Economía
Highlights Duration: Economic fundamentals indicate that TIPS breakeven inflation rates have further cyclical upside and this will drive nominal bond yields higher on a 6-12 month horizon. In the near term, however, positioning data suggest that the uptrend in bond yields is due for a pause. Maintain a below-benchmark duration stance. Oil & Bonds: The cost of inflation compensation is an important driver of bond yields and the oil price is an important driver of the cost of inflation compensation. This will continue to be true until long-maturity TIPS breakeven inflation rates settle into a range between 2.4% and 2.5%. At that point the oil price will become a less important driver of yields. Fed: The Fed will start actively discussing alternative monetary policy frameworks in 2018. While we think the Fed will eventually adopt a policy framework that tolerates higher inflation, this shift probably won't occur this year. Feature There was certainly no shortage of possible catalysts for last week's bond rout (Chart 1). The Bank of Japan (BoJ) reduced its buying of long-dated JGBs, there was a rumor that China plans to slow or stop its purchases of U.S. Treasury debt, and U.S. inflation expectations started to ramp back up - driven by a combination of higher oil prices and a strong December core CPI print. But of all these factors we think it is only the third that merits much attention. Once the BoJ started targeting the level of the yield curve in September 2016 its quantity targets became irrelevant. A reduction in the pace of BoJ buying only matters if it foreshadows a shift to a higher yield curve target. Our foreign exchange strategists don't think such a move is likely in the next 12-18 months.1 China, for its part, still has a highly managed currency and now that capital is no longer flowing out of the country it will start to rebuild its foreign exchange reserves. Given that the U.S. Treasury market remains the world's most liquid, it is hard to see how China can avoid having to park much of its excess foreign capital in the United States (Chart 2). Chart 1Higher Yields, Driven By Inflation Chart 2China's Forex Reserves Are Rising The compensation for 10-year U.S. inflation protection broke above 2% last week, after having been as low as 1.66% as recently as last June. This 34 basis point increase in inflation compensation coincided with a 36 basis point increase in the nominal 10-year yield and a Brent crude oil price that rose from $45 per barrel last June to $70 per barrel as of last Friday. We think these correlations will continue to be the most important factors driving bond yields during the next 6-12 months, and the bulk of this report is dedicated to disentangling the linkages between oil prices, inflation, inflation expectations and nominal bond yields. But first we reiterate our cyclical investment stance. Last week's CPI report provided further evidence that core inflation is in the process of bottoming-out (Chart 3). The 10-year TIPS breakeven inflation rate will settle into a range between 2.4% and 2.5% by the time that core inflation returns to the Fed's target. By that time the nominal 10-year yield will be in a range between 2.8% and 3.25%. Likewise, our energy strategists anticipate that an ongoing steady decline in commercial inventories will keep crude prices well supported on a 6-12 month horizon. Chart 3U.S. Inflation Turns The Corner Chart 4Net Speculative Positioning For Oil And Bonds However, on a shorter time horizon (3 months or less), recent shifts in speculative positioning signal that the uptrends in bond yields and the oil price might be due for a pause (Chart 4). After having been solidly "net long" since the middle of last year, net speculative positions in the 10-year U.S. Treasury futures contract have just dipped into "net short" territory. Historically, net speculative positions have been a decent indicator of 3-month changes in the 10-year U.S. Treasury yield, and at current levels they signal that the 10-year yield could decline modestly during the next three months (Chart 5). Similarly, speculators in the oil futures market are now more "net long" than at any time since last February. While this positioning indicator does not work quite as well for the oil market as for the Treasury market, net longs at more than 20% of open interest (most recent reading is 26%) have more often than not been met with 3-month price declines since 2010 (Chart 6). Chart 5Net Speculative Positions & 10-Year Treasury Yield Chart 6Net Speculative Positions & WTI Oil Price Bottom Line: The outlook for U.S. inflation suggests that TIPS breakeven rates have further cyclical upside and this will drive nominal bond yields higher. However, positioning data in both bond and oil markets suggest that the recent run-up in yields might be due for a near-term pause. Maintain a below-benchmark duration stance on a 6-12 month horizon. Oil, TIPS, Inflation And Bond Yields: Sorting Out The Mess During the post-financial crisis period two relationships have been both (i) incredibly robust and (ii) unlike relationships observed in prior periods. They are: The cost of inflation protection has been an unusually important determinant of nominal U.S. bond yields The oil price has shown a very strong correlation with the cost of inflation protection Both relationships can be explained by the Federal Reserve's asymmetric ability to control inflation. We consider each relationship in turn. The Importance Of Inflation Chart 7TIPS Beta Declines When ##br##Breakevens Are Low A common rule of thumb is to estimate the TIPS beta - the proportion of movement in U.S. nominal bond yields that is explained by movement in TIPS (real) yields - at around 0.8. In other words, this assumes that 80% of the movement in nominal bond yields is explained by the real component. However, we observe that since the financial crisis the 10-year TIPS beta has been a much lower 0.68, and at times it has been closer to 0.5 on a 12-month rolling basis (Chart 7). We also observe that the TIPS beta tends to be lower when TIPS breakeven inflation rates are un-anchored to the downside. There is a very good reason for this. The reason is that the Fed's ability to influence inflation is asymmetric. The Fed has a strong track record of successfully tightening to bring inflation down, but has been less successful at easing to drive it up. This asymmetric ability to influence prices is due in no small part to the zero-lower bound on interest rates. Because the Fed's ability to cut rates is constrained by the zero-bound while its ability to lift rates is not, bond market participants may at times question the Fed's ability to ease and revise their inflation expectations lower. It is also during these periods that inflation expectations become more volatile and a more important determinant of nominal bond yields. This is because they are increasingly driven by the swings in the economic data and less by the Fed's policy bias. The Importance Of Oil This is where the oil price comes in. Oil and other commodities are crucial inputs to the production process. As such, not only do these prices rise in response to stronger aggregate demand, but higher prices also signal mounting cost-push inflationary pressures. But despite this obvious truth, there is not always a strong correlation between oil prices and inflation expectations. This is because the Fed's reaction function influences the relationship. Consider the pre-crisis (2004-2008) period. Long-maturity TIPS breakeven inflation rates stayed range-bound between 2.4% and 2.5% even as the oil price increased dramatically (Chart 8). Since investors perceived that the Fed would simply tighten policy to tamp out any inflationary pressures that might arise, there was no desire to demand greater compensation for inflation. However, this logic does not work in reverse. When commodity prices fell in 2014, inflation expectations declined alongside. In fact we observe that the correlations between long-maturity TIPS breakeven inflation rates and both oil and commodity prices have been much stronger in the post-crisis period, when inflation expectations have been un-anchored (Table 1). Chart 8The Unstable Correlation Breakevens & Oil Table 1Correlations Between TIPS Breakeven Inflation And Commodities Investment Conclusions The Fed's asymmetric reaction function leads to two crucial investment conclusions. First, long-maturity inflation expectations (as measured by the TIPS breakeven inflation rate) can fall when deflationary pressures mount, but their upside is capped in the 2.4% to 2.5% range. This is because the market has no reason to question the Fed's ability to lower inflation by lifting rates. The upside limit of 2.4% to 2.5% will remain in place unless the Fed changes its inflation target. A change to the inflation target that allows for higher inflation is an idea that is quickly gaining traction among policymakers, but is unlikely to be implemented this year (see section titled "The Fed In 2018: Contemplating A Major Change" below). Second, when long-maturity inflation expectations are below their 2.4% to 2.5% upper-bound they become both (i) a more important driver of nominal yields - as evidenced by the lower TIPS beta - and (ii) more sensitive to swings in commodity prices. For this reason, the oil price will continue to be an important driver of inflation expectations and nominal bond yields for the next few months, but will decrease in importance as TIPS breakevens move back to their 2.4% to 2.5% range. Once inflation expectations are re-anchored, nominal bond yields will once again be predominantly driven by the real component and swings in the price of oil will be less important for bond markets. The dynamics described above are not merely theoretical. Consider the evidence from five developed countries presented in Charts 9 & 10. Chart 9 shows that the oil price is tightly correlated with inflation expectations in the U.S., Eurozone and Japan, but also that inflation expectations in the U.K. and Australia did not respond to the recent increase in oil prices. The reason is that core inflation in the U.K. and Australia is already relatively close to the central bank's target (Chart 10). It is only where core inflation is far below target (in the U.S., Eurozone and Japan) that the oil price remains an important driver of bond yields. Chart 9Oil & Inflation Expectations Highly Correlated... Chart 10...But Only When Inflation Is Low The U.K. in particular presents an interesting case study. U.K. core inflation was quite far below target throughout 2015 and 2016, and during this time period U.K. inflation expectations were tightly linked with the oil price. It is only in the past few months that U.K. core inflation has moved back above target, and not surprisingly the correlation between the U.K. 10-year CPI swap rate and the price of oil has started to break down. Bottom Line: At present, the cost of inflation compensation is an important driver of bond yields and the oil price is an important driver of the cost of inflation compensation. Both of these dynamics will continue to be true for the next few months, but will decline in importance as TIPS breakeven inflation rates rise. When long-maturity TIPS breakeven inflation rates settle into a range between 2.4% and 2.5%, then the oil price will become a less important driver of bond yields. The Fed In 2018: Contemplating A Major Change? As was alluded to in the prior section, the biggest potential change for bond markets in 2018 would be if the Fed changed its monetary policy framework to one that tolerated higher levels of inflation. For example, let's imagine that the Fed suddenly lifted its inflation target from 2% to 3%. This would likewise shift the upper-bound range for long-maturity TIPS breakeven inflation rates to approximately 3.4% to 3.5%. It would mean that nominal bond yields have further upside over the course of the cycle, and also that oil and commodity prices would play an important role in bond markets for much longer. It would also lengthen the period where spread product can outperform Treasuries since the Fed would not be so quick to choke off the recovery. We still think it is unlikely that such a change will be implemented this year, but recent weeks have seen a marked increase in the number of Fed policymakers either advocating for a different policy framework or saying that the Fed should start researching alternative frameworks. What's crucial to remember is that the reason policymakers are unsatisfied with the current 2% inflation target is that it brings the zero-lower bound on interest rates into play too often. So any potential change in policy framework would be to one that tolerates higher inflation rates. Bernanke's Idea Chart 11The Implications Of A Price Level Target One potential new policy approach was put forward by ex-Fed Chairman Ben Bernanke in a recent blog post.2 Bernanke made the case for "Temporary Price Level Targeting", a policy where the Fed continues to use a 2% inflation target when the fed funds rate is sufficiently far from zero, but then switches to a price-level target when the fed funds rate is close to the zero bound. In his own words, the strategy would be communicated as follows: The Committee therefore agrees that, in future situations in which the funds rate is at or near zero, a necessary condition for raising the funds rate will be that average inflation since the date at which the federal funds rate first hit zero be at least 2 percent. Chart 11 provides an illustration of this example. Under the current framework the Fed targets 2% PCE inflation and forecasts that it will achieve this target sometime in 2019. In Bernanke's proposed framework the Fed would not target 2% inflation, but rather a price level that is consistent with 2% trend growth in prices since the zero-lower bound was hit in December 2008. In order to achieve this goal by the end of 2019 the Fed would need to tolerate a significant overshoot of inflation during the next two years (bottom panel). Who's On Board? The Appendix to this report is a list of all Fed Governors and Regional Fed Presidents. It also shows our own assessment of each committee member's policy bias. We noted from the most recent Summary of Economic Projections that 6 FOMC participants expect three rate hikes in 2018, 6 expect fewer than three rate hikes and 4 expect more than three hikes. From recent speeches we attempted to discern which member owns which forecast and then we attributed a "dovish" policy bias to those with a forecast for fewer than three hikes, a "neutral" bias to those expecting three hikes, and a "hawkish" bias to those expecting more than three hikes. We also show which FOMC participants are voters in 2018, although we do not think that distinction carries much practical importance. The Committee tends to arrive at decisions by consensus anyways, and all participants voice their opinions at every meeting whether or not it is their turn to vote. But it is the "notes" column of the Appendix that is most striking. There we highlighted all the FOMC participants who have recently made comments regarding the exploration of alternative policy frameworks. A general consensus seems to be forming that alternative frameworks should be studied this year, and a few policymakers (San Francisco Fed President John Williams, in particular) have strongly made the case that the Fed should switch to some sort of price level targeting regime. The Appendix also identifies the biggest source of uncertainty for the Fed this year. Namely that there are four vacant Governor positions that need to be filled. The New York Fed will also need a new President when William Dudley retires later this year. Who is nominated to fill those vacant positions will go a long way toward determining how aggressively the Fed pursues alternative policy frameworks. Bottom Line: The Fed will start actively discussing alternative monetary policy frameworks in 2018. While we think the Fed will eventually adopt a policy framework that tolerates higher inflation, this shift probably won't occur this year. Ryan Swift, Vice President U.S. Bond Strategy rswift@bcaresearch.com 1 Please see Foreign Exchange Strategy Weekly Report, "Yen: QQE Is Dead! Long Live YCC!", dated January 12, 2018, available at fes.bcaresearch.com 2 https://www.brookings.edu/blog/ben-bernanke/2017/10/12/temporary-price-level-targeting-an-alternative-framework-for-monetary-policy/ Appendix Table 2Composition Of The FOMC Fixed Income Sector Performance Recommended Portfolio Specification
Aspectos destacados
La economía japonesa está en auge. Esto permite al BoJ alejarse de su programa QQE (Flexibilización Cuantitativa y Cualitativa).
Sin embargo, el programa YCC (Control de la Curva de Rendimientos) se mantendrá vigente en el futuro previsible, ya que la inflación sigue siendo una función directa de las condiciones financieras.
Debido a que la posición y la valoración del yen están tan sesgadas, esto podría provocar un repunte del yen, especialmente frente al euro. Corto en EUR/JPY.
Al igual que la Fed, el BoC aumentará las tasas tres veces este año. Sin embargo, el mercado ya descuenta más subidas en Canadá que en EE. UU. Mantenemos una postura neutral en USD/CAD. No obstante, el CAD registrará pérdidas frente a la NOK. Corto en CAD/NOK.
Artículo principal
Gráfico I-1
JPY Vs. Bonds: The Divorce
JPY Vs. Bonos: El Divorcio
JPY Vs. Bonos: El Divorcio
Algo fascinante le sucedió al USD/JPY en los últimos meses: comenzó a desacoplarse de los rendimientos de los bonos estadounidenses (Gráfico I-1). En gran medida, esta ruptura en la relación reflejó la propia debilidad del dólar, ya que el índice del dólar cayó un 10% en 2017. Pero por débil que haya sido el dólar el año pasado, en realidad se ha mantenido plano desde el 7 de septiembre. Otro culpable detrás del desacople del yen respecto a los rendimientos de los bonos fue que, cuando el Banco Central Europeo anunció el fin de su programa de compra de activos, el Banco de Japón fue visto como el siguiente en la fila para reducir sus compras.
El 8 de enero, el BoJ comenzó a moverse en esa dirección, ya que empezó a recortar su compra de JGBs a largo plazo. Desde ese día, no solo se han vendido bonos a nivel mundial, sino que el yen también ha recuperado vigor. Creemos que el mercado bajista del yen no ha terminado, pero es probable que surja un repunte aprovechable frente al euro.
El sol está saliendo
El BoJ está justificado al querer retirar cierto estímulo de la política. La economía japonesa está funcionando a pleno rendimiento y la mejora parece generalizada.
La confianza del consumidor, impulsada por el aumento de los precios de los activos y una tasa de desempleo en mínimos de 23 años, está alcanzando máximos históricos (Gráfico I-2). Esto continuará apoyando el gasto real de los hogares, que ahora crece a un ritmo cercano al 2% después de contraerse de forma sostenida desde 2015 hasta principios de 2017.
Otro apoyo al gasto de los hogares proviene del frente salarial. Los salarios contractuales ya están creciendo a su ritmo más rápido desde 2006, y los salarios excluyendo horas extra se expanden a tasas no vistas desde 1998 (Gráfico I-3). Además, la ratio de ofertas por solicitante se encuentra en su nivel más alto desde 1974. Esto aumenta la probabilidad de que el pulso del primer ministro Shinzo Abe con la empresa japonesa para aumentar los salarios dé frutos, y de que las próximas negociaciones salariales de primavera generen ganancias aceleradas.
Gráfico I-2
Los hogares japoneses se sienten eufóricos
ENCUESTA DE CONFIANZA DEL CONSUMIDOR Los hogares japoneses se sienten eufóricos
ENCUESTA DE CONFIANZA DEL CONSUMIDOR Los hogares japoneses se sienten eufóricos
Gráfico I-3
El crecimiento salarial se ha acelerado
El crecimiento salarial se ha acelerado.
El crecimiento salarial se ha acelerado.
La confianza empresarial también está aumentando. El índice PMI manufacturero japonés está elevado según los estándares japoneses, actualmente en 54, y la confianza de las pequeñas empresas apunta a una aceleración de la producción industrial (Gráfico I-4).
Los mercados financieros también validan este panorama. El repunte del Nikkei ha captado la imaginación de los inversores, pero aún más impresionante ha sido la fortaleza de las acciones de pequeña capitalización, que han superado a sus homólogas de gran capitalización en un 17% desde 2015 (Gráfico I-5). Este desarrollo ha coincidido con un repunte en el crecimiento del crédito y normalmente también se asocia con una perspectiva de crecimiento robusta.
El modelo del PIB desarrollado por nuestra publicación hermana, The Bank Credit Analyst, encapsula estos diversos fenómenos y pronostica que el crecimiento real del PIB japonés podría alcanzar una tasa anual del 3% en la primera mitad de 2018 (Gráfico I-6). Por tanto, parece que la economía japonesa seguirá ganando impulso.
Gráfico I-4
Las empresas japonesas también##br## sienten el buen ambiente
Las empresas japonesas también están sintiendo buenas vibras
Las empresas japonesas también están sintiendo buenas vibras
Gráfico I-5
Las small caps apuntan a##br## un futuro prometedor
Las empresas de pequeña capitalización apuntan a un futuro prometedor
Las empresas de pequeña capitalización apuntan a un futuro prometedor
Gráfico I-6
El crecimiento japonés ##br##tiene impulso
El crecimiento japonés gana impulso
El crecimiento japonés gana impulso
¿Pero qué sustenta estas mejoras?
En primer lugar, el empuje fiscal en Japón ha cambiado. La política fiscal fue un lastre en Japón de 2012 a 2016, creando un freno promedio a la actividad económica de 0.6% del PIB por año. Sin embargo, en 2017, la política fiscal se relajó para añadir 0.2% al PIB.
En segundo lugar, Japón se ha beneficiado en gran medida del repunte del crecimiento en los mercados emergentes. Según el FMI, un choque de crecimiento del 1% en los mercados emergentes (EM) afecta al crecimiento japonés en 50 puntos básicos —casi cinco veces más que el efecto del mismo choque en la economía de EE. UU. Esto se debe a que el 43% de las exportaciones japonesas se envían a economías emergentes.
En tercer lugar, el impacto de la actividad de los mercados emergentes en Japón se amplifica por la naturaleza contracíclica del JPY. A medida que el crecimiento global y de los mercados emergentes se expande con mayor vigor, el yen se debilita, lo que relaja las condiciones financieras japonesas. Este fenómeno se manifestó plenamente el año pasado, cuando las condiciones financieras se aflojaron en una desviación estándar completa durante los últimos 16 meses.
Estos desarrollos son los que han sentado las bases para un mejor crecimiento y el cambio de tono del BoJ.
Conclusión: Japón está funcionando muy bien. Los consumidores y las empresas están optimistas, el gasto está en alza y se prevé que el PIB se acelere aún más. La relajación del ajuste fiscal, economías emergentes más fuertes y el ablandamiento de las condiciones financieras son los factores detrás de estas mejoras. El BoJ está tomando nota.
¿Hasta dónde puede llegar el BoJ?
El BoJ llevaba meses deseando mover la política. En noviembre de 2017, el gobernador del BoJ, Haruhiko Kuroda, hablaba del concepto de la "tasa de reversión". La tasa de reversión es el tipo de interés por debajo del cual recortes adicionales de tipos se vuelven contractivos para la actividad económica. Esto se debe a que por debajo de ese nivel, los tipos más bajos dañan los márgenes de interés bancarios en tal medida que los bancos comerciales empiezan a recortar su concesión de crédito al sector privado.
La razón por la que el BoJ se estaba volviendo más vocal sobre la tasa de reversión es porque esta tasa está inversamente relacionada con la cantidad de valores en los balances de los bancos comerciales. Si los bancos comerciales mantienen muchas obligaciones gubernamentales, al caer los tipos a niveles muy bajos, el valor de esos activos aumenta, contrarrestando el impacto negativo de márgenes de interés más estrechos. El problema en Japón es que, a medida que el BoJ absorbió más JGBs de los emitidos por el gobierno, las tenencias de bonos de los bancos disminuyeron a un ritmo alarmante (Gráfico I-7). Esto significaba que la tasa de reversión estaba subiendo, lo que implicaba que el BoJ tenía menos control sobre la política.
Cuando la inflación sorprendió al alza en diciembre, los mercados financieros reaccionaron violentamente. Mientras que los rendimientos nominales japoneses no se movieron mucho, las expectativas de inflación japonesas se dispararon, lo que provocó un colapso en las tasas reales japonesas (Gráfico I-8). Esto produjo un ablandamiento de facto de las condiciones monetarias japonesas, creando la cobertura perfecta para que el BoJ ajustara sus compras de activos: cualquier impacto negativo de modificar las compras de bonos sería mitigado y el BoJ, según su criterio, no perdería control de las condiciones financieras debido a una caída de la tasa de reversión.
A pesar de este cambio en la acción y la retórica de la política, aún no prevemos el fin del programa de Control de la Curva de Rendimientos. La inflación excluyendo alimentos y energía sólo se sitúa en un exiguo 0.3%, todavía muy por debajo del objetivo del 2% del BoJ o incluso del 1% —un nivel que probablemente conduciría a una retirada más real del estímulo.
Además, el BoJ se encuentra en cierta tesitura. Es cierto que la economía está mucho mejor, pero eso no explica realmente la dinámica de la inflación. La utilización de la capacidad en Japón sólo explica el 3% de los movimientos en la inflación subyacente japonesa; la utilización global, sólo el 10%; y la inflación precede a la creación de crédito en Japón. En cambio, el mejor factor para explicar la inflación japonesa han sido las condiciones financieras (FCIs). En ningún otro país las FCIs explican tanto la dinámica de la inflación como en Japón. Los movimientos recientes en la inflación japonesa son totalmente consistentes con la evolución de las FCIs japonesas desde 2010. Basado en esta relación, el IPC excluyendo alimentos y energía probablemente alcanzará un pico del 0.7% en junio de 2018 (Gráfico I-9).
Gráfico I-7
La tasa de reversión japonesa##br## cae debido al QQE
La tasa de reversión de Japón está disminuyendo debido a QQE.
La tasa de reversión de Japón está disminuyendo debido a QQE.
Gráfico I-8
Aumento repentino de##br## las expectativas de inflación
Aumento repentino de las expectativas de inflación
Aumento repentino de las expectativas de inflación
Gráfico I-9
La inflación está subiendo porque##br## las condiciones financieras se relajaron
La inflación se acelera porque las condiciones financieras se relajaron
La inflación se acelera porque las condiciones financieras se relajaron
Sin embargo, si el BoJ elimina el estímulo demasiado rápido, el yen se apreciaría y las condiciones financieras se endurecerían con fuerza. Lo más probable es que la inflación se debilite sustancialmente, anulando la propia razón para endurecer la política en primer lugar. Estas dinámicas apuntan a una continuación del YCC durante al menos los próximos 12 a 18 meses.
Conclusión: Japón pronto eliminará por completo su programa QQE. No obstante, esto no indica la supresión del control de la curva de rendimientos. Esto no solo se debe a que la inflación japonesa está extremadamente lejos del objetivo del BoJ, sino también a que la tasa de inflación de Japón es hipersensible a las condiciones financieras. Por lo tanto, cualquier endurecimiento de las condiciones financieras provocado por un yen más fuerte —la probable respuesta del mercado ante una política más restrictiva— provocará que la inflación colapse, anulando la propia necesidad de una política más restrictiva.
Implicaciones para la inversión
USD/JPY está caro, negociándose un 16% por encima del valor justo implícito por la paridad del poder adquisitivo. Además, el yen está respaldado por un generoso superávit por cuenta corriente del 4% del PIB. Asimismo, los inversores globales han estado infraponderados en duración. Este fenómeno tiende a ser negativo para el yen. Cuando los inversores están tan infraponderados en duración como en la actualidad, el yen tiene más probabilidades de repuntar (Gráfico I-10).
Es cierto que en 2014 los inversores estaban tan negativos con respecto a los bonos como lo están hoy, pero el USD/JPY se vendió. Esto se debió a que en aquel entonces el BoJ anunció un aumento de su programa de compras de activos. Hoy, el BoJ se está moviendo hacia abandonar su programa QQE, lo que probablemente provoque un rally por cobertura de cortos.
Ahora bien, la pregunta clave para los inversores es qué moneda debe venderse frente al yen. Sostenemos que el euro es una alternativa interesante al USD.
EUR/JPY está excepcionalmente caro en la actualidad. A largo plazo, EUR/JPY se negocia muy fuera de su rango normal según la paridad del poder adquisitivo (Gráfico I-11). Además, mientras que USD/JPY está levemente caro según métricas que incorporan diferenciales de tipos y apetito por el riesgo, EUR/USD está muy apreciado basado en una comparación similar. La implicación es que EUR/JPY se negocia a un nivel excepcionalmente exigente en términos de valoraciones a corto plazo (Gráfico I-12). Por tanto, tácticamente, el momento es cada vez más propicio para vender este cruce.
Gráfico I-10
La posición en duración apunta a riesgo alcista para el yen
El posicionamiento en duración apunta a un riesgo al alza para el yen
El posicionamiento en duración apunta a un riesgo al alza para el yen
Gráfico I-11
EUR/JPY está caro
EUR/JPY está caro
EUR/JPY está caro
Gráfico I-12
Riesgo táctico para EUR/JPY
Riesgo táctico para EUR/JPY
Riesgo táctico para EUR/JPY
.
Argumentando además a favor de vender EUR/JPY en lugar de USD/JPY están las condiciones financieras relativas. Las condiciones financieras de la zona euro se han endurecido mucho más que las condiciones financieras de EE. UU. en relación con las de Japón (Gráfico I-13). Como consecuencia, incluso ajustando por sesgos sectoriales, las acciones europeas están actualmente rindiendo por debajo de las japonesas en mayor medida que la infraperformance de las acciones estadounidenses. Esto destaca que la perspectiva económica relativa de Japón brilla más cuando se compara con la zona euro que cuando se compara con EE. UU. Esto también significa que el yen tiene más margen para apreciarse frente al euro que frente al USD.
Finalmente, el posicionamiento relativo entre el euro y el yen también está excepcionalmente sesgado. Como ilustra el Gráfico I-14 , cuando los especuladores están simultáneamente largos en euro y cortos en yen, EUR/JPY tiende a experimentar correcciones posteriores.
Gráfico I-13
Las FCIs de la zona euro se apretaron ##br##más que las de EE. UU.
Los FCIs de la zona del euro se endurecieron más que los de EE. UU.
Los FCIs de la zona del euro se endurecieron más que los de EE. UU.
Gráfico I-14
Posicionamiento sesgado##br## en EUR
Posicionamiento Sesgado en EUR
Posicionamiento Sesgado en EUR
Los factores mencionados apuntan a un posible repunte importante del yen, pero la durabilidad de ese repunte probablemente será limitada. El BoJ solo estará abandonando un programa QQE que ya había implementado solo a medias en los últimos meses, ya que las compras de bonos estaban muy por debajo de su objetivo de JPY80 billones.
El BoJ sigue comprometido con su programa YCC en el futuro previsible. Solo una renuncia a este programa creará un apoyo duradero para el yen. Mientras tanto, dado que cualquier repunte del yen endurecerá las condiciones financieras y dañará la inflación, cualquier repunte del yen debe tomarse como una operación temporal y no como una posición de largo plazo, ya que las tasas de política terminales en Japón aún tienen poco margen para subir.
Conclusión: Abandonar el QQE probablemente resultará en un repunte del yen. Dicho repunte será probablemente más pronunciado frente al euro, ya que las valoraciones, el posicionamiento y las condiciones financieras están especialmente exacerbados en comparación con la moneda europea. Para ser claros, el repunte del yen probablemente será un movimiento contra la tendencia, ya que un yen fuerte ejercerá serias presiones deflacionarias sobre Japón, lo que significa que el programa YCC del BoJ permanecerá firmemente en vigor. Estamos cortos en EUR/JPY en 133.79.
CAD: Atrapado entre el BoC y el NAFTA
Gráfico I-15
Canadá experimentará aumento salarial##br##Surgen condiciones inflacionarias
Canadá experimentará un aumento de los salarios Canadá: surgen condiciones inflacionarias
Canadá experimentará un aumento de los salarios Canadá: surgen condiciones inflacionarias
El Banco de Canadá (BoC) se reúne la próxima semana y aumentan las probabilidades de que eleve las tasas de política este mes. La economía canadiense también es muy fuerte, liderada por el sector doméstico. El gasto real de los consumidores está creciendo a su ritmo más rápido en casi 10 años, la tasa de desempleo está en mínimos de 40 años y la inversión de capital (capex) se está recuperando tras haber sido diezmada por el colapso de los precios del petróleo entre 2014 y 2016.
Gracias a este contexto, la economía canadiense está alcanzando sus propias restricciones de capacidad. El BoC estima que la brecha de producción canadiense se ha cerrado. Además, la reciente Encuesta de Perspectivas Empresariales confirma este mensaje: una proporción récord de empresas canadienses tiene dificultades para satisfacer la demanda debido a las restricciones de capacidad, y el número y la intensidad crecientes de la escasez de mano de obra apuntan a un mercado laboral ajustado (Gráfico I-15). La capacidad limitada y los salarios más altos respaldarán el repunte ya visible de la inflación subyacente, que ya ha alcanzado el 1.8%.
Como resultado, esperamos que el BoC endurezca las tasas tanto como la Reserva Federal este año. Sin embargo, el impacto de este desarrollo en el CAD podría ser limitado. Los inversores ya están descontando más subidas en Canadá que en EE. UU. en los próximos 12 meses - 82 puntos básicos frente a 60 puntos básicos, respectivamente. Además, los especuladores vuelven a estar muy largos en el loonie, lo que implica un obstáculo elevado para que los datos económicos fuertes eleven aún más el CAD.
Además, el NAFTA sigue siendo un riesgo importante para Canadá. Como escribió Marko Papic, nuestro estratega geopolítico jefe, en un Informe Especial de noviembre, el presidente Trump tiene poder sin restricciones cuando se trata de abrogar el NAFTA (Tabla I-1).1 Si el NAFTA colapsara, es muy probable que Canadá volviera en última instancia al todavía preferencial Acuerdo de Libre Comercio Canadá-EE. UU. Por tanto, el impacto en el comercio Canadá-EE. UU. probablemente sería temporal. Sin embargo, el mayor golpe se sentiría en la inversión de capital (capex) en Canadá. El alto grado de incertidumbre asociado con deshacer el NAFTA haría que las empresas abandonaran los planes de expansión en Canadá y las llevaría a expandir su capacidad norteamericana directamente en EE. UU., eludiendo así el riesgo regulatorio creado en la cadena de suministro. Esto amortiguaría el perfil de crecimiento futuro de Canadá.
Tabla I-1
Trump afronta pocas limitaciones en materia comercial
Yen: ¡QQE ha muerto! ¡Larga vida al YCC!
Yen: ¡QQE ha muerto! ¡Larga vida al YCC!
Es poco probable que el petróleo llene el vacío para el CAD. Con Brent cerca de US$70/bbl, ha alcanzado el objetivo de nuestros estrategas de Materias Primas y Energía. OPEC 2.0 no estará dispuesto a acomodar precios mucho más altos, ya que esto incentivaría a los productores de shale a ampliar la capacidad, recreando la dinámica de exceso de oferta que existía antes del colapso de 2014. Además, el referente West Canada Select, el precio del petróleo más relevante para Canadá, sigue con un descuento sustancial frente a WTI y Brent. Esto se debe a que no hay suficiente capacidad de oleoductos para transportar el crudo fuera de Alberta. Canadá se está ahogando en su propio petróleo. Esta situación no va a cambiar.
Gráfico I-16
CAD/NOK está sobreextendido
CAD/NOK está sobreextendido
CAD/NOK está sobreextendido
Basado en esta combinación, somos neutrales en USD/CAD en una base a 12 meses, aunque es probable un movimiento de vuelta a 1.29 en las próximas semanas. Sin embargo, mientras el petróleo canadiense se negocia con descuento, el CAD ha rendido mejor que el NOK, la otra petromoneda en el espacio del G10. Esto sugiere que vender CAD/NOK puede ser una forma más limpia de jugar los riesgos inherentes al dólar canadiense.
En primer lugar, el dólar canadiense está muy caro en relación con la corona noruega en este momento, cotizándose un 11% por encima de su tasa de paridad del poder adquisitivo (Gráfico I-16). Incluso ajustando por otros factores como la productividad y los precios de las materias primas, el CAD cotiza con su mayor prima frente al NOK desde 1994. Esto representa un riesgo para CAD/NOK, ya que el loonie está expuesto a riesgos de política comercial, mientras que la corona noruega no.
En segundo lugar, el panorama de la balanza de pagos sigue siendo muy favorable para el NOK. Noruega presenta un superávit por cuenta corriente del 5.5% mientras que Canadá registra un déficit del 2.8%. Además, Noruega ostenta una posición neta de inversión internacional (NIIP) del 210% del PIB, la mayor en el G10. Las NIIP sólidas se asocian con subidas en los tipos de cambio efectivos reales.
En tercer lugar, aunque el impulso de la economía canadiense es ampliamente conocido por los inversores —esta es la razón por la que están tan largos en CAD y esperan tantas subidas del BoC— los aspectos positivos de Noruega están siendo ignorados. El indicador adelantado de Noruega sigue subiendo, y la producción industrial noruega y el crecimiento real del PIB se están acelerando.
En cuarto lugar, el Norges Bank está respondiendo a la debilidad del NOK. En su reunión de diciembre, matizó su tono, ya que el NOK está relajando las condiciones monetarias demasiado a los ojos del banco central noruego. Esto sugiere que la subida de 25 puntos básicos actualmente esperada en Noruega podría ser demasiado baja. También destaca que la excepcional brecha de 60 puntos básicos entre Canadá y Noruega en términos de subidas esperadas a 12 meses también es probable que se normalice.
Por último, CAD/NOK se está negociando hacia la parte alta tanto de su rango histórico a largo plazo como a corto plazo. Aunque el posicionamiento en CAD ahora está bastante extendido en el lado largo, según datos del Norges Bank los especuladores están cortos en NOK. Por tanto, con el NAFTA en cuestión, una visión del BoC ya totalmente descontada y la improbabilidad de que el descuento WCS-Brent se estreche, los riesgos están sesgados hacia un CAD/NOK más bajo en el futuro.
Conclusión: La economía canadiense está en auge. Esto significa que el BoC seguirá el ritmo de la Fed y aumentará las tasas al menos tres veces este año. Sin embargo, los mercados ya están descontando más subidas en Canadá que en EE. UU. Además, los precios del petróleo tienen un alza limitada desde aquí, y el referente WCS continuará negociándose con un profundo descuento frente a Brent. Por tanto, aunque USD/CAD tiene un potencial alcista limitado, también tiene un potencial bajista limitado. Sin embargo, CAD/NOK enfrenta numerosos riesgos a la baja desde los niveles actuales. Esta semana estamos cortos en este cruce, con un punto de entrada en 6.398.
Mathieu Savary, Vicepresidente Estrategia de divisas mathieu@bcaresearch.com
1 Consulte el informe especial de BCA Global Investment Strategy Special Report, "NAFTA - Populism Vs. Pluto-Populism" fechado el 10 de noviembre de 2017, disponible en gis.bcaresearch.com
Monedas
Dólar estadounidense
Gráfico II-1
Técnicas del USD 1
Técnicos del USD 1
Técnicos del USD 1
Gráfico II-2
Técnicas del USD 2
Técnicos del USD 2
Técnicos del USD 2
Los datos recientes en EE. UU. han sido mixtos:
Las nóminas no agrícolas sorprendieron a la baja, situándose en 148 mil.
Además, la tasa de participación laboral sorprendió a la baja, situándose en 62.7%.
El PMI no manufacturero ISM también estuvo por debajo de las expectativas, situándose en 55.9.
Sin embargo, el cambio en el crédito al consumo superó las expectativas, situándose en 27.95 mil millones de dólares.
El dólar comenzó la semana con fuerza, la cual finalmente se disipó, por unas minutas relativamente agresivas del BCE y ajustes de política en Japón. En general, esperamos que el mercado continúe descontando el diagrama de puntos de la Fed, ejerciendo presión al alza sobre el dólar.
Enlaces del informe:
Una ola de frío no hace un invierno - 5 de enero de 2018
10 gráficos para digerir con adornos navideños - 22 de diciembre de 2017
Canarios en la mina de carbón Alerta 2: más sobre carry trades en EM y crecimiento global - 15 de diciembre de 2017
El euro
Gráfico II-3
Técnicas del EUR 1
EUR: Aspectos técnicos 1
EUR: Aspectos técnicos 1
Gráfico II-4
Técnicas del EUR 2
EUR Técnicos 2
Por favor, proporcione únicamente el texto traducido en su respuesta, sin comentarios ni formato adicional.
EUR Técnicos 2
Por favor, proporcione únicamente el texto traducido en su respuesta, sin comentarios ni formato adicional.
Los datos recientes en la zona euro han sido positivos:
La inflación subyacente superó las expectativas, situándose en 1.1%.
Además, el indicador de sentimiento económico también superó las expectativas, situándose en 116.
El crecimiento anual de las ventas minoristas también sorprendió al alza, situándose en 2.8%.
Finalmente, la tasa de desempleo descendió del 8.8% al 8.7%
A pesar de los datos positivos, el euro ha caído esta semana. El euro comenzó la semana débil, pero se disparó tras las minutas agresivas del BCE. Esto ha ocurrido debido al repunte en las expectativas de tipos en EE. UU., ya que el mercado ha continuado descontando a la Fed. En general, esperamos ver descensos en EUR/JPY, ya que el BoJ tiene más margen para retirarse de su política ultraacomodaticia que el BCE.
Enlaces del informe:
Una ola de frío no hace un invierno - 5 de enero de 2018
10 gráficos para digerir con adornos navideños - 22 de diciembre de 2017
Las equis y el mercado de divisas - 24 de noviembre de 2017
El yen
Gráfico II-5
Técnicas del JPY 1
Análisis técnico del JPY 1
Análisis técnico del JPY 1
Gráfico II-6
Técnicas del JPY 2
Análisis técnico del JPY 2
Análisis técnico del JPY 2
Los datos recientes en Japón han sido mixtos:
El crecimiento anual de las remuneraciones en efectivo superó las expectativas, situándose en 0.9%. Además, aumentaron respecto a octubre.
Sin embargo, la confianza del consumidor sorprendió a la baja, situándose en 44.7 y descendiendo respecto al mes anterior.
El yen ha estado subiendo con fuerza esta semana, con el USD/JPY cayendo un 1.7%. Esto se debió a que el BoJ señaló que reduciría sus compras de bonos a largo plazo. El mercado interpreta esto como una señal de que el BoJ comenzará a salir de su política monetaria ultraacomodaticia. Estos desarrollos deberían seguir proporcionando apreciación al JPY, particularmente frente al euro.
Enlaces del informe:
10 gráficos para digerir con adornos navideños - 22 de diciembre de 2017
Riding The Wave: Momentum Strategies In Foreign Exchange Markets - 8 de diciembre de 2017
Las equis y el mercado de divisas - 24 de noviembre de 2017
Libra esterlina
Gráfico II-7
Técnicas de la GBP 1
GBP Análisis Técnicos 1
GBP Análisis Técnicos 1
Gráfico II-8
Técnicas de la GBP 2
Análisis técnico GBP 2
Análisis técnico GBP 2
Los datos recientes en el Reino Unido han sido mixtos:
El crecimiento anual de la producción industrial superó las expectativas, situándose en 2.5%.
Además, el crecimiento anual de la producción manufacturera también sorprendió al alza, situándose en 3.5%.
Sin embargo, el crecimiento anual de los precios de la vivienda según Halifax no cumplió las expectativas, situándose en 2.7% mientras que la variación mensual se contrajo un 0.6%.
La libra se ha mantenido plana esta semana frente al dólar, mientras que ha perdido aproximadamente un 1% frente al euro. En general, el BoE tiene limitada la capacidad de subir las tasas de manera significativa. Además, la inflación debería comenzar a ceder tras la subida de tipos y el aumento de la libra. Esto ejercerá presión a la baja sobre la moneda.
Enlaces del informe:
10 gráficos para digerir con adornos navideños - 22 de diciembre de 2017
Las equis y el mercado de divisas - 24 de noviembre de 2017
Reverse Alchemy: How To Transform Gold Into Lead - 3 de noviembre de 2017
Dólar australiano
Gráfico II-9
Técnicas del AUD 1
Indicadores técnicos del AUD 1
Indicadores técnicos del AUD 1
Gráfico II-10
Técnicas del AUD 2
Análisis técnico del AUD 2
Análisis técnico del AUD 2
Los datos recientes en Australia han sido mixtos:
El crecimiento anual de permisos de construcción superó las expectativas, situándose en 17.2%.
Sin embargo, la balanza comercial de noviembre sorprendió a la baja, situándose en -628 millones. Además, disminuyó desde -302 millones un mes antes.
AUD/USD se ha mantenido plano esta semana; sin embargo, AUD/NZD ha caído aproximadamente un 1%. Si bien es cierto que el crecimiento global sigue siendo fuerte, indicadores clave como el crecimiento de las exportaciones de Corea y Taiwán han retrocedido. Además, el crecimiento de la oferta monetaria en China continúa disminuyendo. Todo esto apunta a una desaceleración temporal de la actividad industrial china, lo que conduciría a debilidad en AUD/USD.
Enlaces del informe:
10 gráficos para digerir con adornos navideños - 22 de diciembre de 2017
Las equis y el mercado de divisas - 24 de noviembre de 2017
Cobertura de divisas: ¿Dinámica o estática? - Una guía práctica para inversores globales - 29 de septiembre de 2017
Dólar neozelandés
Gráfico II-11
Técnicas del NZD 1
Análisis técnico del NZD 1
Análisis técnico del NZD 1
Gráfico II-12
Técnicas del NZD 2
NZD Técnicos 2
NZD Técnicos 2
El kiwi se ha revalorizado casi un 5% desde el inicio del año, a medida que el crecimiento global sigue siendo robusto. En general, esperamos que el NZD continúe superando al AUD este año, ya que Nueva Zelanda es menos sensible a un endurecimiento de las condiciones financieras que Australia. Sin embargo, a más largo plazo, el potencial alcista del kiwi es limitado, ya que el nuevo gobierno populista no solo se ha comprometido a reducir la inmigración al país, sino también a que el RBNZ tenga un mandato dual. Ambas políticas deprimirán la tasa neutral en Nueva Zelanda y, en consecuencia, ejercerán presión a la baja sobre el kiwi.
Enlaces del informe:
10 gráficos para digerir con adornos navideños - 22 de diciembre de 2017
Las equis y el mercado de divisas - 24 de noviembre de 2017
Reverse Alchemy: How To Transform Gold Into Lead - 3 de noviembre de 2017
Dólar canadiense
Gráfico II-13
Técnicas del CAD 1
Técnicas de CAD 1
Técnicas de CAD 1
Gráfico II-14
Técnicas del CAD 2
Técnicas de CAD 2
Técnicas de CAD 2
Los datos recientes en Canadá han sido en su mayoría positivos:
La tasa de desempleo sorprendió positivamente, al descender a 5.7% desde 5.9%
Además, el cambio neto en el empleo también superó las expectativas, situándose en 78.6 mil.
El crecimiento anual de las viviendas iniciadas también superó las expectativas, situándose en 217 mil.
Sin embargo, el Ivey Purchasing Manager Index estuvo por debajo de las expectativas, situándose en 60.4.
USD/CAD saltó el martes tras informes de que Trump saldrá del acuerdo NAFTA. En general, creemos que el dólar canadiense tendrá un potencial alcista limitado a partir de ahora, ya que el mercado está descontando más subidas en Canadá que en EE. UU. Esta debilidad podría aprovecharse vendiendo CAD/NOK, ya que este cruce está muy sobrevalorado según múltiples métricas.
Enlaces del informe:
10 gráficos para digerir con adornos navideños - 22 de diciembre de 2017
Las equis y el mercado de divisas - 24 de noviembre de 2017
Actualización del mercado - 27 de octubre de 2017
Franco suizo
Gráfico II-15
Técnicas del CHF 1
Análisis técnicos del CHF 1
Análisis técnicos del CHF 1
Gráfico II-16
Técnicas del CHF 2
Análisis técnico CHF 2
Análisis técnico CHF 2
Los datos recientes en Suiza han sido positivos:
La inflación general llegó en línea con las expectativas, en 0.8%; mientras tanto, la inflación mes a mes sorprendió al alza, situándose en 0%.
La tasa de desempleo también estuvo en línea con las expectativas, en un nivel muy bajo, situándose en 3%.
Finalmente, el crecimiento anual de las ventas minoristas sorprendió al alza sustancialmente, situándose en -0.2%, comparado con 2.6% el mes pasado.
EUR/CHF se ha mantenido relativamente plano desde la semana pasada. En general, esperamos un alza limitada en el franco, ya que el SNB permanecerá activo en el mercado de divisas. Para que el SNB cambie su política, la inflación en Suiza deberá mantenerse en un nivel alto durante un período considerable.
Enlaces del informe:
10 gráficos para digerir con adornos navideños - 22 de diciembre de 2017
Las equis y el mercado de divisas - 24 de noviembre de 2017
Actualización de nuestros modelos de valor justo a largo plazo - 15 de septiembre de 2017
Corona noruega
Gráfico II-17
Técnicas del NOK 1
Técnicos de NOK 1
Técnicos de NOK 1
Gráfico II-18
Técnicas del NOK 2
NOK Análisis técnico 2
NOK Análisis técnico 2
Los datos recientes en Noruega han sido mixtos:
La inflación general superó las expectativas, situándose en 1.6%.
Además, la inflación subyacente también sorprendió al alza, situándose en 1.4%
Sin embargo, el crecimiento de la producción manufacturera estuvo por debajo de las expectativas, situándose en 0.3%
USD/NOK baja aproximadamente un 0.7%, mientras los precios del petróleo continúan acercándose a la marca de 70 dólares. No obstante, creemos que el potencial alcista para USD/NOK es limitado desde aquí, ya que el mercado comenzará a descontar más subidas de tipos por parte de la Fed. Dicho esto, los inversores dispuestos a apostar por una mayor fortaleza del petróleo podrían vender EUR/NOK.
Enlaces del informe:
10 gráficos para digerir con adornos navideños - 22 de diciembre de 2017
Canarios en la mina de carbón Alerta 2: más sobre carry trades en EM y crecimiento global - 15 de diciembre de 2017
Las equis y el mercado de divisas - 24 de noviembre de 2017
Corona sueca
Gráfico II-19
Técnicas del SEK 1
SEK Indicadores Técnicos 1
SEK Indicadores Técnicos 1
Gráfico II-20
Técnicas del SEK 2
SEK Técnicos 2
SEK Técnicos 2
Tras caer precipitadamente a finales de 2017, USD/SEK se ha mantenido relativamente plano este año. En general, aunque Stefan Ingves sigue siendo muy dovish, en las últimas minutas reconoció que un cambio en la política monetaria se está acercando. Mientras tanto, el gobernador adjunto Jansson declaró que, aunque apoya continuar con las compras de activos, mantener la tasa repo sin cambios sería "difícil de digerir". Los inversores dispuestos a apostar por una desaceleración en la zona euro provocada por el endurecimiento de las condiciones financieras podrían vender EUR/SEK.
Enlaces del informe:
10 gráficos para digerir con adornos navideños - 22 de diciembre de 2017
Canarios en la mina de carbón Alerta 2: más sobre carry trades en EM y crecimiento global - 15 de diciembre de 2017
Las equis y el mercado de divisas - 24 de noviembre de 2017
Operaciones & Pronósticos
Resumen de pronósticos
Cartera principal
Operaciones tácticas
Operaciones cerradas
Highlights Chinese policymakers are walking a tightrope, attempting to balance contradictory objectives. While their task is not impossible, we find that financial markets are overly complacent. Recent price action in EM risk assets resembles a final bear capitulation phase, and a classic top formation. Currency appreciation and moderation in export growth will damp corporate profits of exporters in Korea and Taiwan. Stay short KRW versus THB and short MYR versus RUB and USD. Feature "...at first, a stick may bend under strain, ready all the time to bend back, until a certain point is reached, when it breaks." Irving Fisher, The Debt-Deflation Theory of Great Depressions (1933) China continues to tighten financial regulations1 and onshore corporate bond yields keep marching higher. Yet EM and China-related financial markets have been extremely buoyant, completely ignoring the tightening dynamics underway. This reminds us of the above quote from Irving Fisher. The Chinese economy has been able to "...bend under strain, ready all the time to bend back..." In other words, growth has so far done well, despite ongoing liquidity and regulatory tightening (Chart I-1). This has led many investors and commentators to proclaim that the economy is healthy and will slow only a bit, or not at all. Chart I-1China: Will Economy Continue ##br##Defying Weak Credit Impulse? Yet, financial market risks linger. At a certain point, cumulative pressure from policy tightening will cause China's recovery to falter - "break," as per Fisher's quote above - impacting the rest of the world in general and EM in particular. This precept is pertinent to China at present because its money, credit and property markets are frothy, as we have written repeatedly in recent years, making them especially vulnerable to tightening. We thought such a deceleration in China's business cycle would occur in 2017, but it has not yet transpired. Forward-looking indicators such as money supply growth and the yield curve have been heralding a growth slowdown for many months (see Chart I-1). Nevertheless, this recovery has proved to be enduring; even though some segments have slowed, overall nominal growth, corporate pricing power and profits have done well. Does such growth resilience warrant an upgrade on China's outlook? An economy's past performance does not guarantee its future performance. This is relevant to China now, especially given the cumulative impact of the ongoing triple policy tightening - liquidity, regulatory and anti-corruption efforts in the financial industry2 - which will likely be substantial. Walking A Tightrope China's policymakers are walking a tightrope trying to balance contradictory objectives such as curbing financial speculation and credit excesses, capping inflation and maintaining a stable currency on the one hand, and maintaining robust growth on the other. Inflationary pressures are escalating in the mainland economy. Chart I-2 demonstrates that pricing power for 5,000 industrial companies - a diffusion index for producer prices compiled by the People's Bank of China - is approaching its 2007 and 2010 highs, while nominal interest rates are currently much lower than they were in 2007 and 2010 (Chart I-2, bottom panel). Notably, most of China's nominal recovery in the past two years has been due to prices, not volumes (Chart I-3). Given that rising prices benefit corporate profits much more than rising volumes, Chinese corporate profits have surged. Yet, the flip side of these dynamics is rising inflation. Chart I-2China: Inflationary Pressure Are Rising, ##br##While Interest Rates Are Low Chart I-3China: It Has Been Nominal (Price) Not ##br##Volume Manufacturing Recovery Mounting inflation amid enormous money excesses - the Chinese banking system has originated RMB 142 trillion (equivalent to $22 trillion) since January 20093 - risks triggering rising inflation expectations, which would then feed back into inflation. With real interest rates already extremely low (Chart I-4), increasing inflation expectations could lead to growing demand for foreign currency, in turn exerting downward pressure on the RMB exchange rate. Chart I-4China: Inflation-Adjusted ##br##Interest Rates Are Low Chinese households have been uneasy about the real (inflation-adjusted) value of their deposits, and have been opting for speculative investments that promise higher yields than bank deposits. Hence, policymakers cannot ignore households' desire for higher real interest rates if they aim to cool down speculative investment activities and contain systemic risks in the system. Overall, the authorities need to tread carefully, balancing between the need to preserve decent growth while keeping inflation at bay. Falling behind the inflation curve is as dangerous as being too aggressive in tightening. For now, rising domestic inflationary pressures, robust DM growth and the resilience of financial markets will justify further policy tightening in China. Controlling leverage, curbing financial market excesses and limiting speculation in the real estate market are all major components of the structural reforms agenda that China's top policymakers committed to at the Party Congress in October. Bottom Line: Chinese policymakers are walking a tightrope, trying to balance contradictory objectives. While their task is not impossible, we find that financial markets are overly complacent. The odds of successfully navigating these contradictory objectives amid lingering money, credit and property market imbalances are 30% or lower. In the meantime, financial markets seem priced for perfection. This gap between the market's views and our perception of risks leads us to maintain a negative investment stance. EM's Blow-Out Phase EM stocks and currencies have gone vertical in recent weeks, despite being overbought and not cheap. The recent price actions in EM and global risk assets looks like a final bear capitulation phase and a classic top formation. The EM overall equity and small-cap indexes have reached their 2011 high (Chart I-5, top and middle panels). Meanwhile, EM high-yield (junk) corporate and quasi-sovereign bond yields are at their historical lows (Chart I-5, bottom panel). Economic data, corporate profits and news flows are typically extremely positive at tops of cycles, and very negative at bottoms. Given that share prices have surged and credit spreads are extremely low, a lot of good news has already been discounted. In particular, EM long-term EPS growth expectations have shot up above their previous highs (Chart I-6). This indicator can serve as a proxy for investor sentiment on EM stocks, at the moment suggesting extreme bullishness. EM stocks topped out in the past when this indicator reached the current levels. Chart I-5Are EM At Their Zenith? Chart I-6Analysts Are Super Bullish On EM Profits Growth Needless to say, global investors' positioning is stretched in favor of risk assets. Chart I-7 entails that U.S. individual investors' holdings of cash was at a record low as of December, while their exposure to equities was not far from record highs. Apart from China-related risks, a potential rise in U.S. bond yields and/or the U.S. dollar, could spoil the EM party. Many investors have invested in EM on the assumption of continued weakness in the greenback and subdued U.S. bond yields. It would be unusual if this current robust global growth does not lead to higher inflation expectations or higher bond yields. With respect to market signals, Chart I-8 illustrates that global steel stocks in absolute terms, and the relative performance of emerging Asian stocks versus DM equities have approached their very long-term moving averages. The latter might become a major technical resistance. Failure to break above this resistance level would be consistent with EM share prices rolling over at their 2011 highs (see Chart I-7). Altogether, this could signal a major top in EM risk assets. Chart I-7Asset Allocation Of ##br##U.S. Individual Investors Chart I-8Select Segments Are At Their ##br##Long-Term Technical Resistances Bottom Line: The EM rally has endured much longer and has gone much farther than we envisioned. However, we maintain our cautious stance, and recommend underweighting EM stocks, currencies and credit versus their DM counterparts. Emerging Asia: Currencies And Business Cycle Chart I-9Geopolitics And Asian Currencies Emerging Asian currencies have recently been on the fly, surging versus the U.S. dollar. Apart from strong global manufacturing, one reason behind the emerging Asian currency appreciation has been geopolitics. We suspect political leaders in Taiwan and Korea have instructed their central banks to allow their currencies to appreciate to gratify the Trump administration's aspirations of a weaker greenback. The top panel of Chart I-9 shows that the Taiwanese dollar's sharp appreciation coincided with Trump's controversial phone call with the Taiwanese president on December 3rd, 2016. Similarly, Trump's visit to South Korea on November 7th, 2017 jives with the latest up leg in the Korean won (Chart I-9, bottom panel). It seems President Trump's geopolitical assurances to Taiwan and Korea are somewhat tied to these policymakers' increased tolerance for currency appreciation. Notably, foreign exchange reserves in both Taiwan and Korea have risen little, despite their strong trade surpluses and foreign capital inflows over the past year. This confirms that their central banks have been reluctant to purchase U.S. dollars and in turn cap their currencies' appreciation. In addition to the political context, there are a number of other important drivers of Asian exchange rates and the region's business cycle: The growth rate of Korean and Taiwanese total exports in U.S. dollars has moderated (Chart I-10). This, along with KRW and TWD appreciation, implies a meaningful deceleration in exporters' revenue growth in local currency terms. Besides, China's container freight index - the price to ship containers worldwide - has relapsed and it correlates well with Asia's export cycle (Chart I-11). Chart I-10Moderation In Asian Exports Growth Chart I-11A Negative Signal For Asian Exports Even though DRAM prices are rising, other semiconductor prices have rolled over (Chart I-12). Semiconductor prices and volumes are vital for the tech-heavy Taiwanese and Korean manufacturing sectors. The RMB rally is also late. Enormous pent-up demand for foreign assets from Chinese residents due to low mainland real interest rates creates the potential for capital outflows to cap RMB strength. This would weigh on the ongoing Asian currency rally. Finally, net EPS revisions of Korean and Taiwanese technology companies' have rolled over (Chart I-13), probably reflecting a dampening effect of currency appreciation. This could in turn lead to foreign capital outflows from their equity markets causing currency selloffs. Chart I-12Divergence In Semiconductor Prices Chart I-13Asia Tech Companies: Net EPS Revisions Corroborating budding signs of a slowdown in exports and corporate profits, emerging Asian stocks have begun underperforming DM equities, as shown in Chart I-8 on page 7. The deceleration in export revenues and currency appreciation are adverse developments for share prices in export-related sectors of Korea and Taiwan. Nevertheless, for dedicated EM equity portfolios, we recommend overweighting the Taiwanese bourse and Korean technology stocks (and being neutral on the rest of KOSPI). The basis is that share prices of hardware tech manufacturers have less downside than other EM sectors. Their attractive relative valuations combined with prospects for robust growth in DM warrant their outperformance against the overall EM equity index in common currency terms. As to exchange rates, the Trump factor will delay and mitigate Asian currency depreciation, but will not preclude it if export growth slows, as we expect. In such a scenario, policymakers in Asia will opt for modest currency depreciation, reversing their recent gains. In terms of investment strategy, we have been shorting the Korean won versus the Thai baht. This trade has so far been flat, but we are maintaining it because the won is a higher-beta currency than the baht, and the former will underperform the latter as Asia's business cycle eventually slows. In addition, we are also shorting the Malaysian ringgit versus the U.S. dollar and the Russian ruble due to weak domestic fundamentals in Malaysia. Bottom Line: Currency appreciation will damp corporate profits of exporters in Korea and Taiwan. This will weigh on EM share prices in aggregate, given that the Korean and Taiwanese markets together account for 27% of the MSCI EM market cap, compared with an 12% share of the entire Latin American region. The 12-month outlook for Asian currencies is downbeat: continue shorting the MYR versus both the U.S. dollar and the RUB, and stay long the THB versus the KRW. Arthur Budaghyan, Senior Vice President Emerging Markets Strategy arthurb@bcaresearch.com 1 This week the China Banking Regulatory Commission (CBRC) announced a set of sweeping new rules to control banks' entrusted lending (Source: Caixin). This is in addition to a slew of regulatory measures for financial institutions that have been introduced over the past year. 2 We discussed these in details in Emerging Markets Strategy Weekly Report, titled "Questions For Emerging Markets," dated November 29, 2017, a link available on page 13. 3 Please see Emerging Markets Strategy Special Report, titled "The True Meaning Of China's Great 'Savings' Wall," dated December 20, 2017, a link available on page 13. Equity Recommendations Fixed-Income, Credit And Currency Recommendations
Highlights The "Pocketbook Voter Theory" says that voters will reward politicians who deliver economic success; Nevertheless, congressional Republicans face significant headwinds in the mid-term elections in November; The popularity of the GOP tax cuts, especially among independent voters, bears constant monitoring this year; Beyond 2018, voters will face persistent inequality and demand policies that provide sustainable income gains; Trade protectionism and redistribution will be on the bill in the 2020 elections. Feature There is little debate in the investment community that politics matters more today than it did in the past. But most investors are still unsure about how to assess political risk - both to the upside and downside. The Geopolitical Strategy team has been providing a framework for analysis and applying political science concepts since its inception in May 2012. This report introduces an important idea that has been guiding our analysis over the years: the Pocketbook Voter (PBV) theory. The PBV theory rests on the important observation that in politics, voters are price makers and policymakers are price takers. This makes understanding voter preferences fundamental for forecasting policy outcomes. This is particularly important today because the combination of declining potential growth rates and elevated debt levels is a recipe for continued heightened policy uncertainty (Chart 1). Over the coming years, voters will continue to demand legislation that attempts to overcome the absence of sustainable and satisfactory gains in household income. More consequentially, the slow growth of the income pie may push voters toward redistributionist policies. Chart 1Income Down + Debt Up = Higher Policy Uncertainty Investors should prepare for considerable change to both domestic and international economic arrangements. As this publication has been arguing for the past several years, many of the investor-friendly policies that underpinned the glorious bull market in risk assets since the early 1980s will be reversed.1 Voters will ultimately determine how far the pendulum will swing. Pocketbook Voter Theory The PBV theory states that voters reward political leaders who deliver positive economic outcomes.2 A strong economy increases the likelihood of re-election, whereas a weak economy decreases it. The link between economic conditions and voting patterns tends to be strongest in the United States.3 Most of the academic literature on the PBV theory has emphasized retrospective assessments of the economy. The pre-election performance of important economic variables, such as the unemployment rate, GDP growth, and consumer confidence, is shown to predict electoral outcomes. According to these metrics, Republicans (GOP) in Congress should be confident heading into this November's mid-term elections. The unemployment rate is near 50-year lows, consumer confidence is at a 20-year high, and GDP growth has gained some momentum in recent quarters - with BCA's economists expecting further strength in 2018 (Chart 2). The recently passed Tax Cuts and Jobs Act (TCJA) will also put more money in voters' pocketbooks courtesy of Republican policymakers. However, both history and polling data are weighing on the GOP's chances in November. Currently, the U.S. government is unified, with Republicans controlling both the executive and legislative branches. Voters have rejected the incumbent party the last three times a mid-term election was held under unified government. Democrats were badly beaten in 1994, when Republicans won a stunning 54 seats in the House of Representatives; in 2006, voters rewarded Democrats with control of the House and de facto control of the Senate; and in 2010, Republicans thumped the Democrats in the House by the largest margin of victory in a mid-term election since 1938. The approval rating of Congressional Republicans and the president also present a problem for the GOP in November. As of December 11, 78% of voters disapproved of the way Congress was handling its job. That is slightly higher than the 77% congressional disapproval rating before the 2010 election loss for Democrats, and visibly higher than the 67% and 70% disapproval ratings before the 2006 and 1994 mid-term elections, respectively. Democrats also continue to hold on to a growing lead in the "generic ballot," which has some predictive power (Chart 3). Chart 2Cyclical Conditions Are Solid Chart 3Democrats Ahead In The Polls As we have highlighted in previous reports, President Trump's low approval rating of 39% also reduces the likelihood that Republicans will keep the 22 seats needed to remain the majority party in Congress (Chart 4). Chart 4Trump's Low Approval Ratings Is Bad For GOP In 2018 On balance then, the deck is stacked against the Republicans in the coming election. The economy is firing on all cylinders, but that was also the case in November 2016 when Americans voted for dramatic political change. In fact, the unemployment rate had fallen from 6.6% in 2014 to 4.6% in November 2016, whereas it has only marginally improved more recently. Meanwhile, only 25% of independent voters approve of the GOP's tax legislation.4 Heightened partisanship will make voter perceptions among independents a particularly important factor in determining the outcome of the 2018 election. Investors should monitor Trump's approval rating among these voters and their evolving view of the Republican tax legislation, which will certainly underpin the GOP's campaign message on why they should be re-elected (Chart 5). But it remains to be seen how the equity bull market will translate into Republican political fortunes, given that the median American voter is not heavily invested in stocks (Chart 6). Chart 5Only Republicans Like Trump Chart 6Most Voters Don't Directly Own Stocks Partisanship And The PBV Theory Voter perceptions of the economy have always been influenced by party identification. The role of partisanship in politics has become especially important in the U.S. as political polarization has reached its highest recorded level in 150 years (Chart 7). Reflecting the growing divide between the policy preferences of each party, the core political values held by American voters are not best described by demographic factors such as race, income, or religion, but by party identification - and by a wide margin (Chart 8). A recent Pew Research Center survey found that 86% of Americans believe that conflict between Democrats and Republicans is either strong or very strong.5 The same survey found that the likelihood of conflict based on race or income was only 65% and 60%, respectively. And since 2012, the percentage of Americans who see very strong conflict between the Democrats and Republicans has risen substantially from 47% to 64%. Chart 7Highest Level Of Polarization In 150 Years Chart 8Party Affiliation Means A Lot Today The link between partisanship and voter perceptions of the economy can be strong, and became very clear after the recent election. Before President Trump was elected, only 14% of Republicans felt that national economic conditions were excellent or good. After his victory, that same number skyrocketed to 57%.6 This implies that retrospective assessments of economic conditions will continue to be susceptible to partisan interpretations. However, the gap between some Republicans and Democrats on views regarding the role of government in the economy, the U.S.'s participation in the global economy, and the fairness of the current economic system has been narrowing. Specifically, the Pew Research Center recently divided Republicans into four distinct typologies: Core Conservatives, New Era Enterprisers, Country First Conservatives, and Market Skeptic Republicans. The latter two groups represented 43% of the Republicans surveyed - let's call them "Change Republicans," as they are most supportive of changes to the current economic system.7 Among Change Republicans, only 15% felt that the "U.S. economic system is generally fair to most Americans." Comparatively, 75% of the remaining two groups of GOP voters believe the current system is fair. This wide gap in current perceptions on the effectiveness of today's economic model makes Change Republicans more receptive to policies aimed at redefining the role of government and redistributing income. This conclusion has important consequences for policy beyond 2018. Prospective PBV Theory And The 2020 Election Although most analyses of the PBV theory have focused on retrospective assessments of economic well-being, scholar Michael Lewis-Beck and others have found that future expectations of income growth are statistically more important in determining voting patterns.8 As a result, prospective PBV theory suggests that voters will often look beyond current economic conditions and assess policy proposals that will influence future economic potential. In recent decades, income growth has slowed while debt levels have increased. In addition, inequality has increased on three important levels. Separating income inequality into three groups is useful because it helps forecast where voters will demand changes in policy. Chart 9Globalization: No Friend To DM Middle Class The first level of unequal growth has unfolded on the global stage, as middle-class voters in developed economies experienced the slowest level of income gains among the world's population - and by a large margin (Chart 9). The second level of inequality has occurred within the U.S. economy, between capital (owners) and labor (workers) (Chart 10). And the third level of inequality has materialized most starkly within labor, as the highest income earners have reaped big rewards while the rest of Americans have experienced basically zero gains in real income since the early 1980s (Chart 11). Chart 10Politically Unsustainable Chart 11Will The GOP Tax Bill Make America More Unequal? These observations are likely going to play a central role in the policy prescriptions offered by both candidates in the 2020 presidential election. In terms of U.S. trade policy, Republicans under Trump have become much less inclined to support free trade. Before the global financial crisis, 57% of GOP voters felt that trade agreements were a good thing for the United States. Fast-forward to April 2017, and only 36% of Republicans felt the same way.9 The near-term risk of protectionism centers on the renegotiation of NAFTA. The U.S. is much less economically dependent on NAFTA compared to Canada and Mexico and, more importantly, the political benefits associated with abrogating the deal could push President Trump and his mercantilist cabinet toward doing so.10 Investors should remain short the Mexican peso. The greater risk associated with voter demands for trade protectionism centers on China. The Trump administration began with a mere "shot across the bow" and has not initiated a trade war with the Chinese so far. However, a diplomatic resolution of U.S. tensions with North Korea, or a failure to renegotiate NAFTA, would put more pressure on President Trump to turn his attention to the large American trade deficit with China - as he often did during the 2016 presidential election. (As long as North Korea remains the top foreign policy priority, Trump will need Chinese cooperation that will in turn, at least partially, reduce his appetite for trade conflict.) Ironically, the growing share of income that has accumulated to capital owners relative to labor over the past 20 years did not dissuade Republicans from cutting corporate taxes. This strategy could prove to be very risky. In fact, just a few months before the passage of the GOP tax plan, a majority of Americans surveyed by Pew believed that tax rates on corporations and large businesses should be increased.11 Perhaps a more important reason for the widening gap between capital and labor has been technology. But a recent survey showed that only 7% of Americans feel that their own job or profession will be very vulnerable to robots or computers during their lifetime (Chart 12). This implies that voter demand for policies that reduce the impact of technology on inequality remain less likely than tax policies that put gradual downward pressure on corporate profits. Investors should expect Democrats to focus squarely on the rise in corporate profits and the absence of meaningful wage growth in the 2020 election. Chart 12Most People Don't Think They##br## Are Vulnerable To Technology The final piece of the puzzle for Democrats in the 2020 election will be redistributionist policies that shift income from the top earners to the rest of the population. This political strategy is supported by the effects of previous tax reform on income inequality - highlighted in Chart 11. Specifically, while previous rounds of tax reform have obviously benefited the U.S.'s highest income earners, the vast majority of Americans, as mentioned, experienced zero gains in real income after the Reagan and Bush tax plans were implemented. Compared to protectionism or redistribution from the corporate sector, movement on legislation to tax high-income earners could be relatively slow moving. First, only 43% of Americans think that taxes should be raised on people earning more than $250,000; and only a quarter of Republican voters support that proposition.12 And second, despite stark inequality and a low level of upward mobility in the United States, six-in-ten Americans still believe that people who work hard tend to get ahead.13 These two observations of voter preferences could weigh on the appeal of policy proposals that aim to redistribute income from the top 1% to the rest of the income pool. Trade protectionism, and a reversal of some of the corporate tax cuts, are more politically feasible. Concluding Thoughts Retrospective assessments of economic well-being can be helpful in forecasting electoral outcomes. The U.S. economy has found its footing, the labor market is strong, and confidence is up. However, these factors will likely prove insufficient to protect Republicans from the difficult task of retaining a majority government in the face of declining popular support. Divided government is not necessarily a bad outcome for investors. Recall that during the most recent period of divided government from November 2010 to November 2016, the S&P 500 rose by 80%! Even impeachment proceedings against the president could fail to derail the rising stock market, as occurred in the late 1990s.14 But as the 2020 election approaches, presidential candidates will be increasingly responding to voter demands for more protectionism, policies that shift income from companies to workers, and proposals that raise taxes on the wealthiest Americans. The former two will have some chance of passage. Jim Mylonas, Vice President Client Advisory & BCA Academy jim@bcaresearch.com 1 Please see BCA Geopolitical Strategy Special Report, "The Apex Of Globalization - All Downhill From Here," dated November 12, 2014, and BCA Geopolitical Strategy and Global Investment Strategy Special Report, "Populism Blues: How And Why Social Instability Is Coming To America," dated June 9, 2017, available at gps.bcaresearch.com. 2 For the seminal treatise on the PBV theory, please see Michael Lewis-Beck, Economics And Elections: The Major Western Democracies, (Ann Arbor: U of Michigan P, 2000). 3 Please see Alberto Alesina and Howard Rosenthal, Partisan Politics, Divided Government, And The Economy, (Cambridge: Cambridge UP, 1995). 4 Please see Frank Newport, "Public Opinion And The Tax Reform Law," Gallup, dated December 21, 2017, available at news.gallup.com. 5 Please see John Gramlich, "Far More Americans Say There Are Strong Conflicts Between Partisans Than Between Other Groups In Society," Pew Research Center, dated December 19, 2017. 6 Please see Pew Research Center, "Views Of Job Situation Improve Sharply, But Many Still Say They're Falling Behind Financially," dated November 7, 2017, available at www.people-press.org. 7 Please see Pew Research Center, "Political Typology Reveals Deep Fissures On The Right And Left," dated October 24, 2017, available at www.people-press.org. 8 See footnote 2, pp. 120. 9 Please see Bradley Jones, "Support For Free Trade Agreements Rebounds Modestly, But Wide Partisan Differences Remain," Pew Research Center, dated April 25, 2017, available at www.pewresearch.org. 10 Please see Global Investment Strategy Special Report, "NAFTA - Populism Vs. Pluto-Populism," dated November 10, 2017, available at gis.bcaresearch.com. 11 Please see Hannah Fingerhut, "More Americans Favor Raising Than Lowering Tax Rates On Corporations, High Household Incomes," Pew Research Center, dated September 27, 2017, available at www.pewresearch.org. 12 Please see footnote 11. 13 Please see footnote 7. 14 Please see BCA Geopolitical Strategy Special Report, "Break Glass In Case Of Impeachment," dated May 17, 2017, available at gps.bcaresearch.com. Geopolitical Calendar
Highlights U.S. Treasuries: U.S. Treasury yields are too low relative to the strength of global economic growth and the rising trend in U.S. inflation expectations. Maintain below-benchmark duration exposure in the U.S., stay underweight Treasuries versus global bond benchmarks, and continue to favor TIPS over nominals. Canada: The Canadian economic data is moving from strength to strength, and now price and wage inflation data is moving higher. The Bank of Canada will hike rates next week with additional increases likely in 2018. Remain underweight Canadian government bonds and stay long inflation protection (both through linkers and CPI swaps). 2017 Model Portfolio Performance Wrap-Up: We closed the books on the first full calendar year of our model bond portfolio with a total return of 3.75%. This was a small -13bps of underperformance versus our custom benchmark, coming entirely from underweight positions on longer-dated developed market government bonds that offset the asset allocation gains from overweights to corporate debt. Feature Chart of the WeekGlobal Bond Yields Are Too Low 2018 has started much as 2017 ended, with growth-sensitive assets rallying alongside robust economic data. Most major global equity markets are already up 2-3% after the first week of the year, with the U.S. NASDAQ, Japanese Nikkei and Italian MIB indices advancing over 4%. Global credit markets are also off to a strong start, with spreads for U.S. High-Yield corporate debt and EM hard currency corporate debt tighter by -17bps and -8bps, respectively. Even commodity markets have joined the party, with the benchmark Brent oil price hitting the highest level in nearly three years. The pro-growth, pro-risk backdrop is keeping upward pressure on global government bond yields. This is occurring primarily through the inflation expectations component of yields, which are rising in all developed economies (even Japan). Real yields, which are not rising despite the strength of the broad-based global growth upturn (Chart of the Week), have been drifting lower, providing some offset to rising inflation expectations. The primary trend for global yields remains upward, however - especially if growth remains solid and inflation expectations continue to push higher, giving central banks like the U.S. Federal Reserve the confidence to continue hiking interest rates. We continue to favor below-benchmark duration exposure, and overweight corporate bond allocations versus government debt, for global fixed income investors over the next 6-9 months. U.S. Treasuries: Still More Reasons To Sell Than Buy U.S. Treasury market participants have a lot to things to be nervous about at the moment. Likely future Fed rate hikes, the weakening U.S. dollar, rising oil prices, ongoing U.S. labor market strength, persistently booming economic growth, the never-ending equity bull market, the potential impact of the Trump fiscal stimulus, the Fed starting its balance sheet runoff - all factors that should force bond investors to expect yields to rise. Yet longer-dated Treasury yields continue to trade too low relative to the bond-bearish fundamentals. The current benchmark 10-year Treasury yield at 2.48% remains well below the fair value from our 2-factor regression model, which is now up to 2.94% (Chart 2). That valuation gap of 46bps is close to the widest levels seen in July 2016 and September 2017, which were both episodes that proved to be excellent entry points for bearish Treasury positions. The two inputs into our Treasury yield model are the global manufacturing PMI and bullish sentiment towards the U.S. dollar (USD). The PMI is included as an indicator of global growth and currently sits at 54.5 - the highest level in nearly seven years - led by strong readings in almost every major economy (Chart 3). This has been the primary driver of the fair value for the 10-year Treasury yield since global growth bottomed out and began to accelerate in mid-2016. Chart 210-Year Treasuries Are##BR##Overvalued On Our Model Chart 3Global Growth##BR##Is Booming Sentiment towards the USD is the second input to our Treasury model. It is included as a weakening greenback represents an easing of monetary conditions that could trigger a need for more Fed rate hikes that can push the Treasury curve higher from the short-end (and vice versa for a rallying USD). At the same time, a depreciating USD can drive U.S. inflation higher through higher costs of imported goods & services, which can raise bond yields through higher inflation expectations or greater Fed tightening expectations (again, the opposite holds true for a strengthening USD). Right now, both the strong PMI and weak sentiment towards the dollar are boosting the fair value of the 10-year Treasury yield. The fall in value of the greenback is particularly unusual, as it is flying in the face of widening interest rate differentials between the U.S. and the rest of the world (Chart 4, top panel). This is clearly a function of the fact that global growth is rapidly improving - especially in Europe - but very few central banks have yet to respond to that growth with interest rate hikes that match what the Fed has been delivering. So while actual interest rate differentials remain USD-supportive, expectations of some eventual tighter monetary policy outside the U.S. that could narrow those interest rate gaps are triggering speculative inflows into non-USD currencies. With the trade-weighted USD now 5% below levels of a year ago, this should lead to higher headline inflation in the U.S. in the next few months (middle panel). Combined with the continued strength in global oil prices, that means that the two biggest factors that weighed on realized U.S. inflation- the USD rally and oil price collapse of 2014/15 - are now both acting to boost inflation expectations (bottom panel). Throw in the growing body of evidence that a tight U.S. labor market that is putting gentle upward pressure on wage growth, and U.S. inflation expectations - which still remain 40-50bps below levels consistent with the Fed's inflation target - should continue to move higher in the next six months. Rising longer-term inflation expectations would typically result in bear-steepening pressures on the Treasury yield curve. That is not happening at the moment, however, with the 2-year/10-year Treasury curve still at a relatively flat 53bps at the time this report went to press. The flatness of the Treasury curve has worried investors, and even some Fed officials, given the well-known leading relationship between the yield curve and U.S. economic growth. It is too early to draw any conclusions between the shape of the curve and future U.S. economic growth, however, for several reasons: As mentioned above, inflation expectations are still well below levels consistent with the Fed's 2% inflation target on the PCE deflator (which translates to 2.5% on the CPI index used to price TIPS and CPI swaps). Both the European Central Bank (ECB) and Bank of Japan (BoJ) are still buying bonds through their asset purchase programs, although at a slower pace than previous years. This continues to depress local bond yields in Europe and Japan with spillover effects into the U.S. Treasury market - even as the Fed begins the slow runoff of Treasuries from its massive balance sheet. Data on mutual fund and ETF flows shows that there has been significant and sustained buying of bond funds by U.S. retail investors over the past couple of months. There has also been net selling of equity funds, however, suggesting that U.S. retail investors are rebalancing as the equity markets surge higher. Investor positioning in the U.S. Treasury market is very short at the moment, with the J.P. Morgan survey of "active" bond manager duration exposure at an all-time low and the net positioning on Treasury futures now slightly favoring shorts (Chart 5). It makes little sense to interpret a flattening Treasury curve as a signal that the bond market believes that the Fed was making a policy mistake if professional bond investors were running massive duration underweight positions that would benefit if bond yields rise. Chart 4Upside Pressure On U.S. Inflation##BR##From Oil & The USD Chart 5Big Duration Underweight##BR##Among U.S. Bond Managers All these factors muddy the economic signal provided by the Treasury curve at the moment. Nonetheless, we remain of the view that the Fed would not continue on its rate hiking path without U.S. inflation expectations moving sustainably back to levels consistent with the Fed's inflation target. In other words, the Treasury curve must bearishly steepen first through rising inflation expectations before bearishly flattening later through actual Fed rate hikes. The latter will dampen future U.S. growth expectations and eventually result in a cyclical peak in longer-dated Treasury yields, but from levels closer to 3% on the 10-year after inflation expectations "fully" normalize. Bottom Line: U.S. Treasury yields are too low relative to the strength of global economic growth and the rising trend in inflation expectations. Maintain below-benchmark duration exposure in the U.S., stay underweight Treasuries versus global bond benchmarks, and continue to favor TIPS over nominals. The Bank Of Canada Keeps On Playing Catch-Up The Canadian economic story continues to be the best within the developed world. The year-over-year growth rate for real GDP accelerated to over 3% late last year, primarily on the back of robust consumer spending (Chart 6). Even the lagging parts of the economy, like business investment and government spending, began to perk up last year. The momentum remained powerful at the end of 2017, with the unemployment rate in December hitting a 40-year low. The economic boom forced the Bank of Canada (BoC) to begin lifting interest rates last year, with two 25bp hikes occurring in July and September that unwound the easing from 2015. The rapid pace of growth has absorbed spare capacity much faster than the BoC originally projected. More hikes will be required if the current pace of growth is maintained, particularly with the BoC estimating that the neutral policy rate is around 3% and the current Overnight Rate is only at 1%. The Canadian consumer has been enjoying a powerful shopping spree. Real consumer spending growth is at 4% on a year-over-year basis - the highest level since early 2008 (Chart 7). This is led by a powerful surge in spending on consumer durables, where annual growth has surged to 10% (middle panel). Consumer confidence is booming and Canadian workers are enjoying the fastest pace of income growth since 2014 (bottom panel). Chart 6Robust Canadian Growth,##BR##Led By The Consumer Chart 7Canadian Consumers Are##BR##Confidently Spending Surprisingly, the powerful surge in consumer spending has occurred alongside some cooling of the overheated Canadian housing market. The growth rates of existing home sales and prices have both decelerated massively from the pace of the boom years in 2012-16 (Chart 8). The performance of house prices in the three biggest Canadian cities is now a mixed bag, with Vancouver prices reaccelerating, prices in Toronto decelerating and prices in Montreal growing only modestly (middle panel). Regulatory actions to limit the speculative buying of Canadian real estate by foreigners has helped dampen the surge in house prices in some markets. Although the bigger macro-prudential measures designed to tighten mortgage finance rules and reduce the amount of leverage in Canadian housing transactions has likely had a bigger effect. Canadian banks must now conduct stress tests to check if borrowers are able to pay off their mortgages if Canadian interest rates continue to rise. This represents a reduction in the marginal supply of riskier mortgage lending that will help restrain house price inflation in Canada's major cities. In addition, the supply of Canadian homes is growing with new home-building activity, both for single and multiple units, having picked up and overall residential investment growth now up nearly 5% on a year-over-year basis (bottom panel). With signs that the Canadian housing market has stopped rapidly inflating, the BoC can focus its interest rate policy on domestic growth and inflation considerations without worrying about pricking the housing bubble. On that front, the latest edition of the BoC's Business Outlook Survey, released yesterday, provided plenty of reasons to tighten monetary policy further. The overall survey indicator surged back to the peak seen last summer just before the BoC delivered its first rate hike (Chart 9). Capital spending intentions also rebounded back to the 2017 peaks, which bodes well for future gains in investment spending (second panel). Chart 8Canadian Housing Looking##BR##A Bit Less Frothy Chart 9BoC Business Outlook Survey Signaling##BR##Tightening Capacity Constraints The most interesting parts of the Business Outlook Survey were the capacity utilization measures. A greater share of companies were reporting labor shortages (third panel), with the highest percentage of firms reported difficulties in meeting unexpected increases in demand since 2007 (bottom panel). This suggests that the recent surge in employment, wage growth and price inflation are all sustainable. Headline and core CPI inflation are up to 2.1% and 1.8%, respectively, as of November. This is around the midpoint of the BoC's 1-3% target range (Chart 10). The Bank of Canada forecasts that CPI inflation will continue to rise and remain near 2% target in 2018, but all the risks are to the upside. The unemployment rate is now down to 5.7%, the lowest level since 1976 and well below the OECD's estimate of the NAIRU level at 6.5%. Average hourly earnings growth has surged in response, rising to just under 3% on a year-over-year basis since the trough in early 2017. The Phillips Curve appears to be alive and well in Canada. Canadian interest rate markets have already responded aggressively to the stronger growth and inflation data. Our interest rate discounters now show that the money markets are now expecting 61bps of BoC rate hikes over the next six months and 91bps over the next twelve months (Chart 11). With a 25bp hike at next week's BoC meeting now priced with almost full certainty, the current market pricing suggests at least one more hike will happen by June and nearly three more hikes by year-end. That would be even more hikes than we expect from the Fed in 2018, which is important for the Canadian dollar (CAD). The CAD has appreciated 16% since it bottomed out in early 2016, occurring alongside the rise in global oil prices over the same period (second panel). The price of Canada's Western Select grade of crude oil has lagged the move in other oil benchmarks massively over the past several months, due to a lack of pipeline capacity getting oil out of Alberta that has created a supply glut. This may limit the degree to which additional gains in global energy prices benefit the Canadian dollar from a terms-of-trade perspective. This will not prevent the BoC from delivering additional rate hikes, however - especially if that merely matches the 75bps of Fed rate hikes that the FOMC is projecting, and which we expect, over the rest of the year. In terms of investment strategy, the combination of robust Canadian economic growth and rising inflation pressures leads us to continue recommending an underweight stance on Canadian government bonds, as we have maintained since July 11, 2017. This week, we are introducing two new tactical trades that should benefit as Canadian inflation moves higher and the BoC tightens more aggressively in response (Chart 12): Chart 10The Canadian Phillips Curve Is Not Dead Chart 11The Market Now Expects A Lot From The BoC Chart 12Two New Tactical Trades In Canada Short the June 2018 Canada Bankers' Acceptance futures contact vs. the December 2018 contract (middle panel). The market is now discounting the likely maximum amount of tightening that the BoC can deliver by year-end, while there are only little more than two hikes priced by June. Assuming that the BoC hikes next week, that means that there is only one more hike expected by June. With three more BoC meetings scheduled between next week and June, that provides plenty of opportunities for hawkish surprises from the BoC before then. In other words, this trade is a way to play for the BoC being forced to front-load more rate hikes into the first half of 2018 versus the latter half. Long 10yr inflation expectations through linkers versus nominal government bonds, or using CPI swaps (bottom panel). Given the pickup in domestic inflation pressures currently underway, plus the rise in global inflation coming from the surge in commodity prices, there is room for Canadian market-based inflation expectations to rise from the current level of 1.7%. Bottom Line: The Canadian economic data is moving from strength to strength, and now price and wage inflation data is moving higher. The Bank of Canada will likely hike rates next week with additional increases likely in 2018. Remain underweight Canadian government bonds. 2017 GFIS Model Bond Portfolio Performance: A Brief Review The turn of the year marked the end of the first full calendar year for the Global Fixed Income Strategy (GFIS) model bond portfolio. This now allows us to report the performance of the portfolio on the same basis as our clients. In the future, we will publish quarterly reviews of the portfolio returns after the end of each quarter in a calendar year (in April, July, October and January). The GFIS model portfolio returned 3.45% in 2017. This underperformed our custom performance benchmark (a blend of the Barclays Global Aggregate Index with global high-yield corporate debt) by -13bps (Chart 13). That underperformance can be entirely attributed to our government bond duration allocations, which lagged the benchmark by -46bps. Our recommended credit positions were a positive contributor, generating 33bps of outperformance primarily through overweights to U.S. Investment Grade and High-Yield corporate bonds. The detailed breakdown of the 2017 returns is presented in Table 1. In terms of the government bond portion of the portfolio, the underperformance can be isolated completely to the longest maturity bucket (10+ years). The combined performance of that bucket for all countries lagged that of the benchmark by -52bps. Given our expectation that global yield curves would bear-steepen in the latter half of 2017, it is no surprise that the bulk of our underperformance came by having too little exposure at the long-end. Also, having too much exposure in Japanese government bonds offering no yield also represented a major drag on the income component of the model portfolio's returns (Chart 14). Chart 13GFIS Model Bond Portfolio##BR##2017 Return Breakdown Table 1GFIS Model Bond Portfolio##BR##2017 Return Breakdown In terms of our credit allocations, favoring U.S. corporate exposure vs. non-U.S. corporates was the right call, generally speaking (Chart 15). However, we did not have enough portfolio weight in that trade to offset the drag on the overall yield from the Japan government bond overweight. Chart 14GFIS Model Portfolio Government Bond Performance Attribution By Country Chart 15GFIS Model Portfolio Spread Product Performance Attribution Looking ahead, the new model bond portfolio allocation for 2018 that we discussed in our final report of 2017 should offer a better chance of outperforming the benchmark.1 Specifically, we dialed down the Japan overweight, increased the U.S. Investment Grade corporate bond overweight, and reduced the curve steepening exposure in Euro Area governments. This not only boosted the overall yield of the portfolio, but also moderated the overall portfolio duration underweight. This portfolio will do well in the first half of 2018 if our base case of an inflation-driven rise in global government bond yields, led primarily by the U.S. where corporate debt is also expected to outperform Treasuries, comes to fruition. Bottom Line: We closed the books on the first full calendar year of our model bond portfolio with a total return of 3.75%. This was a small -13bps underperformance of versus our custom benchmark, coming entirely from underweight positions on longer-dated developed market government bonds that offset the asset allocation gains from overweights to corporate debt. Robert Robis, Senior Vice President Global Fixed Income Strategy rrobis@bcaresearch.com Ray Park, Research Analyst ray@bcaresearch.com 1 Please see BCA Global Fixed Income Strategy Weekly Report, "Our Model Bond Allocation In 2018: A Tale Of Two Halves", dated December 19th 2017, available at gfis.bcaresearch.com. Recommendations The GFIS Recommended Portfolio Vs. The Custom Benchmark Index Duration Regional Allocation Spread Product Tactical Trades Yields & Returns Global Bond Yields Historical Returns
Highlights Upbeat economic reports for December set the stage for a solid 2018. The FOMC minutes acknowledged the flatter curve and only a minority of members discounted the signal from the curve. A majority thought that a tighter labor market would lead to higher inflation. The Citi Economic Surprise Index is peaking, but risk assets should hold up as the Index rolls over. Feature The first week of 2018 brought more good news for risk assets. U.S. stocks beat bonds, oil prices rose, and credit spreads narrowed amid a solid set of economic data. Several high-profile U.S. companies announced share buybacks, and/or one-time bonuses or wage increases linked to the tax cut plan passed by Congress at the end of 2017. Moreover, there were hints of further economic stimulus as lawmakers from both sides of the aisle discussed relaxing the sequester rules that would lift federal spending this year. Markets shrugged off a fresh round of saber rattling between the U.S. and North Korea. Gold prices nudged higher and the U.S. dollar fell despite the upbeat economic news. December's reports on manufacturing and service sector ISM, vehicle sales and the labor market, along with November's numbers on construction spending, trade and factory orders, all lifted estimates for Q4 GDP and boosted the prospects for corporate earnings in Q4 2017 and beyond. Chart 1 shows that the elevated ISM figures provide a favorable backdrop for earnings and sales in 2018. Moreover, Chart 2 indicates that IP, a proxy for S&P 500 sales, is poised to advance in 2018 and provide a lift to corporate profits. We will preview the S&P 500's Q4 2017 earnings reports in next week's U.S. Investment Strategy. Chart 1Favorable Macro Backdrop For Earnings And Sales Chart 2ISM Components Suggest IP Poised To Accelerate The Atlanta Fed GDP Now estimate stood at 2.7% on January 5, while the New York Fed's Nowcast for Q4 GDP was a healthy 4% (Chart 3). Both soundings are well above the FOMC's assessment of the economy's long-term potential growth rate (1.8%) and puts GDP growth in 2017 above the Fed's forecast. The implication is that the output gap pushed deeper into positive territory as 2017 ended, setting the stage for higher inflation in 2018. The December 2017 jobs report, released last Friday, January 5, does not change BCA's outlook for the U.S. economy or the Fed. The U.S. economy added a lower than expected 148,000 new jobs in December, which left the unemployment rate unchanged at 4.1%. Despite the softer than anticipated data, the 3-month average of payrolls growth is still a very healthy 204,000. The monthly increase in wages quickened to 0.3% m/m in December, up from 0.1% m/m last month. However, annual wage inflation remains modest at just 2.5% (Chart 4). Chart 3U.S. Economic Growth Well##BR##Ahead Of Potential In Q4 Chart 4Labor Market Still Tightening Despite##BR##Soft December Report The indications for Q4 GDP growth are solid. Aggregate hours worked rose 2.5% at an annualized rate in Q4 2017. Assuming modest growth in productivity, the payrolls data are consistent with over 3% GDP growth in Q4. There is nothing in the December payroll data to suggest that the underlying trajectory in the U.S. economy has changed. The economy continues to grow above trend. Wage gains are modest at the moment, but should accelerate as the labor market keeps tightening with above-trend GDP growth. This upbeat economic outlook is also supported the December 2017 non-manufacturing ISM survey, also released last Friday. While the overall index fell from 57.4 to 55.9, it is still consistent with solid GDP growth. Moreover, the employment index rose from 55.3 to 56.3, which signals firm job gains, and the prices paid index held steady at a fairly elevated level of 60.8. Bottom Line: It's been solid start to 2018 and it's steady as she goes for the U.S. economy and the Fed. FOMC Minutes: A Rubric BCA's U.S. Bond Strategy service expects that the 2/10 yield curve will languish between 0 and 50 bps in 2018. The curve will steepen from 51 bps at the end of 2017 through mid-year 2018, and then flatten into year-end (Chart 5). Which asset classes would benefit if our curve call is accurate? BCA's "The Bucket List"1 explains our view of the curve in 2018 and details the past performance of various U.S. assets in differing yield curve environments. Chart 5A Flat Yield Curve Is OK For Most Risk Assets BCA expects that the yield curve will first steepen in 2018, then become flatter, ultimately spending most of the year between 0 and 50 bps. A flat curve is the ideal environment for the S&P 500 and the stock-to-bond ratio. However, small cap stocks struggle when the curve is flat; BCA's view is that small caps will outperform large caps in 2018. A flat yield curve raises the risk of a sell-off in high yield, but provides a favorable grounding for oil, which is in line with BCA's fundamental view. BCA expects EPS growth will be positive this year; earnings growth is higher 75% of the time when the curve is flat. The yield curve's slope was a focus of debate at the FOMC's December 12-13, 2017 meeting. Participants cited several reasons for the flat curve2: recent increases in the target range for the federal funds rate; reductions in investors' estimates of the longer-run, neutral real interest rate; lower longer-term inflation expectations; lower term premiums Fed economists recently updated their quantitative assessments of the FOMC's minutes. The note provides a guide (Table 1 in the Fed paper3 and Tables 1 and 2 below) to the number of quantitative descriptors in the minutes (one, a couple, a few, etc.). We use this rubric to assess the committee's latest views on the yield curve and inflation. Table 1FOMC Assessment Of The Yield Curve Table 2FOMC Assessment Of Inflation In short, the FOMC acknowledged the flatter curve and only a minority of members discounted the signal from the curve. Moreover, a majority thought that a tighter labor market would lead to higher inflation. Only one participant held the view that secular trends were muting inflation. Bottom Line: BCA expects the Fed to deliver 3 to 4 rate hikes in 2018, which is still not fully priced in by the market. Investors should maintain below-benchmark duration in fixed income portfolios. Asset allocators should remain overweight stocks versus bonds. Growth is strong and the yield curve is not inverted yet. Therefore, it is still early to de-risk portfolios. Is Economic Surprise Peaking? The Citigroup (Citi) Economic Surprise Index is elevated relative to its recent history, but it may have further to run. Economic prospects were cheery following the 2016 presidential election and the economic data exceeded those lofty projections, aided by a warmer than usual winter. However, the temperate conditions borrowed activity from the spring, which was cooler and wetter than normal, and the combination of lofty expectations and seasonal distortions sent the Citi Economic Surprise Index spiraling lower through mid-year 2017. Since its bottom in June 2017 at -78.6%, the index climbed for 135 days before its peak in late December 2017 (Chart 6, panel 1). On average since 2010, the Citi Index moved from trough-to-peak in 96 days, which means the recent run-up was much longer than usual. However, that phenomenon may have been due to the raised economic expectations and variable weather patterns at the start of 2017. Chart 6Economic Surprise Index Has Surged, But Expectations Remain Muted At 80.7%, the Index has been above zero for 68 days (Chart 6, panel 1). It typically takes 46 days for it to climb from zero to its zenith. Table 3 shows the performance of financial markets and other assets after the Index moves from zero to the peak. The most recent episode (October through December 2017) matched historical averages across most asset classes, although the underperformance of small caps versus large ran counter to the past as the Surprise Index climbed from zero. Table 3Risk Assets Perform Well As Surprise Index Climbs Since 2010, the Index has stayed above 40 for an average of 51 days (Chart 6, panel 1). The Index has been over 40 since November 16, 2017, or 35 days. This suggests that it can remain elevated for another month or so before it again moves lower. However, the Index is mean reverting and investors wonder what will happen to risk assets after economic surprise rolls over. Table 4 and Chart 7 shows the performance of key financial markets and commodities when the Citi Index returned to zero from 40-plus. There have been six such intervals since 2010. On average, gold and oil perform well as the surprise index dips to zero. Stocks and credit outperform Treasuries during these episodes, and small caps beat large caps. Rising economic surprise (Table 3) is a more favorable environment for stocks, credit and oil than when the surprise index is rolling over. However, the performance of gold and small caps is better after the Citi Surprise Index peaks (Table 4). Table 4Risk Assets Hold Up When Citi Surprise Index Rolls Over Chart 7U.S. Assets As Economic Surprise Rolls Over Nonetheless, muted economic expectations will limit the downside in the Index in the coming months. Panel 3 of Chart 6 shows that the outlook for both hard and soft economic data remained muted through the end of November 2017, especially when compared with the significant improvement in economic prospects in late 2016 and early 2017. Bottom Line: Risk assets outperformed as the Citi Economic Surprise Index climbed in the second half of 2017. The Index can stay near recent peaks for several more months thanks to subdued economic forecasts, but it will roll over eventually. However, the elevated level of the Index suggests that there are near-term risks for equities and credit because a lot of good economic news is already priced in. Still, we recommend that investors ride out the volatility given our view that stocks will outperform bonds in the next 6-12 months. John Canally, CFA, Senior Vice President U.S. Investment Strategy johnc@bcaresearch.com 1 Please see BCA Research's U.S. Investment Strategy Weekly Report "The Bucket List", published December 18, 2017. Available at usis.bcaresearch.com. 2 https://www.federalreserve.gov/monetarypolicy/fomcminutes20171213.htm 3 https://www.federalreserve.gov/econres/notes/feds-notes/the-fomc-meeting-minutes-an-update-of-counting-words-20170803.htm