グローバル

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ハイライト 通貨市場は、悪化する世界の成長と緩和する世界の金融環境との綱引きを続けている。 一方で、歴史的に見て、ポートフォリオ資金フローと金利差に基づけば実効為替レートベースのドルは10〜15％高くあるべきだったことを示唆している。実際の抑制された戻りは懸念材料だ。 この攻防が進む中、当面の勝者は円のような安全資産通貨であろう。 勢力バランスの変化を探る手掛かりとして金と債券の比率に注目すべきであり、この比率の上昇はドルにとってネガティブだ。 投資家が上昇する双子の赤字、世界経済の脱ドル化、及び米国資産の低い期待リターンに注目を移せば、最終的に米ドルに対する清算の日が到来すると我々は予想する。 特集 先週の世界の金融市場を襲った嵐を考えると、先進国の通貨市場の最近の落ち着きは非常に不気味だ。先週のヨーロッパと日本の冴えない製造業PMIは株式市場を急落させた。注目されている米国の10年対3か月のスプレッドが逆転し、これを最も信頼できる景気後退指標と考える投資家の間でパニック売りを誘発した。アジアの株式市場は年初来高値から下落しており、地域の国債利回りは取引安値付近にとどまっている。原油を除き、コモディティ市場も軟調だ。 これらの動きにもかかわらず、実効ドルは比較的安定している。ここ数か月、多くの通貨ペアは非常に狭いウェッジ形成の頂点に向けて狭く推移している。これがボラティリティを大幅に低下させている（チャート1）。長期的には、これらの通貨クロスの金に対する安定性は、ブレトン・ウッズ風の固定為替相場体制を彷彿とさせる恐ろしい響きがある（チャート2）。 チャート1 通貨市場の不気味な静けさ An Eerie Calm In Currency Markets An Eerie Calm In Currency Markets チャート2 金に対する固定為替相場か？ Fixed Exchange Rates Versus Gold? Fixed Exchange Rates Versus Gold?   物理学では、向心力系は平衡を保ちやすい一方で、遠心力は劇的に爆発することがある。ポスト・ブレトン・ウッズの世界では、長期にわたる通貨の安定が持続することは稀だった。これは、どの経済間で不均衡のトレンドと大きさを常に監視し、圧力点がどこにあるか、対応する為替レートがどの方向に最終的に崩れるかを見極める必要があることを意味する。ドル見通しを左右する力のバランスがこの作業の自然な出発点のように思える。 グローバル流動性とドル ほとんどの相対的トレンドの尺度で判断すると、ドルは今まさに急騰しているはずだ。3月のマークイット製造業PMI発表では、日本とユーロ圏はいずれも縮小域にある一方、米国は52.5と世界の他地域を確実に上回っている。確かにこのリーダーシップの勢いは最近失速してきているが、歴史的には米国と世界の他地域の間でこれほど大きな成長差があると、6か月間で10〜15％のドル高をもたらすことがあった（チャート3）。これまでのところ、DXYドル指数は10月以降で1.9％上昇している。 過去にこの指標が大幅に縮小したたびに、ドル不足がどこかで爆発を引き起こしてきた。 米連邦準備制度理事会（FRB）が最近の金融政策の急転換をするまでは、相対的利回りもまたドルに有利に働いていた。米国と世界の他地域との2年スワップ利回り差はDXYドル指数を105に押し上げ、これは現在水準より8％高い値を示していた（チャート4）。一方、相対的な政策金利も実効為替レートベースのドルが約6％高いはずだと示唆している。そして今日でさえ、FRBが明確な利下げ方向に動かない限り、世界の他の中央銀行のハト派シフトは米ドルにとって即時の追い風であり続けるだろう。 チャート3 成長差に基づけば米ドルはもっと高いはず USD Should Be Higher Based On Growth Divergences USD Should Be Higher Based On Growth Divergences   チャート4 スワップ差に基づけば米ドルはもっと高いはず USD Should Be Higher Based On Swap Differentials USD Should Be Higher Based On Swap Differentials   国際的には、FRBの資産購入のテーパリングが米ドル流動性に対する純流出を引き起こしてきた。これは米国の経常収支赤字が拡大しているにもかかわらず起きている。FRBのバランスシートは2015年初めに4.5兆米ドルをわずかに上回ってピークに達し、それ以来減少している。これが米国のマネタリーベースの深刻な縮小を招き（チャート5）、商業銀行の超過準備金を大幅に削減し、現在は前年比で20％超の縮小となっている。BCAのお気に入りの国際流動性の主要指標の一つはFRBに預けられた外国中央銀行の準備高だが、これは過去40年以上で最悪のペースで縮小している。過去にこの指標が大幅に縮小したたびに、ドル不足がどこかで爆発を引き起こし、典型的には双子の赤字を抱える国々で顕在化してきた。 チャート5 ドルの流動性逼迫 A Liquidity Squeeze Of Dollars A Liquidity Squeeze Of Dollars 付け加えれば、昨年の米国税制の改正により海外現金の還流が認められたことはドルを支援したが、期待されたほどの効果はなかった。ローリング12か月ベースで、米国は約4,000億米ドル、すなわちGDPの約2％に相当する純資産を還流させている。歴史的に見てこれは非常に大きな金額であり、ドルを火の出るように上昇させる可能性がある量だ—おおむね10％程度の上昇（チャート6）。 チャート6 還流フローに基づけば米ドルはもっと高いはず 本国送還フローを考慮すれば、米ドルは本来もっと高くなるはずだ 本国送還フローを考慮すれば、米ドルは本来もっと高くなるはずだ ドル流動性の不足は負のフィードバックループを引き起こすために悪性化しやすい。国際的な米ドルの回転率が上がると、オフショアのドル金利が上昇し、借入国の資本コストが上がる。これが限界点に達すると、設備投資や消費は返済に置き換わる。生産や物価の下落、またはその両方は債務デフレ問題をさらに悪化させる。 結論として、過去のトレンドを見ると、ドルは現在の水準よりずっと高くあるべきだ。実務的な投資家は相関のシフトに注意を払う必要性を認識している。我々の好む流動性指標が完全に機能しなくなったのか、より現実的には別の力が働いてドルの相対的安定を説明しているのか、どちらかだろう。 逆循環的な通貨 一つの可能性は、最近の米ドルの安定が今年後半の経済指標の改善を織り込んでいるということだ。我々は過去に何度も示してきたが、ドルは逆循環的な通貨であり、世界経済の勢いが回復すると成績が悪くなりがちだ。多くの投資家は現在中国に注目しており、最近の信用供給が中国経済、ひいては世界経済を立て直すのに十分かどうかを見守っている。さらに、米中貿易協議が進めば、人民元の対ドル下落を防ぐ通貨条項が盛り込まれる可能性が高い。 実際のところ、世界成長の底打ちを支持する十分な証拠はまだ乏しく、これをドル安定に結びつけるのは難しい。 実際のところ、世界成長の底打ちを支持する十分な証拠はまだ乏しく、これをドル安定に結びつけるのは難しい。典型的なリフレーションの指標であるコモディティ価格、新興市場通貨、輸送株価は安値から反発しているが再び失速している。3月の輸出データは世界的に依然として弱かったが、構成的には幾つかの緑の芽が見られた。シンガポールから中国向けの輸出は前年比で34％増、エマージング向けは前年比で22％増加した。日本の工作機械の対中受注も一部安定化を示した。歴史的に見ると、これらは底打ちプロセスに入るかを判断するには必要条件だが十分条件ではない（チャート7）。 もう一つの矛盾点がある：もしドルラリーが世界成長の改善見通しによって抑えられているなら、金は弱く推移し、ほとんどの通貨は金とドルの両方に対してアウトパフォームしているはずだ。昨日の金の売りまで、そうなっていなかった。つまり何らかの別の説明が米ドルの上昇を抑えている可能性がある。 チャート7 世界貿易における回復の兆しか？ 世界貿易における暫定的な回復の兆しか？ 世界貿易における暫定的な回復の兆しか？   レジーム・シフトか？ 米国居住者が資本を国内に呼び戻している一方で、外国人投資家は近年でも有数の速さで米国資本市場から逃避している。ローリング12か月トータルで見ると、米国からは外国人による株式の約2,000億米ドルの流出があり、これは過去最大だ（チャート8）。総じて、外国の公的・民間の長期ポートフォリオ投資はいずれも減少傾向にあり、投資家の関心はエージェンシー債や社債に限られている。外国人は依然として約4,500億ドルの米国証券のネット買い手であるが、近年の買い入れの下落トレンドは明白だ。興味深いことに、この期間において金は米国債をアウトパフォームしている。 米ドルは今日も世界の基軸通貨であり続けているが、その莫大な特権は確かに端がほころび始めている。 対公的フローの観点では、中国は米国の貿易赤字の最大の寄与国にまで台頭している。同時に、北京は米国の過去の政策への報復として、あるいは人民元の国際化のための余地を作るために、保有する米国債の在庫を削減してきた可能性がある（チャート9）。より広く見れば、FRBにおけるドル預金の減少は、世界経済がドルから離れ、より多様化した通貨バスケットへ向かう基礎的なシフトを示しているのかもしれない。原油、天然ガス、バルクコモディティ、さらにはソフトコモディティに至るまで、取引の相当部分が米国の取引所外で行われる割合が高まっていることを考えれば、これは理にかなっている。 チャート8 外国人が米国株を投げ売りしている 外国人投資家が米国エクイティを投げ売りしている 外国人投資家が米国エクイティを投げ売りしている   チャート9 中国は黒字を米国債に再循環させるのを止めた 中国は余剰資金をトレジャリーズに再投資するのをやめた。 中国は余剰資金をトレジャリーズに再投資するのをやめた。   国際通貨基金（IMF）のデータは、対外準備高におけるドルの割当が2000年代初頭に約72％でピークに達し、それ以来下落傾向にあることを示している。一方、英ポンド、スイスフラン、円など他の通貨への割当は急増している（チャート10）。同時に、中央銀行は金の準備を大量に積み上げており、特にロシアと中国は年間生産量のほぼ総量に匹敵する量を蓄えている（チャート11）。これらはドルが本来あるべきほど強くない理由を説明するのに役立つ。こうした要因は、金価格に対するこれらの通貨ペアの相対的安定性も説明する。 チャート10 世界はドルからの多様化を進めている 世界はドルからの分散化を進めている 世界はドルからの分散化を進めている チャート11 中央銀行が金の生産の大部分を吸収している Central Banks Are Absorbing Most Gold Production Central Banks Are Absorbing Most Gold Production 米ドルは今日も世界の基軸通貨であり続けているが、収支のダイナミクスは間違った方向に向かっており、その莫大な特権は確実にほころびつつある。今後5年間で米議会予算局（CBO）は米国の財政赤字がGDP比で4.5％まで膨らむと見積もっている。経常収支赤字が多少拡大してその後安定すると仮定すれば、双子の赤字はGDP比で8.1％に達する見込みだ。これは不況が起きないという前提での見通しであり、不況が発生すれば赤字はさらに膨らむ可能性がある（チャート12）。 チャート12 ドルにとっての双子の赤字の崖 ドルが直面する双子の赤字の崖 ドルが直面する双子の赤字の崖 金融危機後、米国の双子の赤字はGDP比でほぼ13％まで膨らんだが、その当時との違いはコモディティブームの結果ドルが割安であった（コモディティ通貨が過大評価されていた）ことだった。その後のシェール革命も米国の貿易赤字を大いに緩和した。シェールの生産性は引き続き堅調で米国の生産はさらに増えるだろうが、取りやすい果実はすでに摘み取られている。 何らかの理由で外国の中央銀行はドルからの多様化を進めている。貿易の景色が変わっているためであればこの傾向は続くだろうし、急速に拡大する米国の双子の赤字を避けたいという理由であればこれも続くだろう。そして米ドルが「良いニュース」で十分に上昇できないのであれば、悪いニュースが出始めたときに沈むことを期待すべきだ。ただしタイミングは不確実だ。   民間資本フロー 外国の公的フローが米ドルから離れている理由が基軸通貨としての魅力の低下であったとしても、民間資本は米国資産の投下資本利益率（ROIC）が資本コストを下回ると出口へ殺到し始めるだろう。長期保有の投資家にとっては、これはすでに起きている可能性がある。 例えば10年国債を見てみよう。日本やドイツの投資家にとって、現地通貨で借りて米国に投資するのは、国内金利がマイナスで10年米国債利回りが2.4％であることを考えれば論理的に思えるかもしれない。しかし、この正のキャリーはヘッジコストを考慮すると突然消えてしまう（チャート13）。 チャート13 ヘッジ済み米国債より日本国債が魅力的 日本国債はヘッジされた米国債より魅力的 日本国債はヘッジされた米国債より魅力的 強気相場では、マイナス金利の国々はキャリートレードによる強い資本流出を受けやすい。これらの影響を測るのは難しいが、ヘッジコストが低い期間（通常はボラティリティが低い期間に相当）には強力な触媒となり得ることは間違いない。市場が変動的になりこれらの取引が巻き戻されると、非ヘッジの取引はショートカバーのフローの犠牲になる。 世界の多くの利回り曲線が逆イールドになっている中で、長期債のリターンがスポット金利に対して相対的に劣後するため、このショートカバーの頻度が暗黙のうちに上昇する危険がある。ボラティリティが上がり始めると一つの勝者は円だ。投資家はヘッジとして今日ドル/円のショートポジションの組成を検討すべきだ。 フィクスト・インカム領域を除けば、重要なのは相対的なROICが資本コストより高いかどうかだ。どちらも多くの新興国や先進国の資産クラスで測るのは難しい。しかし株式市場に関しては、為替が国間のリターンを均等化する方向に動く傾向があるため、評価指標が常に良い出発点となる。 MSCIの米国、欧州、日本の各指数のフォワードP/Eはそれぞれ16.5倍、12.6倍、12.3倍だ。米国に偏るのは、市場参加者が米国の利益が引き続きアウトパフォームすると期待しているか、米国通貨が引き続き上昇すると期待しているか、その両方を見込んでいるためだ。だが経験的には、現在の米国のバリュエーションは将来の利益ストリームが既に今日の価格に織り込まれていることを示唆している（チャート14）。 チャート14A 投下資本利益率は米国で最も低い可能性がある（1） Return On Capital Could Be Lowest In The U.S. (1) Return On Capital Could Be Lowest In The U.S. (1) チャート14B 投下資本利益率は米国で最も低い可能性がある（2） Return On Capital Could Be Lowest In The U.S. (2) Return On Capital Could Be Lowest In The U.S. (2) チャート14C 投下資本利益率は米国で最も低い可能性がある（3） Return On Capital Could Be Lowest In The U.S. (3) Return On Capital Could Be Lowest In The U.S. (3) MSCI米国の期待される10年年率リターンは3.1％、MSCI欧州は5.5％、MSCI日本は9.6％だ。いくつかのモデルが示唆するように米ドルが過大評価されていると仮定すれば、これは将来の米国リターンをさらに侵食することになる。前述の図に示したように、米国への純株式ポートフォリオフローは既にマイナスだ。これは、現在の追い風が最終的に弱まったときに米ドルの清算の日が遠くない可能性を示唆している。   Chester Ntonifor, 外国為替ストラテジスト chestern@bcaresearch.com トレード＆フォーキャスト 予測概要 コア・ポートフォリオ タクティカル・トレード 決済済み取引

ハイライト グローバル株式およびその他のリスク資産は、今後数週間はボラティリティ高止まりの横ばい推移となり、その後一連の出だし失敗を経て世界成長がようやく加速するにつれて年末までは徐々に上昇するだろう。 私たちは現在、フェドが以前想定していたよりも遅いペースで利上げを行うと見ているが、最終的にはインフレを抑えるために利上げを急がざるを得なくなるだろうと考えている。 フェドファンド金利はおそらく2021年に4％で頭打ちとなり、市場が現在織り込んでいるよりも四半期ごとに0.25ポイントの利上げが合計9回多く示唆される。 12か月の投資期間では、投資家はグローバル株式をオーバーウェイトし、国債をアンダーウェイトし、現金配分は中立を維持すべきである。 ドルは第2四半期にピークを迎え、その後年末までおよび2020年にかけて弱含みとなり、来年遅い時期に再び強含み始めるだろう。 投資家は今後数週間、新興国（EM）および欧州株を一時的に格上げする準備をすると同時に、景気循環型の株式セクターへのエクスポージャーを増やすべきである。 工業用金属と原油は年の経過とともに強含みとなるだろう。金は押し目で買うべきである。 投資家は2020年末にポートフォリオのリスク低減を開始し、2021年の景気後退に備えるべきである。 チャート 001   特集 また始まるのか？ 昨年6月によりディフェンシブになった後、私たちは12月のFOMC後の急落を受けて株式に対して強気に転じた。株式が反発を続けるにつれて、私たちは楽観を和らげた。3月初めに私たちは「年初から上昇してきた世界の株式は、投資家が慌てていわゆるグリーンシュートの出現を待つため、今後6～8週間で『デッドゾーン』に入る可能性が高い」と書いた。1 先週金曜日に発表された期待外れの欧州PMIデータは、グリーンシュート論に一部止めを刺した格好だ。ドイツの製造業PMIは6年ぶりの低水準に落ち込み、新規受注の構成要素はグレート・リセッション以来の弱い水準を示した。これを受けてドイツの10年国債利回りは2016年以来初めてマイナス圏に入り、米10年国債利回りも15か月ぶりの低水準まで下落し、3か月/10年のカーブが逆イールド化した。歴史的に見て、逆イールドは米国の景気後退を予測する信頼できる指標であった（チャート1）。 チャート1イールドカーブの逆転、景気後退、およびタームプレミアム イールドカーブの逆転、景気後退、そしてタームプレミアム イールドカーブの逆転、景気後退、そしてタームプレミアム トランプ大統領がテレビ評論家のスティーブン・ムーアをフェドの理事に任命する決定を下したことも事態を好転させなかった。供給側（サプライサイド）の「経済学者」ラリー・クドローの推薦を受けたムーアは、2007年の住宅市場の懸念を軽視したこと、2010年にQEがハイパーインフレを引き起こすと的確に予測したことで知られ、トランプ減税が財政赤字を小さくするだろうと信じている点でも有名だ。 世界成長は年の後半に加速するだろう これらの憂慮すべき展開を踏まえ、景気とリスク資産に対して再び景気循環的に弱気に転じるべき時だろうか。私たちはそうは考えない。今後数週間は株式にとって厳しい局面があり得る――これは私たちのマクロクオンツ・モデルが現在示しているリスクだ――が、一連の出だし失敗を経て世界成長がようやく加速するにつれてセンチメントは改善するはずだ。実際、すでにいくつかの前向きな兆候が見えている：上昇している先行指標を持つ国の比率を追跡する当社のグローバル先行経済指標の拡散指数は上昇しており（チャート2）、グローバルLEIを先行している。サービス業のPMIも概ね改善しており、世界成長の弱さは主に貿易と製造業に集中していることを示唆している。さらに貿易面でも、バルチック・ドライ指数や世界のコンテナ船の活動を示す週次のHarpex海運指数といったいくつかの先行指標が安値から反発している。 我々はイールドカーブのシグナルを過小評価すべきだと考える。現在それはマイナスのタームプレミアムによって深刻に歪められているからだ。もし米10年のタームプレミアムが2004年の水準に戻っていれば、3か月/10年のスロープは200ベーシスポイント以上急勾配になり、この問題について誰も話題にしないだろう。実際、今日のタームプレミアムを考慮すれば、1995年にはほぼ確実にカーブは逆転していただろう。当時株式を手放した者は歴史上最も偉大なブルマーケットの一つを逃したことになる。 また、米10年利回りの一部低下はポジティブな展開を反映していることは言うまでもない：フェドがよりハト派に転じたのだ。10年/30年部分のイールドカーブを見れば、実際にはスティープ化している。これは市場がフェドの行動をリフレーション的であると見なしている兆候である。 逆イールドカーブが経済活動を鈍化させる明確な因果メカニズムはないが、イールドカーブの逆転が投資家を怯ませ、それによって金融環境のタイト化を招くという自己成就的予言になる可能性はある（チャート3）。このような「ドゥームループ」は概念的には可能だが、今年初めに我々が議論したように、現在の環境で発生する可能性は低い。2いずれにせよ、金融環境は年初以来緩和している。これは今後数か月の成長を押し上げるはずだ。   チャート2世界成長は##br##安定し始めている可能性がある 世界の成長は安定し始めている可能性がある 世界の成長は安定し始めている可能性がある チャート3年初来の金融環境の緩和は世界成長にとって好材料 年初以来の金融環境の緩和は世界経済の成長にとって好材料だ 年初以来の金融環境の緩和は世界経済の成長にとって好材料だ 中国のクレジット成長は上昇へ 世界成長は中国経済の減速に足を引っ張られてきた。昨年のデレバレッジ化キャンペーンは投資支出の大幅な減速を招き、これは世界中の資本財メーカーやコモディティ生産者に悪影響を及ぼした（チャート4）。 歴史的に見て、クレジット成長が名目GDP成長に近づくとき、中国は金融部門への締め付けを緩めてきた（チャート5）。おそらく我々はそのポイントに達したようだ。季節調整で歪んだ弱い2月の数値にもかかわらず、クレジット成長はついに前年比で加速している。 チャート4中国：デレバレッジ化キャンペーンは投資支出に悪影響を与えた 中国：デレバレッジ化の取り組みは投資支出に悪影響を及ぼした 中国：デレバレッジ化の取り組みは投資支出に悪影響を及ぼした チャート5歴史的に、中国はクレジット成長が名目GDP成長に接近するとデレバレッジを縮小してきた 歴史的に見ると、信用の伸びが名目GDP成長率に近づくと、中国はデレバレッジの取り組みを縮小してきた。 歴史的に見ると、信用の伸びが名目GDP成長率に近づくと、中国はデレバレッジの取り組みを縮小してきた。 我々は中国のクレジット成長が過去の再レバレッジ局面ほど大きく上昇するとは予想していない。だが、これは経済の状態がより良くなっているためであり、現状からの債務増加に内在的な制約があるためではない。 中国の高い貯蓄率は、ターム名目GDP成長率よりも金利を大きく下回る水準に保ってきた。これは債務持続可能性の主要な決定要因である（チャート6）。3中央政府が現在のように大部分の地方債務と企業債務に対して暗黙の保証を維持している限り、デフォルトリスクは最小限にとどまるだろう。いずれにせよ、総債務がGDP比240％に達していることを考えれば、クレジット成長が1パーセンテージポイント上昇するだけで、GDPの2.4％に相当する大きなクレジット刺激が生じることになる。 中国のクレジットインパルスは輸入を約6～9か月先行する（チャート7）。これは年の後半における世界貿易にとって良い兆候である。 チャート6中国の高い貯蓄率は金利をトレンドの名目GDP成長率を大きく下回る水準に保ってきた 中国の高い貯蓄率が金利をトレンドの名目GDP成長率を大幅に下回る水準に抑えている 中国の高い貯蓄率が金利をトレンドの名目GDP成長率を大幅に下回る水準に抑えている チャート7中国のリフレーション的刺激は世界貿易に恩恵をもたらすだろう グローバル・トレードは中国のリフレーション的な刺激から恩恵を受けるだろう グローバル・トレードは中国のリフレーション的な刺激から恩恵を受けるだろう   貿易戦争の一服か？ 貿易戦争の緊張緩和は事態を改善するだろう。自称「名交渉人」であるドナルド・トランプは、来年の大統領選挙前に中国との合意をまとめる必要があり、同時にその合意が米国にとって有利な条件で成立したと有権者に納得させなければならない。 任期序盤に中国と合意に達することは、双方向の貿易赤字を減らせなかった場合にはリスクがあった――米国の財政政策が景気循環的であることを考えればそれは全くあり得る結果だ。しかし現時点では、トランプは中国と素晴らしい取引をまとめたと自慢でき、かつその成果が実現するのは再選後であると有権者に安心させることができる。したがって、トランプが合意の締結を目指す可能性は高まっている。 中国側は可能な限り大きな交渉力を確保したがっている。これは、自国経済が双方の利益にならない貿易協定を突っぱねても、その影響を十分に吸収できるほど強いと説得力を持って示せることを意味する。クレジットサイクルが中国成長の支配的な原動力であるため、これはデレバレッジ化キャンペーンを一時的に後回しにすることを必要とする。世界成長の加速と強い国内需要は欧州に恩恵をもたらす 中国の成長加速は今年後半に欧州の輸出セクターを助けるだろう。中国のCaixin購買担当者指数（PMI）の輸出コンポーネントは底値から上昇している。これはユーロ圏のPMIを約三か月先行している。一方で、ユーロ圏の国内需要はより緩和的な財政政策と低下する債券利回りの恩恵を受けるだろう。 イタリアにとっては債券利回りの低下が特に有益だ。昨年三月にポピュリスト政権が選出された後の利回り急騰と企業信頼感の喪失は景気後退に突入させた（チャート 8）。現在、10年物BTP利回りが高値から100ベーシスポイント以上低下しているため、イタリア経済は回復し始めるはずだ。 国内成長が加速しても欧州中央銀行は今年利上げを行わないだろうが、市場はおそらく2020年以降に数回の利上げを織り込むだろう。これによりコア欧州債券市場の利回り曲線がわずかに再スティープ化し、長らく苦しんでいる銀行の収益にはプラスに働くはずだ。 ブレグジットは依然として懸念材料だ。この継続する物語は滑稽な段階に達しており、1) 英国はEU離脱に投票したが、2) 議会はブリュッセルと満足のいく合意に達しない限りEUに留まることに投票し、しかも3) 提示されていた唯一の合意案を拒否した。多くの英国有権者がもはやブレグジットを望んでいないことを考えると（チャート 9）、我々は政府がいわゆる先送りを続け、二度目の国民投票が発表されるか「ソフト・ブレグジット」合意が策定されるまでその問題を先送りにするだろうと考えている。いずれの結果も市場には歓迎されるだろう。 チャート 8イタリアの債券利回りはもはや逆風ではない イタリア国債利回りはもはや逆風ではない イタリア国債利回りはもはや逆風ではない チャート 9英国：やり直しとなれば残留側が勝つ可能性が高い 英国：やり直しが行われれば、残留派が勝つ可能性が高い 英国：やり直しが行われれば、残留派が勝つ可能性が高い   フェッドはどうするか？ チャート10 昨年の「クリスマス暴落」はフェッドの反応関数を明らかによりハト派の方向へと変えた。今後数か月でジェローム・パウエルが利上げを行うとは予想していないが、世界成長の再加速は12月にフェッドを再び引き締めに向かわせる可能性が高い。フェッドは2020年に四半期に一度の利上げを継続し、インフレ上昇に対応して2021年には引き締めペースを加速させるだろう。 総じて、我々はこのサイクルの終わりまでにフェデラルファンド金利が約4%に上昇すると見ている。これは市場が現在織り込んでいる水準よりも四半期ごとの25ベーシスポイントの利上げが九回多いことを意味する（チャート 10）。我々はフェデラルファンド先物のショートポジションで損切りになったが、顧客には2021年6月限フェデラルファンド先物または同等の手段をショートすることを推奨する。 米国経済：再び好調 基本的に米国経済は堅固な基盤にあり、より高い金利にも耐えられる。10年前とは異なり、住宅市場は良好な状態にある（チャート 11）。持ち家空室率は記録的な低水準近辺にある。フィコ・スコアを見る限り、住宅ローンの貸出の質は依然として高い。労働市場も堅調で、求人件数は二月に再び過去最高を記録した（チャート 12）。健全な住宅市場と労働市場の組み合わせは消費者にとって不可避的に良い。 チャート 11米国の住宅の基礎条件は堅調 米国の住宅ファンダメンタルズは堅調だ 米国の住宅ファンダメンタルズは堅調だ チャート 12米国の労働市場は堅調である 米国の労働市場は堅調だ 米国の労働市場は堅調だ チャート13 個人貯蓄率は現在7.6%にあり、家計の純資産対可処分所得比率から期待される水準よりもかなり高い（チャート 13）。貯蓄率の低下は消費支出が所得よりも速く増加することを可能にするだろう。後者は賃金上昇によって支えられているため、これは消費にとって強気材料となる。 設備投資意向は過去数か月で低下したが、歴史的基準から見ると依然として高い水準にある（チャート 14）。実質非住宅資本ストックは回復開始以来平均でわずか1.7%しか成長しておらず、リセッション前の期間の3%から低下している（チャート 15）。生産性成長の景気循環的な上振れ、上昇する労働コスト、低い余剰生産能力の水準は、企業が新しい工場や設備に投資する動機付けとなるはずだ。 チャート 14設備投資意向は軟化したが、依然として高水準にある 設備投資の意向は軟化したが、依然として高水準にある 設備投資の意向は軟化したが、依然として高水準にある チャート 15米国の設備投資余地はまだある 米国への資本投資にはさらなる余地がある 米国への資本投資にはさらなる余地がある   企業債務：どれほどのリスクか？ チャート 16米国の企業債務は世界基準で極端ではない 米国の企業債務は世界基準では極端ではない 米国の企業債務は世界基準では極端ではない 近年、企業債務水準は大幅に増加し、契約条項の緩いローンの増加に見られるように引受基準は悪化した。それでも状況は深刻とは程遠い。 他国と比べると、米国の企業債務はかなり低い（チャート 16）。フランスの企業債務はGDP比で143%に達し、米国の2倍である。これはフランスの企業セクターがすべて順調であることを示すわけではないが、事実としてフランスは企業債務の危機に見舞われていない。これは米国が差し迫った危機に瀕していないことのシグナルにもなる。 現金を差し引くと、米国の企業債務のGDP比は1989年と同じ水準にあり、その年のフェデラルファンド金利はほぼ9%であった。法人ネット負債対EBITDの比率は比較的低いままである。利子負担能力比率は歴史平均を上回っている。加えて、過去数年で企業資産もかなり速く増加しており、企業の債務対資産比率は概ね安定している（チャート 17）。 企業部門の金融収支－－企業の収入と支出の差－－は依然としてGDPの1%でプラス圏にある。過去50年のすべての景気後退は企業部門の金融収支が赤字になったときに始まっている（チャート 18）。 チャート 17米国の企業債務：どのくらい高いか？ 米国の企業債務：どこまで高くなる？ 米国の企業債務：どこまで高くなる？ チャート 18企業部門の金融収支は依然として黒字 企業部門の金融収支は依然として黒字 企業部門の金融収支は依然として黒字 住宅ローンのようにレバレッジドな機関が多く保有する債務とは異なり、ほとんどの企業債務は年金基金、保険会社、ミューチュアル・ファンド、イーティーエフのような非レバレッジのプレイヤーによって保有されている。銀行貸出は非金融企業部門債務のわずか18%を占め、1980年の40%から低下している（チャート 19）。銀行が保有するレバレッジド・ローンのシェアは10年前の約25%から現在は10%未満に低下している。さらに、今日の銀行は過去よりもはるかに高品質の自己資本を多く保有している（チャート 20）。これにより企業債務は経済にとってシステミックに重要である度合いが低くなっている。   チャート 19銀行は企業セクターへのエクスポージャーを削減した 銀行は企業向けのエクスポージャーを縮小した 銀行は企業向けのエクスポージャーを縮小した チャート 20米国の銀行は十分な自己資本を保有している 米国の銀行は健全な資本水準にある 米国の銀行は健全な資本水準にある 我々が12月にリスク資産に対してより強気になった理由の一つは、株式が急落し企業スプレッドが拡大したにもかかわらず金融ストレス指数に大きな追随がなかったためである。例えば、悪名高いテッド・スプレッドはほとんど動かなかった（チャート 21）。 チャート 21テッド・スプレッドは落ち着いており、深刻な金融ストレスの兆候は示していない TEDスプレッドは良好に推移しており、金融ストレスの重大な兆候は見られない TEDスプレッドは良好に推移しており、金融ストレスの重大な兆候は見られない みんなラリーに同意している 米国経済に大きな不均衡がないことを踏まえると、投資家はなぜフェッドが実際にはさらに利上げできないと考えているのだろうか。フェデラルファンド金利の実質ベースはかろうじてゼロを上回っているにすぎないのに。答えは、投資家がラリー・サマーズの世俗的停滞（セキュラー・スタグネーション）論を受け入れているように見えることである。これは中立金利が過去に比べて今日ははるかに低いという仮説である。 我々はこの理論にいくぶんの同情を持っているが、これは生産性や人口動態といった長期的な金利決定要因に関する理論であることを忘れてはならない。この理論は景気循環的な金利のドライバー、すなわち余剰生産能力の量、財政政策のスタンス、信用の成長、賃金動向などについてはほとんど何も語っていない。 今十年初め、我々がまだ債券に非常に強気であったときには、経済は極めて低い金利を必要としているともっともらしく主張できた：産出ギャップは依然として大きく、デレバレッジのサイクルは始まったばかりであり、住宅と株価は下押しされ、賃金上昇は乏しく、大不況の間の短い景気刺激のバーストの後に財政政策は制約的になっていた。中立からはほど遠いか？ 上述のすべての要因は、過去数年の間に完全にまたは部分的に方向を転じている。財政政策を一例として挙げると、IMFは米国の構造的財政赤字が2014–15年にGDPの平均で3.3%だったと推計している。2019–20年にはIMFは赤字がGDPの平均で5.6%になると見込んでいる。 より緩和的な財政政策はどの程度まで米国の中立金利を押し上げたのだろうか。保守的に仮定して、追加の1ドルの財政刺激が総需要を1ドル押し上げるとしよう。この場合、財政政策は過去5年間で総需要に対してGDP比で2.3%を上乗せしたことになる。総需要が1パーセンテージポイント増加すると中立金利が1%上昇すると仮定すると（これはイエレン元FRB議長が支持したテイラールールの仕様と一致する）、財政政策だけで中立金利を2パーセントポイント以上押し上げたことになる。 上の議論は、長期的な構造要因が中立金利を下押ししているとしても、景気循環的な要因が中立金利をかなり押し上げた可能性があることを示唆している。FRBは今後1〜2年の経済にとって適切な水準を見据えて金利を設定するはずなので、金利が過度に低い状態が長く続くことになりかねない。これにより経済は過熱し、最終的にはインフレが急上昇するだろう。 インフレの脅威 良いニュースは、我々のお気に入りの指標のいずれも大規模な差し迫ったインフレ上昇を示していないことだ（チャート22）。関税が高まっているにもかかわらず、消費者向け輸入物価のインフレ率は鈍化している。コア中間財の生産者物価インフレ率は減速している。ISMや地域連銀の調査における支払価格項目は急落している。インフレ・サプライズ指数は反転して低下している。調査ベースおよび市場ベースのインフレ期待はともに昨夏より低いままである。これらの動きに沿って、BCAの独自のパイプライン・インフレ指標は2年半ぶりの低水準に下落している。 賃金上昇は加速しているが、生産性の伸びの方がさらに大きくなっている。その結果、単位労働コストのインフレ率は昨年中頃から低下している。単位労働コストはコアCPIの約12か月先行指標である（チャート23）。これは少なくとも来年下半期までは消費者物価のインフレ率が不快なほど高い水準に達する可能性は低いことを示唆している。 Chart 22米国における差し迫った大規模インフレ上昇の兆候は見られない 米国で差し迫った大規模なインフレーションの急騰の兆候は見られない... 米国で差し迫った大規模なインフレーションの急騰の兆候は見られない... Chart 23単位労働コストの減速は当面インフレ圧力を和らげる ...そして、単位労働コストの減速は当面の間、インフレ圧力を和らげるだろう ...そして、単位労働コストの減速は当面の間、インフレ圧力を和らげるだろう その時点では、インフレが上昇に転じるリスクが高い。これによりFRBは2021年初めに急激な利上げを開始せざるを得なくなり、ドルが上昇し株式やスプレッド・プロダクトが売られる可能性がある。結果として金融状況が引き締まり、2021年中～後半に米国と世界の景気が後退に陥る恐れが高い。   当面はグローバル株式に強気を維持し、来年後半に防御的姿勢へ転換 Chart 24アナリスト予想はかなり控えめである アナリストの予想はかなり控えめだ アナリストの予想はかなり控えめだ 上で述べた二段階のFRBによる引き締めサイクル――12月に始まり2020年にかけて徐々に利上げを行い、その後インフレ上昇に反応してより積極的な利上げに移行する――が今後数年間の投資見解を形作る。本刊行物の冒頭にある主要金融市場予測チャートは、主要資産クラスが向かう先の大まかなスケッチを示している。 株式や他のリスク資産は、FRBが年内にさらに利上げを示唆して市場の準備を始める時期の前後でボラティリティが高まるものの、最初の段階の利上げを織り込むことができるだろうと我々は考えている。昨年9月とは異なり、利益見通しはより保守的だ。ボトムアップの推計では、2019年に米国で1株当たり利益（EPS）が3.9%上昇し、世界のその他地域で5.4%上昇する見通しである（チャート24）。成長の加速、金融環境の緩和、継続的な自社株買いの組合せは、これらの数値に上振れ余地を示唆している。 さらに重要な点は、9月とは異なり、FRBは経済が良好に推移している場合にのみ利上げを開始するだろうということである。パウエルは米国経済が減速し始めたちょうどその時に「金利は中立からは遠い」と述べてしまい、誤りを犯した。もしその発言が米国の成長がまだ加速している時点で出ていたなら、投資家はおそらくそれを無視しただろう。 ジェローム・パウエルは同じ過ちを繰り返さないだろう。代わりに別の誤りを犯す可能性がある：経済を過熱させ、FRBが明らかに後手に回り、追いつくために慌てて利上げを行わざるを得ない状況にしてしまうことである。その結果生じるスタグフレーション的な環境――労働力不足により成長が鈍化しつつインフレが上向く状況――は株式や他のリスク資産にとって有毒となるだろう。 タイミングを正確にするのは難しいが、我々は投資家に対して今後12〜18か月は控えめにリスク志向を維持することを推奨する。ただし、FRBが利上げのペースを加速する前の来年後半には株式とスプレッド・プロダクトへのエクスポージャーを削減すべきだ。 国際株式を一時的に格上げする準備をする 米国株式市場は他の市場と比べて「ロー・ベータ」になりがちである。もし今年後半に世界成長が加速するなら、国際株式は米国株式をアウトパフォームするだろう。我々はEEMイーティーエフのプットを1月3日に売却して104%の利益を得ており、現在は新興国株式を純粋にロングすることを推奨している。世界成長の回復を示すさらなる確証が得られ次第、為替ヘッジなしの条件で新興国株式と欧州株式の両方をオーバーウェイトへ格上げすることを数週間以内に検討する予定だ。 日本株については判断が分かれるところだ。強い世界成長は日本の多国籍企業に恩恵をもたらすが、国内市場に重心を置く企業は政府が10月に消費税を引き上げるなら打撃を受ける可能性がある。当面は日本株の格上げは見送るつもりだ。 グローバルなセクターレベルでは、我々は今年初めにディフェンシブ寄りの配分を縮小した（昨夏により慎重になっていた後で）。投資家にはエネルギーとインダストリアル（工業）をオーバーウェイトすることを推奨する。金融とマテリアル（素材）にも好感を抱き始めている。前者は今年後半のイールドカーブのスティープ化やクレジット成長の加速から恩恵を受けるだろう。後者はより堅調な中国経済から利益を得るだろう。ヘルスケア、情報技術、コミュニケーション・サービスは中立配分を維持する。不動産と公益事業は債券利回りが上昇し始めるとどちらも傷を負う。生活必需品のような古典的なディフェンシブ・セクターもアンダーパフォームするだろう。  世界の債券利回りは上昇しそうだ 世界の債券利回りは、成長が上振れサプライズを起こすにつれて今後12〜18か月で上昇する可能性が高い。インフレが加速するにつれて利回りは2021年前半に向けてさらに上昇し続けるだろう。 過去のリスクオフ局面とは異なり、次の景気後退に向かう過程で米国債が大きなセーフヘイブンの役割を果たすとは限らない。上述の通り、今日債券利回りがこれほど低い理由の一つはターム・プレミアムが非常に低下していることだ。FRBの債券買入の累積効果がターム・プレミアムを押し下げている可能性は高いが、より大きな影響は投資家が米国債をさまざまなマクロリスクに対する保険として見なしていることに由来している。投資家は、経済が景気後退に陥ると株価は下落し、住宅市場は悪化し、賃金上昇は鈍化し、雇用見通しは悪化するが、少なくとも債券ポートフォリオの価値は上がるだろうと考えることに慣れているのだ。 この考え方の問題は、それが有効なのはFRBが成長の強まりに対して利上げを行う場合だけだという点だ。もしFRBがインフレが手に負えなくなっていることに反応して利上げを行うなら、米国債利回りは上昇する一方で株式は下落する可能性がある。これは実際、1960年代後半から2000年代初頭にかけては常態だった（チャート25）。 Chart 25米国債利回りが上昇する一方で株式が下落する可能性 米国債利回りは上昇する一方で、株価は下落する可能性がある 米国債利回りは上昇する一方で、株価は下落する可能性がある もし米国債がセーフヘイブンの地位を失えば、ターム・プレミアムは上昇するだろう。利回り上昇が株式市場を弱め、投資家が株式と債券の両方から現金へと一斉に逃げることで、さらなる利回り上昇と株価下落を招くという悪循環が生じる可能性がある。 投資家は今後12か月間、米国債に対してはやや短めのデュレーション・スタンスを維持し、その後インフレが表面化し始める2020年中頃にはデュレーションを最大限アンダーウェイトにするべきだ。デュレーションをロングする（長めの債を保有する）判断が合理的になるのは、FRBが金利を制約的な水準まで引き上げ、経済が景気後退に入った場合だけである。それが起こるのは2021年下半期まで見込まれない。 地域別には、今後12か月間で米国債に対して欧州、カナダ、オーストラリア、ニュージーランド、特に日本の国債を好む。米国経済が最も過熱するリスクにさらされているからだ。通貨ヘッジありの観点では、10年物米国債利回りは世界の主要国の中で低い部類に入る（表1）。例えば日本の10年国債は通貨ヘッジありの条件で2.72%を提供し、ドイツ国債は2.94%を示している。 Table 1先進国の債券市場 2019年第2四半期 ストラテジー見通し：デッドゾーンからエンドゾーンへ 2019年第2四半期 ストラテジー見通し：デッドゾーンからエンドゾーンへ  米ドル：ソフト・パッチへ向かう 米ドルの見通しを測るのはやや厄介だ。米連邦準備制度理事会（Fed）は今後12か月間で段階的に利上げを行うにせよ、市場が織り込んでいる水準よりは高い利上げを行う見込みだ。他の大半の中央銀行がまだ様子見の姿勢を続けているため、短期金利差は米ドルに有利に動く可能性が高い。それでも、日本を除けば、世界的な成長が強まると投資家は2020年以降の他の先進国での追加利上げを織り込む可能性が高い。その結果、長期の利回り差は短期の利回り差ほど拡大しないかもしれない。 おそらくそれ以上に重要なのは、米ドルはカウンターサイクリカル、つまり世界成長の動きと逆方向に動く通貨であるという点だ（Chart 26）。この逆循環性は、米国経済が世界の他地域と比べて製造業よりもサービス業により重点を置いていることに起因する（Chart 27）。したがって、世界成長が加速すると、資本は米国から世界の他地域へ流れる傾向が強まり、外貨需要が増え、ドル需要は減少することになる。 Chart 26ドルは逆循環通貨である ドルは景気循環に逆行する通貨である ドルは景気循環に逆行する通貨である Chart 27米国はグローバル成長に対する低ベータの投資対象である 米国はグローバル成長に対する低ベータの投資先 米国はグローバル成長に対する低ベータの投資先 もし世界成長が今年後半に持ち直すなら、ドルは第2四半期にピークを付け、その後2019年末から2020年にかけて弱含む可能性が高い。ドルの動きは、2017年の経過と似た経路をたどるかもしれない。2017年はFedが4回利上げした年だが、貿易加重換算の広義ドルはそれでも7％弱含んだ。 Chart 28円はリスクオフ通貨である 円はリスクオフ通貨だ 円はリスクオフ通貨だ 2017年と同様に、ユーロは今年後半に米ドルに対して上昇するだろうし、多くの新興国通貨やコモディティ通貨も同様に上昇するだろう。ただし、2017年に多くの通貨がドルに対して上昇したのに日本円がその動きに参加しなかったのと同じように、円は米ドルに対してあまり勢いよく上昇するのは難しいだろう。 円は“リスクオフ”通貨であり、したがって世界のリスク資産が上昇すると円は弱まる傾向がある（Chart 28）。さらに、もし今年後半に世界の国債利回りが日本国債（JGB）利回りに対して上昇するならば、円は打撃を受けるだろう。特に、財政政策の引き締まりを受けて日銀がイールドカーブ・コントロールの運用を長引かせざるを得ない場合はその傾向が強まる。123を下回る場面ではEUR/JPYをロングするつもりだ。 一旦弱含んだ後、米ドルは来年末に再び上昇する 米国経済が2020年に供給面の制約にますます直面するにつれ、成長は鈍化し、インフレは加速するだろう。Fedはインフレの上昇以上の速さで利上げを行って応じる。結果として実質金利が上昇し、ドルに上方圧力がかかるだろう。 このスタグフレーション的な環境では、株式は急落し、クレジットスプレッドは拡大する。米国の金融環境の引き締まりは世界中に波及し、世界成長はそれがなかった場合よりも一層減速するだろう。これがさらにドルを加速させる。米ドルがピークを付けるのは、Fedが2021年末に利下げを開始した時点のみである。 コモディティ：より強気に 今年後半のドルの弱含みと、中国の回復に牽引された世界成長の強化はコモディティにとって追い風となる。BCAのコモディティ・ストラテジストは、現行水準で銅のロングを推奨する。また、原油に対する強気のバイアスも維持している。ブレントは今年平均75ドル/バレル、2020年は80ドル/バレルになると見込んでいる。米国のシェール生産の増加は、深海の輸出施設整備の遅延によって相殺され、供給は比較的タイトに保たれるだろう。 過去のレポートでは、インフレヘッジとして金を購入することの有用性を論じてきた。ただし、我々はドル強気見解のためにそれを実行に移すのを控えてきた。今やドルが今後数か月でピークを付けると見ているため、1275ドル/オンスを下回る場面があれば金を買いたい。   Peter Berezin, チーフ・グローバル・ストラテジスト グローバル・インベストメント・ストラテジー peterb@bcaresearch.com 脚注 1      Please see Global Investment Strategy Weekly Report, “グレツキーのドクトリン,” dated March 1, 2019. 2      Please see Global Investment Strategy Weekly Report, “FCIドゥーム・ループの可能性は低い,” dated January 4, 2019. 3      Please see Global Investment Strategy Weekly Report, “本当に世界には政府債務が多すぎるのか？” dated February 22, 2019. ストラテジー & マーケット動向 マクロクォント・モデルと現在の主観的スコア チャート29 タクティカル・トレード ストラテジー推奨 クローズド・トレード

Highlights Driven by its fear that deflation is a more intractable danger than inflation, the Federal Reserve has enshrined its pause for the remainder of 2019 in order to lift inflation expectations. Since the U.S. business cycle expansion is not over, the Federal Reserve’s plan to put policy on hold this year raises the odds that the economy will overheat. Global growth is set to bottom during the second quarter in response to easier financial conditions. Accommodative policy, rebounding global economic activity and a softening dollar will boost risk asset prices during the remainder of the year. Safe-haven bonds, including Treasurys, will underperform cash over the coming 12 to 18 months. The rally in risk assets will ultimately prove the last hurrah as the Fed will resume tightening later this year or in 2020, and a bear market lies down the road. Only investors with tactical investment horizons should aggressively play this rally. Those with longer investment horizons should use this rally to lighten up their exposure to risk. Feature Introduction Following the introduction of the word “patience” into the Federal Reserve’s lexicon, a move lower in the so-called Fed dots was to be anticipated. The FOMC now expects no rate increases in 2019 and only one hike in 2020. The interest rate market remains skeptical that the Fed will be able to deliver on its forecast. For now, the OIS curve is pricing in a 75% probability of a cut this year, and rates at 1.9% by the end of 2020. With the 10-year/3-month yield curve inverting last week and the U.S. Leading Economic Indicator still decelerating, it is no wonder that investors are betting on the Fed becoming ever more dovish (Chart I-1). BCA is inclined to take the Fed at its word – the next move will be a hike, not a cut. This call rests on our view of the business cycle: The fed funds rate is still somewhat below neutral, U.S. economic activity can expand further, and global growth is likely to trough soon. The current dovish inclination of global central banks will only nurture the cycle a little bit longer. Consequently, we continue to recommend a positive stance on stocks for the coming quarters, while keeping in mind that the cycle is long in the tooth, and that beyond this last climb lies a significant bear market. The U.S. Business Cycle Has Further To Run… The Fed remains data dependent, but this now means that depressed inflation expectations in the private sector need to be vanquished before the hiking can resume (Chart I-2). With the view that low realized inflation has curtailed expectations now common across major central banks, this implies that a temporary overshoot in actual core PCE will be tolerated in order to lift expectations. Chart I-1Worrisome Signs For Growth Chart I-2The Fed Wants To Lift Inflation Expectations   Since consumer prices are a lagging variable, lifting both realized and anticipated inflation will only be possible if we move ever further along the business cycle, further pressuring the economy. Our base case remains that the risk of a recession is low in 2019, and is even receding in 2020. First, U.S. credit-dependent cyclical spending currently constitutes only 25.3% of potential GDP. As Chart I-3 illustrates, this is in line with its historical average, and well below the levels recorded near the end of previous business cycles. This suggests that the amount of vulnerability caused by misallocated capital is not yet in line with previous cycles. It also indicates that the share of output generated by the sectors most sensitive to higher rates is also low. Chart I-3U.S. Cyclical Spending: Limited Signs Of Vulnerability Second, the consumer remains in good shape. Households have deleveraged, and debt-service payments relative to disposable income are still near multi-generational lows (Chart I-4). Moreover, thanks to a saving rate of 7.6%, consumer spending is likely to move in line or even outperform income growth. On this front, the outlook is also good. As Chart I-5 demonstrates, the link between wages and salaries relative to the employment-to-population ratio for prime-age workers – a measure of labor utilization unaffected by the demographic changes that have muddied the interpretation of the unemployment rate – is still as tight as it was 20 years ago. Thus, as long as the labor market does not suddenly collapse, wage growth will continue to accelerate, supporting household income and consumption.   Chart I-4Household Balance Sheets Are Solid Third, at 0.4% of GDP, the fiscal thrust remains positive. In other words, fiscal policy will still add to GDP in 2019. Fourth, we do not see the traditional symptoms associated with a fed funds rate above neutral. After dipping sharply in the second half of 2018, mortgage for purchase applications are back near their cycle highs (Chart I-6). Moreover, the performance of homebuilders’ equities relative to the broad market has begun to rebound, which is inconsistent with a fed funds rate above neutral. Chart I-6Mortgage Applications Do Not Suggest Policy Is Tight Fifth, there is scope for the contribution from housing sector activity to morph from a negative to a positive. A fed funds rate below neutral historically is correlated with an improving housing market. Rising mortgage rates from 3.8% to 4.6% depressed home sales and construction output, and the fall in mortgage rates over the past x month 4.3% should stimulate housing activity (Chart I-7). Chart I-7Residential Activity Will Rebound This Year Bottom Line: U.S. first-quarter GDP growth will be dismal, but one quarter does not make a trend. The low degree of economic vulnerability in the U.S., and the likelihood that the fed funds rate will stay below neutral for a while suggest that growth should rebound to the 2-2.5% range and should remain above-trend for the remainder of 2019. … And Global Growth Will Soon Trough As the cliché goes, it is darkest before the dawn. This is a fitting description of the world economy outside the U.S. right now. Global trade is depressed, global PMIs are moribund and nothing feels good. But it is exactly when nothing is going well that one needs to wonder what may cause the outlook to turn for the better. Thankfully, green shoots are emerging. To begin with, central banks around the world have taken a more dovish slant. This dovish forward guidance is nurturing global activity via a significant easing in global financial conditions, which is undoing the severe brake-pumping imposed on global growth in the fourth quarter of 2018 (Chart I-8). Chart I-8Global Financial Conditions Are Easing This more dovish forward guidance has helped our Financial Liquidity Index, which sharply deteriorated through 2009, rebound. Historically, this presages an improvement in the BCA Global Leading Economic Indicator (Chart I-9). Improving liquidity conditions have already been reflected in lower real rates around the globe, creating a reflationary impulse. EM financial conditions are responding positively, pointing to an upcoming pick-up in industrial activity, as measured by our Global Nowcast (Chart I-10). Chart I-9Improving Global Liquidity Backdrop Chart I-10A Tailwind From EM? Our Global LEI diffusion Index has begun to reflect some of these developments. After forming a trough in 2018, more than 50% of the countries in our Global LEI are currently experiencing a sequential improvement in their LEIs. We are now entering the normal lag after which a broadening growth impulse converts into aggregate activity moving higher (Chart I-11). Most interestingly, investors do not seem to be anticipating such a rebound. There is therefore room for growth surprises around the world. Chart I-11Scope For Growth Surprises China has a role to play in this story, will likely morph from a headwind to global growth to a positive. Positive may be a strong word, but at the very least, we expect China to stop detracting from global growth. Premier Li-Keqiang recently put the accent on stability and preserving employment, suggesting Chinese policymakers are likely to de-emphasize deleveraging over the coming 12-18 months. For Chinese growth to improve, deleveraging does not even have to stop. As both theory and history have shown, a slower pace of deleveraging means that the credit impulse moves back into positive territory and growth re-accelerates, even if only temporarily (Chart I-12). Chart I-12Growth Can Improve Even If Deleveraging Continues As a thought experiment, if Chinese leverage were to stabilize this year and nominal growth were to hit 8% – the lower bound of the real GDP target of 6-6.5% and inflation of 2% – the Chinese credit impulse would surge to more than 10% of GDP (Chart I-13)! We are not forecasting such a large rebound in the impulse, but this exercise clearly shows that if the Chinese authorities – who are cutting taxes and trying to ease credit conditions for small- and medium-sized enterprises – want to favor stability and employment for just one year, the impact on growth will be non-negligible, even if deleveraging continues. Since domestic demand responds to the credit impulse, and imports sport an elevated beta to domestic demand, Chinese imports are likely to soon morph from a negative to something more neutral – maybe even a small positive for the rest of the world. Chart I-13A Thought Experiment Finally, as weak as Europe is right now, it will likely be an important source of positive surprises in the second half of the year. To begin with, Europe is much more sensitive to EM growth conditions than the U.S. (Chart I-14). In the same way as Europe felt the full force of the deceleration in global trade last year, it will benefit from any improvement in trade this year. A myriad of idiosyncratic shocks rammed through the euro area last year, worsening an already difficult situation. The new WLTP emission standards caused German auto production to collapse by nearly 20%. Nonetheless, as contracting domestic manufacturing orders and a large inventory pullback in the final quarter of last year suggest, the inventory overhang has been worked off (Chart I-15, top panel). Chart I-15Passing European Idiosyncratic Shocks Just as critically, Italy’s technical recession should end soon. The country’s economic malaise reflected the tightening in financial conditions that followed the violent battle between Rome and Brussels early last year. Ultimately, Rome folded: The budget deficit is 2.3% of GDP, not above 6%, and threats of leaving the union have been abandoned. Consequently, financial conditions are easing. Italian bond auctions are massively oversubscribed this year, and rising bond prices are supporting the solvency of the Italian banking system. The last hurdle affecting Europe was the fact that funding stress in the Italian and Spanish banking systems have been directly addressed by the TLTRO-III announced three weeks ago by the European Central Bank. Spanish and Italian banks have to refinance EUR 425 billion of TLTRO-II this June, in a year where a sizeable amounts of European bank bonds also needs to be refinanced. This is simply too much. With the ECB again bankrolling Italian and Spanish financial institutions, funding stress in the periphery can decline. Consequently, the European credit impulse, which had formed a valley in 2018 Q1, can continue its ascent (Chart I-15, bottom panel). Bottom Line: Investors expect little from the global economy outside the U.S., yet easing liquidity and financial conditions, a temporary shift in Chinese policy preferences and passing idiosyncratic shocks in Europe all point to improvement in global economic activity. U.S. Inflation Expectations Will Allow The Fed To Resume Rate Hikes Above-potential growth in the U.S. and rebounding economic activity in the rest of the world are consistent with higher – not lower – U.S. inflation. First, rebounding global growth is normally associated with a weakening dollar (Chart I-16). This time will not be different, especially as U.S. equity valuations relative to global stocks suggest that investors are particularly pessimistic on non-U.S. growth. A weaker dollar will lift import prices, commodity prices, and goods prices, helping inflation move higher. Chart I-16The USD Is Counter-Cyclical Second, the change in the velocity of the money of zero maturity in the U.S. is consistent with a further strengthening in core inflation (Chart I-17). Chart I-17The Fisher Equations Points To Gently Rising Inflation Third, above-trend U.S. growth in the context of elevated capacity utilization is also consistent with rising inflation (Chart I-18). Chart I-18Elevated U.S. Capacity Utilization If these three forces can cause core PCE inflation to move slightly above 2% in the second half of 2019, this will likely result in inflation expectations firming. Moreover, the combination of positive growth surprises around the world and easy monetary and liquidity conditions will prove supportive of asset prices globally, implying further easing in global and U.S. financial conditions. This set of circumstances will allow the Fed to shift its tone toward the end of 2019, in order to crystalize additional hikes in 2020. Additionally, we estimate the U.S. terminal policy rate to be around 3.25%. In fact, a longer-than-originally-anticipated Fed pause reinforces confidence in this assessment, even if it means that it will take longer to reach the terminal level than we previously thought. Bottom Line: Our growth outlook is consistent with robust inflation and improving inflation expectations. This means we disagree with interest rate markets and anticipate the Fed will resume its hiking campaign instead of cutting rates next year. Moreover, easier-for-longer policy also strengthens our view that the fed funds rate can end this cycle near 3.25%. Stay Positive On Risk Assets For Now… Most bear markets are linked to recessions. It follows that if the U.S. business cycle can be extended and the Fed remains on the easy side of neutral for longer, then the S&P 500 has more upside (Chart I-19). So do global equities. Chart I-19Low Bear-Market Risk This view is reinforced by the fact that buy-side analysts and investors alike have aggressively curtailed their expectations for EPS growth this year, to 3.9% for the U.S. and 4.9% outside the U.S. Yet, our profit model suggests that U.S. EPS growth is likely to come in at around 8.1% this year. Earnings revisions are pro-cyclical. Hence, our expectation that the BCA global Leading Economic Indicator meaningfully revives in the second half of 2019 points toward analysts having ample room to revise global earnings higher in the second half of the year (Chart I-20). Chart I-20Global Profit Margins Will Improve If Growth Rebounds Moreover, global valuations experienced a reset last year. Despite a rebound, the forward P/E ratio for the MSCI All-Country World Index remains in line with 2014 levels, 12.5% lower than at their apex last year. When looking at the U.S., our composite valuation index has also improved meaningfully (Chart I-21). This improvement in valuations increases the probability that a bottom in global growth will lift stock prices. Chart I-21Large Improvement In The Equity / Risk Reward Ratio Our Monetary Indicator further reinforces this message. After being a headwind for stocks over the past eight quarters, now that the Fed has paused and is essentially guaranteeing low real rates for an extended period, this gauge is growing more supportive of further equity price gains (Chart I-22). Chart I-22Stock-Friendly Monetary Backdrop A below-benchmark duration exposure for fixed-income portfolio still makes sense, even if the Fed has prolonged its pause. As per our U.S. Bond Strategy service’s “Golden Rule Of Treasury Investing,” if the Fed increases rates more than the market has priced in 12 months prior, Treasurys underperform cash (Chart I-23). Even if the Fed does nothing this year, it will still be more than the OIS curve is currently pricing in. Moreover, the dollar is likely to soften and the Fed is increasingly taking the risk of falling behind the realized inflation curve. This should create upside not only for inflation breakevens but also for term premia, which are depressed everywhere across the G-10. The yield curve should modestly steepen in this environment. It may take a bit more time than we originally expected, but safe-haven bond yields are trending higher, not lower. Chart I-23The Golden Rule Of Treasury Investing Spread products are also likely to continue to do well. Easy monetary policy, a soft U.S. dollar, an ongoing U.S. business expansion, an upcoming rebound in global growth and rising asset values all point toward a delay of the inevitable wave of defaults. Corporate bonds may offer poor value and credit quality has deteriorated, but an end to the business cycle and a tighter Fed will be key to catalyzing these poor fundamentals. We are not there yet. The Brexit saga continues to have the potential to unsettle markets. Nonetheless, we would fade any broad market sell-off linked to poor British headlines. As Marko Papic writes in this month's Special Report, despite continued political uncertainty in Westminster this year, the risk of a no-deal Brexit is dwindling by the minute, and political logic suggests that there is a high probability that the U.K. will ultimately remain in the EU in two to three years. Bottom Line: After the reset in valuations and earning expectations last year, markets should continue their ascent. The Fed has showed that its “put” is alive and well. This will both favor risk-taking and extend the duration of the business cycle. If global growth can rebound in the second quarter, it will create fertile ground for strong asset prices over the bulk of 2019. Treasury yields will also exhibit upside, even if achieving these higher rates will take more time now. … But Beware What Lurks Below The benign outlook for this year masks that the rally in risk assets is living on borrowed time. A Fed willingly falling behind the curve may fan speculative flames this year, but it doesn’t mean that policy will stay easy forever. On the contrary, the inevitable rise in inflation will push rates higher down the road and the unavoidable recession will ultimately materialize, most likely somewhere around 2021. Since asset valuations will only grow more inflated between now and then, a bigger fall will ultimately ensue. Our Composite Valuation Indicator may currently be flashing a positive signal, but dynamics within its components already point to brewing trouble down the road (Chart I-24). First, the balance sheet group of indicators has showed no improvement. In other words, without last year’s rebound in profitability, stocks would not be as attractively valued as the overall indicator suggests. Chart I-24Disconcerting Internal Dynamics Second, the interest rate group is currently flattering aggregate valuations. To remain supportive of higher returns ahead, this group depends on interest rates staying constrained. Here, the Fed will play a particularly perverse role. Its willingness to tolerate inflationary pressures right now means lower rates today at the price of a higher cost of capital tomorrow. Once it becomes obvious that the Fed is falling behind the curve – something more likely to happen once inflation expectations normalize – safe-haven yields will rise sharply. The interest rate group will suddenly look a lot less supportive than it does today. Third, the profit components of our valuation indicator may look healthy today, but this will not remain the case. At 31.7%, EBITD margins are currently extraordinary elevated. In fact, if the profit margins were to normalize to their historical average, the Shiller P/E would skyrocket to 40.3 from 29.9 today, implying the stock market may be just as expensive as it was at the start of 2000. For margins to remain wide, wages will have to stay depressed relative to selling prices (Chart I-25). However, the combination of an economy at full employment and the Fed goosing economic growth points to rising wages. Since the pass-through from wages to prices is below 100%, unless productivity rises more than labor costs, profitability will suffer and P/E ratios will start sending the same message as the price-to-sales ratio, a multiple that currently stands near record highs. Chart I-25Rising Wages Will Ultimately Hurt Profits Valuations are not the only danger lurking for stocks: Spread products will morph from a tailwind to a headwind for equities. Whether or not it steepens a bit this year, the yield curve’s previous big flattening already points toward rising financial market volatility (Chart I-26). The Fed’s recent dovish tilt can keep the VIX and the MOVE compressed for a while longer. However, since inflation expectations will ultimately move higher, likely within a year or so, the Fed will once again tilt to the hawkish side, and volatility will follow its path of least resistance higher. Carry trades of all kinds will suffer, and spreads will widen. The deteriorating credit quality this cycle, with BBB and lower-rated issues constituting 60.1% of the corporate universe, could make this widening more violent than normal. This phenomenon will hurt stocks. Chart I-26Volatility Is A Coiled Spring Finally, the improvement in global growth this year is likely to prove temporary. China may want to slow the pace of deleveraging this year, but pushing debt loads lower and reforming the economy remains Beijing’s number one priority on a multi-year horizon. China has created USD 26 trillion worth of yuan since 2008, making the Chinese money supply larger than the euro area’s and the U.S.’s together. As a result, China’s incremental output-to-capital ratio continues to trend lower, implying large misallocation of capital (Chart I-27). State-owned enterprises, the recipients of much of the credit created over the past 10 years, now generate lower RoAs than their cost of borrowing, an unmistakable sign of poorly allocated funds. Chart I-27The Biggest Threat To China's Long-Term Prosperity Correcting this structural impediment will require the Chinese credit impulse to once again move back into negative territory. This means that unless Chinese policymakers abandon their efforts to prise the country off easy credit, Chinese growth will morph back into a headwind for the world somewhere in 2020, i.e. not so late as to encourage excesses, but not so early as to sharply slow the economy ahead of the Communist Party’s one-hundredth birthday in July 2021. In 2018, the global economy nearly ground to a halt after China had shifted from stimulus to policy tightening. The next time around, we doubt that a global recession will be avoided. The second half of 2020 may set up to be one tumultuous period. Bottom Line: In all likelihood, global risk assets should perform well this year, but we are living on borrowed time. In the background, equity valuations are deteriorating meaningfully, a phenomenon that will worsen once the Fed’s desired outcome comes to fruition: higher inflation. Wage pressures and higher interest rates will reveal how fully rotten stock valuations genuinely are. Compounding this effect, higher volatility and a resumption of China’s deleveraging efforts will likely achieve the coup de grace for stocks in the second half of 2020. Conclusion The FOMC wants to lift inflation expectations in order to defuse any lingering deflationary risk. Consequently, the Fed’s pause will last longer than we originally anticipated, but terminal rates are likely to climb higher than would have otherwise been the case. Before last week’s Fed meeting, the U.S. was already set to grow above trend. Now, the Fed will only extend the business cycle further, fanning greater inflationary pressures in the process. This potentially misguided reflationary impulse, which is echoed around the world, will contribute to a rebound in global growth that will become fully evident by the summer. Consequently, we expect risk assets to climb to new highs over the coming 12 months. Treasurys will likely underperform cash over that timeframe, as interest rate markets are currently too sanguine. Investors are facing a real dilemma. On one hand, the potential for elevated stock market returns is high over the coming 12 months. On the other, poor valuations will only grow more onerous, and the Fed will ultimately have to tighten policy even more following the on-hold period. Moreover, Chinese policymakers are unlikely to ignore the pressing danger created by misallocating capital for an extended period of time. Consequently, the outlook for long-term returns is deteriorating. As a result, we recommend more tactically minded investors to stay long stocks, with a growing preference for international equities that are both cheaper and more exposed to global growth than U.S. ones. However, longer-term asset allocators should use this period of strength to progressively move out of stocks and into safer alternatives. Mathieu Savary Vice President The Bank Credit Analyst March 28, 2019 Next Report: April 25, 2019   II. The State Of Brexit So What? It makes sense for long-term investors to buy the GBP. However, short-term investors should instead buy the 2-year call while selling 3-month ones. Why? The U.K. electorate is not staunchly Euroskeptic. In fact, Bregret has already set in. Volatility is the only sure bet over the tactical and strategic time horizons. The most likely scenario is that Theresa May either resigns and is replaced by a soft-Brexit Tory, or that she agrees to a long-term extension to give the U.K. time to call a new election. Brexit is unsustainable over the secular time horizon. Our low-conviction view is that in the long term, the U.K. will remain inside the European Union. The hour is late in the ongoing Brexit saga. The original deadline, once spoken of with religious reverence, will be tossed aside for one, potentially two, extensions. In this analysis, we attempt to consider the state of Brexit from multiple time horizons. First, we offer our tactical view, what will happen in the next several weeks and months. Second, we offer our strategic view, surveying the Brexit process to the end of the year. Third, we consider the secular view and attempt to answer the question of whether the U.K. will ever fully exit the EU. We then assign investment recommendations across the three time horizons. How Did We Get Here? In March 2016, three months ahead of the fateful June referendum, BCA’s Geopolitical Strategy and European Investment Strategy published a joint report on the topic that drew three conclusions: The probability of Brexit was understated by the market. “According to our modeling results, roughly 64% of Tory undecided voters would have to swing to the “Stay” camp in order to ensure that the vote crosses the 50% threshold in favour of continued EU membership … Conventional wisdom suggests that the probability of Brexit is around 30%, anchoring to the 1975 referendum results. Our own analysis of current polling data suggests that it is much closer to 50%, as in too close to call.” The biggest loser of Brexit, domestically, would be the Conservative Party. “The risk is that the British populace realizes that leaving the EU was a sub-optimal result and that little sovereignty was recovered. As such, there could be a backlash against the Tories in the next general election. In this scenario, the winner would not necessarily be UKIP, but rather the Jeremy Corbyn-led Labour Party – as close to the Michael Foot-led opposition in the early 1980s as any Labour Leadership.” The EU would survive, intact, with no further “exits.” “European integration is therefore a gambit for relevance by Europe’s declining powers. Brexit will not create centrifugal forces that tear the EU apart, and could in fact enhance the sinews that bind EU member states in a bid for 21st century geopolitical relevance.” Thus far, all three predictions have proven prescient. Not only was the probability of Brexit understated, but the electorate actually voted to exit the EU.1 The Conservative Party has wrapped itself into an intellectual pretzel trying to deliver on a referendum that the pro-Brexit Tories – a minority in the party – promised would not mean losing access to the Common Market. And the EU has not only seen no other “exits,” but has held firm and united in the negotiations with the U.K. while witnessing an increase in the support for its troubled currency union, both in the Euro Area in aggregate as well as in crisis-ridden Italy (Chart II-1). Chart II-1The Euro Area Stands Unified The net assessment we conducted in 2016 correctly gauged what the Brexit referendum was about and what it was not about. Our view was that behind the angst lay factors too general to be laid at the feet of European integration. Decades of supply-side reforms combined with competition from emerging economies led to a sharp rise in U.K. income inequality (Chart II-2), the erosion of its manufacturing economy (Chart II-3), and the ballooning of the country’s financial sector (Chart II-4). As a result, the U.K.’s income inequality and social mobility were, in 2016 as today, much closer to those of its Anglo-Saxon peer America than to those of its continental European neighbors (Chart II-5). Chart II-2Brits Saw Inequality Surge Chart II-3Manufacturing Jobs Collapsed Chart II-4The Financial Bubble Burst The underlying economic angst has continued to influence British politics since Brexit. Campaigning on an anti-austerity platform in the summer of 2017, the Labour Party leader Jeremy Corbyn nearly won the general election, only underperforming the Conservative vote by 2% (Chart II-6). The election was supposed to politically recapitalize Theresa May and allow her to lead the U.K. out of the EU. But the failure to secure a single-party majority created the political math in the House of Commons that is today preventing the prime minister from executing on Brexit. There are simply not enough committed Brexiters in Westminster to deliver on the relatively hard Brexit – no access to the EU Common Market or customs union – that Prime Minister May has put on offer (Chart II-7). The decision not to pursue a customs union arrangement with the EU is particularly disastrous. As our colleague Dhaval Joshi – Chief Strategist of BCA’s European Investment Strategy – has pointed out, remaining in the customs union would have protected the cross-border supply chains that are vital to many U.K. businesses and would have avoided a hard customs border on the island of Ireland.2 However, the slim margin of the Tory victory in 2017 has boosted the influence of the 20-to-40 hard-Brexiters in the party. They pushed Theresa May to the extreme, where a customs union arrangement – let alone access to the Common Market – became politically unpalatable. Had the British electorate genuinely wanted “Brexit über alles,” or the relatively hard Brexit on offer today, the margin of victory for Leave would have been greater. Furthermore, the electorate would not have come so close to giving the far-left Corbyn – who nonetheless supports the softest-of-soft Brexits – a majority in mid-2017. The slim margin of victory effectively tied May’s hands in her subsequent negotiations with both the EU and her own party. But there was more to the 2016 referendum than just general malaise centered on the economy and inequality. There were idiosyncratic events that provided tailwinds for the Leave campaign. Or, as we put it in 2016: Certainly, a number of ills have befallen the continent in quick succession: the euro area sovereign debt crisis, Russian military intervention in Ukraine, rampant migrant inflows from Africa and the Middle East, and terrorist attacks in France. It is no surprise that the U.K. populace wants to think twice about tying itself even more closely to a Europe apparently on the run from the Four Horsemen of the Apocalypse. The two issues we would particularly focus on were the migrant crisis and terrorist attacks in Europe. Data ahead of the referendum clearly gave credence to the view that the influx of migrants was raising “concerns about immigration and race.” This angst was primarily focused on EU migrants who came to the U.K. legally (Chart II-8), but the influx of millions of migrants into the EU in 2015 – peaking at 172,000 in the month of October – certainly bolstered the anxiety in the U.K. (Chart II-9).3 Chart II-8EU Migrants A Source Of Anxiety In 2016 Chart II-9The Refugee Crisis Boosted Brexit Vote Terrorism was another concern. In the 18 months preceding the referendum, continental Europe experienced 13 deadly terror attacks. Two were particularly egregious: the November 2015 Paris terror attack that led to 130 deaths, and the March 2016 Brussels terror attack that led to 32 deaths. Both the migration and terror crises, however, were temporary and caused by idiosyncratic variables with short half-lives. BCA’s Geopolitical Strategy argued that both would eventually abate. The migration crisis would subside due to firming European attitudes towards asylum seekers and the exhaustion of the supply of migrants as the Syrian Civil War drew to its tragic close. The extremist Islamic terror attacks would dwindle due to the decrease in the marginal utility of terror that has been observed in previous waves of terrorism (Chart II-10). Neither forecast was popular with our client base, but both have been spot on. Chart II-10Fewer Attacks Due To Declining Marginal Utility Of Terror The point is that the British electorate was never as Euroskeptic as the Euroskeptics cheering on Brexit thought. Support for EU integration has waxed and waned for decades (Chart II-11). Instead, a combination of macro-malaise caused by the general plight of the middle class – the same factors that have given tailwinds to populist policymakers across developed markets – and idiosyncratic crises in the middle of this decade created the context in which the public voted to leave the EU. Whatever the vote was for, we can say with a high degree of certainty that it was not in favor of the current deal on offer, a relatively hard Brexit. After all, the pro-Leave Tories almost universally campaigned in favor of remaining in the Common Market post-Brexit.4 Chart II-11Data Does Not Support Euroskeptic U.K. Today, Bregret has clearly set in. Not only on the specific issue of whether the U.K. should leave the EU – where the gap between Bremorseful voters and committed Brexiters is now 8% (Chart II-12), a 12% swing since just after the referendum – but also on the more existential question of whether U.K. citizens feel European (Chart II-13). Chart II-12Bregret Has Set In... Chart II-13...And Brits Feeling More European The political reality of Bregret is the most important variable in predicting Brexit. Not only is it difficult for Prime Minister May to deliver her relatively hard Brexit in Westminster due to the mid-2017 electoral math, but it is especially the case when the electorate does not want it. Yes, the mid-2016 referendum is an expression of a democratic will that must be respected. But no policymaker wants to respect the referendum at the cost of disrespecting the current disposition of the median voter, which is revealed through polls. Doing so will cost them in the next election. Reviewing “how we got here” is essential in forecasting the tactical, strategic, and secular time horizons in the ongoing Brexit imbroglio. To this task we now turn. Bottom Line: The U.K. electorate is not staunchly Euroskeptic: data clearly support this fact. The Brexit referendum simply came at the right time for the Leave vote, as the secular forces of middle-class discontent combined with idiosyncratic crises of migration and terror. Three years following the referendum, the discontent remains unaddressed by British policymakers while the idiosyncratic crises have abated. As such, Bregret has set in, creating a new reality that U.K. policymakers must respond to if they want to retain political capital. Where Are We Going? The Tactical And Strategic Time Horizons The EU has offered a two-step delay to the Article 50 deadline of March 29. The first option is a delay until May 22, but only if Theresa May successfully passes her Brexit plan through Westminster. The second option is a delay until April 12. This would come in effect if the House of Commons rejects the deal on offer. The short time frame is supposed to pressure London to come up with the next steps, which the EU has inferred would either be to get out of the bloc without a deal or to plan for a long-term extension. Although there are no official conditions to awarding a long-term extension, it is clear that the EU only envisages three options: Renegotiate the terms of Brexit, to include either a customs union or full Common Market membership (a softer Brexit); Hold a general election to break the impasse; Hold another referendum. The EU is suggesting that it could deny the U.K. an extension if London does not come back with a plan. There are two reasons why we would call the EU’s bluff. First, it is likely an attempt to help May get the deal through the House of Commons by creating a sense of urgency. Second, the European Court of Justice (ECJ) ruled in December 2018 that the U.K. could “revoke that notification unilaterally, in an unequivocal and unconditional manner, by a notice addressed to the European Council in writing.”5 The only requirement is that the notification be sent to Brussels prior to March 29 (or, in the case of a mutually agreed upon extension, prior to April 12). It is increasingly likely that, after the deal on offer fails, Theresa May will have to go “hat-in-hand” to the EU to ask for a much longer extension. She will have until April 12 to ask for that extension, but it would require participation in the European Parliamentary (EP) elections on May 23. Prime Minister May has said that the U.K. will not hold those elections. We beg to differ. Not holding the election would allow the EU to end the U.K.’s membership in the bloc, which would by default mean contravening the Parliament’s will to reject a no-deal Brexit (which it did in a rebuke to the government in March). As such, the U.K. will absolutely hold an EP election in May. Yes, it will be a huge embarrassment to the Conservative government. And we would venture that the election would turn out a huge pro-EU majority from the U.K., given that it is the Europhile side of the aisle that is now excited and activated, further embarrassing the ruling government. The most likely scenario, therefore, is that Theresa May either resigns and is replaced by a soft-Brexit Tory, or that she agrees to a long-term extension to give the U.K. time to call a new election. As we have been arguing throughout the year, the only way to break the impasse without calling a referendum – is to call a new election. A new election would be contested almost exclusively on the issue of Brexit – unlike the 2017 election, which Jeremy Corbyn managed to be almost exclusively contested on the issue of austerity. As such, the winner would have a clear political mandate to pursue the Brexit of their choice. If it is Jeremy Corbyn, this would mean a second referendum, given his recent conversion to supporting one. If Theresa May remains prime minister, it would be her relatively hard Brexit option; if another Tory replaces her, it would potentially be a softer Brexit. Intriguingly, Theresa May is coming up to the average “expiry date” of a “takeover” prime minister, which is 3.3 years (Chart II-14). Why do we think that Theresa May would be replaced with a soft Brexit Tory? Because there are simply not enough members of parliament in the Conservative Party caucus to elect a hard Brexiteer. Furthermore, the current deal on offer, which is a form of hard Brexit, clearly has no chance of passing in the House of Commons. Theresa May herself did not support the Leave campaign, but she converted into a hard Brexiteer due to the pressures in the Conservative Party caucus. If, on the other hand, we are wrong and the Conservative Party elects a hard Brexit Tory as leader, the odds of losing the election to the Labour Party would increase. Furthermore, the impasse in the House of Commons would not be resolved as Theresa May would be replaced by a prime minister with essentially the same approach to Brexit. Confused? You are not alone. Diagram II-1 illustrates the complexity of the tactical (0-3 months) and strategic (3-12 months) time horizons. There are so many options over the next six months alone that we ran out of space in our diagram to consider the consequences of the general election. Needless to say, an election would induce volatility in the market as it would put Jeremy Corbyn close to the premiership. While he has now promised a second referendum, his government would also implement policies that could, especially in the short term, agitate the markets. Our forecasts of the currency moves alone suggest that volatility is the only sure bet over tactical and strategic time horizons. We do not have a high-conviction view on a directional call on the pound or U.K. equities. However, global growth concerns, combined with political uncertainty, should create a bond-bullish environment. Bottom Line: Over the course of the year, political uncertainty will remain high in the United Kingdom. A general election is the clearest path to breaking the current deadlock. However, it is not guaranteed, as Labour’s recent decline in the polls appears to be reversing since Jeremy Corbyn finally succumbed to the demands that he support a new referendum (Chart II-15). Chart II-15Labour Party Revives On Referendum Support The Secular Horizon BCA Geopolitical Strategy believes that the median voter is the price maker in the political market place. Politicians are merely price takers. This is why Theresa May’s notion that the sanctity of the 2016 referendum cannot be abrogated is doubly false. First, she cannot truly claim from the slim 52%-48% result that U.K. voters want her form of Brexit. The referendum therefore may be a sacred expression of the democratic will, but her “no customs union” Brexit option is not holy water: It is an educated guess at best, pandering to hard Brexit Tories (a minority of the electorate) at worst. Given that 48% of the electorate wanted to remain in the EU and that a large portion of Brexit voters wanted a Common Market membership as part of Brexit, it is mathematically obvious that the softest of soft Brexit options was the desire of the median voter in June 2016. Furthermore, polling data (presented in Chart II-12 and Chart II-13 on page 28) now clearly show that the median voter is migrating away from even the softest of soft Brexit options to the “Stay” camp. Bregret has set in and a strong plurality of voters no longer supports Brexit. The question behind Chart II-12 is unambiguous. It clearly asks, “In hindsight, do you think Britain was right or wrong to vote to leave the EU?” What does all of this infer for the long term, or secular, horizon? First, an election this year could usher in a Labour government that delivers a new referendum. At this time, given the polling data and the geopolitical context, sans terror and migration crises, we would expect such a referendum to lead to a win for the Stay camp. Second, an election that produces a soft Brexit prime minister or negotiated outcome would allow the U.K. to leave the EU in an orderly fashion. A new Tory prime minister, pursuing a soft Brexit outcome, could even entice some Labour MPs to cross the aisle and support such an exit from the bloc. However, over a secular time horizon of the next two-to-three years, we doubt that a soft Brexit outcome would be viable. Investors have to realize that the vote on leaving the EU does not conclude the U.K. long-term deal with the bloc. That negotiating phase will last during the transition phase, over the next two-to-three years, and would conclude in yet another Westminster vote – and likely crisis – at the end of the period. If this deal entails membership in the Common Market, our low- conviction view over the long term is that it will ultimately fail. Take the financial community’s preferred soft Brexit option, the so-called super soft “Norway Plus” option. A Norway Plus option would entail the highest loss of sovereignty imaginable, given that the U.K. would essentially pay full EU membership fees with no ability to influence the regulatory policies that London would have to abide by. There is also a debate as to whether London would be able to constrict immigration from the EU under that option over the long term, a key demand of Brexiters.6 As such, the only viable option would be to switch to a customs union relationship. However, we fear that even this option may no longer be available to U.K. policymakers. Conservative Party leaders have wasted too much time and lost too much of the public’s good will. With only 40% of the electorate now considering Brexit the correct decision, it is possible that even a customs union arrangement will be unacceptable by the end of the transition period. Aside from the electorate’s growing Bregret, there is also the economic logic – or lack thereof – behind a customs union. A customs union would ensure the unfettered transit of goods between the U.K. and the continent, but not of services. This arrangement greatly favors the EU, not the U.K., as the latter has a wide (and growing) deficit in goods and an expanding surplus in services with the bloc (Chart II-16). Chart II-16Services Are Key For The U.K. The only logic behind selecting a customs union over the Common Market is that a customs union would allow the U.K. to conclude separate trade deals with the rest of the world. While that may be a fantasy of the few remaining laissez-faire free traders in the U.K. Conservative Party, the view hardly represents the desire of the median voter. Other than a potential trade deal with the U.S., it is practically inconceivable to expect the U.K. electorate to support a free trade agreement with China or India, both of which would likely entail an even greater loss of blue-collar jobs. Even a trade deal with the U.S. would likely face political opposition, given that the U.K. is highly unlikely to be given preferential treatment by an economy seven times its size.7 The fact of the matter is that the Conservative Party has wasted its window of opportunity to push a hard, or moderately hard (customs union), Brexit through Parliament. Bregret has set in, as the doyens of Brexit increasingly pursued an unpopular strategy. On the other hand, a Brexit that retains the U.K. membership in the Common Market has never had much logic to begin with. Where does this leave the U.K. in the long term? Given the time horizon and the uncertainty on multiple fronts, our low-conviction view is that it leaves the U.K. inside the European Union. Bottom Line: The combination of increasing Bregret, lack of economic logic behind a customs union membership alone, and the lack of a political logic behind a Common Market membership, suggests that Brexit is unsustainable over the secular time horizon. This imperils the ultimate deal between the U.K. and the EU, which we think will not be able to pass the House of Commons in two-to-three years when it comes up for approval. This is a low-conviction view, however, as political realities can change. Support for Brexit could turn due to exogenous factors, such as a global recession that renews the Euro Area economic imbroglio or a major geopolitical crisis. Both are quite likely over the secular time horizon. Investment Implications Today, cable is cheap, trading at an 18% discount to its long-term fair value as implied by purchasing-power parity models (Chart II-17). The growing probability that the U.K. may, down the road, remain in the European Union means that, at current levels the pound is indeed attractive, especially against the U.S. dollar. Chart II-17Cable Attractive On Higher Odds Of Bremain However, when it comes to short-term dynamics, the picture is much murkier. The low probability of a no-deal Brexit implies limited downside. However, the path to get the U.K. to abandon the current relatively hard Brexit is also one that involves a new election. This implies that before a resolution is reached, multiple scenarios are possible, including one where Corbyn becomes the next prime minister. Jeremy Corbyn could be the most left-of center leader of any G-10 nation since Francois Mitterrand in France in the early 1980s. Mitterrand’s audacious nationalization and left-leaning policies were met with a collapse in the French franc (Chart II-18). Chart II-18A Left-Wing Leader Bodes Ill For The Currency Global growth also has an impact on cable. Despite all the noise around Brexit, the reality remains that exports constitute 30% of U.K. GDP, a larger contribution to output than in the euro area. This means that if global growth deteriorates, GBP/USD will face another headwind. If, however, global growth improves, then cable would face a new tailwind. Since BCA is of the view that global growth will likely trough by the summer, we are inclined to be positive on the pound. Netting out all those factors, it makes sense for long-term investors to buy the GBP, using the dips along the way to build a larger position in this currency. Even on a six-to-twelve-month basis, the path of least resistance for cable is likely upward. The problem is that risk-adjusted returns are likely to be poor as volatility will remain very elevated. We therefore recommend that short-term investors instead buy the 2-year call while selling 3-month ones (Chart II-19). Chart II-19Volatility Will Be A Challenge For Short Term Investors Marko Papic Senior Vice President Chief Geopolitical Strategist Mathieu Savary Vice President The Bank Credit Analyst III. Indicators And Reference Charts Equities have had a volatile month of March, something that was bound to happen after the violent rally witnessed from the end of December to the end of February. When a rally is being tested, it always make sense to review our indicators to gauge whether or not a trend change is in the offing. Generally, our indicators remain broadly positive. Our Willingness-to-Pay (WTP) indicators for the U.S. and the euro area continue to improve. Meanwhile, it has begun to hook back up in Japan. The WTP indicators track flows, and thus provide information on what investors are actually doing, as opposed to sentiment indexes that track how investors are feeling. The current readings in major advanced economies thus suggest that investors are still inclined to add to their stock holdings. Our Revealed Preference Indicator (RPI) has however once again deteriorated, suggesting that the period of churn in global equities prices could last a bit longer. This indicator is essentially saying that in order to resume their ascent, stocks need a bit more time to digest their previous surge. The RPI combines the idea of market momentum with valuation and policy measures. It provides a powerful bullish signal if positive market momentum lines up with constructive signals from the policy and valuation measures. Conversely, if constructive market momentum is not supported by valuation and policy, investors should lean against the market trend. According to BCA’s Composite Valuation Indicator, an amalgamation of 11 measures, the U.S. stock market remains slightly overvalued from a long-term perspective. Nonetheless, despite this year’s rally, the S&P 500 offers a much more attractive risk/reward profile than it did in the fall. Moreover, our Monetary Indicator has shifted out of negative territory for stocks, and is now decisively in stimulative territory. The Fed’s dovish forward guidance last week only reinforces the message from this indicator. Our Composite Technical Indicator for stocks had broken down in December, but it is finally flashing a buy signal. This further confirms that the current period of churn is most likely to ultimately make way for a continued rally in the S&P 500. The 10-year Treasury yield remains within its neutral range according to our valuation model. Moreover, our technical indicator flags a similar picture. This means that without signs of improvements in global growth, price action alone will not be enough to lift bond yields higher. That being said, since BCA expects that over the next 24 months, the Fed will lift rates more than the OIS curve anticipates, and since the term premium is incredibly low, once green shoots for global growth become evident, bonds could suffer a violent selloff. The U.S. dollar is still very expensive on a PPP basis. Our Composite Technical Indicator is not as overbought as it once was, but it is far from having reached oversold levels either. This combination suggests that the greenback could experience further downside this year. However, for this downside to materialize, global growth will first have to stabilize. EQUITIES: Chart III-1U.S. Equity Indicators Chart III-2Willingness To Pay For Risk Chart III-3U.S. Equity Sentiment Indicators Chart III-4Revealed Preference Indicator Chart III-5U.S. Stock Market Valuation Chart III-6U.S. Earnings Chart III-7Global Stock Market And Earnings: Relative Performance Chart III-8Global Stock Market And Earnings: Relative Performance FIXED INCOME: Chart III-9U.S. Treasurys And Valuations Chart III-10Yield Curve Slopes Chart III-11Selected U.S. Bond Yields Chart III-1210-Year Treasury Yield Components Chart III-13U.S. Corporate Bonds And Health Monitor Chart III-14Global Bonds: Developed Markets Chart III-15Global Bonds: Emerging Markets CURRENCIES: Chart III-16U.S. Dollar And PPP Chart III-17U.S. Dollar And Indicator Chart III-18U.S. Dollar Fundamentals Chart III-19Japanese Yen Technicals Chart III-20Euro Technicals Chart III-21Euro/Yen Technicals Chart III-22Euro/Pound Technicals COMMODITIES: Chart III-23Broad Commodity Indicators Chart III-24Commodity Prices Chart III-25Commodity Prices Chart III-26Commodity Sentiment Chart III-27Speculative Positioning ECONOMY: Chart III-28U.S. And Global Macro Backdrop Chart III-29U.S. Macro Snapshot Chart III-30U.S. Growth Outlook Chart III-31U.S. Cyclical Spending Chart III-32U.S. Labor Market Chart III-33U.S. Consumption Chart III-34U.S. Housing Chart III-35U.S. Debt And Deleveraging Chart III-36U.S. Financial Conditions Chart III-37Global Economic Snapshot: Europe Chart III-38Global Economic Snapshot: China   Mathieu Savary Vice President The Bank Credit Analyst Footnotes 1       At the time of publication of our March report, we still had a low-conviction view that the vote would swing towards Stay at the last moment. 2       Please see BCA Research European Investment Strategy Weekly Report, “Important Message From The Currency Markets,” dated March 14, 2019, available at eis.bcaresearch.com. 3       Trying to play up the threat of unchecked migration, the U.K. Independence Party ran a famous campaign poster showing hundreds of refugees on a road under the title of “Breaking Point – The EU has failed us all.” Despite the fact that the U.K. accepted only around 10,000 Syrian refugees since the 2015 crisis. Germany has accepted over 700,000 while Canada – which is located across the Atlantic Ocean on a different continent – accepted over 40,000. Even the impoverished Serbia has accepted more Syrian refugees than the U.K. 4       One of the most prominent Leave supporters, Boris Johnson, famously quipped after the referendum result that “There will continue to be free trade and access to the single market.” 5       Please see The European Court of Justice, “Judgement Of The Court,” In Case C-621/18, dated December 10, 2018, available at curia.europa.eu. 6       Proponents of the Norway Plus option point out that Article 112(1) of the European Economic Area (EEA) Agreement allows for restriction of movement of people within the area. However, these restrictions are intended to be used in times of “serious economic, societal or environmental difficulties.” It certainly appears to be an option for London to restrict EU migration, but it is not clear whether Europe would agree for this to be a permanent solution. Liechtenstein has been using Article 112 to impose quantitative limitations on immigration for decades, but that is because its tiny geographical area is recognized as a “specific situation” that justifies such restrictions. 7       President Donald Trump may want to give the U.K. preferential trade terms on the basis of the filial Anglo-Saxon relationship alone, but it is highly unlikely that the increasingly protectionist Congress would do the same. There is also no guarantee that President Trump will be around to bring such trade negotiations across the finish line. EQUITIES:FIXED INCOME:CURRENCIES:COMMODITIES:ECONOMY:

Highlights Duration: None of the economic indicators that have reliably signaled peak interest rates in prior cycles are sending a signal at the moment. This leads to the inevitable conclusion that further Fed rate hikes are likely at some point before the end of the cycle. With the Fed now projecting an essentially flat path for interest rates, the next surprise from the Federal Reserve will probably be a hawkish one. Fed: The Fed is currently waging a war on two fronts. It wants to keep interest rates low enough to send inflation expectations higher, back to levels consistent with its 2% target. But it also wants to avoid excessively easy financial conditions that could threaten the sustainability of the economic recovery. We expect that easier financial conditions will cause the Fed to shift back toward a tightening bias near the end of this year. Yield Curve: Inversion of the 3-month/10-year Treasury slope is cause for concern, if it persists. But we expect it to reverse in the coming months as global growth recovers and the Fed remains accommodative. Eventually, after financial conditions have eased sufficiently, the Fed’s next move will be a hawkish surprise. Investors can profit from this move by entering positive carry yield curve trades: short the 5-year or 7-year bullet and go long a duration-matched barbell. Feature The Last Dovish Surprise Or The Beginning Of The End? Treasury yields moved sharply lower following last week’s Fed meeting, as FOMC participants made larger-than-anticipated downward revisions to their interest rate projections. As of last December, 11 out of 17 Fed members expected to lift rates at least twice in 2019. Now, 11 out of 17 expect to keep rates flat (Chart 1). Chart 1Fed Sees No Hikes This Year Judging from the bond market’s reaction, the Fed clearly managed to deliver a dovish surprise at last week’s meeting. Now, the relevant question for investors becomes whether that dovish surprise can be repeated. With the Fed signaling an essentially flat path for interest rates, a dovish surprise from these levels would involve the suggestion of rate cuts. History tells us that rate cuts are only likely to occur if the economy is headed into recession, an event that still seems relatively far off. As such, we expect that the next surprise from the Fed will be a hawkish one, and that the next large move in Treasury yields will be higher. Our conviction that the economy is not yet close to recession comes from our analysis of economic markers that have reliably signaled peak interest rates in past cycles.1 For example, one such marker is when year-over-year nominal GDP growth falls below the 10-year Treasury yield (Chart 2). At present, year-over-year nominal GDP growth is running at 5.3%. That growth rate is bound to slow during the next few quarters, but it would need to slow a lot before it falls below the current 10-year Treasury yield of 2.40%. Chart 2GDP Growth Suggests That Monetary Policy Remains Accommodative The New York Fed’s GDP Nowcast projects that real GDP growth will be 1.29% in the first quarter. Incorporating 2% inflation, that is roughly 3.3% in nominal terms. If Q1 turns out to be the trough in growth for the year, it suggests that interest rates still have considerable room to rise before the economic recovery ends. Second, we have observed that peak interest rates tend to coincide with material declines in the 12-month moving averages of single-family housing starts and new home sales. While the housing data weakened somewhat in 2018, the data have rebounded sharply since mortgage rates fell near the end of last year. Housing starts have already jumped back above their 12-month moving average, as has the weekly Mortgage Application Purchase index (Chart 3). Chart 3Housing & Employment Support Higher Rates Finally, we have noted that peak interest rates tend to coincide with an uptrend in initial jobless claims. Much like with housing, the initial claims data sent a warning near the end of last year. But that tentative increase in claims has already reversed course (Chart 3, bottom panel). None of those historically reliable indicators suggest that we have reached peak interest rates for the cycle.  We will continue to keep a close eye on nominal GDP growth, the housing data and initial jobless claims. But all in all, none of those historically reliable indicators suggest that we have reached peak interest rates for the cycle. This leads to the inevitable conclusion that further Fed rate hikes are likely at some point and that the next surprise from the Federal Reserve will probably be a hawkish one. Given this skewed risk/reward trade-off, we recommend that investors maintain below-benchmark duration in U.S. bond portfolios on the view that the next large move in Treasury yields will be higher. The difficult part is timing when that move will occur. In the remainder of this report we provide some thoughts on how to think about that timing, and also some trade ideas that should be profitable in the meantime. The New Battleground: Inflation Expectations Vs. Financial Conditions Recent remarks from Fed Chairman Jerome Powell and other FOMC participants have made it clear that an important rationale for the Fed’s pause is a desire to re-anchor inflation expectations at a level closer to the Fed’s target. For example, here is Chairman Powell from last week’s press conference: So, if inflation expectations are below two percent, they’re always going to be pulling inflation down, and we’re going to be paddling upstream and trying to, you know, keep inflation at two percent … And here is what the Chairman said about inflation expectations in his recent congressional testimony: In our thinking, inflation expectations are now the most important driver of actual inflation. With that in mind, consider that long-maturity TIPS breakeven inflation rates have been below “well anchored” levels for pretty much the entire post-crisis period, as have long-term inflation expectations from the University of Michigan Consumer survey (Chart 4). Chart 4The Fed Wants Higher Inflation Expectations The Fed has clearly made the re-anchoring of inflation expectations a priority, meaning that we should monitor TIPS breakeven inflation rates and survey measures of inflation expectations to assess when rate hikes might re-start. However, we don’t think that higher inflation expectations are absolutely necessary before the Fed resumes hiking. Consider what Fed officials were saying as recently as December: Governor Lael Brainard on December 7, 2018:2 The last several times resource utilization approached levels similar to today, signs of overheating showed up in financial-sector imbalances rather than in accelerating inflation. Chairman Powell on June 20, 2018:3 Indeed, the fact that the two most recent U.S. recessions stemmed principally from financial imbalances, not high inflation, highlights the importance of closely monitoring financial conditions.   In other words, until recently the Fed seemed more concerned with financial conditions than with inflation expectations. What changed? Quite simply, financial markets sold off and financial conditions no longer appear excessively easy (Chart 5). Chart 5The Fed Doesn’t Want An Asset Bubble The Financial Conditions component of our Fed Monitor remains “easier” than its historical average, but shows that conditions have tightened significantly since last October (Chart 5, top panel). Junk spreads have widened since last October (Chart 5, panel 2), as has the excess corporate bond risk premium after accounting for expected default risk (Chart 5, panel 3). 4 The S&P 500’s 12-month forward Price/Earnings ratio is down to 16.5, from 17 last October and a 2018 peak of 18.8 (Chart 5, bottom panel). If financial markets rally during the next few months, then it is quite possible that financial conditions will once again force the Fed’s hand. In essence, financial asset valuations appear somewhat reasonable and are not an immediate cause for concern. This means that the Fed can turn its attention toward trying to drive inflation expectations higher. However, if financial markets rally during the next few months, then it is quite possible that financial conditions will once again force the Fed’s hand. The Outlook For Financial Conditions & Global Growth The Fed’s dovish policy shift should support a rally in risk assets in the coming months, though such a rally may also require evidence of improvement in global growth. Right now that evidence is scant. March Flash PMIs for the U.S. and Eurozone both fell last week, while Japan’s stayed flat below the 50 boom/bust line. This means that the Global Manufacturing PMI’s downtrend will almost certainly continue when the final March data are released next week (Chart 6). Chart 6Global Growth Is Weak ... However, while the coincident PMI data continue to soften, we have recently noticed some green shoots in leading global growth indicators (Chart 7). Chart 7... But Leading Indicators Are Improving First, our Global Leading Economic Indicator (LEI) Diffusion Index has moved above 50%, meaning that a majority of countries are seeing improvement in their LEIs for the first time since early 2018 (Chart 7, top panel). Second, our China Investment Strategy service’s Li Keqiang Leading Indicator – a composite of six indicators of Chinese money and credit growth – has stabilized. While a 2016-style surge in credit growth is unlikely, even a stabilization in this leading indicator will help prop up global growth in 2019 (Chart 7, panel 2). We do not think that 3-month/10-year curve inversion will last very long.  Finally, the CRB Raw Industrials index has rebounded smartly during the past few weeks, and is now threatening to break above its 200-day moving average (Chart 7, bottom panel). Investment Implications The Fed is currently waging a war on two fronts. It wants to keep interest rates low enough to send inflation expectations higher, back to levels consistent with its 2% target. But it also wants to avoid excessively easy financial conditions that could threaten the sustainability of the economic recovery. Asset prices are not extended at the moment, so the Fed can maintain an accommodative policy focused on driving inflation expectations higher. However, at some point the combination of accommodative policy and improving global growth will cause the Fed’s attention to turn back toward financial conditions. That will put rate hikes back on the table and send Treasury yields higher. Timing when that shift will occur is difficult, which is why we recommend that investors enter positive carry yield curve trades to boost returns while we await a hawkish surprise from the Fed later this year (see next section). What The Yield Curve Is Telling Us The Fed’s dovish surprise sent Treasury yields lower last week and also led to significant changes in the shape of the yield curve. In particular, investors have focused on the fact that the 10-year yield is now below the 3-month T-bill rate. That focus is not surprising, given that curve inversion has been a reliable leading indicator of recession in past cycles. We use the 2-year/10-year and 3-year/10-year slopes in our research into the phases of the cycle (Chart 8), and while both of those slopes remain positive – consistent with a “Phase 2” environment – we will keep a close eye on the 3-month/10-year slope in the coming weeks.5 Historically, inversion of the different curve segments has occurred at around the same time. Chart 8Still In Phase 2 Given that the Fed has already signaled a much more dovish policy stance and that global growth is likely to improve later this year, we do not think that 3-month/10-year curve inversion will last very long. However, if we are wrong and the 2-year/10-year and 3-year/10-year slopes are eventually pulled down into negative territory, then we may have to re-visit some of our asset allocation positions. But for now, we find the 5-year and 7-year maturities to be the most interesting points on the yield curve (Chart 9). In fact, the 5-year and 7-year yields are so low that investors can earn more yield by entering duration-matched barbells consisting of the long and short ends of the curve. For example, the 5-year Treasury note offers a lower yield than a duration-matched barbell consisting of the 2-year and 10-year notes. Similarly, the 7-year note offers less yield than a duration-matched barbell consisting of the 2-year note and 30-year bond (Chart 10). Chart 10Barbells Are Positive Carry Further, we have also observed that the 5-year and 7-year yields are most sensitive to changes in 12-month rate hike expectations. Chart 11 shows that when our 12-month discounter rises, the yield curve tends to steepen out to the 7-year maturity, and flatten thereafter. This means that the 5-year and 7-year yields have the most upside when rate hikes are eventually priced back into the curve. Chart 11Yield Curve Correlations Taken together, positive carry in the barbells and the sensitivity of 5-year and 7-year yields to 12-month rate expectations mean that investors should enter short positions in the 5-year or 7-year notes today, offset by long positions in duration-matched barbells (eg. the 2/10 or 2/30). These trades will earn significant capital gains when the Fed ultimately delivers a hawkish surprise, sending the 5-year and 7-year yields higher, and will also earn positive carry in the meantime, while we wait for financial conditions to ease enough to shift the Fed’s reaction function. We have also observed that the 5-year and 7-year yields are most sensitive to changes in 12-month rate hike expectations. These long barbell / short 5-year or 7-year bullet positions will only lose money if the market prices-in further rate cuts going forward. With the market already priced for 32 bps of cuts during the next 12 months, a further decline would be consistent with economic recession. This remains the least likely scenario. Bottom Line: Inversion of the 3-month/10-year Treasury slope is cause for concern, if it persists. But we expect it to reverse in the coming months as global growth recovers and the Fed remains accommodative. Eventually, after financial conditions have eased sufficiently, the Fed’s next move will be a hawkish surprise. Investors can profit from this move by entering positive carry yield curve trades: short the 5-year or 7-year bullet and go long a duration-matched barbell.   Ryan Swift,  U.S. Bond Strategist rswift@bcaresearch.com Footnotes 1 Please see U.S. Bond Strategy Weekly Report, “Running Room,” dated January 29, 2019, available at usbs.bcaresearch.com 2 https://www.federalreserve.gov/newsevents/speech/brainard20181207a.htm 3  https://www.federalreserve.gov/newsevents/speech/powell20180620a.htm 4 The Gilchrist and Zakrajsek (GZ) Excess Bond Premium is a measure of the excess spread available in a sample of nonfinancial corporate bonds, after removing a bottom-up estimate of expected default losses for each security. Default losses are estimated based on the Merton Default model, using each firm’s market value of equity and face value of debt. https://www.federalreserve.gov/econresdata/notes/feds-notes/2016/files/… 5 Our research into the different phases of the cycle based on the slope of the yield curve can be found in U.S. Bond Strategy Special Report, “2019 Key Views: Implications For U.S. Fixed Income,” dated December 18, 2018, available at usbs.bcaresearch.com Fixed Income Sector Performance Recommended Portfolio Specification

Highlights Dovish Central Banks: Central bankers have successfully talked down bond yields, in an effort to prevent an even deeper pullback in global growth. Government bonds now look overvalued relative to likely outcomes on growth and inflation over the next year. A moderate below-benchmark medium-term duration exposure is warranted on a risk/reward basis, as the next large yield move from current levels is more likely up than down. U.S. Treasuries: The Fed is now signaling no more rate hikes for the rest of 2019, but this newly dovish language merely brings their own interest rate forecasts closer to current market pricing. Lower bond yields and easier financial conditions will help underwrite a recovery in U.S. growth, just as a stabilization of the global economy is starting to materialize. The current downturn in Treasury yields, which is looking technically stretched, should soon begin to bottom out. Feature Another Panic Hits Global Bond Markets The message from central banks to the financial markets is now very loud and clear – global monetary policy is firmly on hold for at least the rest of 2019. Fears over slowing global growth, persistent geopolitical uncertainty and underwhelming inflation have put policymakers on a more cautious footing. The messaging from central banks has become highly synchronized, with even the same buzz words (“patience”, “uncertainty”, “data dependent”) being bandied about in speeches and policy statements. Bond yields have responded to the dovish forward guidance in recent weeks from the Fed, the European Central Bank, the Bank of England, the Bank of Japan and others. Our “Major Countries” measure of 10-year government bond yields in the largest developed economies has fallen to 1.3%, the lowest level since May 2017. The 10-year U.S. Treasury yield now sits at 2.40%, below the fed funds rate and triggering investor angst over the traditionally negative economic message of an inverted yield curve. Global equity markets, however, seem less concerned. The MSCI World Equity Index is only 5% from the 2018 highs after rallying 16% so far from the late 2018 low. This gap between robust equity prices and depressed bond yields is unusual, but not unprecedented. Similar divergences have occurred as recently as 2016 and 2017 (Chart of the Week). During those episodes, central banks responded to uncertainty (the July 2016 Brexit vote followed by currency volatility in China) or sluggish inflation readings (the unexpected 2017 dip in U.S. core inflation) by shifting to an easier monetary stance. This was largely done through delayed interest rate hikes or more dovish forward guidance, with the result being lower bond yields, diminished market volatility and easier financial conditions. Better global growth and more stable inflation expectations soon followed. Chart of the WeekWill Bonds Lose This Battle Once Again? With tentative signs emerging that global growth momentum is bottoming out, the next major move in global bond yields is likely up. Those prior gaps between low bond yields and high stock prices were eventually resolved through higher yields – an outcome that we think will be repeated in the current episode. Already, bond markets have aggressively repriced expectations of future monetary policy with even some rate cuts now discounted in the U.S., Canada and Australia. With tentative signs emerging that global growth momentum will soon bottom out and recover in the latter half of 2019 (Chart 2), the next major move in global bond yields is likely up, not down. Chart 2Global Bond Yields Are Too Pessimistically Priced The decline in yields over the past few months has obviously challenged our recommended strategic below-benchmark global duration stance. The two primary factors that drive our medium-term duration calls on any country can be summed up by the following questions: Do we expect greater or fewer rate hikes than are discounted in money market curves? Do we expect bond yields to rise above or below the current pricing in forward yield curves? In aggregate, we do not expect the major central banks to deliver more monetary easing than is currently priced according to our 12-month discounters, although we think that is most likely in the U.S. where the market is pricing in -21bps of cuts over the next year. Also, the 12-month-ahead forwards for 10-year bond yields in the U.S. (2.51%), Canada (1.69%), Germany (0.13%), Japan (0.02%), U.K. (1.16%) and Australia (1.82%) are not particularly high. Although, once again, we have the greatest confidence that those yield levels will be surpassed in the U.S. The timetable to generate a positive payoff by positioning for higher yields has been stretched out by the renewed dovishness of central banks. By switching their focus from tight labor markets and accelerating wage growth to slowing economies and softening inflation expectations, policymakers are creating a backdrop of lower volatility and more market-friendly stock/bond correlations (Chart 3). Chart 3Stock/Bond Yield Correlation Negative Once Again The goal is to underwrite additional rallies in risk assets to ease financial conditions and stimulate economic activity. This will eventually sow the seeds for a return to a more hawkish bias, but the timing of that switch is uncertain and will most likely coincide with some evidence of faster Chinese economic growth and an end to the downturn in global trade activity – an outcome that is unlikely to occur until the latter half of 2019. Bottom Line: Central bankers have successfully talked down bond yields, in an effort to prevent an even deeper pullback in global growth. Government bonds now look overvalued relative to likely outcomes on growth and inflation over the next year. A moderate below-benchmark medium-term duration exposure is warranted on a risk/reward basis, as the next large yield move from current levels is more likely up than down. The Fed’s more dovish forward guidance only brought the Fed’s rate forecasts down closer to current market pricing. U.S. Treasury Yields Should Soon Bottom Out U.S. Treasury yields moved sharply lower following last week’s Fed meeting, as the FOMC delivered a dovish surprise with its new set of interest rate projections. As of last December, 11 out of 17 Fed members expected to lift rates at least twice in 2019. Now, 11 out of 17 expect to keep rates flat. This was enough to lower the median “dot” by 50bps for 2019, essentially forecasting an unchanged funds rate this year with only one hike expected in 2020. While these are significant dovish changes to the Fed’s forward guidance, it only brought the Fed’s forecasts down to current market pricing on interest rate expectations (Chart 4). Yet bond yields fell sharply in response, tipping the Treasury curve into inversion. The cautious language from Fed Chairman Powell in the post-meeting press conference, which included a reference to Japan-style deflation risks as a threat if the Fed ignored the message from below-target U.S. inflation expectations, likely helped fuel the bullishness of Treasury market participants. Chart 4Fed Is Just Catching Up To Market Pricing It seems clear that the arguments of the more dovish members of the FOMC (John Williams, Richard Clarida, James Bullard, Neil Kashkari) have won over the more pragmatic members of the committee, including Jay Powell. Yet our own Fed Monitor is still not suggesting that rate cuts are necessary (Chart 5), although the growth component of the Monitor is tracking the last downturn seen in 2014/15. More importantly, the inflation elements of the Monitor are not pointing to a need for easier policy, while financial conditions are still in the “tighter money required” zone. Chart 5Markets Pricing In Fed Easing That Is Not Required The Fed is likely to ignore the risks to financial stability stemming from the new dovish slant to its monetary policy, as financial conditions have not yet fully unwound the tightening seen in the risk asset selloff in late 2018. Does that mean that the Fed wants to see U.S. equities hit new highs and U.S. corporate credit spreads return to previous lows? If that means a deeper U.S. economic slowdown can be avoided, the answer is most likely “yes”. They can always return to targeting overvalued asset markets if and when the U.S. and global economy is on more stable footing. In terms of the U.S. economic outlook, we think the current concerns over the recession risks stemming from an inverted Treasury curve are overstated. In a Special Report we published last July, we looked at the relationship between monetary policy, yield curves and economic growth and came to the following conclusions:1 Curve inversion, on a sustained basis, occurs when the Fed lifts the real (inflation-adjusted) funds rate above the neutral rate of interest, “r-star” (Chart 6); Chart 6Too Soon For Sustained U.S. Treasury Curve Inversion Once the Treasury yield curve does invert on a sustained basis, a recession starts seventeen months later, on average; Curve inversion, on a sustained basis, occurs when the Fed lifts the real funds rate above the neutral rate of interest, “r-star” At the moment, the Fed has paused its rate hiking cycle with a real funds rate that is just shy of the Williams-Laubach estimate of r-star, which is 0.5%. Considering that the “Williams” in “Williams-Laubach” is the current president of the New York Fed and Number Two on the FOMC, we should not be surprised that the Fed chose to pause now! The more important point is that it seems too early to look for a classic late-cycle Treasury curve inversion with the Fed on hold – unless, of course, U.S. inflation falls and pushes the real fed funds rate above r-star. That would require a much sharper slowing of U.S. growth to a below-potential pace that is not indicated by current data. Reliable cyclical indicators like the ISM Manufacturing index have fallen from the heady 2018 peaks, but remain at levels consistent at least trend U.S. economic growth (Chart 7). Additionally, the Conference Board’s leading economic indicator, as well as our own models for U.S. employment and capital spending growth, are suggesting that only some cooling of U.S. growth should be expected in the next few quarters (Chart 8), but not to a below-potential pace (i.e. significantly less than 2%). Chart 7UST Yields Should Soon Stabilize Chart 8A Big U.S. Slowdown In 2019 Is Unlikely So how much lower can Treasury yields go in this current rally? Looking at the individual valuation components of yields, the answer is “not much”. The real component of Treasury yields has already fallen sharply since the 2018 peak, and is now approaching 2017 resistance levels. At the same time, 10-year inflation expectations are drifting higher and are now around 25bps below the highs seen in 2018 (Chart 9). At best, we can see real yields and inflation expectations fully offsetting each other and keeping yields unchanged. The more likely outcome, however, is that inflation expectations continue to move higher while real yields stabilize as the U.S. economy moves away from the Q1 growth slowdown, meaning that we are close to the floor in yields now. Chart 9Inflation Expectations Will Lead UST Yields Higher How much lower can Treasury yields go in this current rally? Looking at the individual valuation components of yields, the answer is “not much”. The current downturn in Treasury yields is already looking stretched from a technical perspective (Chart 10). The 26-week total return of the Bloomberg Barclays U.S. Treasury index is now approaching the highs seen during all previous Treasury rallies since the Fed ended its QE program in 2014. The same signal comes from the size of the deviation of the 10-year Treasury yield below its 200-day moving average. Duration positioning is quite long, as well, according to the J.P. Morgan client survey. Chart 10UST Rally Looking Stretched In The Near-Term Not all the technical indicators are as stretched, as the Market Vane Treasury sentiment survey remains depressed and net speculative positioning on 10-year Treasury futures is only neutral (after a very large short position was covered). On balance, however, the indicators suggest that the current Treasury rally is looking over-extended. One other factor to consider is global growth. Much of the current decline in Treasury yields is a result of the prolonged weakness in non-U.S. growth that has pulled down all global bond yields. Yet according to the latest readings from cyclical indicators like the ZEW survey, expectations of future economic growth are now bottoming out, even as current growth continues to slow (Chart 11). This bodes well for a potential bottoming of global growth momentum that could put a floor underneath bond yields. Chart 11Early Signs Of Growth Stabilization? One final note – any signs of stabilization of European growth could also help global bond yields find a floor. Not only are the ZEW surveys in Europe starting to bottom out, the widely-followed German IFO survey is also starting to show modest improvement. If these trends continue, that would help end the drag on global yields from weakening European growth which has pulled German Bunds back to the 0% level (Chart 12). Chart 12Bunds & JGBs Have Been A Drag On Global Yields Any signs of stabilization in European growth could also help global bond yields find a floor. Bottom Line: The Fed is now signaling no more rate hikes for the rest of 2019, but this newly dovish language merely brings their own interest rate forecasts closer to current market pricing. Lower bond yields and easier financial conditions will help underwrite a recovery in U.S. growth, just as a stabilization of the global economy is starting to materialize. The current downturn in Treasury yields, which is looking technically stretched, should soon begin to bottom out. Robert Robis, CFA, Chief Fixed Income Strategist rrobis@bcaresearch.com Footnotes 1 Please see BCA Global Fixed Income Strategy/U.S. Bond Strategy Special Report, “Three Frequently Asked Questions About Global Yield Curves”, dated July 31st, 2018, available at gfis.bcaresearch.com and usbs.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