CoreMacro

The Fed hiked rates last week, but Fed officials expect this tightening cycle will involve no more than three 25-basis point hikes, contingent on inflation coming down quickly in 2027. We’re inclined to agree.

Labor supply is not meaningfully boosting inflation today, but the net exit of unauthorized immigrants has lowered the bar for stronger labor demand to turn inflationary. Hawkish monetary policy surprises over the coming year are possible.

Informe especial

China shock 2.0 threatens Europe’s industrial core, but it is also forcing a long-overdue response. China stands to lose more than the EU from the coming confrontation. Beijing cannot afford to alienate Europe while its domestic demand remains weak. Europe, meanwhile, can turn protectionism into a stronger fiscal multiplier and an industrial revival.

Concerns by the major AI companies that they are locked into a financially unsustainable arms race for AI dominance are likely playing as much a role in their newfound “go slow” approach as concerns over AI doom.

Scott Bessent’s attempts to suppress yields while financing large twin deficits risk crashing foreign inflows, the dollar, US bonds, and equities. Without a major equity selloff or large-scale commercial bank purchases of Treasurys, the bond selloff will persist – producing a major equity drawdown and a lower dollar.

The ECB is winning, and almost nobody's pricing it in. A flatter Phillips curve, a shrinking term premium, a euro built to shrug off France, credibility is the trade.

Concerns about the savings rate’s sustainability ease after adjusting for retirements and capital gains. The US economy continues to grow at a pace that is neither too hot nor too cold and investors should remain fully invested in risk assets.

Informe especial

Europe’s earnings recovery is increasingly difficult to dismiss. Margins, ROE, ROIC, and capital efficiency have all improved, while banks have re-emerged as an earnings engine. Cyclical conditions remain supportive, and the structural picture continues to improve: higher investment, improving productivity, and EU reforms could give the recovery staying power.

Informe especial

We propose a unified framework for predicting the direction of short-term interest rates and long-term bond yields that brings together three approaches: 1) the saving-investment approach; 2) the Taylor rule approach; and 3) the portfolio balance approach. Our analysis suggests that bond yields in the US and many other countries have increased mainly because of a higher neutral interest rate and a larger term premium. Given the risk of a further rise in inflation expectations, investors should overweight inflation-linked bonds.

Informe especial

China’s manufacturing edge should endure in the next few years. AI will challenge the country’s advantage in some industries, but geopolitics and weakening productive investment pose greater threats to sustaining China’s industrial leadership.