Developed Countries
The Fed can’t un-invert the yield curve all on its own. The Fed can pull down the short-end of the curve, but it needs the economy to cooperate if it wants to boost long-end yields. In fact, if the global economic data improve, then the market will no…
In the current environment, monetary policy exerts its greatest influence on the economy via its impact on broad financial conditions. Easier financial conditions lead to stronger growth and higher inflation in the future, and the Fed must ensure that…
Both our regression models show the pound as undervalued. This supports our view that over the long term, the pound is attractive. The consumption baskets in both the U.K. and the U.S. are roughly similar, which means traditional PPP models do a good job at…
We reverse-engineered the fair value for the DXY index by aggregating the model results from its six constituents, using the corresponding DXY weights. This includes the euro, the Japanese yen, the British pound, the Canadian dollar, the Swedish krona, and…
Underweight BCA U.S. Equity Strategy’s electrical components & equipment (EC&E) three-factor earnings model did an excellent job in anticipating the recent breakdown in the S&P EC&E index (top & bottom panels). First, the trade-weighted dollar has broken out to fresh cyclical highs. Historically, relative share prices and the greenback are tightly inversely correlated and the current weak global growth message that the U.S. dollar is emitting is bearish for the S&P EC&E index (U.S. dollar shown inverted, second panel). This global growth soft patch is not only negative for new orders owing to deficient foreign demand, but the appreciating currency also makes EC&E exports less competitive in the global market place (U.S. dollar shown inverted, third panel). For details on the other two driver’s behind our bearish S&P EC&E index stance, please refer to our most recent Weekly Report. Bottom Line: We reiterate our underweight recommendation for the S&P EC&E index. The ticker symbols for the stocks in the index are: BLBG: S5ELCO – AME, EMR, ETN, ROK.
It appears that investors are becoming less sensitive to President Trump’s positive trade tweets, but remain wary of the negative ones. In other words, equities are caught in this tug-of-war and have started to move three steps back and one step forward. As a result of the re-escalation of the U.S./China trade war, economists are downgrading their U.S. real GDP growth estimates and the forecast now stands at 2.3% for the current year according to Bloomberg. While the recession alarm bells are not sounding off, these downward revisions bode ill for stocks (top panel).With regard to financial market variables, stress is slowly building in the high yield market especially given the recent tick up in bankruptcies and the blind sides that cove-lite loans now pose to bond investors. As a reminder, the U.S. high yield option adjusted spread (OAS) troughed last September and continues to emit a distress signal for the broad equity market (junk OAS shown inverted, second panel). Taking the pulse of international markets that seem to crater, also warns that the path of least resistance is lower for the SPX (bottom panel). Bottom Line: The sustained global growth slowdown, widening junk spreads, along with the risk of a U.S. recession becoming a self-fulfilling prophecy suggest that caution is still warranted in the broad equity market on a 3-12 month time horizon. Please see this Monday’s Weekly Report for additional details.
We have been disappointed by residential investment’s muted response to the significant year-to-date decline in mortgage rates. The trajectory of starts and permits hasn’t changed, new and existing home sales haven’t perked up, and mortgage purchase…
Trade tensions are a legitimate threat to a global economy already challenged by a downswing in the global manufacturing cycle. A recession is a possibility, but it is hardly a foregone conclusion. We agree with our fixed-income colleagues that the yield…
The United States is insulated from global trade, but only to a point – it cannot escape a global recession should one develop, given that its economy is still closely linked to the rest of the world. With global and U.S. equities vulnerable to additional…
Trump’s predicament suggests that he will have to adjust his policies. Global trade, capital spending, and sentiment have deteriorated significantly since the last escalation-and-delay episode with China in May and June. Beijing’s economic stimulus measures…