Insights

The Federal Reserve’s Beige Book shows a modestly growing economy imbued with post-election optimism, while highlighting some caution about employment.

The latest Beige Book is in line with other sentiment indicators showing modest growth but increased post-election expectations. The picture remains the same for employment, with a slowing-but-not-collapsing labor market. Consumer spending also exhibited some minor cracks, with higher price sensitivity and reduced spending on big items.

Our Beige Book Monitor confirms this narrative. Our sentiment indicator is in positive territory for the first time since April. The growth re-acceleration is, however, already reflected in asset prices. Despite Chairman Powell signaling more patience for rate cuts given recent data strength, our base case continues to call for a recession next year. We expect further slowdown in the labor market to stifle US consumer spending, and global growth to suffer due to trade tensions. Accordingly, our US Bond strategists recommend maintaining above-benchmark portfolio duration and steepener positions on a 6-to-12 months basis. They are also tactically long the December 2025 federal funds futures contract.

The US dollar steamrolled its peers since early October. After breaking out above its 200-day moving average, it is now fast approaching recent highs. Multiple factors drove this rally, among them are the stronger-than-expected US economic data, weaker data overseas, and Trump’s victory.

In the very near-term, we see further dollar strength. The dollar is a momentum currency, and positioning is neutral while sentiment is not extended either. Furthermore, deregulation initiatives, tariffs weakening overseas growth, and loose fiscal policy will boost dollar sentiment. This policy mix will remain the market’s assumption until more clarity emerges on the policy agenda and its sequencing.

In the long-run, the US dollar is expensive, as are US assets. The current rally is thus likely to be the last leg of a structural bull market in place since 2011. It will end as the Trump administration aims to weaken the currency to rebalance trade.

China’s Caixin Manufacturing PMI rebounded one point in October to 50.3. This was in line with the NBS PMIs from earlier this week, which also showed a modest rebound.

We are looking for a turning point in China as the government unrolls stimulus measures. This Caixin rebound is not that turning point, as the manufacturing PMI has been gyrating along the boom-bust line for nearly two years.

Our Emerging Markets and China strategists believe investors should follow measures like credit demand, housing sales, and the number of anti-corruption investigations to assess whether China’s policy announcements are reviving animal spirits. Until then, data gyrations are noise. We recommend investors maintain a risk-off stance in a global portfolio, as China’s stimulus measures has not met the threshold needed to reflate the global economy.

The October global manufacturing PMI printed at 49.4, up from 48.7 in September but still in contractionary territory. While output stabilized at 50.1, new orders (48.8) and new export orders (48.3) remain in contraction, as is the case for the new orders-to-inventories spread.

This rebound is in line with recent soft data showing that the global manufacturing cycle is still contracting, but at a lesser speed. While positive at the margin, this still paints a worrying picture given risk assets are richly valued.

Macro momentum points to much lower future returns for equities vs. bonds, after their massive outperformance led by US equities. The US election brings considerable uncertainty for the rest of the world, as a Trump victory would translate into trade tariffs and a headwind for global growth.

Our US Equity strategists prepared a Post-Election US Equity Cheat Sheet. Here are highlights of their recommended positioning for a US equity portfolio in a Red Sweep scenario.

Our US Equity strategists prepared a Post-Election US Equity Cheat Sheet. Here are highlights of their recommended positioning for a US equity portfolio in a Red Sweep scenario.

Protectionism and pro-growth domestic policies will increase the budget deficit and inflationary pressures, resulting in a bear steepening and a stronger USD. The initial reaction will be positive as markets focus on tax cuts and deregulation. The negative impact of tariffs will be more obvious later in 2025 or 2026.

Our colleagues predict that recent winners such as the Magnificent Seven, Tech, Growth, and Large Caps will yield leadership to Value, Small Caps, Industrials, Energy, Banks, and Pharma. They are also considering upgrading Regional Banks and Industrials.

Although foreseen by our US & Geopolitical strategists, a “Red Sweep” now makes the macro environment more volatile. After convening for our BCA Live & Unfiltered meeting, we offer three main takeaways.

First, 2024 is not 2016. To begin with, a Trump victory is less of a surprise. Moreover, the macro context differs. The 2016 economy was the result of a tepid recovery, while the 2024 economy is cooling down from a period of overheating. The world needed reflation back then, but not now. Markets are more sensitive to any hint of stimulus, as seen recently in the UK bond market.

Second, the Trump victory and market reaction strengthens our recession case. Higher bond yields tighten financial conditions for an already cooling labor market and a global manufacturing recession. Trade tensions will only weaken global growth.

Finally, we put together a playbook for what a Trump 2.0 presidency will look like across asset classes. While the short-term mood is to go long risk, we recommend positioning for incoming global headwinds.

Job openings missed expectations at 7.44 million in September, a mild slowdown from August. The details of the JOLTS report were also negative, except for hirings which continue their June rebound. Meanwhile, consumer confidence for October data beat expectations. The Conference Board’s labor differential – a proxy for the difficulty of finding a job – signaled a marginally tighter labor market from September.

The labor market continues to cool. The gap between quits and layoffs, which leads labor demand, ticked down and now sits below pre-COVID levels. Layoffs are rising, albeit from a low level.

The JOLTS confirm that the US economy is slowing and could soon approach a tipping point. Meanwhile, equities remain priced for a perfect soft landing. Considering this dichotomy, investors should be positioned more defensively going into next year, with tactical flexibility going into the US election next week.

Elevated US equities valuations and their impact on returns are a hot topic right now. Valuations are not a tactical or cyclical timing tool, but they help predict long-term returns. Our Global Asset Allocation Strategy team publishes their multi-asset 10-to-15 years return assumptions annually, and this year’s edition points to a strategic underperformance of US equities vs. its DM peers.

Valuation is one of their inputs, and is the main factor dragging projected returns for US equities. While their calculations point to a 3.2% annualized return, other DMs should see 5.1% returns. These numbers are below historical averages, and show a reversal of the massive US outperformance from recent decades.

Our colleagues discussed the matter during our BCA Live & Unfiltered meeting, delving into whether this dim outlook applied outside of megacaps. We think growth stocks will underperform value stocks as investors book gains when the next recession comes.

As an industrial metal, copper acts as a barometer of economic activity. Silver and gold are safe-haven assets with inflation-hedging properties, though silver is relatively more sensitive to global growth developments given that industrial applications account for roughly half of silver demand.

The silver-to-gold and copper-to-gold ratios are therefore coincident indicators of the global manufacturing cycle. They have fallen 17% and 23%, respectively, from their May peaks.

Our Commodity and Energy strategists have demonstrated that industrial metals lead the rest of the commodity complex around business cycle inflection points, making the signal from copper particularly noteworthy.

Conversely, energy prices tend to lag the broader commodity complex around business cycle turning points. Nevertheless, the recent oil sell-off has been demand-driven and has been demand driven and impervious to bullish supply-side developments. Oil prices are thus also symptomatic of deteriorating economic conditions.

The US has been a large driver of global demand this cycle but we do not expect it to continue propping it up beyond early 2025. We expect continued deterioration in US labor demand (see The Numbers) to tip the US economy into a recession on a cyclical investment horizon. Meanwhile, the nature and scope of China’s stimulus make it unlikely to meaningfully revive global demand.

We ultimately expect a recession in the US to morph into a global slowdown on a cyclical investment horizon. Investors should underweight pro-cyclical EM equities, Eurozone equities and favor the counter-cyclical USD and safe-haven JPY. 

According to BCA Research’s Geopolitical Strategy service, seven surprises with non-negligible odds could tip the scale in favor of Republicans for the White House by November 5. One of them is a war between Israel and Iran.

Iran is still highly likely to retaliate against Israel. The Biden administration’s ceasefire talks have floundered since Hamas killed some Israeli hostages. Since then Israel has struck Iranian targets in Syria and Hezbollah targets in Lebanon, including a commander of the Radwan Force.

• Iran transferred short-range ballistic missiles to Russia in another sign that the Biden administration is failing to keep relations stable and achieve a ceasefire.
• Israel’s attack on Hezbollah confirmed our colleagues’ base-case view that the war would spread beyond Gaza but not all the way to a regionwide war centering on Iran and the Persian Gulf.
• The attack on a Saudi oil tanker in the Red Sea (not to mention the Greek tanker) proved that the current trajectory of conflict is causing minor oil shocks. These incidents can become larger or more frequent while remaining “minor” from a global macro point of view. But they could also become “major” under the wrong circumstances.
• Our colleagues pegged the risk of “major” oil shocks at 37% for this year. It should go up after the election. Major shocks would involve Iranian attacks on significant oil supply and distribution in Iraq or the Persian Gulf region, whether preemptively or in reaction to Israeli or American attack.
• It is possible for Israel to agree to a ceasefire with Hamas and still escalate with Hezbollah or even Iran, and for this to happen before the US election. Israel is focused on its long-term security and the Biden administration may not succeed in restraining Israel now that it is mobilized and has an opportunity to strike Iran and its proxies.