Latest from BCA Research
Numerous divergences have opened up between global risk assets and global business cycle variables. These gaps are unsustainable, and odds are that the recoupling will occur to the downside with risk assets selling off.
Some thoughts on this morning’s inflation number and implications for Treasury yields and TIPS.
The downgrade of the US credit rating highlights the risk of fiscal dominance overriding the Fed’s long-standing monetary dominance focused on its dual mandate. This threatens to push inflation and long-term interest rates higher. It also will redound to the detriment of the USD, and governments’ and investors’ willingness to hold it. China’s liquidity trap will keep its inflation subdued in the short run, but not forever. We remain long gold as a hedge against fiscal dominance and USD debasement risks.
In absolute terms, Mexican markets may correct given their impressive rally and an impending EM risk-off move. Relative to EM however, Mexico will continue to outperform given its unique cyclical and structural macro fundamentals, as well as attractive valuations.
China has generated 41 percent of the world’s economic growth through the past ten years, al-most double the 22 percent contribution from the US. Now that the Chinese growth engine is failing, we explain why it is arithmetically impossible for world growth to maintain the altitude of the past few decades. And we discuss an important investment implication.
Although the RMB has cheapened, macro conditions are not yet favorable for the Chinese currency. We expect the RMB to decline by at least another 5% in the next six months. A weak currency and subdued economic growth lead us to maintain a cautious stance on Chinese equities.
The global economy will not enjoy an “immaculate disinflation” but will suffer a very maculate one due to China’s growth slowdown and restrictive monetary policy in the developed world. Investors should stay overweight low-beta assets.
Time is running out on the Bank of England’s tightening cycle. UK economic growth is flirting with recession, unemployment is rising, house prices are contracting and inflation is decelerating. Markets are overestimating the eventual bottom in UK inflation, and thus are also underestimating how much the Bank of England will eventually cut rates in the next easing cycle, which could begin as soon as H1/2024. The backdrop is turning increasingly positive for Gilts on a medium-term basis, while the overbought pound is due for a breather.
