Estados Unidos

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

Con la temporada de publicación de resultados del Q4 a punto de despegar en serio la próxima semana, la composición de las estimaciones merece cierto análisis. Como se muestra en el panel inferior, tras un mínimo en 2015, el número de revisiones positivas de ingresos ha superado de forma constante al número de revisiones positivas de ganancias, a pesar de que el crecimiento real de las ganancias ha superado con creces al crecimiento de los ingresos. Creemos que hay tres razones concebibles para esta extraña tendencia, ninguna de las cuales es mutuamente excluyente. En primer lugar, hay buenas probabilidades de que los analistas simplemente tengan mejor visibilidad de la demanda final mientras adoptan un enfoque de esperar y ver respecto a los márgenes. En segundo lugar, las revisiones netas de ingresos podrían seguir los cambios en los precios al productor, una teoría respaldada por nuestro panel inferior. Por último, las recientes revisiones muy positivas de ingresos podrían reflejar cierto traslado de beneficios de 2017 a 2018 para captar el beneficio de la reciente reforma fiscal, especialmente dada la rebaja en las estimaciones de EPS del Q4/2017 y la mejora en las estimaciones de EPS del Q1/2018 y del año calendario 2018. Si esto afecta o no el desempeño del Q4 con respecto a las estimaciones está por verse, aunque una percepción de debilitamiento del motor de ganancias actual podría ser el catalizador para la tan esperada corrección del S&P 500; permanezcan atentos. ¿Qué pasa con las revisiones de ingresos frente a beneficios del SPX? ¿Qué pasa con las revisiones de ingresos frente a beneficios del SPX?

A finales del año pasado, rebajamos el índice S&P de constructores de viviendas a infraponderación de alta convicción, citando tres razones: el aumento de los costos de endeudamiento que afecta la asequibilidad, una reforma fiscal pendiente desfavorable para los propietarios y costos elevados (y en aumento). Con respecto a la primera de ellas, la asequibilidad de la vivienda ha ido disminuyendo a medida que la tasa hipotecaria a 30 años se ha movido en la dirección opuesta (segundo panel). Súmele el tope más bajo aprobado recientemente para la deducibilidad de los intereses hipotecarios, la menor deducibilidad del impuesto sobre la propiedad y la eliminación de las deducciones por intereses hipotecarios de las casas de vacaciones, y la asequibilidad debería sufrir un descenso importante en 2018. Al mismo tiempo, los costos han estado aumentando a un ritmo insostenible, con las ganancias en la construcción creciendo al ritmo más rápido desde el colapso inmobiliario y los precios de la madera muy por encima del nivel clave de $400. Esto indica que los constructores tendrán que o bien aumentar los precios, suprimiendo aún más la asequibilidad, o bien asumir un golpe en los márgenes, que creemos que es lo más probable. Cualquiera de los dos escenarios es perjudicial para las ganancias por acción (EPS) de los constructores; manténgase en infraponderación. Los símbolos bursátiles de las acciones en este índice son: BLBG: S5HOME-DHI, LEN, PHM, LEN / B. Los constructores de viviendas deberían ponerse a la venta Los constructores de viviendas deberían ponerse a la venta

Fed data released this week showed consumer credit growth surging at close to its fastest pace since the turn of the century, driven in large part by exceptional growth in revolving consumer credit (second panel). The last time this kind of growth was seen on a consistent basis was 2007, which would be potentially concerning were it not for the historically low household debt service ratios and the resulting pristine credit quality of credit card borrowers (third panel). Add on a widening credit card interest rate spread (bottom panel), typically an excellent leading indicator of earnings improvements and 2018 should be an exceptionally powerful earnings growth year for consumer finance stocks; stay overweight. The ticker symbols for the stocks in the S&P consumer finance index are: BLBG: S5CFINX-AXP, COF, DFS, SYF, NAVI.

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 Chart 1Bond Bear On Pause? The start of a new year often brings optimism and nowhere is this more evident than in economic projections. In three of the past four years (2017 being the exception) Bloomberg consensus GDP growth expectations ended the year lower than where they began. A related pattern played itself out in the Treasury market. At the turn of each of the past four years the average yield on the Bloomberg Barclays Treasury Index increased in December only to fall back in January. In two of those instances the January decline exceeded the December increase. Should we expect a similar January bond rally this year? Our favorite short-term indicators are not sending a strong signal (Chart 1). Net speculative futures positions weakly suggest that the 10-year yield will be lower in three months, but our auto regressive model suggests the Economic Surprise Index will still be in positive territory at the end of the month. In a recent report we showed that yields tend to rise in months where the Surprise Index is above zero.1 Perhaps most importantly, our 2-factor Treasury model shows that yields are significantly lower than is suggested by global economic fundamentals. Maintain below-benchmark duration. Feature Investment Grade: Overweight Chart 2Investment Grade Market Overview Investment grade corporate bonds outperformed the duration-equivalent Treasury index by 49 basis points in December and by 335 bps in 2017. At 94 bps, the average index spread is 28 bps tighter than at the beginning of 2017 and investment grade corporate spreads are extremely expensive compared to history (Chart 2). After adjusting for changes in the average duration of the index over time, we calculate that A-rated corporate spreads have only been tighter 5% of the time since 1989 (panel 2), and Baa-rated spreads have only been tighter 7% of the time (panel 3). Essentially, at this stage of the credit cycle we should expect excess returns no greater than carry. As for the credit cycle itself, we noted in our last report that with corporate balance sheets deteriorating, low inflation and still-accommodative monetary policy are the sole supports for corporate spreads.2 We expect spreads will start to widen later this year once inflation rises and policy becomes more restrictive. With excess returns likely to be lower in 2018 than in 2017, we should also expect a lower marginal return from increasing the riskiness within credit portfolios.3 For investors looking to scale back on credit risk, our model shows that Financials and Technology are the most attractive low-risk sectors. Energy, Basic Industry and Communications are all attractive high-risk sectors (Table 3). Table 3ACorporate Sector Relative Valuation And Recommended Allocation* Table 3BCorporate Sector Risk Vs. Reward* High-Yield: Overweight Chart 3High-Yield Market Overview High-Yield outperformed the duration-equivalent Treasury index by 23 basis points in December and by 602 bps in 2017. The average index option-adjusted spread tightened 1 bp on the month and 66 bps in 2017. Though spreads appear somewhat more attractive than for investment grade corporates, there is still not much room for spread compression in high-yield. In fact, we calculate that if the high-yield index spread tightens another 117 bps, junk bonds will be the most expensive they have been since 1995. In an optimistic scenario where the index spread tightens 100 bps, bringing it close to all-time expensive levels, then we would expect junk excess returns to be in the range of 600 bps (annualized). Given trends in corporate leverage, another 100 bps of spread tightening should be viewed as unlikely. More realistically, we expect excess returns in the range of 200 bps to 500 bps (annualized) between now and the end of the credit cycle (Chart 3). Given our forecast for default losses, flat spreads translate to a 12-month excess return of 213 bps. An additional warning sign for junk spreads is that the slope of the 2/10 Treasury curve is hovering around 50 bps. We showed in a recent report that when the 2/10 slope is between 0 bps and 50 bps, junk bonds underperform Treasuries in 48% of months, and average monthly excess returns (though still positive) are much lower than when the curve is steeper.4 MBS: Neutral Chart 4MBS Market Overview Mortgage-Backed Securities outperformed the duration-equivalent Treasury index by 16 basis points in December and by 51 bps in 2017. The conventional 30-year zero-volatility MBS spread narrowed 2 bps in December, the combination of a flat option-adjusted spread (OAS) and a 2 bps decline in the compensation for prepayment risk (option cost). The Z-spread widened 2 bps in 2017, as an 8 bps OAS widening was offset by a decline of 6 bps in the compensation for prepayment risk. The substantial OAS widening in early 2017 was almost certainly caused by investors pricing-in the eventual run-off of the securities on the Fed's balance sheet. Now that run-off has begun we see no obvious catalyst for further OAS widening in the months ahead. Turning to the compensation for prepayment risk, with Treasury yields biased higher as the Fed continues to lift rates, we see little risk of a material increase in refinancing activity. This will ensure that overall MBS spreads stay capped near historically low levels (Chart 4). All in all, with MBS OAS looking more attractive relative to Aaa-rated credit than at any time since 2015 (panel 3), we think this is an opportune time for investors looking to de-risk their portfolios to shift some of their spread product allocation away from corporate bonds and into MBS. We already upgraded our recommended allocation to MBS from underweight to neutral in October, and will likely further increase exposure as we advance toward the end of the credit cycle. Government-Related: Underweight Chart 5Government-Related Market Overview The Government-Related index underperformed the duration-equivalent Treasury index by 5 basis points in December, but outperformed by 216 bps in 2017. Sovereign bonds underperformed the Treasury benchmark by 36 bps in December, Foreign Agencies and Domestic Agencies underperformed by 8 bps and 1 bp, respectively. Local Authorities outperformed the benchmark by 17 bps, and Supranationals underperformed by 1 bp. Sovereign bonds were the best performers within the Government-Related index in 2017, delivering excess returns of 538 bps relative to duration-matched U.S. Treasuries. This outperformance was concentrated early in the year and was driven by the sharp depreciation of the U.S. dollar (Chart 5). With the market still priced for a relatively modest 63 bps of Fed rate hikes during the next 12 months, further sharp dollar depreciation appears unlikely. We recommend an underweight allocation to Sovereign debt. We remain overweight Local Authority and Foreign Agency bonds, sectors that delivered excess returns of 420 bps and 248 bps, respectively in 2017. Despite the outperformance, both of these sectors still offer attractive spreads after adjusting for credit rating and duration. We remain underweight Domestic Agency and Supranational bonds. Though both sectors offer low risk and high credit quality, they also only offer 15 bps and 17 bps of option-adjusted spread, respectively. We much prefer Agency-backed MBS and CMBS which are also relatively low risk and offer option-adjusted spreads of 28 bps and 42 bps, respectively. Municipal Bonds: Underweight Chart 6Municipal Market Overview Municipal bonds outperformed the duration-equivalent Treasury index by 99 bps in December and by 332 bps in 2017 (before adjusting for the tax advantage). The average Aaa Municipal / Treasury (M/T) yield ratio fell 5% in December, and is 12% below where it began 2017 (Chart 6). The recent decline follows a sharp increase that was driven by fluctuating supply trends related to the passage of U.S. tax legislation. The final tax bill ends the practice of advance refunding municipal bonds. As a result, December set a new high of $55.6 billion for municipal issuance as issuers rushed to get their advance refunding deals to market before the bill was passed (panel 3). Now that the bill has passed, visible supply has evaporated and the average M/T yield ratio has fallen back to one standard deviation below its post-crisis mean. The absence of advance refunding will bias municipal bond issuance lower in 2018, thus removing one potential risk for yield ratios. The M/T yield ratio for short maturity debt has risen considerably relative to the yield ratio for long maturity debt in recent months (panel 2), and the risk/reward trade-off now appears more balanced. We close our recommendation to favor long maturities versus short maturities on the Aaa Muni curve. The third quarter update of our Muni Health Monitor showed a slight improvement (panel 5), but still no clear reversal of trend. Although health remains supportive for now - and consistent with municipal upgrades outpacing downgrades - with yield ratios close to their lows we maintain an underweight allocation to Municipal bonds.  Treasury Curve: Favor 5-Year Bullet Over 2/10 Barbell Chart 7Treasury Yield Curve Overview The Treasury curve bear-flattened in December. The 2/10 Treasury slope flattened 13 bps on the month, and the 5/30 Treasury slope flattened 15 bps. The evolution of the Treasury curve in 2018 will come down to a trade-off between how quickly inflation rises versus how quickly the Fed lifts rates. For example, in a recent report we showed that the 10-year Treasury yield will likely settle into a range between 2.80% and 3.25% by the time that core PCE inflation reaches the Fed's 2% target.5 That same report shows that if that adjustment occurs relatively quickly, and the Fed has only lifted rates once or twice between now and then, then the 2/10 Treasury slope is much more likely to steepen than to flatten. Conversely, if the Fed lifts rates three or four more times between now and the time that inflation returns to target, then the curve is more likely to flatten. For our part, we think it is wise to maintain a position long the 5-year bullet and short a duration-neutral 2/10 barbell. Such a position profits from a steeper curve, and our model shows that the butterfly spread is currently priced for significant curve flattening (Chart 7). According to our model, the 2/5/10 butterfly spread is discounting 27 bps of 2/10 flattening during the next six months.6 In other words, if the 2/10 slope steepens or flattens by less than 27 bps, then our recommended position will profit. TIPS: Overweight Chart 8TIPS Market Overview TIPS outperformed the duration-equivalent nominal Treasury index by 41 basis points in December, but underperformed by 43 bps in 2017. The 10-year TIPS breakeven inflation rate went on a wild ride last year. It started 2017 at 1.95% and, driven by strong inflation prints and continued post-election euphoria, reached as high as 2.09% in January. The breakeven dropped to a low of 1.66% in June, as inflation started to disappoint in the second quarter, but has rebounded during the past couple of months and just recently broke back above 2%. The 10-year TIPS breakeven rate is currently 2.02%, above where it began 2017. According to our TIPS Financial Model, the recent widening in breakevens is in line with the message from other related financial market instruments (Chart 8). Specifically, oil prices, the trade-weighted dollar and the stock-to-bond total return ratio. Further, measures of pipeline inflation pressure continue to signal an increase in inflationary pressures (panels 3 and 4), and the trimmed mean PCE shows that the realized inflation data are forming a tentative bottom (bottom panel). The annualized 6-month rate of change in the trimmed mean PCE ticked up to 1.68% in November, higher than the 12-month rate of change (1.67%). The 1-month rate of change is higher still at 2.19%, annualized. We continue to see signs that inflation will start to rebound in the coming months, and this will cause long-maturity TIPS breakeven inflation rates to reach a range between 2.4% and 2.5% by the time that inflation returns to the Fed's target. Remain overweight TIPS versus nominal Treasury securities. ABS: Neutral Chart 9ABS Market Overview Asset-Backed Securities performed in line with the duration-equivalent Treasury index in December and outperformed by 92 basis points in 2017. In 2017, Aaa-rated ABS outperformed the Treasury benchmark by 79 bps and non-Aaa ABS outperformed by 217 bps. The index option-adjusted spread for Aaa-rated ABS widened 1 bp in December, but tightened 21 bps in 2017. It now sits at 31 bps, only 4 bps above its all-time low (Chart 9). At 31 bps, Aaa-rated ABS now offer only a 3 bps spread advantage over Agency-backed MBS, and offer 11 bps less spread than Agency-backed CMBS. With consumer lending standards tightening and delinquency rates rising, we view no more than a neutral allocation to ABS as appropriate. On lending standards, the Fed's October Senior Loan Officer's Survey showed a continued tightening in lending standards on both credit cards and auto loans (panel 4), and also that demand for credit card and auto loans was essentially unchanged from the prior quarter. It also included a set of special questions regarding the reasons for changes in the supply and demand for consumer credit. Banks cited a less favorable or more uncertain economic outlook, a deterioration in existing loan quality and a general reduced risk tolerance as reasons for tightening the supply of credit. The hard data confirm that banks are seeing a deterioration in the quality of their consumer loan books (bottom panel). Although delinquencies remain depressed compared to history, with ABS spreads near all-time tights, rising delinquencies and tightening lending standards make for a poor risk/reward trade-off in the sector. Non-Agency CMBS: Underweight Chart 10CMBS Market Overview Non-Agency Commercial Mortgage-Backed Securities outperformed the duration-equivalent Treasury index by 20 basis points in December and by 201 bps in 2017. The index option-adjusted spread for non-agency Aaa-rated CMBS tightened 2 bps in December and 13 bps in 2017. At its current level of 64 bps, the index spread is about one standard deviation below its pre-crisis mean, and only 13 bps above its all-time low reached in 2004 (Chart 10). With spreads at such low levels in an environment of tightening commercial real estate (CRE) lending standards and falling CRE loan demand, we continue to view the risk/reward trade-off in non-Agency CMBS as unfavorable. Agency CMBS: Overweight Agency CMBS outperformed the duration-equivalent Treasury index by 21 basis points in December and by 133 bps in 2017. The index option-adjusted spread for Agency CMBS tightened 3 bps in December and 13 bps in 2017. At its current level of 42 bps, the sector offers greater option-adjusted compensation than a position in Agency-backed MBS (28 bps) and Aaa-rated consumer ABS (31 bps). Such an attractive spread pick-up in a sector that benefits from Agency backing is surely worth grabbing.   Treasury Valuation Chart 11Treasury Fair Value Models The current reading from our 2-factor Treasury model (based on Global PMI and dollar sentiment) pegs fair value for the 10-year Treasury yield at 2.94% (Chart 11). Our 3-factor version of the model (not shown), which also incorporates the Global Economic Policy Uncertainty Index, places fair value at 2.92%. PMIs across the world continue to surge. December PMI data show increases in the four largest economic blocs (U.S., Eurozone, China, Japan), and more broadly show that 86% of the 36 countries with available data currently have PMIs above the 50 boom/bust line. Meanwhile, bullish sentiment toward the U.S. dollar continues to trend lower in response to strong growth in the rest of the world (bottom panel). This is also a bearish development for U.S. bonds. For further details on our Treasury models please refer to U.S. Bond Strategy Weekly Report, "The Message From Our Treasury Models", dated October 11, 2016, available at usbs.bcaresearch.com. At the time of publication the 10-year Treasury yield was 2.48%. Ryan Swift, Vice President U.S. Bond Strategy rswift@bcaresearch.com Alex Wang, Research Analyst alexw@bcaresearch.com Jeremie Peloso, Research Assistant jeremiep@bcaresearch.com 1 Please see U.S. Bond Strategy Weekly Report, "How Much Higher For Yields?", dated October 31, 2017, available at usbs.bcaresearch.com 2 Please see U.S. Bond Strategy Weekly Report, "Ill Placed Trust?", dated December 19, 2017, available at usbs.bcaresearch.com 3 Please see U.S. Bond Strategy Weekly Report, "Proactive, Reactive Or Right?", dated December 12, 2017, available at usbs.bcaresearch.com 4 Please see U.S. Bond Strategy Weekly Report, "Proactive, Reactive Or Right?", dated December 12, 2017, available at usbs.bcaresearch.com 5 Please see U.S. Bond Strategy Weekly Report, "Ill Placed Trust?", dated December 19, 2017, available at usbs.bcaresearch.com 6 For further details on the model please see U.S. Bond Strategy Special Report, "Bullets, Barbells And Butterflies", dated July 25, 2017, available at usbs.bcaresearch.com Fixed Income Sector Performance Recommended Portfolio Specification Corporate Sector Relative Valuation And Recommended Allocation Total Return Comparison: 7-Year Bullet Versus 2-20 Barbell (6-Month Investment Horizon)

Overweight Sales departments in the S&P industrial machinery index have been exceptionally busy in the past several months as order bookings have been soaring with both domestic and global orders pouring in (second panel). With growth accelerating around the world and a tax change at home that could shift the capex cycle into overdrive, the path of least resistance for industrial machinery new orders is higher. At the same time as orders have been surging, the industry has been ramping production to meet them, keeping the new orders to inventory relationship surprisingly stable over the past 4 years (third panel). However, growth in production has not been matched by an equivalent increase in employment, resulting in our productivity proxy moving much higher (bottom panel). This bodes well for profits, particularly in the context of a swelling top line in this relatively high fixed cost industry. The upshot is that EPS growth should outperform the market in 2018; stay overweight. The ticker symbols for the stocks in this index are: BLBG: S5INDM - ITW, IR, SWK, PH, FTV, DOV, PNR, XYL, SNA, FLS.

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