Asset Allocation
The Fed's recent dovishness represents an acknowledgement of the feedback loop between Fed policy and financial conditions. Expect Fed hawkishness to ramp back up prior to the next rate hike, likely in June.
The Fed's decision to scale back intended interest rate hikes reflects economic reality.
A dovish Fed bought the bounce a bit more time, but there is little incentive to add portfolio risk. Buy consumer finance, especially vs. banks, and expect communications equipment outperformance.
While the FOMC was more dovish than expected, rising inflation may cause the Fed to escalate hawkish rhetoric. The bounce in oil should help high-beta stocks. Underweight U.S. equities versus Europe, Japan and H-shares. We estimate U.S. equities will deliver returns of 4%, ann. over the next 10 years, <i>vis-à-vis</i> 9% for the euro area and Japan, and 14% for H-shares. Central banks have more options to combat any possible debt-deflation spiral in Europe/Japan/China than is often recognized.
A surprisingly dovish outcome from this week's FOMC meeting has led to broad-based weakness in the U.S. dollar. The monetary policy divergence supporting the dollar may have peaked.
We differ markedly with the U.S. EIA's assessment of the near-term evolution of oil supply and demand.
A Chinese reflationary cycle is unfolding. Capital spending is showing signs of regained vigor, driven by both housing and infrastructure. Chinese PPI deflation will ease further. This will help reduce balance sheet stress of materials producers and boost overall industrial profits. Remain positive on Chinese investable stocks.
This <i>Special Report</i> reviews all of our active recommendations, including our over/underweight country and asset allocation positions, as well as our current tactical trades.
The current uptrend in Treasury yields will be cut short once the dollar appreciates in response to an increasingly hawkish Fed. Maintain benchmark duration and add a long 2/10 barbell, short 5yr bullet trade to profit from Fed hawkishness.