Latest from BCA Research

The Fed’s tone has taken a decidedly dovish turn during the past week and, despite September’s hot CPI print, there is mounting evidence that a period of disinflation is coming. This makes the case for a pause in the Fed’s tightening cycle in Q1 or Q2 of next year.

Banks face many challenges from a slower economy and tighter financial conditions, which offset benefits from rising rates and higher net interest income. It is likely that things will get worse, a sentiment supported by many banking executives. However, negative expectations have already been priced in. We will maintain our overweight for now but will fade this position after a bounce in the next bear market rally. The long-term outlook is negative. We prefer Regional Banks to Diversified Banks.

The September CPI report was disappointing, but we still see several signs pointing to a rapid decline in inflation. Our constructive near-term view on stocks and the economy remains intact.

After years of underperformance, the pieces are finally falling into place for Chilean equities to sustainably outperform their EM peers. Political uncertainty has dissipated with the establishment of a pragmatic government and the rejection of the new constitution. Further, a peak in inflation and interest rates, together with attractive valuations, will support Chilean relative equity outperformance.

The ECB will continue to lift rates due to sticky inflation and a tight labor market. Will it be enough to push long-term German yields higher?

The kinked Phillips curve not only explains why inflation surged last year but makes a number of surprising predictions, chief of which is that inflation could fall significantly over the coming months without a major increase in the unemployment rate. In the near term, that is bullish for stocks.

A country’s external balance remains one of the key pillars of the longer-term trend for the exchange rate. In this week’s report, we look at the developments in global basic balances, and their implications for currency strategy.

Special Report

The G7’s attempt to insert itself in the oil-price-formation process performed by global trading markets will distort markets and the signals driving production, consumption and investment. The G7 will need a face-saving off-ramp to ditch this planner-based proposal. We expect Brent prices to move toward our expectations of $105/bbl in 4Q22 and $118/bbl in 2023, and remain long the XOP ETF.

BCA’s Emerging Markets Strategy team’s view remains that US inflation will prove to be sticky. That said, in this report, we examine under what conditions a considerable drop in US core inflation, whenever it transpires, would be bullish for stocks. Potentially significant US disinflation would be bullish for stocks if it is due to an improvement in supply-side dynamics, but bearish if it is demand driven.

Since our last “macro checkpoint” at the end of June, the BCA Score L/S has continued to perform well on the backs of a consistent Value factor and a resurgence in Technicals and Safety (Table 1). Small size, which accounts for a small weight in the BCA Score model, has been the poorest performer over the past 3 to 12 months.