monthly payments by the 20th of the month. Unsurprisingly, both of these figures are below what was seen last year: In 2019, about 93% of renters had made their April and May monthly payments by the 20th of the month. But the fact that May 2020 data show a small increase compared to April indicates that the situation is not worsening, and it may in fact be getting better. Bottom Line: We are not worried about significant inflation pressures any time soon. But equally, we don’t see 12-month headline CPI falling much below zero this year. This means that TIPS are cheap relative to nominal Treasuries. We recommend overweighting TIPS versus nominal Treasuries across the entire maturity spectrum. We also recommend implementing TIPS curve steepeners.8 Appendix - Buy What The Fed Is Buying The Fed rolled out a number of aggressive lending facilities on March 23. These facilities focused on different specific sectors of the US bond market. The fact that the Fed has decided to support some parts of the market and not others has caused some traditional bond market correlations to break down. It has also led us to adopt a strategy of “Buy What The Fed Is Buying”. That is, we favor those sectors that offer attractive spreads and that benefit from Fed support. Right now, that means we are overweight corporate bonds rated Ba and higher, Aaa-rated Agency and non-agency CMBS, Aaa-rated consumer ABS and municipal bonds. We are underweight residential mortgage-backed securities and corporate bonds rated B and lower. The below Table tracks the performance of these different bond sectors since the Fed’s March 23 announcement. We will use this Table to monitor bond market correlations and evaluate our strategy's success. Table 2Performance Since March 23 Announcement Of Emergency Fed FacilitiesRyan Swift US Bond Strategist rswift@bcaresearch.com Footnotes 1 The Weekly Economic Index is a composite of 10 daily and weekly indicators of real economic activity. For more details on its construction please see https://www.newyorkfed.org/research/policy/weekly-economic-index 2 Please see US  Bond Strategy Weekly Report, “The Treasury Market Amid Surging Supply”, dated May 12, 2020, available at usbs.bcaresearch.com 3  https://www.newyorkfed.org/medialibrary/media/markets/survey/2020/apr-2020-smp-results.pdf 4 For more details on our recommended yield curve positioning please see US Bond Strategy Weekly Report, “Life At The Zero Bound”, dated March 24, 2020, available at usbs.bcaresearch.com 5 For more details on the MLF and the Fed’s other emergency lending facilities please see US Investment Strategy/US Bond Strategy Special Report, “Alphabet Soup: A Summary Of The Fed’s Anti-Virus Measures”, dated April 14, 2020, available at usbs.bcaresearch.com 6 For full pricing details please see https://www.federalreserve.gov/newsevents/pressreleases/files/monetary20200511a1.pdf  7 For more details on BCA’s outlook for oil prices please see Commodity & Energy Strategy Weekly Report, “US Politics Will Drive 2H20 Oil Prices”, dated May 21, 2020, available at ces.bcaresearch.com 8 For more details on our recommendation for TIPS curve steepeners please see US Bond Strategy Weekly Report, “Negative Oil, The Zero Lower Bound And The Fisher Equation”, dated April 28, 2020, available at usbs.bcaresearch.com Fixed Income Sector Performance Recommended Portfolio Specification

Highlights Economic conditions are quite bad, … : Stay-at-home orders have decimated economic activity, giving rise to massive layoffs. … but policy makers embarked on a mighty initial effort to limit the longer-run effects: Mixing emergency GFC programs with bold new initiatives, the Fed has kept markets functioning and restrained defaults. Congress did its part with the CARES Act, opening the fiscal taps full blast to ease the burden on struggling households and businesses. Now the key question is if they’ll have the stomach to do more: Several businesses will not reopen, and it will be some time before nonfarm payrolls regain their peak. Successive waves of monetary and fiscal accommodation may be required to prevent longer-term scarring. Feature If we could have just one data series to assess the health of the economy, we would choose the monthly employment situation report. Though employment is only a coincident indicator, it is a powerfully self-reinforcing series, influencing consumption (Chart 1), fixed investment and future hiring. The unemployment rate also drives most household credit performance models, thereby influencing banks’ willingness to make auto, credit card and mortgage loans. The ripple effects of job losses can lead to a broader tightening of financial conditions, exacerbating downturns. Chart 1As Goes Employment, So Goes Consumption The April release was grim. The headline unemployment rate leaped by ten percentage points to 14.7%, its highest level since the Depression, but it failed to convey the full picture. With greater than 2% of the labor force having been laid off in each of the two weeks following the survey cut-off date, we estimate that the unemployment rate at the end of April was another four percentage points higher. There is a sizable gap between the 38.6 million workers who have filed for unemployment since mid-March and the 17.3 million newly unemployed captured in the March and April household surveys. The labor market data will get worse before it gets better, and we assume that the unemployment rate will peak above 20%. Astonishing numbers of jobs have been lost in the blink of an eye.  To avoid getting caught up in the unemployment rate’s technicalities, we are focusing on the change in employment. The establishment survey’s nonfarm payrolls series1 shrank by 21 million in March and April, or 14% from its February peak. To put the current episode into context, the 6.3% peak-to-trough decline in payrolls that played out over 25 months from February 2008 through February 2010 was previously the worst of the postwar era, dwarfing the typical recessionary payroll contraction of 1.5-3% (Chart 2). Chart 2Payrolls Have Never Shrunk Anything Like This Before Readers who’ve had their fill of the word “unprecedented” can call the employment contraction breathtaking. One mitigating factor, cited by economists inside and outside of the Fed, is that four-fifths of the layoffs have been characterized as temporary (Chart 3). That is certainly a positive, and we don’t doubt that nearly all bars, restaurants, gyms, hotels and concert venues would like to reopen. They surely planned to when stay-at-home orders were initially implemented, but things have changed over the ensuing ten weeks, and a new research paper suggests that only about three-fifths of laid-off workers will be recalled.2 Chart 3Nearly Every Laid-Off Worker Expects To Be Recalled For most of the postwar era, it took about 18 to 24 months for employment to recover its pre-recession peak. With the onset of the twenty-first century’s “jobless recoveries,” however, employment has rebounded much more slowly across cycles. After the dot-com bust and the global financial crisis, it took four and six years, respectively, to make new highs (Chart 4). The combination of manufacturing outsourcing and the ongoing automation of white-collar tasks is likely to make the slower pace of employment recovery the rule. Investors should anticipate that unemployment will linger at elevated levels through 2021 even in the event of an optimistic scenario. Chart 4Employment Doesn't Rebound Like It Used To Congress Versus The Data When employment falls, the virtuous circle in which changes in employment feed into further changes in employment becomes a vicious circle. Falling employment doesn’t just directly weigh on activity via less consumption and fixed investment; it also leads to reduced credit availability via tighter lending standards. With COVID-19 looming as a massive shock to consumer credit performance, Congress rushed to prop up the income streams of households in harm’s way. It began by sending $1,200 checks to more than 60% of taxpayers (single filers with less than $75,000 of adjusted gross income, and married couples with less than $150,000). One-off $1,200 payments could help strapped households, but the CARES Act’s more significant measure provided for a weekly $600 supplement to state unemployment benefits through the end of July. Weekly state-level benefits average about $400. When coupled with the federal supplement, unemployed workers will receive around $1,000 per week, slightly above the average weekly wage. After applying the stimulus check, the average worker will earn 10% more over his/her first three months of joblessness than s/he did when working full time. Why leave the couch when sitting in front of the TV is more lucrative than venturing outside? The Fed is deliberately aiming to keep households and businesses from defaulting. The direct payments3 and the supplemental unemployment benefits could prevent spending from falling, and consumer loan performance from weakening, as much as they otherwise would given the scale of layoffs. The Department of Labor has tracked the share of the average worker’s income that is replaced by unemployment benefits (the replacement rate) since the late nineties. During the two recessions covered by that sample period, laid-off workers received benefits amounting to just 40% of their previous income (Chart 5). Not surprisingly, consumer loan defaults surged (Chart 6). We are hopeful that credit performance through July, the expiration date of the supplemental benefit program, will be much better than simple regression analyses based on the unemployment rate would project, leaving ample room for a positive surprise. Chart 5Unemployment Benefits Typically Replace Just 40% Of Average Income ... Chart 6... But Consumer Borrowers Might Be Able To Stay Current When They Exceed It Powell Versus The Data In his 60 Minutes interview broadcast on May 17th, Fed Chair Jay Powell repeatedly indicated that the Fed is also pursuing a finger-in-the-dike strategy. Early in the interview, after lamenting the seriousness of the COVID-19 shock, he noted, “the good news is that we have policies that can go some way toward minimizing those [hysteresis-like] effects. And that’s by keeping people and businesses out of insolvency just for maybe three or six more months while the health authorities do what they can do. We can buy time with that.” He came back to the short-term-stimulus-to-prevent-long-term-impairment theme toward the end, explicitly referencing credit performance. “[W]e have tools to try to minimize the longer-run damage to the supply side of the economy. And these tools just involve keeping people solvent, keeping them in their homes, keeping them paying their bills just for maybe a few more months. And the same thing with businesses. Keeping them away from Chapter 11 if it’s available.” It seems reasonable to assume that the worst of the public health news will have passed by the fall. If employment were to rebound in line with re-opening measures, six months of active fiscal and monetary support, from March to September, ought to be enough to stave off long-run damage. As the massive scale of the job losses is revealed, however, we are beginning to rethink our own assumptions about when the economy will truly be able to stand on its own. As Chart 4 suggests, it may be unrealistic to think that the US can return to full employment by 2022, especially as the lockdowns may have given businesses lots of ideas about where they can permanently reduce headcount. The Fed is prepared for such a contingency, to hear the Chair tell it: It may well be that the Fed has to do more. It may be that Congress has to do more. And the reason we’ve got to do more is to avoid longer-run damage to the economy. [W]e’re not out of ammunition by a long shot. No, there’s really no limit to what we can do with these lending programs that we have. So there’s a lot more we can do to support the economy, and we’re committed to doing everything we can as long as we need to. Powell’s take did not come as news to markets, even if it helped stocks romp higher the day after the interview was broadcast. The Fed moved with dizzying speed in March, and its measures have been effective. Taking the corporate bond market as an example, spreads narrowed sharply after the primary- and secondary-market corporate credit facilities were announced on March 23rd (Chart 7) and have fallen to a level consistent with a run-of-the-mill recession (Chart 8). Corporate bond issuance set an all-time monthly record in March, then broke it in April, all without the Fed buying a single bond until mid-May. Chart 7The Fed Tamed The Corporate Bond Market Without Firing A Shot ... Chart 8... And Spreads Are Now At Levels Consistent With A Ho-Hum Recession Investment Implications Investors can count on the Fed’s whatever-it-takes pledge, but they shouldn’t expect the Fed to defend the economy from monumental job losses all by itself. States, cities and towns need cash grants to avoid laying off wide swaths of their workforces, and only Congress and the administration can issue them. Despite their public wavering, we do not think that Republicans will want to spurn masses of unemployed voters and their teachers, police and firefighters ahead of the election. Bailout fatigue and deficit worries will make succeeding iterations of aid packages less generous, though. A wave of defaults and business failures would complicate the near-term recovery playbook. Independent of longer-run effects, financial markets will fare better over the next year if fiscal and monetary policy continue to focus on limiting avoidable busts. We think they will, however begrudgingly, but financial markets already discount this benign outcome. Jay Powell is singing the SIFI banks' song. The combination of Fed support and low valuations makes them especially attractive. Relentlessly accentuating the positive leaves risk assets vulnerable in the near term. We continue to expect some sort of an equity correction and have no appetite for anything but the BB-rated top tier of high yield corporates. Over the tactical 0-to-3-month timeframe, we continue to recommend that multi-asset investors maintain a benchmark equity weighting, while underweighting bonds and overweighting cash. We recommend overweighting equities, underweighting bonds and equal-weighting cash over the cyclical 3-to-12-month timeframe. Within bonds, we are underweight Treasuries and high yield, and overweight investment grade, over both timeframes. The SIFI banks will benefit most directly if policymakers are able to limit consumer and business defaults. Chair Powell’s 60 Minutes refrain should have been music to their management teams’ and stockholders’ ears. They are the rare prominent segment of the market that is viewing the glass as half-empty. Investors have a considerable margin of safety buying them at or near their book value and they continue to be our favorite long idea.   Doug Peta, CFA Chief US Investment Strategist dougp@bcaresearch.com Footnotes 1 The employment situation report is compiled from a survey of households (used to calculate the size of the labor force and the unemployment rate) and a survey of business establishments (used to calculate net employment gains, hours worked and earnings). The foregoing unemployment discussion referenced the household survey; the subsequent discussion and charts reference the establishment survey. 2 Barrero, Jose Maria, Nicholas Bloom and Steven J. Davis, 2020. "COVID-19 Is Also a Reallocation Shock," NBER Working Paper No. 27137. Accessed May 21, 2020. Using historical data samples analyzed by other researchers, and the responses to the Survey of Business Uncertainty, the authors estimate that only 58% of pandemic-induced layoffs will prove to be temporary. 3 Another round of direct payments is being debated on Capitol Hill as we go to press.

Overweight In our April 14 Weekly Report we executed our upgrade alert and boosted the S&P internet retail index to overweight – a call that has since produced handsome relative gains of 14%. The most recent Advance Monthly Retail Trade (AMRT) report also suggests that the path of least resistance remains up for relative share prices. In fact, non-store retailers were the only category that reported an increase in activity on a month-on-month basis, while other categories such as clothing & accessories contracted nearly 80%. Bottom Line: We heed the message from the most recent AMRT report and continue to recommend an above benchmark allocation for the S&P internet retail index. The ticker symbols for the stocks in this index are: BLBG: S5INRE - AMZN, BKNG, EBAY, EXPE.

Dear client, In lieu of our regular weekly report next week, we will hold a webcast on Thursday at 10:00 am ET discussing both tactical and strategic currency considerations. The format will be a short presentation, followed by a Q&A session. We look forward to engaging with you. Kind regards, Chester Ntonifor Vice President, Foreign Exchange Strategy Highlights Go short the Gold/Silver ratio (GSR). Hold a basket of NOK and SEK against a basket of the dollar and euro. Go long sterling. Feature Chart I-1The Dollar And Business Cycles When constructing a basket of high-conviction positions, the starting point is usually the framework used to build the portfolio. Ours is through a three-factor lens. The first lens determines what macroeconomic environment we are operating in. Think of a four-quadrant matrix, with growth on one axis and inflation on the other. Intuitively, the dollar should do best when global growth is decelerating and inflation is falling. The climatic expression of this is a deflationary bust, when all bets are off and the dollar is king. On the other side of the spectrum, the dollar should weaken as global growth rebounds (Chart I-1). The second lens is valuation. Specifically, as the drop in cyclical currencies in a deflationary bust approach a capitulation phase, value begins to put a cushion under deteriorating fundamentals. In our previous work, we showed that foreign exchange value-trading strategies based on PPP are profitable over the long term.1  Finally, technical indicators are our third lens for two reasons. First, they are the most powerful indicators for short-term trades. Second, they act as a bridge between bombed-out valuations and a subsequent improvement in macro fundamentals. For example, a saucer-shaped bottom in a cyclical currency can usually be a prelude to a U-shaped economic recovery. A high-conviction trade is one that ticks all three boxes or is agnostic to the first but has a powerful signal from both the second and third. Using this framework, we suggest two trades this week. Go Short The Gold/Silver Ratio When looking at our four-quadrant matrix, it is clear that the dollar tends to rise during a downturn, and fall early in the cycle. Intra-cycle performance is more nuanced. With both first- and second-quarter GDP likely to contract severely around the world, growth is likely to bounce back later this year if economies stay open. This should, ceteris paribus, lead to a weaker dollar. A bearish view on the dollar can be expressed by being short the GSR. The Gold/Silver ratio (GSR) tends to track the US dollar (Chart I-2), so a bearish view on the dollar can be expressed by being short the GSR. It is well known that most of the time, bullion is inversely correlated to the US dollar, not only due to the numeraire effect but also as competing monetary standards. Given that silver tends to rise and fall more explosively than the price of gold (Chart I-3), it makes sense that the GSR should inversely track the greenback. Part of the reason for silver’s explosive – albeit lagged – response is that the silver market is thinner and more volatile, with open interest in futures about one-third of gold. Chart I-2GSR And The Dollar Chart I-3Silver Has Explosive Rallies The potency of the GSR is in its leading properties, as it provides important information on the battleground between easing financial conditions and a pickup in economic (or manufacturing) activity. The GSR tends to rally ahead of an economic slowdown, then peaks when growth is still weak but financial conditions are easy enough to short-circuit any liquidity trap. Silver fabrication demand benefits from new industries such as solar and a flourishing “cloud” orbit – both of which are capturing the new manufacturing landscape. Not surprisingly, the GSR has led the rise and fall of many ASEAN and Latin American currencies that are at the forefront of manufacturing (Chart I-4). Chart I-4GSR, Latam And Asean Currencies A key assumption in a lower GSR is that the global economy fends off a deeper recession, which would otherwise sustain a high and rising ratio. But even if we are wrong and the dollar remains stronger over the next 12-18 months, the valuation cushion from being short the GSR is outstanding. The ratio broke above major overhead resistance at 100 just as the dollar liquidity crunch was intensifying, and is now staging a V-shaped reversal. Historically, these reversals tend to be quick, powerful, and extremely volatile. Unless gold is entering a new paradigm versus silver, the forces of mean reversion should pull the ratio towards 50 (Chart I-5). Chart I-5Big Downside Potential For GSR The next important technical level for silver is the $18-$20-per-ounce zone. This has acted as a strong overhead resistance since 2015, and has provided strong downside support for silver prior to that. If silver is able to punch through this zone, this will help bridge the gap between silver and gold fundamentals. Globally, the world produces 24,201 tons of silver a year and 3,421 tons of gold. That is a supply ratio of 7:1. Meanwhile, the price ratio between gold and silver is 100:1. This seems like a very wide gap, given that the physical supply of silver is in deficit. Bottom Line: We have been flagging the GSR as a key indicator to watch since last year.2 Our sell-stop on the ratio was finally triggered at 100. Place stops at 110, with an initial target of 75. Go Long Sterling, In Addition To NOK And SEK If the dollar is indeed in a renewed downtrend, the most potent beneficiaries of this move will be NOK and SEK. Our basket of long Scandinavian currencies against both the dollar and the euro has a significant margin of safety, even if we are offside on the dollar trend (Chart I-6). The euro will naturally pop on dollar weakness, but a very liquid beneficiary could also be sterling. Trade negotiations between the UK and EU are clearly breaking down. The worst-case scenario is a no-deal Brexit, in which case the pound could significantly decline. The key question would be by how much? Every time there has been maximum pessimism on the pound driven by Brexit fears, the line in the sand has been 1.20.  The first observation is that each time the odds of a “hard” Brexit have risen significantly, the threshold for cable downside has been 1.20. The first occurrence was the aftermath of the UK referendum in 2016. The second episode was when Prime Minister Boris Johnson was elected with a mandate to take the UK out of the EU (Chart I-7). Intuitively, this suggests that every time there has been maximum pessimism on the pound driven by Brexit fears, the line in the sand has been 1.20. Of course, a pandemic can change this dynamic, as we saw with the drop in cable to 1.15 in March, but this move was not isolated to sterling. Chart I-6SEK And NOK Are Attractive Chart I-7GBP Has Historically Bottomed At 1.2 While a no-deal Brexit is not our base case, it is still instructive to simulate cable downside in the case of  such an event. Given that the last time Britain majorly defected from a union was during the Exchange Rate Mechanism (ERM) crisis in the 1990s, revisiting this episode could be instructive. The episode leading to the collapse of the pound in 1992 has important lessons for today.3 Britain entered the ERM in October of 1990 in an attempt to find a stable nominal anchor. In other words, with high inflation and an overvalued currency, adopting German interest rates was expected to temper inflation and realign the real exchange rate. Fundamental models show the pound as being very cheap. Problems began to surface in June 1992, when the Danes voted no in a referendum on the Maastricht Treaty that included a chapter on the EMU. As doubts towards the progress of a union began to rise, investors started to question where the shadow exchange rate for ERM currencies lay, especially the Italian lira and the Spanish peseta. Britain also massively stepped up its interventions in the foreign exchange market in August of that year, having to borrow excessively to increase reserves. Britain was eventually forced to suspend its membership in the ERM. Herein lies the key differences with today. Support for the euro within member countries is extremely strong. So, while EUR/GBP may have near-term upside, a destabilizing fall in the pound relative to the euro is unlikely. A substantial rise in the EUR/GBP, assuming little euro breakup risk, is a bet on the fact that not only is the pound misaligned versus the German “Deutschemark,” but it is also expensive versus the Italian “Lira” and Spanish “Peseta.” This seems unrealistic. The pound was overvalued as the UK entered the ERM, judging from its real effective exchange rate adjusted for consumer prices. A persistent inflation differential between the UK and Germany had led to significant appreciation in the real rate. That gap is much narrower today (Chart I-8). Moreover, fundamental models show the pound as being very cheap, especially versus the US dollar on both a PPP and productivity basis. During the ERM crisis, most of the adjustment in the pound happened quickly, but a key difference is that it was unanticipated. Foreign exchange markets today are extremely fluid and adjust to expectations quite fast. From its peak, GBP/USD depreciated by 24% by end of October 1992. Peak to trough, cable has fallen by almost 30% today. Given this drop, it is hard to imagine that the probability of a no-deal Brexit is not priced into cable. The real effective exchange rate of the pound is now lower than where it was after the UK exited the ERM in 1992, with a drawdown that has been similar in magnitude (24% in both episodes). In the event a deal is forged, the pound should converge toward the mid-point of its historical real effective exchange rate range, which will pin it at least 15%-20% higher (Chart I-9). Chart I-8Not Much Misalignment In U.K. Prices Today Chart I-9Cable Valuation Reflects Brexit Risk Bottom Line: Go long the pound as a trade but maintain tight stops at 1.20. Our limit sell on EUR/GBP was a whisker from being triggered this week at 0.9. While we will respect this level, long-term investors can start slowly shorting the cross.   Chester Ntonifor Foreign Exchange Strategist chestern@bcaresearch.com Footnotes 1 Please see Foreign Exchange Strategy Special Report, “Introducing An FX Trading Model,” dated April 24, 2020 avaiable at fes.bcaresearch.com. 2 Please see Foreign Exchange Strategy Weekly Report,  “On Money Velocity, EUR/USD And Silver,” dated October 11, 2019, available at fes.bcaresearch.com. 3 Mathias Zurlinden, “The Vulnerability of Pegged Exchange Rates: The British Pound in the ERM,” Economic Research, Vol. 75, No. 5 (September/October 1993). Currencies U.S. Dollar Chart II-1USD Technicals 1 Chart II-2USD Technicals 2 Recent data in the US have been mostly negative: Retail sales fell by 16.4% month-on-month in April, following an 8.3% decrease the previous month. The preliminary Markit manufacturing PMI increased from 36.1 to 39.8 in May. The services PMI also improved from 26.7 to 36.9. The NAHB housing market index increased from 30 to 37 in May. This follows a contraction in building permits by 21% month-on-month in April and a 30% month-on-month drop in housing starts. Initial jobless claims kept rising by 2438K for the week ended May 15th. The DXY index fell by 1% this week. The DXY index has been stuck in a narrow trading range between 98.50 and 101, ever since the Fed’s swap liquidity programs were unveiled. This suggests a stalemate between weak global growth and improving financial conditions. Report Links: Cycles And The US Dollar - May 15, 2020 Capitulation? - April 3, 2020 The Dollar Funding Crisis - March 19, 2020 The Euro Chart II-3EUR Technicals 1 Chart II-4EUR Technicals 2 Recent data in the euro area have been negative: GDP contracted by 3.2% year-on-year in Q1. Employment fell by 0.2% quarter-on-quarter in Q1. The seasonally-adjusted trade surplus narrowed to €23.5 billion from €25.6 billion in March. The current account surplus fell from €37.8 billion to €27.4 billion. The ZEW sentiment index improved from 25.2 to 46 in May. The preliminary Markit manufacturing PMI increased from 33.4 to 39.5 in May. The services PMI also ticked up from 12 to 28.7. The euro increased by 1.7% against the US dollar this week. During a recent speech at the Institute for Monetary and Financial Stability Policy Webinar, the ECB member Philip R. Lane reinforced that the ECB will continue to constantly assess the monetary measures and is fully prepared to further adjust its instruments, which might include increasing the size of the PEPP. Report Links: On The DXY Breakout, Euro, And Swiss Franc - February 21, 2020 Updating Our Balance Of Payments Monitor - November 29, 2019 On Money Velocity, EUR/USD And Silver - October 11, 2019 Japanese Yen Chart II-5JPY Technicals 1 Chart II-6JPY Technicals 2 Recent data in Japan have been negative: GDP plunged by 3.4% year-on-year in Q1. Industrial production fell by 5.2% year-on-year in March. Machinery orders fell by 0.7% year-on-year in March, following a 2.4% contraction in February. Exports and imports both fell by 21.9% and 7.2% year-on-year respectively in April. The total trade balance fell from a ¥5.4 billion surplus to a ¥930.4 billion deficit. The preliminary manufacturing PMI fell from 41.9 to 38.4 in May. The Japanese yen fell by 0.9% against the US dollar this week. The Bank of Japan announced on Tuesday that it will hold an emergency policy meeting on Friday, May 22nd, following the bleak GDP data on Monday. Report Links: The Near-Term Bull Case For The Dollar - February 28, 2020 Building A Protector Currency Portfolio - February 7, 2020 Currency Market Signals From Gold, Equities And Flows - January 31, 2020 British Pound Chart II-7GBP Technicals 1 Chart II-8GBP Technicals 2 Recent data in the UK have been negative: The unemployment rate slightly decreased from 4% to 3.9% in March. Average earnings including bonuses grew by 2.4% year-on-year. Headline retail price inflation fell from 2.6% year-on-year to 1.5% year-on-year in April. The Markit manufacturing PMI increased from 32.6 to 40.6 in May. The services PMI also improved from 13.4 to 27.8. The British pound increased by 0.9% against the US dollar this week. This week saw the UK selling its long-term government bonds with negative yield for the first time in history. Moreover, the BoE has also not ruled out the possibility of negative interest rates. Please refer to our front section this week for a more detailed analysis on the pound. Report Links: Updating Our Balance Of Payments Monitor - November 29, 2019 A Few Trade Ideas - Sept. 27, 2019 United Kingdom: Cyclical Slowdown Or Structural Malaise? - Sept. 20, 2019 Australian Dollar Chart II-9AUD Technicals 1 Chart II-10AUD Technicals 2 Recent data in Australia have been negative: The Westpac leading index fell by 1.5% month-on-month in April. Retail sales plunged by 17.9% month-on-month in April. The preliminary Commonwealth manufacturing PMI slipped from 44.1 to 42.8 in May, while the services PMI increased from 19.5 to 25.5. The Australian dollar appreciated by 2.6% against the US dollar this week. The RBA minutes released this week noted that the Australian economy had been severely affected by the COVID-19, and most of the contraction was expected to occur in the second quarter of 2020. The current economic contraction is unprecedented in the 60-year history of the Australian economy. Report Links: On AUD And CNY - January 17, 2020 Updating Our Balance Of Payments Monitor - November 29, 2019 A Contrarian View On The Australian Dollar - May 24, 2019 New Zealand Dollar Chart II-11NZD Technicals 1 Chart II-12NZD Technicals 2 Recent data in New Zealand have been negative: The Manufacturing PMI fell from 53.2 to 26.1 in April. The services PMI also plunged from 52 to 25.9. PPI output prices increased by 0.1% quarter-on-quarter in Q1, while input prices depreciated by 0.3% quarter-on-quarter. House sales plunged by 78.5% year-on-year in April. The New Zealand dollar appreciated by 3.4% against the US dollar this week, making it the best performing G10 currency. The RBNZ indicated that the recent rate cuts have not been transferred via lower mortgage rates or lower retail rates. They have also expressed concerns about a higher mortgage default rate once the 6-month mortgage repayment deferrals expire. Report Links: Updating Our Balance Of Payments Monitor - November 29, 2019 Place A Limit Sell On DXY At 100 - November 15, 2019 USD/CNY And Market Turbulence - August 9, 2019 Canadian Dollar Chart II-13CAD Technicals 1 Chart II-14CAD Technicals 2 Recent data in Canada have been negative: Headline consumer prices contracted by 0.2% year-on-year in April, falling into deflationary territory for the first time since 2009. Core inflation fell from 1.6% to 1.2% year-on-year in April. Trade sales contracted by 2.2% month-on-month in March.  Existing home sales plunged by 56.8% month-on-month in April, following a 14.3% decrease in March. The Canadian dollar rose by 1.3% against the US dollar this week. Statistics Canada shows that in April, consumer prices deflation is led by transportation, clothing and footwear, which saw yearly declines of 4.1% and 4.4% respectively. However, consumers paid more for food due to higher demand. Rice, eggs and pork prices rose by 9.2%, 8.8%, and 9% year-on-year respectively in April. In addition, household cleaning products and toilet paper prices also surged in April. Report Links: More On Competitive Devaluations, The CAD And The SEK - May 1, 2020 A New Paradigm For Petrocurrencies - April 10, 2020 The Loonie: Upside Versus The Dollar, But Downside At The Crosses Swiss Franc Chart II-15CHF Technicals 1 Chart II-16CHF Technicals 2 Recent data in Switzerland have been negative: Producer and import prices contracted by 4% year-on-year in April, following a 2.7% yearly decrease in March. Total sight deposits continued to rise from CHF 669.1 billion to CHF 673.5 billion last week. The Swiss franc appreciated by 0.5% against the US dollar this week. Due to the COVID-19 pandemic, KOF published a new forecast for Switzerland in May, which now forecasts the economy to rebound gradually once the current lockdown restrictions are eased. However, tax revenues in Switzerland are expected to fall by over CHF 5.5 billion this year and CHF 25 billion over the next years. Report Links: On The DXY Breakout, Euro, And Swiss Franc - February 21, 2020 Currency Market Signals From Gold, Equities And Flows - January 31, 2020 Portfolio Tweaks Before The Chinese New Year - January 24, 2020 Norwegian Krone Chart II-17NOK Technicals 1 Chart II-18NOK Technicals 2 Recent data in Norway have been negative: Exports plunged by 24% year-on-year to NOK 58.8 billion in April. Imports fell by 10.8% year-on-year to NOK 55.5 billion. The trade surplus fell by 78.5% year-on-year to NOK 3.2 billion. The Norwegian krone appreciated by 3.2% against the US dollar this week, fuelled by the recent oil prices recovery. Statistics Norway showed that the recent plunge in exports was mostly led by crude oil, natural gas, and fish exports. Natural gas condensates exports, on the other hand, rose by 44.7% year-on-year in April. That being said, we remain long the Norwegian krone from the valuation perspective. Report Links: A New Paradigm For Petrocurrencies - April 10, 2020 Building A Protector Currency Portfolio - February 7, 2020 On Oil, Growth And The Dollar - January 10, 2020 Swedish Krona Chart II-19SEK Technicals 1 Chart II-20SEK Technicals 2 Recent data in Sweden have been negative: Industry capacity fell slightly from 89.4% to 89.2% in Q1. Total number of employees grew by 0.3% year-on-year in Q1, compared with a 0.4% growth the previous quarter. The Swedish krona appreciated by 2.8% against the US dollar this week. In the latest Financial Stability Report released this Wednesday, the Riksbank highlighted that “if the crisis becomes prolonged, the risks to financial stability will increase”. Moreover, the Bank stated that they are ready to contribute by providing the necessary liquidity to help banks maintaining sufficient credit supply. Report Links: Updating Our Balance Of Payments Monitor - November 29, 2019 Where To Next For The US Dollar? - June 7, 2019 Balance Of Payments Across The G10 - February 15, 2019 Trades & Forecasts Forecast Summary Core Portfolio Tactical Trades Limit Orders Closed Trades