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Highlights The euro is in a cyclical bull market. It is supported by attractive valuations, improving balance of payments dynamics, declining political risk, potential shifts in reserves preferences, and a re-rating of the European terminal rate. This positive cyclical backdrop hides a more treacherous short-term outlook. EUR/USD is vulnerable because ECB members are increasingly worried, the European periphery is displaying early strains, European inflation will slow versus the U.S., global industrial activity may experience a mini down cycle, and sentiment measures are massively stretched. Short EUR/JPY for now, and use any move in EUR/USD to 1.15 or lower to buy this pair. Feature The euro has undergone a major paradigm shift over the course of the past 16 months. In December 2016, the euro was trading near parity, and expectations were uniform that it would fall well below that threshold. The narrative was simple: Europe was turning Japanese, with inflation forever moribund; also, Europe was succumbing to the siren call of nationalism and populism, which meant the euro was bound to break up within the next five years. Meanwhile, the U.S. was on the rebound. Core consumer price inflation was above 2.2%, and U.S. President Donald Trump was set to massively stimulate the American economy, giving a free hand for the Federal Reserve to hike to its heart's content. Today, the picture could not be more different. Investors expect the European Central Bank's first hike to materialize in the summer of 2019, European growth is stellar, and European inflation is not low enough to warrant emergency-level policy rates. As a result, not only is EUR/USD trading above 1.20, but consensus forecasts increasingly see the euro trading into the 1.25 to 1.30 zone by year end. Is EUR/USD at 1.22 a buying or a selling opportunity? Short-term risks are currently elevated for the euro, but a move toward 1.15 would represent a buying opportunity, as the cyclical bear market in the euro is over. The Long-Term Bull Case A crucial long-term positive factor for the euro is that it is cheap. EUR/USD currently trades at a 10% discount to its purchasing-power-parity equilibrium, even after a nearly 17% rally since its December 2016 low. Encapsulating this concept, the real effective exchange rate for the euro remains well below equilibrium (Chart I-1). Additionally, our fundamental long-term fair value model pegs the euro as being almost 1-sigma undervalued. The euro area's balance of payment is also very favorable. It is well known among the investment community that the euro area sports a surplus of 3.5% of GDP, but significant changes are also materializing in the capital account. Portfolios outflows out of the euro area have begun to decrease, as equity inflows are rising and bond outflows are becoming smaller. Moreover, the euro area basic balance is moving into positive territory, which historically has been a precursor to sustainable euro rallies (Chart I-2). The supply of euro for international markets is therefore decreasing. Additionally, the euro area's net international investment position (NIIP), which was as low as -17% of GDP in 2014, will likely move into positive territory toward the end of the year. The NIIP has historically been a strong driver of long-term exchange rate moves.1 Chart I-1The Euro Is Still Cheap Chart I-2The European Balance Of Payments Has Improved Politics too have been moving in the right direction. Euro skepticism is not taking hold in the euro area: Last year's French election was a vivid demonstration that "more Europe" is not electoral poison. Even the Italian elections this coming March may not land much of a blow to the European project: The Five Star Movement is rapidly softening its anti-euro rhetoric, and support for centrist parties is strengthening (Chart I-3). Moreover, a German move toward a grand coalition means Angela Merkel's CDU is very likely to be governing along with a pro-euro SPD, whose campaign theme was "MEGA": Make Europe Great Again. Already, Germany is lending a listening ear to some of Macron's integrationist proposals, and fiscal stimulus could well be in the pipeline. Long-term reserves diversification is also in the euro's favor. A headline last week suggested that China would unload some of its vast holdings of Treasurys. This leak was soon condemned as "Fake News" by China's State Administration of Foreign Exchange. However, while the news clearly lacked substance, the reality remains that despite the euro area and the U.S. being similarly sized economies, the euro only represents 20% of allocated global reserves, compared to 65% for the greenback. The greater depth and liquidity of U.S. bond markets contributes to this discrepancy, but the ECB's bond buying, by creating a scarcity of euro denominated securities, has exacerbated the disparity. This latter handicap for the euro will end sometime next fall, and if Europe's integrates further, European bond markets will increasingly become alternatives to U.S. ones. A rebalancing of reserves would principally help the euro by hurting the U.S. dollar: It will become more tenuous for the U.S. to achieve a positive international income balance while sporting a NIIP of -40% of GDP if official international demand for dollars falls (Chart I-4). Chart I-3Italian Centrists Are Gaining Ground Chart I-4The USD Needs Its Reserve Status Finally, the terminal rates differential between the U.S. and the euro area remains well above its long-term average of 110 basis points. Thus, there is scope for a normalization of European terminal rates relative to the U.S. on a long-term basis (Chart I-5). However, an average is only a number. What forces could cause the terminal rate spread between the euro area and the U.S. to normalize over the coming years? European policy is currently very loose when compared to the U.S., which will enable the ECB to play catchup over the coming years. To make this judgment, we look at broad money supply in excess of money demand. Because money demand is an unobserved variable, we have to estimate it. Economic theory argues it should be a positive function of economic activity, wealth and uncertainty. Therefore, to get a sense of what money demand may be, we regress the real broad money aggregates of various countries on uncertainty indices and real wealth.2 The difference between real broad money supply numbers and these estimates represent excess money supply. If a country's excess money is being generated today, it ends up stimulating future economic activity and inflation. This increase in expected nominal growth should contribute to lifting expected interest rates at the long end of the yield curve - i.e. expected terminal rates. As Chart I-6 shows, the stock of excess money supply in the U.S. has stopped growing since 2015. However, it is currently exploding in the euro area as European commercial banks are regaining their health and lending again. The money supply dynamics in Europe signal that the easy policy of the ECB is finally bearing fruit. And as the bottom panel of Chart I-6 illustrates, when European excess money supply increases relative to the U.S., as is currently the case, EUR/USD experiences cyclical rallies.3 This counterinituitive result exists because previous ECB easing is bearing fruits, European asset returns are rising, and economic activity is increasing. As a result, the European terminal rate now has more scope to rise vis-à-vis the U.S. The steepening of the German yield curve relative to the Treasury curve only confirms this message (Chart I-7). Chart I-5The U.S. Terminal Rate Has Room To Fall##br## Against That Of Europe Chart I-6European Excess##br## Money Is Surging Chart I-7Listen To Yield ##br##Curves The five forces described above imply that the euro's move from 1.03 to 1.21 was the first salvo in what is likely to be a long cyclical bull market that could end up driving the euro above 1.40 over many years. However, these factors provide little insight regarding the euro's path over the next three to six months. Bottom Line: The euro is likely to have embarked on a cyclical bull market at the beginning of 2017. Five factors support this judgment: The euro is cheap, the European balance-of-payment backdrop is favorable, political winds in the euro area remain favorable to further European integration, global foreign exchange reserves are very underweight the euro, and the spread between U.S. and euro area expected terminal rates remains well above its long-term average, and has scope to narrow. Murkier Short-Term Outlook While the long-term outlook is very favorable for the euro, the shorter-term outlook is much more clouded. First, the chorus of complaints against the euro's strength is growing among European central bankers. In recent days, not only have Vitor Constâncio and Francois Villeroy voiced concerns over the euro's recent strength, but so has Ewald Nowotny, the rather hawkish Austrian central banker. Additionally, Bundesbank President Jens Weidmann stated that the market should not anticipate a rate hike before the summer of 2019, suggesting he would not want to see a more aggressive rate pricing than what is currently at play (Chart I-8). Second, the less competitive and more fragile European periphery is already showing early signs that the sharp appreciation in the euro is causing some pain. Peripheral equities have begun to underperform the stocks of core euro area nations, and are also sharply underperforming U.S. equities. This phenomenon tends to be associated with a weakening euro. Moreover, peripheral inflation excluding food and energy has already weakened to 1.3% from a high of 2% in February last year, the consequence of a tightening in financial conditions (Chart I-9). Chart I-8ECB Doesn't Want This To Change Chart I-9Peripheral Core Inflation In Free Fall Third, the economic environment points to underperformance of aggregate European inflation relative to the U.S. A fall in the gap between euro area and U.S. inflation tends to be associated with short-term gyrations in EUR/USD (Chart I-10). This is because a fall in relative inflation against the euro area causes investors to temporarily tweak the perceived path of future policy differentials. Over the course of 2018, U.S. inflation is set to increase. A simple model based on U.S. capacity utilization and the velocity of money shows that U.S. core CPI could hit 2.1% (Chart I-11). While this model has done a good job picking the turning points in U.S. core inflation, it has consistently overestimated inflation since 2013. Correcting for this bias, the model still forecasts a significant pick-up in inflation to 1.8% (Chart I-11, bottom panel). Chart I-10Higher European Inflation Equals Higher Euro Chart I-11A U.S. Inflation Pick Up Is Coming The same cannot be said for euro area inflation. Not only is the European periphery already feeling the pain caused by the euro's strength, but also we have entered the window of time where the previous tightening in euro area financial conditions vis-à-vis the U.S. puts a brake on euro area relative inflation.4 Moreover, the diffusion index of the components of the euro area core CPI index has been below 50% for four months in a row now. Historically, this has been associated with a fall in core CPI. Fourth, over the past year or so, EUR/USD has traded in line with risk assets. The euro area has benefited from EM growth improvement, which has lifted all corners of the global economy levered to the global industrial cycle. As a result, as investors become increasingly bullish on industrial metals, EM assets or momentum plays, so they have of the euro.5 However, clouds are slowly forming over the global economy, at the very least pointing to a mini-cycle downturn. For one, Chinese producer prices have rolled over, and Chinese import growth has significantly underperformed expectations in recent months, slowing to a 5% pace from a 20% pace as recently as September 2017. Essentially, industrial activity has slowed in response to a tightening in Chinese monetary conditions. This slowdown is already beginning to impact various corners of the globe: Korean and Taiwanese export growth continues to decelerate; BCA's Global LEIs Diffusion Index is well below the 50% mark, which normally precedes slowdowns in the global LEI itself; Our boom/bust and global growth indicators have slowed further - two precursors to global industrial production decelerations. Our global economic and financial A/D line, which tallies 100 pro-cyclical variables, has also rolled over sharply, another early warning sign for the global economy (Chart I-12). Finally, as we highlighted in December, EM/JPY carry trades, a canary for the global economy, have lost momentum - a signal that has normally preceded a slowdown in global industrial activity.6 All these signals only confirm the "Yellow Flags" we highlighted last October.7 In an environment where complacency is rampant and assets levered to growth are priced for perfection, this is worrisome. The euro's recent elevated correlation to such risk assets, along with the fact that the gap between European and U.S. core inflation is itself led by Chinese PPI, suggests that the euro is tactically vulnerable. Fifth, from a technical perspective speculators have never been this long the euro, which represents a significant danger as the euro is trading at a sharp premium to its short-term interest rate driver (Chart I-13). Moreover, risk-reversals for EUR/USD point to heightened susceptibility of a selloff if the bad omen on global growth and European inflation come to fruition (Chart I-14). Chart I-12Rising Risks For Global Growth Chart I-13The Euro Is Vulnerable Chart I-14Risk Reversals Point To Euro Downside This short-term picture suggests that the probability of a move in EUR/USD toward 1.15 is growing over the course of the next three to six months. Bottom Line: While the cyclical picture for the euro is bright, the short-term snapshot is much more dangerous. Not only are an increasing number of ECB officials weighing in on the impact of the euro's recent rally, but the European periphery is showing growing signs that the euro rally has indeed taken a bite. Additionally, European inflation is set to underperform U.S. inflation, and the global economic cycle could enter a short burst of disappointment. Finally, investors are not positioned for such developments, increasing the likelihood of a downward move in the euro. What To Do? Caught between a cyclically propitious backdrop and a tactically dangerous environment, EUR/USD presents a riddle for FX investors right now. The odds of a euro correction over the next three to six months are substantially greater than 50%. But as we highlighted last week, instead of taking a direct bet on EUR/USD, we recommend investors short EUR/JPY. Shorting EUR/JPY is an even cleaner way to take advantage of the cloudy weather building over the global economy.8 Moreover, in recent years, EUR/JPY has fallen when the 52-week rate-of-change of momentum trades began to weaken (Chart I-15). This highly mean-reverting indicator is currently in the 96th percentile of its distribution for the past 25 years, suggesting an imminent rollover. Additionally, EUR/JPY tends to perform well when the LIBOR-OIS spread widens. Today, the three-month FRA-OIS spread has been widening, even as the end-of-year dollar funding shortage has passed (Chart I-16). These kinds of dynamics point to a potential drying out in global liquidity, a phenomenon which historically hurts risk assets, especially when they are as frothy as they are now. This should once again hurt EUR/JPY. Chart I-15EUR/JPY And Momentum Stocks Chart I-16Funding Stresses Point To A Fall In EUR/JPY Thus, shorting EUR/JPY is our highest conviction trade for the next six months or so. If, as we foresee, EUR/USD weakens during the first half of 2018, we will look to buy this pair. Mathieu Savary, Vice President Foreign Exchange Strategy mathieu@bcaresearch.com 1 Please see Foreign Exchange Strategy Special Report, "Assessing Fair Value In FX Markets" dated February 26, 2016 available at fes.bcaresearch.com 2 We do not include real GDP in the models because since wealth is affected by GDP, they are two co-integrated variables, which creates strong multi-collinearity in the regressions. Of the two variables, real wealth was the stronger explanatory variable. 3 While the focus of this report is on the euro, the relationship between relative excess money supply and currency performances works across many exchange rates. We will develop this theme over the coming weeks. 4 Please see Foreign Exchange Strategy Special Report, "Assessing Fair Value In FX Markets" dated February 26, 2016 available at fes.bcaresearch.com 5 Please see Foreign Exchange Strategy Weekly Report, "Euro: Risk On Or Risk Off" dated November 17, 2017 available at fes.bcaresearch.com 6 Please see Foreign Exchange Strategy Weekly Report, "A Cold Snap Doesn't Make A Winter" dated January 5, 2018 available at fes.bcaresearch.com 7 Please see Foreign Exchange Strategy Weekly Report, "The Best Of Possible Worlds?" dated October 6, 2017 available at fes.bcaresearch.com 8 Please see Foreign Exchange Strategy Weekly Report, "Yen: QQE Is Dead! Long Live YCC!" dated January 12, 2018 available at fes.bcaresearch.com Currencies U.S. Dollar Chart II-1USD Technicals 1 Chart II-2USD Technicals 2 Data out of the U.S. was strong this week: Industrial production increased by 0.9% on a monthly pace; Capacity utilization increased to 77.9% from 77.2%; Continuing jobless claims increased to 1.952 million from 1.876 million, beating expectations of 1.9 million; Initial jobless claims however decreased to 220K from 261K, beating expectations of 250K. We continue to expect the Fed to hike more than is priced by the market. A tightening labor market will eventually feed inflationary pressures, causing upward pressure on the dollar. Report Links: A Cold Snap Doesn't Make A Winter - January 5, 2018 10 Charts To Digest With The Holiday Trimmings - December 22, 2017 Canaries In The Coal Mine Alert 2: More On EM Carry Trades And Global Growth - December 15, 2017 The Euro Chart II-3EUR Technicals 1 Chart II-4EUR Technicals 2 European data was decent: German CPI came in unchanged and at expectations, at 1.6%; European headline and core CPI also remained unchanged and at consensus, coming in at 1.4% and 1.1% respectively. However, the euro seems to be losing momentum his week. Comments by ECB board members such as Ewald Nowotny, Vitor Constâncio, and Francois Villeroy, all pointed to issues with the euro's sharp rise, and how they "don't reflect changes in fundamentals". Additionally, relapsing inflation data in the peripheries shows that the strength in the euro is beginning to cause strains and may even negatively affect the ECB's mandate. Report Links: The Unstoppable Euro - January 19, 2018 Yen: QQE Is Dead! Long Live YCC! - January 12, 2018 A Cold Snap Doesn't Make A Winter - January 5, 2018 The Yen Chart II-5JPY Technicals 1 Chart II-6JPY Technicals 2 Recent data in Japan has been mixed: Domestic corporate goods year on year inflation underperformed expectations, coming in at 3.1%. It also decreased substantially from November. Moreover, the Eco Watchers Survey for current conditions underperformed expectations, coming in at 53.9. It also decreased from the November reading. However, machinery orders yearly growth outperformed expectations substantially, coming in at 4.1%. USD/JPY is relatively flat from last week. Overall we expect upside to the yen to be limited against the U.S. dollar, given that bond yields are set to go up in the U.S. That being said, the yen has upside against the euro, as financial conditions have eased significantly in Japan relatively to the euro area. This should cause rate expectations in Japan to improve relative to those of Europe's, pushing EUR/JPY lower. Report Links: Yen: QQE Is Dead! Long Live YCC! - January 12, 2018 10 Charts To Digest With The Holiday Trimmings - December 22, 2017 Riding The Wave: Momentum Strategies In Foreign Exchange Markets - December 8, 2017 British Pound Chart II-7GBP Technicals 1 Chart II-8GBP Technicals 2 Recent data in the U.K. has been mixed: The DCLG House Price Index yearly growth outperformed expectations, coming in at 5.1%. However, core consumer price inflation underperformed expectations, coming in at 2.5%. It also decreased from the 2.7% reading of November. Moreover, headline inflation came in line with expectations at 3%. This also marks the first decrease in inflation in the U.K. since July 2017. Lifted by the USD's weakness, cable has now reached the pre-Brexit low 1.38 hit in February 2016. However, GBP has been experiencing a downtrend versus the euro since last September Overall, we continue to be skeptical of the ability of the BoE to raise interest rates meaningfully. Thus, we would fade any further rally from GBP/USD. Report Links: 10 Charts To Digest With The Holiday Trimmings - December 22, 2017 The Xs And The Currency Market - November 24, 2017 Reverse Alchemy: How To Transform Gold Into Lead - November 3, 2017 Australian Dollar Chart II-9AUD Technicals 1 Chart II-10AUD Technicals 2 Australian data was strong this week: Home loans grew at a 2.1% annual pace in November, higher than the expected -0.2%; Employment grew by 34.7K, beating expectations of 9K. The part-time component increased by 19.5K, while the full-time component grew by 15.1K; The participation rate increased to 65.7% from 65.5%; Unemployment rate increased to 5.5% from 5.4%. Foreign exchange traders lifted the AUD further this week. While the headline employment data remains stellar, the heavy concentration part-time job creation means that overall labor utilization measures is staying low. This will cap wage and inflationary pressures, especially as the AUD is once again expensive, further exacerbating deflationary pressures. Report Links: 10 Charts To Digest With The Holiday Trimmings - December 22, 2017 The Xs And The Currency Market - November 24, 2017 Currency Hedging: Dynamic Or Static? - A Practical Guide For Global Investors - September 29, 2017 New Zealand Dollar Chart II-11NZD Technicals 1 Chart II-12NZD Technicals 2 Recent data in New Zealand has been negative: The month-on-month growth of food prices declined from -0.4% to -0.8%. Moreover, Electronic Card retail sales yearly growth slowed from 4.3% to 3.3%. Finally the ANZ Commodity Price Index year on year growth declined from -0.9% to -2.2%. The New Zealand Dollar has surges by almost 3% year to data against the U.S. dollar. This has been largely due to the depreciation of the greenback itself, as global growth continues to beat forecast. On a short term basis we are positive on the NZD relative to the AUD, as Chinese tightening should weigh more on Australia than New Zealand. However, the new populist government in New Zealand worsens the outlook of the kiwi on a long term basis. Report Links: 10 Charts To Digest With The Holiday Trimmings - December 22, 2017 The Xs And The Currency Market - November 24, 2017 Reverse Alchemy: How To Transform Gold Into Lead - November 3, 2017 Canadian Dollar Chart II-13CAD Technicals 1 Chart II-14CAD Technicals 2 Movements in the petrocurrency were muted following the 'dovish hike' by the Bank of Canada. Numerous factors were highlighted to justify the rate hike to 1.25%, such as: strong employment growth; higher wages; robust consumption; and exceptional GDP growth in 2017. While the Bank's Business Outlook Survey suggests the labor market is tightening due to labor shortages, the BoC underplayed this factor, pointing to much more muted overall labor utilization metrics. The BoC also noted the expected decline in the contribution of housing and consumption to growth this year due to higher mortgage and borrowing rates. While the economy is firing on all fronts, the spread between the West Canada Select and West Texas Intermediate oil prices continues to widen due to a lack of pipeline capacity to ship the oil out of Canada. According to the Bank, these bottlenecks should be temporary, which means that the CAD could catch up to oil later. Report Links: Yen: QQE Is Dead! Long Live YCC! - January 12, 2018 10 Charts To Digest With The Holiday Trimmings - December 22, 2017 The Xs And The Currency Market - November 24, 2017 Swiss Franc Chart II-15CHF Technicals 1 Chart II-16CHF Technicals 2 On Tuesday, Thomas Jordan, the president of the SNB once again reiterated that the franc is still "highly valued", and thus interest rates need to stay low so as to prevent the franc from appreciating. Moreover, he emphasized that while expansionary monetary policy was necessary, it was important to not wait too long to normalize rates. Overall, we believe that the SNB will want to see sustained inflation at relatively high levels to justify an exit from their radical monetary policy. In the meantime the Swiss Central bank will stay accommodative, and thus, EUR/CHF is likely to have limited downside. If the mini down cycle takes hold of the global economy, this would temporarily weigh on EUR/CHF. Report Links: 10 Charts To Digest With The Holiday Trimmings - December 22, 2017 The Xs And The Currency Market - November 24, 2017 Updating Our Long-Term Fair Value Models - September 15, 2017 Norwegian Krone Chart II-17NOK Technicals 1 Chart II-18NOK Technicals 2 The krone continued to appreciate this week, and is now UP 3.3% year-to-date. The krone has been helped mostly by the surge in oil prices and by the fall in the dollar. Overall, we are bullish on this cross against the CAD, as there are 60 basis points of hiked priced in the Canadian curve, even after this week's hike. In the meantime, there are only 21 basis points in the Norwegian curve. We believe this spread is too high, and thus, that the krone should appreciate against the Canadian dollar. Moreover, further downside in EUR/NOK is limited, given that near 70 dollars, there is not much room for oil prices to go up. Thus, we are closing our EUR/NOK trade with a 3.40% gain but keep our long NOK/SEK call in place. Report Links: Yen: QQE Is Dead! Long Live YCC! - January 12, 2018 10 Charts To Digest With The Holiday Trimmings - December 22, 2017 Canaries In The Coal Mine Alert 2: More On EM Carry Trades And Global Growth - December 15, 2017 Swedish Krona Chart II-19SEK Technicals 1 Chart II-20SEK Technicals 2 In a recent speech in Uppsala, Sweden, Deputy Governor Henry Ohlsson reminded the audience of his view from the December meeting that it would have reasonable to hike rates in "early 2018". He pointed to Sweden's robust economic performance, highlighting population growth, migration into cities, and higher real wages. Inflation has also been on target since mid-2017. This assessment is in line with our view of the economy, however Governor Ingves consistently supported a strong dovish tone which undermined our view. Now that the ECB has begun tapering, the consensus within the Riksbank seems to also be shifting. Falling house prices need to be monitored closely, especially when one keeps in mind Governor Ingves dovish inclinations. Report Links: 10 Charts To Digest With The Holiday Trimmings - December 22, 2017 Canaries In The Coal Mine Alert 2: More On EM Carry Trades And Global Growth - December 15, 2017 The Xs And The Currency Market - November 24, 2017 Trades & Forecasts Forecast Summary Core Portfolio Tactical Trades Closed Trades

Highlights December's money and trade data releases were not positive, but they do not likely herald a more aggressive economic slowdown than our base case view would suggest. Conventional methods of gauging the tightness of China's monetary policy stance tend to ignore the fact that market-based interest rates have already increased over the past year. Meaningful increases to the benchmark lending rate are therefore unwarranted barring a significant improvement in China's growth momentum. Despite several identifiable risk factors, investors should remain overweight Chinese investable stocks versus the emerging market and global benchmarks. Feature Several highly-watched Chinese data releases are being published as we go to press, including Q4 GDP growth, and December retail sales, industrial production, and fixed asset investment. We are inclined to agree with Bloomberg's consensus expectations that these series will come in flat-to-modestly down, given our base case view of a benign, controlled economic slowdown. While we cannot rule out the potential for significantly positive surprises from this data, our November 30 Special Report noted in detail that these types of activity indicators tend to lag (or are not correlated with) the Li Keqiang index, which we have shown continues to act as an important predictor of the growth in investable EPS and nominal import growth.1 As such, the series in today's release do not rank highly on our list of important data to watch over the coming 6-12 months. Instead, we remain focused on the components of our BCA Li Keqiang Leading Indicator, as well as the evolution of the relationship between the Li Keqiang index and the growth in earnings and imports. December: A Bad Month For Money & Trade Chart 1A Non-Trivial Deceleration##br## In Money Growth Among the December data released in the first half of this month, the most important series in our view have been the Caixin Manufacturing PMI, imports/exports, and the money supply. The PMI was a bright spot; after having decelerated since August, the index unexpectedly increased from 50.8 in November to 51.5 in December. The Caixin Services PMI also surprised to the upside. The year-over-year (YoY) growth rate of nominal imports, however, fell sharply in December, and significantly missed expectations. In addition, supply of money (measured either as M2 or BCA-defined M3) also fell on a YoY basis, with the 3-month annualized rate of change declining meaningfully (Chart 1). Given that M2 and M3 are components of our BCA Li Keqiang Leading Indicator, and that nominal imports directly impact China's contribution to global growth, this raises the question of whether December's economic data suggest that China is slowing at a more aggressive pace than we expect. For now, our answer is no. Several points are worth considering: China's trade data is highly volatile, and a smoothed version of nominal import growth is behaving exactly as the Li Keqiang index suggests that it should (Chart 2). In addition, while import growth significantly missed the street's expectations, negative surprises of this magnitude have frequently occurred in the past (Chart 3). Chart 2Despite A Weak December, ##br##Smoothed Nominal Imports Look As They Should Chart 3Negative Import Surprises ##br##Are Fairly Common Money supply measures form just one-third of our Li Keqiang Leading Indicator, and the other factors aren't nearly as negative as these measures imply. Chart 4 illustrates that the indicator would be considerably higher if M2 and M3 were excluded, and that the overall indicator is not falling at a sharp or aggressive pace. Even though we did not include it in our composite indicator, we noted in our November 30 Special Report that the manufacturing PMI is an important signal for the Chinese economy, so it is encouraging that it ticked higher. While 51.5 may not seem like an elevated reading when compared with developed economies, it ranks in the 91st percentile of the data since mid-2011. Export growth remained buoyant, which will provide the industrial sector with some reflationary offset. We noted in a previous report that strong export growth would likely decelerate and converge to global industrial production growth over the coming year,2 but a regression-based approach to modelling Chinese export growth suggests that it may stay strong if leading indicators of global economic activity remain robust (Chart 5). Chart 4Severely Weak Money Measures ##br##Are In Contrast To Other Indicators Chart 5Chinese Export Growth ##br##May Stay Strong Bottom Line: December's money and trade data releases were not positive, but they do not likely herald a more aggressive economic slowdown than our base case view would suggest. Some Approaches To Gauging The Stance Of Chinese Monetary Policy While we do not regard December's economic data as a deviation from our base case view, that view does acknowledge that a gradual, controlled slowdown is occurring. There are two drivers of this ongoing economic slowdown. The first is the past imposition of "supply side" constraints on some industrial sectors, which have been part of the government's efforts to cut excess capacity and reduce pollution. For example, we noted in our October 5 Special Report that coal, base metals and cement producers have chronically underperformed in recent years, and have also hurt the overall performance of the industrial sector.3 Similarly, capital spending in the mining sector, historically highly sensitive to moves in global metals prices, have continued to contract, despite the sharp increase in metals prices since 2016 (Chart 6). The more obvious catalyst for a slowdown in the economy is, however, the tightening in monetary policy that began in late-2016. We have strongly emphasized the importance of monetary conditions in our approach to tracking the end of China's mini-cycle, and part of the tightening in these conditions can be linked to the end of material RMB depreciation. But a variety of interest rates have also increased substantially over the past year, which has been worrying to some investors. These concerns have been magnified recently by quite a bit of hawkish rhetoric from the PBOC, including an ultimately retracted statement from a leading PBOC researcher last week that stronger economic conditions have created enough room for a hike in the benchmark one-year lending rate. The current environment naturally raises the question of what would constitute tight policy in China. Chart 7 presents two conventional methods of answering this question, both of which aim to compare the benchmark 1-year policy lending rate to a fair, neutral, or equilibrium level. The first method uses a Taylor Rule approach with the IMF's output gap, headline consumer price inflation, and the IMF's assumptions of a 6% nominal equilibrium interest rate and a 3% headline inflation target.4 The second method simply compares the benchmark lending rate to that prescribed by our BCA China Interest Rate Model, which is a proprietary indicator based on China's growth momentum relative to its recent average, Chinese inflation, U.S. interest rates, and the CNY/USD exchange rate. Chart 6Policy Constraints Weigh Heavily On ##br##Some Sectors Chart 7Conventional Methods Say The Benchmark##br## Lending Rate Should Rise... At first blush, Chart 7 seems to imply that a significant increase in the benchmark 1-year policy lending rate is warranted. But these approaches ignore the fact that market-based interest rates have already increased over the past year, in some cases materially. A comprehensive understanding of the framework and mechanics of China's new monetary policy era is still elusive to many investors, and is an area of ongoing research at BCA. But for now, it is important to note that the benchmark lending rate merely acts as a reference point for Chinese banks when determining the actual interest rate charged on new loans. Chart 8 highlights that the percentage of loans issued above the benchmark rate correlates strongly with, and is led by, the 3-month interbank lending rate. Given the significant increase in 3-month SHIBOR over the past year, it is not surprising that China's weighted average lending rate has recently been increasing, even though the benchmark rate has remained constant. The rise in the average lending rate has so far been moderate, with our Q4 estimate showing only a 35% cumulative retracement of the 180bps decline that occurred from 2014 - 2016. But Chart 9 illustrates what would likely occur to the average lending rate if the PBOC were to hike the benchmark rate by 50bps over the coming year, based on two different scenarios: 1) an unchanged 3-month SHIBOR rate, and 2) a 50bps rise in 3-month SHIBOR (i.e. a parallel shift with the benchmark rate). The chart makes it clear that such a move would push average lending rates above the midpoint of the 2014-2016 range, which from our perspective is a reasonable estimate of the threshold between easy and tight monetary policy. Chart 8...But This Ignores The Recent Rise##br## In Market-Based Interest Rates Chart 9Even Modest Hikes To The Benchmark Rate ##br##Will Create Tight Policy A rise into tight monetary policy territory would be exacerbated even further if the 3-month SHIBOR rate rose disproportionately to any increase in the benchmark rate, which is not a trivial risk given the extent of their rise since late-2016. In short, given that China's economy is already slowing, this analysis underscores that any meaningful increases to the benchmark rate are likely unwarranted, and would be greeted negatively by global investors were they to occur. Bottom Line: Conventional methods of gauging the tightness of China's monetary policy stance tend to ignore the fact that market-based interest rates have already increased over the past year. Meaningful increases to the benchmark lending rate are therefore unwarranted barring a significant improvement in China's growth momentum. Monetary Policy And Investment Strategy We presented a "decision tree" for Chinese stocks in our January 4 Weekly Report,5 and noted that signs of significant further tightening of monetary policy should be met with a downgrade bias towards Chinese equities. We argued that the "bark" of monetary authorities would be worse than their "bite" over the coming several months, given that growth momentum and house price appreciation has already peaked. Recent market performance suggests that global investors agree with our assessment that the PBOC will refrain from any meaningful increases to the benchmark lending rate, and that any further rise in the average lending rate will be modest. Chart 10 shows that while the performance of Chinese investable ex-tech stocks versus global ex-tech did challenge its 200-day moving average in mid-December, the selloff has been completely reversed over the past month. In addition, Chart 11 shows that bottom-up 12-month forward EPS growth expectations remain solid and net earnings revisions remain close to a seven-year high, suggesting that there is no imminent fundamental basis for a major decline in Chinese investable equity prices. Chart 10Investors Aren't Worried##br## By The Specter Of Tight Policy Chart 11There Is Fundamental Support ##br##For Chinese Stocks Accordingly, while further monetary policy tightening remains a risk to be monitored over the course of the year, our "decision tree" framework continues to suggest that investors should be overweight Chinese stocks. We regard this as a recommendation to be cautiously bullish, a stance that we will be continually evaluating over the course of the year as more information about the risk factors that we have identified presents itself. Stay tuned! Bottom Line: Despite several identifiable risk factors, investors should remain overweight Chinese investable stocks versus the emerging market and global benchmark. Jonathan LaBerge, CFA, Vice President Special Reports jonathanl@bcaresearch.com 1 Please see China Investment Strategy Special Report, "The Data Lab: Testing The Predictability of China's Business Cycle", dated November 30, 2017, available at cis.bcaresearch.com. 2 Please see China Investment Strategy Weekly Report "China's Economy - 2015 Vs Today (Part I): Trade", dated October 26, 2017, available at cis.bcaresearch.com. 3 Please see China Investment Strategy Special Report "On A Higher Note", dated October 5, 2017, available at cis.bcaresearch.com. 4 IMF Country Report No. 17/247, People's Republic of China : 2017 Article IV Consultation, August 8, 2017. 5 Please see China Investment Strategy Weekly Report, "The "Decision Tree" For Chinese Stocks", dated January 4, 2017, available at cis.bcaresearch.com. Cyclical Investment Stance Equity Sector Recommendations

Highlights Duration: Economic fundamentals indicate that U.S. TIPS breakeven inflation rates have further cyclical upside and this will drive nominal bond yields higher on a 6-12 month horizon. In the near term, however, positioning data suggest that the uptrend in U.S. bond yields is due for a pause. Maintain a below-benchmark duration stance. Oil & U.S. Bonds: The cost of inflation compensation is an important driver of U.S. bond yields and the oil price is an important driver of the cost of inflation compensation. This will continue to be true until long-maturity TIPS breakeven inflation rates settle into a range between 2.4% and 2.5%. At that point the oil price will become a less important driver of U.S. bond yields. Australia: Maintain an overweight position in Australian government debt. Economic data are still mixed and the RBA will stay on hold for the foreseeable future. Against a backdrop of Fed rate hikes, Australian debt should outperform. Feature Chart of the WeekHigher Yields, Driven By Inflation There was certainly no shortage of possible catalysts for last week's bond rout (Chart of the Week). The Bank of Japan (BoJ) reduced its buying of long-dated JGBs, there was a rumor that China plans to slow or stop its purchases of U.S. Treasury debt, and U.S. inflation expectations started to ramp back up - driven by a combination of higher oil prices and a strong December core CPI print. But of all these factors we think it is only the third that merits much attention. Once the BoJ started targeting the level of the yield curve in September 2016, its quantity targets became irrelevant. A reduction in the pace of BoJ buying only matters if it foreshadows a shift to a higher yield curve target. Our foreign exchange strategists don't think such a move is likely in the next 12-18 months.1 China, for its part, still has a highly managed currency and now that capital is no longer flowing out of the country it will start to rebuild its foreign exchange reserves. Given that the U.S. Treasury market remains the world's most liquid, it is hard to see how China can avoid having to park much of its excess foreign capital in the United States (Chart 2). The compensation for 10-year U.S. inflation protection broke above 2% last week, after having been as low as 1.66% as recently as last June. This 34 basis point increase in inflation compensation coincided with a 36 basis point increase in the nominal U.S. 10-year yield and a Brent crude oil price that rose from $45 per barrel last June to $70 per barrel as of last Friday. We think these correlations will continue to be the most important factors driving bond yields during the next 6-12 months, and the bulk of this report is dedicated to disentangling the linkages between oil prices, inflation, inflation expectations and nominal bond yields. But first we reiterate our cyclical investment stance. Last week's U.S. CPI report provided further evidence that U.S. core inflation is in the process of bottoming-out (Chart 3). The 10-year U.S. TIPS breakeven inflation rate will settle into a range between 2.4% and 2.5% by the time that core inflation returns to the Fed's target. By that time the nominal 10-year yield will be in a range between 2.8% and 3.25%. Likewise, our energy strategists anticipate that an ongoing steady decline in commercial inventories will keep crude prices well supported on a 6-12 month horizon. Chart 2China's Forex Reserves Are Rising Chart 3U.S. Inflation Turns The Corner However, on a shorter time horizon (3 months or less), recent shifts in speculative positioning signal that the uptrends in bond yields and the oil price might be due for a pause (Chart 4). After having been solidly "net long" since the middle of last year, net speculative positions in the 10-year U.S. Treasury futures contract have just dipped into "net short" territory. Historically, net speculative positions have been a decent indicator of 3-month changes in the 10-year U.S. Treasury yield, and at current levels they signal that the 10-year yield could decline modestly during the next three months (Chart 5). Similarly, speculators in the oil futures market are now more "net long" than at any time since last February. While this positioning indicator does not work quite as well for the oil market as for the Treasury market, net longs at more than 20% of open interest (most recent reading is 26%) have more often than not been met with 3-month price declines since 2010 (Chart 6). Chart 4Net Speculative Positioning##BR##For Oil And Bonds Chart 5Net Speculative Positions &##BR##10-Year Treasury Yield (2010 - Present) Chart 6Net Speculative Positions &##BR##WTI Oil Price (2010 - Present) Bottom Line: The outlook for U.S. inflation suggests that TIPS breakeven rates have further cyclical upside and this will drive nominal bond yields higher. However, positioning data in both bond and oil markets suggest that the recent run-up in yields might be due for a near-term pause. Maintain a below-benchmark duration stance on a 6-12 month horizon. Oil, TIPS, Inflation And U.S. Bond Yields: Sorting Out The Mess During the post-financial crisis period two relationships have been both (i) incredibly robust and (ii) unlike relationships observed in prior periods. They are: The cost of inflation protection has been an unusually important determinant of nominal U.S. bond yields. The oil price has shown a very strong correlation with the cost of inflation protection. Both relationships can be explained by the Federal Reserve's asymmetric ability to control inflation. We consider each relationship in turn. The Importance Of Inflation Chart 7TIPS Beta Declines When##BR##Breakevens Are Low A common rule of thumb is to estimate the TIPS beta - the proportion of movement in U.S. nominal bond yields that is explained by movement in TIPS (real) yields - at around 0.8. In other words, this assumes that 80% of the movement in nominal bond yields is explained by the real component. However, we observe that since the financial crisis the 10-year TIPS beta has been a much lower 0.68, and at times it has been closer to 0.5 on a 12-month rolling basis (Chart 7). We also observe that the TIPS beta tends to be lower when TIPS breakeven inflation rates are un-anchored to the downside. There is a very good reason for this. The reason is that the Fed's ability to influence inflation is asymmetric. The Fed has a strong track record of successfully tightening to bring inflation down, but has been less successful at easing to drive it up. This asymmetric ability to influence prices is due in no small part to the zero-lower bound on interest rates. Because the Fed's ability to ease policy is constrained while its ability to tighten is not, bond market participants may at times question the Fed's ability to ease and revise their inflation expectations lower. It is also during these periods that inflation expectations become more volatile and a more important determinant of nominal bond yields. This is because they are increasingly driven by the swings in the economic data and less by the Fed's policy bias. The Importance Of Oil This is where the oil price comes in. Oil and other commodities are crucial inputs to the production process. As such, not only do these prices rise in response to stronger aggregate demand, but higher prices also signal mounting cost-push inflationary pressures. But despite this obvious truth, there is not always a strong correlation between oil prices and inflation expectations. This is because the Fed's reaction function influences the relationship. Consider the pre-crisis (2004-2008) period. Long-maturity TIPS breakeven inflation rates stayed range-bound between 2.4% and 2.5% even as the oil price increased dramatically (Chart 8). Since investors perceived that the Fed would simply tighten policy to tamp out any inflationary pressures that might arise, there was no desire to demand greater compensation for inflation. However, this logic does not work in reverse. When commodity prices fell in 2014, inflation expectations declined alongside. In fact we observe that the correlations between long-maturity TIPS breakeven inflation rates and both oil and commodity prices have been much stronger in the post-crisis period, when inflation expectations have been un-anchored (Table 1). Chart 8The Unstable Correlation: Breakevens & Oil Table 1Correlations Between TIPS Breakeven Inflation & Commodities Investment Conclusions The Fed's asymmetric reaction function leads to two crucial investment conclusions. First, long-maturity inflation expectations (as measured by the U.S. TIPS breakeven inflation rate) can fall when deflationary pressures mount, but their upside is capped in the 2.4% to 2.5% range. This is because the market has no reason to question the Fed's ability to lower inflation by lifting rates. The upside limit of 2.4% to 2.5% will remain in place unless the Fed changes its inflation target. A change to the inflation target that allows for higher inflation is an idea that is quickly gaining traction among policymakers, but is unlikely to be implemented this year. Second, when long-maturity inflation expectations are below their 2.4% to 2.5% upper-bound they become both (i) a more important driver of nominal yields - as evidenced by the lower TIPS beta - and (ii) more sensitive to swings in commodity prices. For this reason, the oil price will continue to be an important driver of inflation expectations and nominal U.S. bond yields for the next few months, but will decrease in importance as TIPS breakevens move back to their 2.4% to 2.5% range. Once inflation expectations are re-anchored, nominal bond yields will once again be predominantly driven by the real component and swings in the price of oil will be less important for bond markets. The dynamics described above are not merely theoretical. Consider the evidence from five developed countries presented in Charts 9 & 10. Chart 9 shows that the oil price is tightly correlated with inflation expectations in the U.S., Eurozone and Japan, but also that inflation expectations in the U.K. and Australia did not respond to the recent increase in oil prices. The reason is that core inflation in the U.K. and Australia is already relatively close to the central bank's target (Chart 10). It is only where core inflation is far below target (in the U.S., Eurozone and Japan) that the oil price remains an important driver of bond yields. Chart 9Oil & Inflation Expectations Highly Correlated... Chart 10...But Only When Inflation Is Low The U.K. in particular presents an interesting case study. U.K. core inflation was quite far below target throughout 2015 and 2016, and during this time period U.K. inflation expectations were tightly linked with the oil price. It is only in the past few months that U.K. core inflation has moved back above target, and not surprisingly the correlation between the U.K. 10-year CPI swap rate and the price of oil has started to break down. Bottom Line: At present, the cost of inflation compensation is an important driver of U.S. bond yields and the oil price is an important driver of the cost of inflation compensation. Both of these dynamics will continue to be true for the next few months, but will decline in importance as TIPS breakeven inflation rates rise. When long-maturity TIPS breakeven inflation rates settle into a range between 2.4% and 2.5%, then the oil price will become a less important driver of U.S. bond yields. Australia: Too Soon To Expect A Hike Chart 11Australia: A Solid Rebound In Growth... Over the last quarter much of the economic data from Australia have improved. Real GDP growth rebounded sharply to 2.8% YoY in Q3 from 1.9% the previous quarter (Chart 11). Iron ore prices have been rising since mid-October. Employment growth is robust and the unemployment rate is well below its estimated natural level. This begs the question - with so much going right is it time for the Reserve Bank of Australia (RBA) to lift rates? Our answer is an emphatic "no." First, most data improvements have been relatively minor and the overall economic picture remains mixed. As we mentioned in our recent Special Report,2 the RBA is stuck between conflicting forces. Booming house prices and rising household indebtedness on the one hand, and an economy still working off excess capacity on the other. Nevertheless, our expectation is that the RBA will allow the economy to recover further for the following reasons: Consumer health is fragile. Policymakers left cash rates unchanged at the last monetary policy meeting in December, and Governor Philip Lowe expressed concerns about household consumption. Consumption is a significant driver of economic growth and the combination of declining savings, elevated debt levels and weak income growth is worrisome (Chart 12). Since then, real income growth has dipped back into positive territory, but only barely so. Meanwhile, house prices are still surging, despite macro-prudential measures aimed at tightening lending standards, thereby supporting consumer spending through the wealth effect. Given an extreme household debt to income ratio, consumption would be very vulnerable if the RBA were to curb house price gains by raising rates. Labors markets have plenty of slack. The unemployment rate has fallen to a four year low and other labor market statistics show a broad-based improvement over the last quarter. However, the unemployment rate is still significantly higher than it was in the previous cycle and other improvements in the labor market have also occurred from extremely weak levels. In 2017Q1, the underemployment rate and part-time workers as a percentage of total workers both reached all-time highs. Those numbers have dipped slightly in Q3, with underemployment falling to 8.3% and part-time workers as a percentage of total declining to 31.7%, but those elevated levels suggest there still needs to be significant improvement before spare capacity is worked off and real wage growth starts to move higher (Chart 13). Chart 12...But Consumers Can't Afford A Rate Hike Chart 13Still Plenty Of Slack In Australian Labor Markets Inflation is still too low. Headline and core inflation readings came in at 1.8% and 1.9% respectively in Q3 (Chart 14). While headline slowed, core inflation recovered over the last quarter. Tradeable goods inflation collapsed into negative territory at -0.9%, as a result of currency strength and increased competition among retailers. Going forward, we expect consumer price growth to be muted given the lack of inflationary pressures. The output gap is wide, despite rebounding growth, and the IMF forecasts that it will be years before the Australian economy reaches capacity. The trade-weighted Aussie dollar index has risen almost 5% since it bottomed in early December, while the AUD/USD has broken above its 40-week moving average. Continued currency strength would exert even further deflationary pressure. As stated above, the labor market also requires significant improvement to work off excess capacity. All of these factors caused the RBA to dial back its inflation forecast in the November statement. It now expects that inflation will remain quite flat for the next two years, only touching the lower-end of its 2%-3% target range at the end of 2019. Consequently, inflation will not be forcing the RBA's hand in the foreseeable future. One of our key themes for 2018 is that global growth will be less synchronized. Central banks will therefore employ diverging monetary policies, presenting cross-country bond market investment opportunities. As such, we recently shifted to a slight overweight position in Australian debt within our model portfolio, arguing that it would outperform global government bond benchmarks during a year expected to be driven by Fed tightening and ECB/BoJ tapering concerns. Historically, relative yield moves have closely tracked relative shifts in monetary policy (Chart 15). In the U.S., above-trend growth, a tight labor market and the continued recovery in inflation will force the Fed to become more aggressive. If the RBA stays inactive as we expect, then this gap should continue to move in favor of Australian debt. Additionally, there is still a modest yield pickup in Australian debt relative to the global index and as we expect global bond yields to rise, low-beta Australian government bonds should offer considerable protection. Chart 14Australia: Lacking Inflationary Pressures Chart 15Australian Relative Yields Track Relative Policy This also leads us to continue holding our tactical Long Dec 2018 Australian Bank Bill futures trade from last October. We initially entered into this trade as a more focused way of expressing that the RBA will stay on hold. The trade is currently 6 bps in the money and with markets still pricing about 30 bps of rate hikes during the next 12 months, there is plenty of room for further profit as market expectations are revised down. Bottom Line: Maintain an overweight position in Australian government debt. Economic data are still mixed and the RBA will stay on hold for the foreseeable future. Against a backdrop of Fed rate hikes, Australian debt should outperform. Ryan Swift, Vice President U.S. Bond Strategy rswift@bcaresearch.com Patrick Trinh, Associate Editor Patrick@bcaresearch.com 1 Please see BCA's Foreign Exchange Strategy Weekly Report, "Yen: QQE Is Dead! Long Live YCC!", dated January 12, 2018, available at fes.bcaresearch.com. 2 Please see BCA's Global Fixed Income Strategy Special Report, "Australia: Stuck Between A Rock And A Hard Place", dated July 25, 2017, available at gfis.bcaresearch.com. Recommendations The GFIS Recommended Portfolio Vs. The Custom Benchmark Index Duration Regional Allocation Spread Product Tactical Trades Yields & Returns Global Bond Yields Historical Returns

Highlights Duration: Economic fundamentals indicate that TIPS breakeven inflation rates have further cyclical upside and this will drive nominal bond yields higher on a 6-12 month horizon. In the near term, however, positioning data suggest that the uptrend in bond yields is due for a pause. Maintain a below-benchmark duration stance. Oil & Bonds: The cost of inflation compensation is an important driver of bond yields and the oil price is an important driver of the cost of inflation compensation. This will continue to be true until long-maturity TIPS breakeven inflation rates settle into a range between 2.4% and 2.5%. At that point the oil price will become a less important driver of yields. Fed: The Fed will start actively discussing alternative monetary policy frameworks in 2018. While we think the Fed will eventually adopt a policy framework that tolerates higher inflation, this shift probably won't occur this year. Feature There was certainly no shortage of possible catalysts for last week's bond rout (Chart 1). The Bank of Japan (BoJ) reduced its buying of long-dated JGBs, there was a rumor that China plans to slow or stop its purchases of U.S. Treasury debt, and U.S. inflation expectations started to ramp back up - driven by a combination of higher oil prices and a strong December core CPI print. But of all these factors we think it is only the third that merits much attention. Once the BoJ started targeting the level of the yield curve in September 2016 its quantity targets became irrelevant. A reduction in the pace of BoJ buying only matters if it foreshadows a shift to a higher yield curve target. Our foreign exchange strategists don't think such a move is likely in the next 12-18 months.1 China, for its part, still has a highly managed currency and now that capital is no longer flowing out of the country it will start to rebuild its foreign exchange reserves. Given that the U.S. Treasury market remains the world's most liquid, it is hard to see how China can avoid having to park much of its excess foreign capital in the United States (Chart 2). Chart 1Higher Yields, Driven By Inflation Chart 2China's Forex Reserves Are Rising The compensation for 10-year U.S. inflation protection broke above 2% last week, after having been as low as 1.66% as recently as last June. This 34 basis point increase in inflation compensation coincided with a 36 basis point increase in the nominal 10-year yield and a Brent crude oil price that rose from $45 per barrel last June to $70 per barrel as of last Friday. We think these correlations will continue to be the most important factors driving bond yields during the next 6-12 months, and the bulk of this report is dedicated to disentangling the linkages between oil prices, inflation, inflation expectations and nominal bond yields. But first we reiterate our cyclical investment stance. Last week's CPI report provided further evidence that core inflation is in the process of bottoming-out (Chart 3). The 10-year TIPS breakeven inflation rate will settle into a range between 2.4% and 2.5% by the time that core inflation returns to the Fed's target. By that time the nominal 10-year yield will be in a range between 2.8% and 3.25%. Likewise, our energy strategists anticipate that an ongoing steady decline in commercial inventories will keep crude prices well supported on a 6-12 month horizon. Chart 3U.S. Inflation Turns The Corner Chart 4Net Speculative Positioning For Oil And Bonds However, on a shorter time horizon (3 months or less), recent shifts in speculative positioning signal that the uptrends in bond yields and the oil price might be due for a pause (Chart 4). After having been solidly "net long" since the middle of last year, net speculative positions in the 10-year U.S. Treasury futures contract have just dipped into "net short" territory. Historically, net speculative positions have been a decent indicator of 3-month changes in the 10-year U.S. Treasury yield, and at current levels they signal that the 10-year yield could decline modestly during the next three months (Chart 5). Similarly, speculators in the oil futures market are now more "net long" than at any time since last February. While this positioning indicator does not work quite as well for the oil market as for the Treasury market, net longs at more than 20% of open interest (most recent reading is 26%) have more often than not been met with 3-month price declines since 2010 (Chart 6). Chart 5Net Speculative Positions & 10-Year Treasury Yield Chart 6Net Speculative Positions & WTI Oil Price Bottom Line: The outlook for U.S. inflation suggests that TIPS breakeven rates have further cyclical upside and this will drive nominal bond yields higher. However, positioning data in both bond and oil markets suggest that the recent run-up in yields might be due for a near-term pause. Maintain a below-benchmark duration stance on a 6-12 month horizon. Oil, TIPS, Inflation And Bond Yields: Sorting Out The Mess During the post-financial crisis period two relationships have been both (i) incredibly robust and (ii) unlike relationships observed in prior periods. They are: The cost of inflation protection has been an unusually important determinant of nominal U.S. bond yields The oil price has shown a very strong correlation with the cost of inflation protection Both relationships can be explained by the Federal Reserve's asymmetric ability to control inflation. We consider each relationship in turn. The Importance Of Inflation Chart 7TIPS Beta Declines When ##br##Breakevens Are Low A common rule of thumb is to estimate the TIPS beta - the proportion of movement in U.S. nominal bond yields that is explained by movement in TIPS (real) yields - at around 0.8. In other words, this assumes that 80% of the movement in nominal bond yields is explained by the real component. However, we observe that since the financial crisis the 10-year TIPS beta has been a much lower 0.68, and at times it has been closer to 0.5 on a 12-month rolling basis (Chart 7). We also observe that the TIPS beta tends to be lower when TIPS breakeven inflation rates are un-anchored to the downside. There is a very good reason for this. The reason is that the Fed's ability to influence inflation is asymmetric. The Fed has a strong track record of successfully tightening to bring inflation down, but has been less successful at easing to drive it up. This asymmetric ability to influence prices is due in no small part to the zero-lower bound on interest rates. Because the Fed's ability to cut rates is constrained by the zero-bound while its ability to lift rates is not, bond market participants may at times question the Fed's ability to ease and revise their inflation expectations lower. It is also during these periods that inflation expectations become more volatile and a more important determinant of nominal bond yields. This is because they are increasingly driven by the swings in the economic data and less by the Fed's policy bias. The Importance Of Oil This is where the oil price comes in. Oil and other commodities are crucial inputs to the production process. As such, not only do these prices rise in response to stronger aggregate demand, but higher prices also signal mounting cost-push inflationary pressures. But despite this obvious truth, there is not always a strong correlation between oil prices and inflation expectations. This is because the Fed's reaction function influences the relationship. Consider the pre-crisis (2004-2008) period. Long-maturity TIPS breakeven inflation rates stayed range-bound between 2.4% and 2.5% even as the oil price increased dramatically (Chart 8). Since investors perceived that the Fed would simply tighten policy to tamp out any inflationary pressures that might arise, there was no desire to demand greater compensation for inflation. However, this logic does not work in reverse. When commodity prices fell in 2014, inflation expectations declined alongside. In fact we observe that the correlations between long-maturity TIPS breakeven inflation rates and both oil and commodity prices have been much stronger in the post-crisis period, when inflation expectations have been un-anchored (Table 1). Chart 8The Unstable Correlation Breakevens & Oil Table 1Correlations Between TIPS Breakeven Inflation And Commodities Investment Conclusions The Fed's asymmetric reaction function leads to two crucial investment conclusions. First, long-maturity inflation expectations (as measured by the TIPS breakeven inflation rate) can fall when deflationary pressures mount, but their upside is capped in the 2.4% to 2.5% range. This is because the market has no reason to question the Fed's ability to lower inflation by lifting rates. The upside limit of 2.4% to 2.5% will remain in place unless the Fed changes its inflation target. A change to the inflation target that allows for higher inflation is an idea that is quickly gaining traction among policymakers, but is unlikely to be implemented this year (see section titled "The Fed In 2018: Contemplating A Major Change" below). Second, when long-maturity inflation expectations are below their 2.4% to 2.5% upper-bound they become both (i) a more important driver of nominal yields - as evidenced by the lower TIPS beta - and (ii) more sensitive to swings in commodity prices. For this reason, the oil price will continue to be an important driver of inflation expectations and nominal bond yields for the next few months, but will decrease in importance as TIPS breakevens move back to their 2.4% to 2.5% range. Once inflation expectations are re-anchored, nominal bond yields will once again be predominantly driven by the real component and swings in the price of oil will be less important for bond markets. The dynamics described above are not merely theoretical. Consider the evidence from five developed countries presented in Charts 9 & 10. Chart 9 shows that the oil price is tightly correlated with inflation expectations in the U.S., Eurozone and Japan, but also that inflation expectations in the U.K. and Australia did not respond to the recent increase in oil prices. The reason is that core inflation in the U.K. and Australia is already relatively close to the central bank's target (Chart 10). It is only where core inflation is far below target (in the U.S., Eurozone and Japan) that the oil price remains an important driver of bond yields. Chart 9Oil & Inflation Expectations Highly Correlated... Chart 10...But Only When Inflation Is Low The U.K. in particular presents an interesting case study. U.K. core inflation was quite far below target throughout 2015 and 2016, and during this time period U.K. inflation expectations were tightly linked with the oil price. It is only in the past few months that U.K. core inflation has moved back above target, and not surprisingly the correlation between the U.K. 10-year CPI swap rate and the price of oil has started to break down. Bottom Line: At present, the cost of inflation compensation is an important driver of bond yields and the oil price is an important driver of the cost of inflation compensation. Both of these dynamics will continue to be true for the next few months, but will decline in importance as TIPS breakeven inflation rates rise. When long-maturity TIPS breakeven inflation rates settle into a range between 2.4% and 2.5%, then the oil price will become a less important driver of bond yields. The Fed In 2018: Contemplating A Major Change? As was alluded to in the prior section, the biggest potential change for bond markets in 2018 would be if the Fed changed its monetary policy framework to one that tolerated higher levels of inflation. For example, let's imagine that the Fed suddenly lifted its inflation target from 2% to 3%. This would likewise shift the upper-bound range for long-maturity TIPS breakeven inflation rates to approximately 3.4% to 3.5%. It would mean that nominal bond yields have further upside over the course of the cycle, and also that oil and commodity prices would play an important role in bond markets for much longer. It would also lengthen the period where spread product can outperform Treasuries since the Fed would not be so quick to choke off the recovery. We still think it is unlikely that such a change will be implemented this year, but recent weeks have seen a marked increase in the number of Fed policymakers either advocating for a different policy framework or saying that the Fed should start researching alternative frameworks. What's crucial to remember is that the reason policymakers are unsatisfied with the current 2% inflation target is that it brings the zero-lower bound on interest rates into play too often. So any potential change in policy framework would be to one that tolerates higher inflation rates. Bernanke's Idea Chart 11The Implications Of A Price Level Target One potential new policy approach was put forward by ex-Fed Chairman Ben Bernanke in a recent blog post.2 Bernanke made the case for "Temporary Price Level Targeting", a policy where the Fed continues to use a 2% inflation target when the fed funds rate is sufficiently far from zero, but then switches to a price-level target when the fed funds rate is close to the zero bound. In his own words, the strategy would be communicated as follows: The Committee therefore agrees that, in future situations in which the funds rate is at or near zero, a necessary condition for raising the funds rate will be that average inflation since the date at which the federal funds rate first hit zero be at least 2 percent. Chart 11 provides an illustration of this example. Under the current framework the Fed targets 2% PCE inflation and forecasts that it will achieve this target sometime in 2019. In Bernanke's proposed framework the Fed would not target 2% inflation, but rather a price level that is consistent with 2% trend growth in prices since the zero-lower bound was hit in December 2008. In order to achieve this goal by the end of 2019 the Fed would need to tolerate a significant overshoot of inflation during the next two years (bottom panel). Who's On Board? The Appendix to this report is a list of all Fed Governors and Regional Fed Presidents. It also shows our own assessment of each committee member's policy bias. We noted from the most recent Summary of Economic Projections that 6 FOMC participants expect three rate hikes in 2018, 6 expect fewer than three rate hikes and 4 expect more than three hikes. From recent speeches we attempted to discern which member owns which forecast and then we attributed a "dovish" policy bias to those with a forecast for fewer than three hikes, a "neutral" bias to those expecting three hikes, and a "hawkish" bias to those expecting more than three hikes. We also show which FOMC participants are voters in 2018, although we do not think that distinction carries much practical importance. The Committee tends to arrive at decisions by consensus anyways, and all participants voice their opinions at every meeting whether or not it is their turn to vote. But it is the "notes" column of the Appendix that is most striking. There we highlighted all the FOMC participants who have recently made comments regarding the exploration of alternative policy frameworks. A general consensus seems to be forming that alternative frameworks should be studied this year, and a few policymakers (San Francisco Fed President John Williams, in particular) have strongly made the case that the Fed should switch to some sort of price level targeting regime. The Appendix also identifies the biggest source of uncertainty for the Fed this year. Namely that there are four vacant Governor positions that need to be filled. The New York Fed will also need a new President when William Dudley retires later this year. Who is nominated to fill those vacant positions will go a long way toward determining how aggressively the Fed pursues alternative policy frameworks. Bottom Line: The Fed will start actively discussing alternative monetary policy frameworks in 2018. While we think the Fed will eventually adopt a policy framework that tolerates higher inflation, this shift probably won't occur this year. Ryan Swift, Vice President U.S. Bond Strategy rswift@bcaresearch.com 1 Please see Foreign Exchange Strategy Weekly Report, "Yen: QQE Is Dead! Long Live YCC!", dated January 12, 2018, available at fes.bcaresearch.com 2 https://www.brookings.edu/blog/ben-bernanke/2017/10/12/temporary-price-level-targeting-an-alternative-framework-for-monetary-policy/ Appendix Table 2Composition Of The FOMC Fixed Income Sector Performance Recommended Portfolio Specification

ハイライト コンセンサスは2017年第4四半期の1株当たり利益（EPS）が前年同期比で12%の増加、2018年は14%を見込んでいる。税制改正法案が2018年の営業環境に与える影響は、2017年第4四半期の決算を議論する際に企業経営陣や投資家の注目点となるだろう。 12月の小売売上高とコアCPIの数値は、FRBの3月利上げの理論を後押ししている。 我々は来たる2月のFOMC議長交代は円滑に進むと予想しており、それは金融政策の段階的正常化を確実にするだろう。ただし、連邦準備制度理事会（FRB）の空席、タカ派/ハト派のシフトおよび反対票は懸念事項である。 特集 米国株式は先週も上昇を続け、投資家は世界成長と2018年のS&P 500収益に対する期待を切り上げた。本レポートの次節では2017年第4四半期の決算シーズンのプレビューを提供する。12月のコアCPIが前年比で予想より強い1.8%上昇したことから、インフレの気配も見られた。多くのFRB関係者の発言が相次いだが、市場の見方──次回の利上げは3月会合で行われる──を変えるほどではなかった。今週のレポートの最終節ではFOMCの構成について論じる。10年物米国債利回りは約10ベーシスポイント上昇し、週末は2.56%で終えた。BCAの米国ボンド・ストラテジストは10年物の公正価値を2.94%と見積もっている。1 さらに、2年物米国債利回りは先週金曜日に2008年以来初めて2%に到達した。 S&P 500の業績：2017年第4四半期 コンセンサスは2017年第4四半期のEPSが2016年第4四半期比で12%増加、2018年は15%増を見込んでいる。エネルギー、資本財・素材、そしてテクノロジー株が収益成長を牽引する一方、通信および不動産セクターの収益は伸び悩むだろう。エネルギーセクターを除くと、コンセンサスは2017年第4四半期のEPSが前年比で10%上昇すると見ている。 過去四半期と2018年に関する楽観的な利益見通しは、原油価格の回復を反映しており、原油高は2017年第4四半期のエネルギーセクターEPSを印象的な138%押し上げると予想される（チャート1）。エネルギー関連の設備投資とS&P 500全体の収益は密接に関連している（チャート1、パネル2）。世界成長環境の改善と抑制された労働コストは、2017年第4四半期および2018年初めに利益率のカウンタ―サイクリカルな上昇を引き続き促した。さらに、昨年末に成立したTax Cut and Jobs Act of 2017の直接的効果は、2018年の米国実質GDP成長率を0.2〜0.3ポイント押し上げる可能性が高い。ハリケーン復興支出と連邦裁量的支出の上限引き上げに関する議会の合意が得られれば、今年の成長率にさらに0.2ポイント程度上乗せされる可能性がある。しかし、税制変更や即時の資本償却が企業部門のセンチメントをさらに高め、投資支出を前倒しさせる能力に大きく依存する。 税制改正法案が2018年の営業環境に与える影響は、2017年第4四半期の決算を議論する際に企業経営陣や投資家の関心事となるだろう。具体的には、企業が低い税率の恩恵や海外からの資金還流を通じて現金をどのように活用するかが前面に出るだろう。チャート2は2017年第3四半期までのデータで、株式買戻しと配当が過去の景気循環をやや上回る一方、設備投資はほぼ平均的であったことを示している。BCAはこのミックスを引き続き注視する。欧州と新興市場（EM）での経済状況の改善、米ドル、マージンの持続可能性、そしてハリケーン・ハーベイやイルマの影響は、決算説明会で厳しく検証されるだろう。 Chart 1 S&P 500 Sensitive To Oil Prices##BR##And Oil Driven Capex S&P 500は原油価格および原油主導の設備投資に敏感 S&P 500は原油価格および原油主導の設備投資に敏感 Chart 2 Comparison Of Corporate Outlays##BR##Across Four Economic Expansion Phases 円滑な移行？ 円滑な移行？ アナリストはまた、金利上昇とイールドカーブの形状にも注目するだろう。1月12日に10年物米国債利回りは3月以来の高水準となる2.56%に達した。さらに、2017年第4四半期の10年物利回りは第3四半期比で16ベーシスポイント高く、2016年第4四半期比では26ベーシスポイント高かった。BCAは2年物と10年物のイールドカーブが今後6か月で急勾配化（steepen）し、その後年後半にフラット化すると予想している。カーブと上昇する金利はS&P 500の金融セクターに追い風を与える。BCAのU.S. エクイティ・ストラテジーチームは2017年5月以来、金融セクターをオーバーウェイトで継続している。2 いつものように、2018年第1四半期以降のトレンドに関する経営陣のガイダンスは、実際の第4四半期結果よりも重要である（チャート3）。投資家は経営陣の過度な楽観に警戒すべきだ。というのも収益成長の予想は時間とともに下方修正されることが多いからである。 2017年第4四半期も2017年前3四半期と同様に、海外売上が高い企業は欧州、日本および新興市場での成長改善の恩恵を受けるはずだ。チャート4は高いISM数値が2018年の収益と売上にとって好ましい背景を提供していることを示している。さらに、チャート5はS&P 500の売上の代替指標である鉱工業生産（IP）が2018年に加速し企業収益を押し上げる態勢にあることを示している。今年および来年の世界GDP成長予測は着実に上向いており、過去に予想が容赦なく下方修正され続けた年とは対照的である（チャート6）。 Chart 3 2018 Estimates Turned Higher After Tax Law Passed; '19 Likely To Move Lower 税制改正法が可決された後、2018年の見積もりは上方に転じた；2019年は下方に動く可能性が高い。 税制改正法が可決された後、2018年の見積もりは上方に転じた；2019年は下方に動く可能性が高い。 Chart 4 Favorable Macro Backdrop For Earnings And Sales 利益および売上高にとって好ましいマクロ環境 利益および売上高にとって好ましいマクロ環境 加えて、BCAのU.S. エクイティ・ストラテジーサービスは3、2015年の谷の後、売上高のポジティブな改定数が収益のポジティブ改定数を着実に上回っていることを指摘している。これは実際の収益成長が売上成長を大きく上回っているにもかかわらず起きている現象である。最近の売上高に対する非常にポジティブな改定の一因として、企業が税制改革の最大の恩恵を受けるために一部の利益を2017年から2018年に移している可能性が考えられる。 Chart 5 ISM Components Suggest IP##BR##Poised To Accelerate ISMの構成要素は鉱工業生産（IP）の加速を示唆 ISMの構成要素は鉱工業生産（IP）の加速を示唆 Chart 6 Global Growth Estimates##BR##Still Accelerating 世界の成長見通しはなお加速している 世界の成長見通しはなお加速している 米ドルは最近数四半期ではEPSに対して小幅な悪影響にとどまってきたが、第4四半期はややプラスに転じる見込みだ。米ドルは広範な通貨バスケットに対して1年前より3%下落している。さらに、最新のベージュブック（11月29日）では「強いドル」に関する言及が1年前と比べて8件減少した。これは強い通貨がここ数か月で経営陣の主要な懸念事項として薄れてきたことを示している（チャート7）。 それでもBCAの見解は、米ドルは今後12か月で5%上昇するとしている。ドル高はEPS成長を概ね1〜2ポイント押し下げるが、その大部分はラグのため来年に生じるだろう。単独でのドル上昇は株式市場にとって大きな逆風にはならないはずだ。実際にドルが上昇するのは、米国の堅調な経済成長と企業の売上拡大という文脈においてのみである。米国におけるインフラ投資パッケージの立法進展や米国の企業設備投資の改善は、ドルの見通しを高めるだろう。 昨秋の大規模ハリケーンが第4四半期の決算に与える影響は、S&P 500およびほとんどのセクターにとって限定的だろう。天候に敏感な複数の産業（保険、航空、化学、精製、レジャー等）は第3四半期の結果に大きな混乱を受けた。これらの産業は第4四半期にいくばくかの反動増が見られる可能性が高い。 投資家は2017年第4四半期にマージンが6四半期連続で改善することに懐疑的だ。BCAの見解では、我々はマージンにとって一時的な「甘いスポット」にあり、これは今後数四半期続くはずだが、賃金上昇圧力が表面化するにつれてその後はマージンの長期的な平均回帰が再開するだろう。 結論として、我々は2017年第4四半期および2018年初頭にかけて収益環境は株価を下支えすると予想する。その先では、EPS成長は2018年後半に減速を始め、2019年に入ると株価にとってより逆風となるだろう（チャート8）。株式を債券に対してオーバーウェイトのまま維持せよ。 Chart 7 The Dollar Should Not Be##BR##A Factor In Q4 Earnings Season 第4四半期の決算シーズンにおいて、ドルは要因とならないはずだ 第4四半期の決算シーズンにおいて、ドルは要因とならないはずだ Chart 8 Strong S&P Growth Ahead,##BR##Will Start To Slow Soon S&Pは今後強い成長が見込まれるが、まもなく減速し始めるだろう S&Pは今後強い成長が見込まれるが、まもなく減速し始めるだろう FRB議長交代：順風満帆か？ Chart 9 December's CPI Data Will Be Met##BR##With A Sigh Of Relief From The Fed 12月のCPIデータはFRBに安堵のため息をもたらすだろう 12月のCPIデータはFRBに安堵のため息をもたらすだろう 11月の月次で0.1%と期待外れだった伸びの後、12月のコアCPIは月次で0.3%の反発を示した（チャート9）。歓迎すべきニュースだが、いくつか留意点がある。第一に、伸びは住宅と医療ケアの2つのサブコンポーネントに集中していた。住宅はコアCPIの40%以上を占め、我々のモデルは今後の緩和を示唆している。第二に、コアサービス（住居と医療を除く）インフレは依然として2%未満と弱く、コア財の価格はなおデフレ傾向にある。第三に、年率のコアインフレ率はわずか1.8%である。コアCPIの2.4〜2.5%はコアPCEデフレーターに対するFRBの2%目標と整合的である。 12月の小売売上高のリポートは、2018年末時点での景気の明るいトーンを補強した。アトランタ連銀のGDPNowによる2017年第4四半期の推定は1月12日時点で3.3%と、1月5日の2.7%から上方修正された。 米国のインフレは年末までに徐々に目標に戻るはずである。米国のフィクスト・インカム・ポートフォリオでは、投資家はベンチマークを下回るデュレーションを維持し、名目国債に対してTIPSをオーバーウェイトにすべきだ。インフレ・ブレークイーブンの上昇はイールドカーブをスティーピングさせるバイアスも生むだろう。コアCPIの反発は確かに心強いが、FRBがインフレが本当に目標に向かっていると一層自信を持つには、さらに確かな数値が必要だ。3月のFOMC会合までにあと2件のCPI公表があるため、FRBはその時までに利上げを決断するための証拠を得るかもしれない。 我々は来たる2月のFOMC議長就任に関して、パウエル氏への移行は円滑に進むと予想しており、それにより金融政策の段階的正常化が確実となるだろう。パウエル氏はFF金利を推定の終点である2.75%に徐々に近づける過程で波風を立てたくないはずだ。4 我々がFOMC指導部の移行が円滑に行われると断言する理由はいくつかある： FRB議長の前例：過去のFOMC指導部交代において、平均すると金融政策の軌道は約13か月間継続してから方向転換した（チャート10）。例えば、グリーンスパン退任（2006年2月）の後、バーナンキ前議長はさらに4回の利上げを続け、引き締めサイクルは2006年6月にピークに達した。イエレン前議長は2014年初めにバーナンキが去った後、ほぼ2年間ゼロ金利政策（ZIRP）を維持した。グリーンスパン議長はボルカーが始めた引き締めの軌道を維持したが、1987年の株式市場クラッシュ後にクレジットクランチを回避するため一時的に中断した。その後グリーンスパン議長は1年以上にわたり利上げを再開した。コンフォーミングな中道派として知られるパウエル議長も先人の流れに従うだろう。米国の金融政策は、世界成長に対する予期せぬショックやインフレの想定外の軌道の逸脱がない限り、イエレン前議長の政策から大きく変わらないだろう。 Chart 10 Fed Chair Precedents: Continuous Monetary Policy Path FRB議長の先例：継続的な金融政策の道筋 FRB議長の先例：継続的な金融政策の道筋 FOMCの構成変化：地域連銀総裁のローテーションに伴い、毎年FOMCの投票メンバーは異なる顔ぶれになる。今年は複数の地域総裁の退任と理事会の空席で不確実性が高まっている。2018年の投票FOMCメンバーの構成は2017年に比べややタカ寄りになるだろう（チャート11）。金融政策の連続性と有効性は、先物市場で既に織り込まれている今後の追加利上げ（少なくとも2回）や2018年に期待されるさらに3回の利上げ見込みによりさらに促進されるだろう。ミネアポリス連銀総裁カシュカリとシカゴ連銀総裁エバンスは今年、投票権のないメンバーとして退任する。カシュカリは最もハト派と見なされ、2020年に投票権を持つメンバーとして戻る予定であり、エバンスは2019年に復帰するだろう。 Chart 11 Composition Of Voting FOMC Members 2017 Vs. 2018 円滑な移行？ 円滑な移行？ 対照的に、クリーブランドのメスター、サンフランシスコのウィリアムズ、リッチモンドのバーキンの到着は政策をややタイト寄りに傾ける。最も重要なのは、ニューヨーク連銀のダドリー（中道派）がイエレンの任期が来月満了してから約5か月後に退任することである。オバマ政権時代に任命された理事のレール・ブレイナードは、現存する2人のハト派のうち最もハト派の投票者として残るだろう。FOMCのタカ派寄りの傾向はもはや認識の問題ではなく現実のものになる。トランプ大統領によるマーウィン・グッドフレンドの理事指名は中立化に向けた動きを促すはずだ（グッドフレンドは必ずしも明確なタカ派ではなく、デフレ対策にも慎重である）とともに、2018年に少なくとも4人の理事でFRBが運営されることを確実にするだろう。グッドフレンドの承認が成功すれば、副議長と残る2名の理事の合計3つの空席だけが残ることになる。限界的には、2018年のFOMC投票メンバーは若干タカ派寄りに傾くが、歴史は新議長が急激な政策転換よりも段階的な移行を好むことを示唆している。 FRBの空席：理事会の3つの未埋めの空席は、来月のイエレンからパウエルへの円滑な指導権移行を妨げるべきではない。近年、FRBの空席の継続期間は過去の年と比べて長くなっている。超党派政策センターの最近の報告によれば5、長期にわたる空席は13の独立金融規制機関の中でFRBに最も顕著に見られる。1986年以降のFRBの空席率67%は、1947年〜1986年の21%を大きく上回っている（チャート12）。同センターはまた、2000年1月1日以降、連邦準備理事会に少なくとも1つの空席がある期間が80%以上であったと計算しており、「満員のFRB理事会はかつての空席ほど珍しい」という点を強調している。FOMCは1947年〜1986年の間は大部分（79%）で満員であったが、過去30年ではその割合は3分の1（33%）に過ぎなかった（チャート13）。したがって、FOMC構成の構造的変化でさえ、2015年12月のゼロ金利政策からの離陸（2006年6月以来の初の利上げ）や昨年9月のFRBバランスシート正常化の開始を妨げることはなかった。投資家への示唆は、FOMCはかなり前から高い空席率の下で運営しており、そのような状況に慣れているため、空席は今年のFRBの政策軌道やイエレンからパウエルへの移行において大きな役割を果たすべきではないということである。 Chart 12 Vacancies Are Now The Norm スムーズな移行？ スムーズな移行？ Chart 13 More Than One Vacancy Is Not Uncommon Too スムーズな移行ですか？ スムーズな移行ですか？ FOMCにおける反対意見：FRB理事会の定員未満であっても、2005年以降理事による反対はなかった（チャート14）。我々は過去のサイクルと同程度の頻度の反対があると予想している。2017年の4件の反対はいずれも地域連銀総裁によるものであった。イエレン議長は理事会のメンバー時代にも、サンフランシスコ連銀総裁時代にも意見の不一致を表明したことはない。注目すべきは、パウエル次期議長は2012年に理事会に加わって以来、反対票を投じたことがないことである。さらに、理事会メンバーによる反対表明は通常より緩和的な政策を求めるものであった（78%が緩和志向で、28%が引き締め志向）。例えば、2015年秋のサイクル最初の利上げ前に、2人のハト派のFRB理事がイエレン議長に反対した。ブレイナード理事とタルーロ理事は、インフレが依然として低すぎると考え、利上げを2016年に先送りすべきだと主張した。彼らは先行きリスクが下振れ要因として残るため、早まって行動するより「待って様子を見る」方がリスクが低いと考えた。この意見の相違の一因は、市場ベースのインフレ期待に関する見解の相違にあった。原油価格と密接に関連して、市場ベースの長期インフレ期待は低下していた。同様に2017年にはミネアポリス連銀総裁カシュカリとシカゴ連銀総裁エバンスが懸念を示して意見を異にした。彼らは、低インフレの持続がFOMCが述べたような純粋に「一時的な要因」によるものとは限らないと主張した。 Chart 14 Dissent By Reserve Bank Presidents And Fed Governors スムーズな移行？ スムーズな移行？ 結論：2018年にFRB政策に最も重大な影響を与えるのは、FRBの構成ではなく経済とインフレの軌跡だ。2017年12月のFOMC会合ではインフレや名目GDPターゲティングの採用を検討する支持が一部にあったが、FRBは現行の政策にコミットし続けるだろう。一方、パウエル新議長は前任者と同様に利上げに対して段階的なアプローチを維持する可能性が高いが、FOMC投票メンバーの構成はわずかにタカ寄りである。2018年初めの理事会の空席はリスクではあるが、過去の空席が劇的な政策変更を引き起こしたことはない。BCAは今年3〜4回の利上げを予想しているが、ポートフォリオのリスクを軽減するにはまだ時期尚早である。株式を債券に対してオーバーウェイトで維持せよ。 John Canally, CFA, シニア・バイス・プレジデント 米国インベストメント・ストラテジー johnc@bcaresearch.com Jizel Georges, シニア・アナリスト jizelg@bcaresearch.com 1 BCAリサーチのU.S. ボンド・ストラテジー ウィークリー・レポート「January Effect」、2018年1月9日掲載を参照のこと。usbs.bcaresearch.comで入手可能。 2 BCAリサーチのU.S. エクイティ・ストラテジー ウィークリー・レポート「Girding For A Breakout」、2017年5月1日掲載を参照のこと。uses.bcaresearch.comで入手可能。 3 BCAリサーチのU.S. エクイティ・ストラテジー インサイト「What's Up With SPX Revenue Vs. Profit Revisions」、2018年1月12日掲載を参照のこと。uses.bcaresearch.comで入手可能。 4 https://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20171213.pdf 5 "Financial Regulators Struggling With Longer Vacancies At The Top", Schardin, Justin and Sheth, Ashmi, Bipartisan Policy Center, March 2017.

ハイライト 日本経済は好調です。これにより日銀はQQE（量的・質的金融緩和）プログラムから段階的に離脱することが可能になっています。 しかし、インフレが金融環境の直接的な関数であり続けるため、YCC（イールドカーブ・コントロール）プログラムは当面維持されるでしょう。 円のポジショニングとバリュエーションがこれほど歪んでいるため、特にユーロに対して円のリレーが生じる可能性があります。EUR/JPYをショートします。 米連邦準備制度と同様に、カナダ銀行（BoC）も今年に3回利上げするでしょう。しかし、市場はすでにカナダの利上げを米国よりも多く織り込んでいます。USD/CADはニュートラルを維持します。ただし、CADはNOKに対して下落圧力を受けるでしょう。CAD/NOKをショートします。 特集 チャート I-1 JPY 対 債券：決別 JPY対債券：決別 JPY対債券：決別 ここ数か月、USD/JPYに興味深い変化が起きました。米国の国債利回りから切り離され始めたのです（チャート I-1）。大部分は、2017年にドル指数が10%下落したことに起因するドル自身の弱さが反映されています。しかし昨年のドルの弱さにもかかわらず、9月7日以降は実質的に横ばいでした。円が債券利回りから切り離されたもう一つの要因は、欧州中央銀行（ECB）が独自の資産購入プログラムの終了を発表したことで、次に購入縮小の対象になるのは日銀だと見なされたことです。 1月8日、日銀はその方向に動き始め、長期JGBの買入れを縮小し始めました。その日以降、世界の債券は売られ、円も勢いを取り戻しました。我々は円のベア相場が終わったとは考えていませんが、ユーロに対してプレイ可能なリレーが生じる可能性が高いと見ています。 太陽は昇る 日銀が一部の金融刺激を取り除きたいと考えるのは正当です。日本経済は全てのシリンダーで稼働しており、改善は幅広く見られます。 資産価格の上昇と23年ぶりの低水準の失業率に支えられた消費者信頼感は過去最高水準に達しています（チャート I-2）。これは実質家計支出を引き続き支え、2015年から2017年初めまでの持続的な縮小の後、現在はほぼ年率2%のペースで成長しています。 家計支出を支えるもう一つの要因は賃金面です。契約賃金はすでに2006年以来の最速ペースで伸びており、残業代を除く賃金は1998年以来見られなかったペースで拡大しています（チャート I-3）。さらに、求人倍率は1974年以来の高水準にあります。これにより、安倍晋三首相が企業と賃上げを巡って繰り広げている圧力が実を結び、今春の賃金交渉で加速的な上昇が生じる可能性が高まります。 チャート I-2 日本の家計は意気軒昂 消費者信頼感調査 日本の世帯は活気にあふれている 消費者信頼感調査 日本の世帯は活気にあふれている チャート I-3 賃金成長が加速 賃金の伸びが加速している 賃金の伸びが加速している 企業の信頼感も急上昇しています。日本の製造業PMIは日本基準で高い水準にあり、現在54であり、中小企業の信頼感は工業生産の加速を示唆しています（チャート I-4）。 金融市場もこの状況を裏付けています。日経平均の急騰が投資家の注目を集めていますが、さらに印象的なのは小型株の強さで、2015年以降大型株を17%アウトパフォームしています（チャート I-5）。この動きは信用成長の回復と一致しており、通常は堅調な成長見通しと関連します。 我々の系列誌であるザ・バンク・クレジット・アナリストが開発したGDPモデルは、これらの諸現象を要約しており、日本の実質GDP成長率は2018年前半に年率3%に達する可能性があると予測しています（チャート I-6）。したがって、日本経済はさらに勢いを増すと見られます。 チャート I-4 日本企業も好況感を実感##br##している 日本企業も好調を実感している 日本企業も好調を実感している チャート I-5 小型株は明るい見通しを示唆##br##している スモールキャップは明るい見通しを示す スモールキャップは明るい見通しを示す チャート I-6 日本の成長は##br##勢いを持っている 日本の成長に勢いがある 日本の成長に勢いがある では、こうした改善を支えている要因は何でしょうか。 第一に、日本の財政の流れが変わりました。2012年から2016年にかけて財政政策は日本の経済活動に年間平均0.6%分のブレーキをかけていました。しかし2017年には財政政策は緩和に転じ、GDPに0.2%の押し上げをもたらしました。 第二に、日本は新興市場（EM）成長の回復から大きな恩恵を受けています。IMFによれば、新興市場の成長が1%ショックした場合、日本の成長に与える影響は50ベーシスポイントであり、これは米国への同じショックのほぼ5倍に相当します。これは日本の輸出の43%が新興市場向けであるためです。 第三に、新興市場の活動が日本に与える影響は、円の逆循環的な性質によって増幅されます。世界および新興市場の成長がより力強くなると円は弱含み、これが日本の金融環境を緩和します。この現象は昨年顕著に表れ、過去16か月で金融環境は1標準偏差分緩和しました。 これらの動きが成長改善と日銀のトーンの変化の土台を築いたのです。 結論： 日本は非常に好調です。消費者と企業の期待は高く、支出は増加しており、GDPはさらに加速する見込みです。財政引き締めの緩和、強い新興市場、そして金融環境の緩和がこれらの改善を支えています。日銀はこれに注目しています。 日銀はどこまで踏み込めるか？ 日銀はここ数か月、政策変更に動きたがっていました。2017年11月、日銀総裁の黒田氏は「リバーサル・レート」という概念について言及していました。リバーサル・レートとは、金利をそれ以下に下げると追加の利下げが経済活動にとって収縮的になる金利水準を指します。これは、その水準を下回ると金利の低下が銀行の金利マージンを損ない、商業銀行が民間部門への貸し出しを抑制し始めるためです。 日銀がリバーサル・レートについて声を大きくしていた理由は、このレートが商業銀行のバランスシートに保有される証券の量と逆相関関係にあるからです。商業銀行が政府債を多く保有している場合、金利が非常に低い水準に下がるとこれらの証券の評価額が上昇し、低い金利マージンの悪影響を相殺します。日本の問題は、日銀が政府の発行額より多くのJGBを吸い上げたため、銀行の保有残高が急速に減少していたことです（チャート I-7）。これはリバーサル・レートの上昇を意味し、日銀の政策運営がやや制約されていることを示していました。 12月にインフレが上振れサプライズを起こしたとき、金融市場は激しく反応しました。日本の名目利回りはあまり動きませんでしたが、日本のインフレ期待が急上昇し、それが日本の実質金利の急落を促しました（チャート I-8）。これは日本の金融環境を事実上緩和させ、日銀が資産購入を調整するための絶好の口実を作りました：債券購入の微調整による負の影響は緩和され、日銀の見解ではリバーサル・レートの低下により金融環境の制御を失うことはないと考えられたのです。 このような政策行動とレトリックの変化にもかかわらず、我々はまだイールドカーブ・コントロール（YCC）プログラムの終わりを予想していません。食料とエネルギーを除くインフレはわずか0.3%にとどまり、日銀の2%目標や1%ですら大きく下回っています。1%台は緩和をより現実的に解除するレベルでしょう。 さらに、日銀はやや板挟みの状況にあります。確かに経済は大きく改善していますが、これはインフレ動向を十分に説明するものではありません。日本の設備稼働率は日本のコアインフレ変動のわずか3%しか説明しておらず、世界の稼働率は10%にとどまります。むしろ日本のインフレを説明する最良の要因は金融環境（FCIs）でした。他のどの国でも金融環境がこれほどまでにインフレ動向を説明することはありません。最近の日本のインフレの動きは、2010年以来の日本の金融環境の変化と完全に整合しています。この関係に基づくと、食料とエネルギーを除くCPIは2018年6月に0.7%でピークに達する可能性が高いです（チャート I-9）。 チャート I-7 QQEのために##br##リバーサル・レートは低下している 日本のリバーサル・レートはQQEのために低下している 日本のリバーサル・レートはQQEのために低下している チャート I-8 インフレ期待の急上昇 インフレ期待の急上昇 インフレ期待の急上昇 チャート I-9 金融環境の緩和で##br##インフレは上昇している 金融環境が緩和されたため、インフレが加速している 金融環境が緩和されたため、インフレが加速している しかし、日銀が緩和をあまりに速く取り除けば、円は上昇し金融環境は急激に引き締まります。おそらくインフレは大幅に弱まり、当初の利上げ理由が無効化されるでしょう。これらの力学は少なくとも今後12～18か月はYCCが継続されることを示唆しています。 結論：日銀は間もなくQQEプログラムを完全に廃止するでしょう。しかし、これはイールドカーブ・コントロールの解除を意味するものではありません。これは日本のインフレが日銀の目標から極めてかけ離れていることと、日本のインフレ率が金融環境に非常に敏感であることの両方によります。したがって、よりタイトな政策による市場の反応としての強い円が金融環境を引き締めれば、インフレは崩壊し、引き締めの必要性自体がなくなってしまうのです。 投資への示唆 USD/JPYは割高で、購買力平価が示す公正価値より16%高く取引されています。さらに、円はGDP比4%の好ましい経常黒字に支えられています。加えて、グローバル投資家はデュレーションをアンダーウェイトしてきました。こうした現象は円にとってネガティブになる傾向があります。投資家が現在のようにデュレーションを大幅にアンダーウェイトしている場合、円がリレーする可能性が高まります（チャート I-10）。 確かに2014年にも投資家は現在と同様に債券にネガティブでしたが、USD/JPYは下落しました。これは当時、日銀が資産購入プログラムの拡大を発表したためです。今日は日銀がQQEを放棄する方向に動いており、これはショートカバーを伴うリレーを誘発する可能性が高いです。 では、投資家は円に対してどの通貨を売るべきでしょうか。我々はユーロが米ドルに代わる興味深い選択肢であると考えます。 現在、EUR/JPYは極めて割高です。長期的には、購買力平価ベースでEUR/JPYは通常のレンジから大きく外れて取引されています（チャート I-11）。さらに、金利差やリスクアペタイトを織り込む指標ではUSD/JPYはやや割高ですが、同様の比較でEUR/USDは非常に高値圏にあります。つまり、短期的なバリュエーションの観点からEUR/JPYは非常に需要が高い水準で取引されていることになります（チャート I-12）。したがって、戦術的にはこのクロスをショートするタイミングが徐々に整いつつあります。 チャート I-10 デュレーションのポジショニングは##br##円に上昇リスクを示唆 デュレーションのポジショニングは円の上方リスクを示している デュレーションのポジショニングは円の上方リスクを示している チャート I-11 EUR/JPYは割高 EUR/JPYは割高です EUR/JPYは割高です チャート I-12 EUR/JPYに対する戦術的リスク EUR/JPY向けタクティカル・リスク EUR/JPY向けタクティカル・リスク . EUR/JPYをショートすることを支持する追加の理由として、相対的な金融環境があります。ユーロ圏の金融環境は日本に対して米国よりもはるかに引き締まっています（チャート I-13）。その結果、セクターの偏りを調整しても、欧州株は現在日本株に対して米国株よりも大きくアンダーパフォームしています。これは、日本の相対的な経済見通しが米国と比較するよりもユーロ圏と比較した場合により明るいことを示しています。つまり、円は米ドルよりもユーロに対してより大きく上昇する余地があるということです。 最後に、ユーロと円の間のポジショニングも極めて偏っています。チャート I-14 が示すように、投機筋が同時にユーロをロングし円をショートしているとき、EUR/JPYはその後に調整を経験する傾向があります。 チャート I-13 ユーロ圏の金融環境は##br##米国よりも大きく引き締まった ユーロ圏の金融環境指数は米国のそれよりも一層引き締まった ユーロ圏の金融環境指数は米国のそれよりも一層引き締まった チャート I-14 ユーロの##br##偏ったポジショニング EURにおける偏ったポジショニング EURにおける偏ったポジショニング 以上の要因は円の大きなリレーの可能性を示唆しますが、このリレーの持続力は限定的である可能性が高いです。日銀が放棄しようとしているQQEは、ここ数か月にわたって半ばしか実施されておらず、債券買入れは8兆円の目標を大きく下回っていました。 日銀は当面YCCの維持にコミットしています。このプログラムを放棄して初めて円に対する持続的なサポートが生まれます。それまでは、どのような円のリレーも金融環境を引き締めインフレを傷つけるため、円高は「レンタル」するもの（短期的に借りるベット）であり、保有するものではありません。日本の最終的な政策金利が上昇できる余地はまだ小さいのです。 結論：QQEの放棄は円高を引き起こす可能性が高いです。そのリレーは、評価、ポジショニング、金融環境が欧州通貨と比べて特に悪化しているため、ユーロに対して最も顕著になるでしょう。明確に言えば、円高は反動的な動きとなる可能性が高く、強い円は日本に深刻なデフレ圧力を与えるため、日銀のYCCプログラムは堅く維持されるでしょう。我々はEUR/JPYを133.79でショートしています。 CAD：BoCとNAFTAの狭間に チャート I-15 カナダは賃金上昇を経験する見込み Canada:##br## インフレ環境が出現 カナダの賃金は上昇する見込み カナダ：インフレ圧力が高まり始めている カナダの賃金は上昇する見込み カナダ：インフレ圧力が高まり始めている カナダ銀行（BoC）は来週会合を開き、今月政策金利を引き上げる確率が高まっています。カナダ経済も国内部門主導で非常に堅調です。実質消費支出は約10年ぶりの速さで伸び、失業率は40年ぶりの低水準にあり、設備投資は2014年から2016年の原油価格暴落で打撃を受けた後回復しています。 この背景により、カナダ経済は既に自国のキャパシティ制約に達しつつあります。BoCはカナダの産出ギャップが閉じたと見積もっています。さらに、最近のビジネス・アウトルック調査はこのメッセージを裏付けています：記録的な割合のカナダ企業がキャパシティ制約のため需要に応えられないと述べており、人手不足の数と深刻度の増加は労働市場の逼迫を示しています（チャート I-15）。逼迫したキャパシティと賃金上昇は、すでに可視化されているコアインフレの回復を支えるでしょう。現在コアインフレはすでに1.8%に達しています。 その結果、我々はBoCが今年はFRBと同程度に利上げするだろうと見ています。しかし、この展開がCADに与える影響は限定的かもしれません。投資家は今後12か月でカナダの利上げを米国より多く織り込んでおり、それぞれ82ベーシスポイント対60ベーシスポイントとなっています。さらに、投機筋は再びルーニー（カナダドル）を大幅にロングしており、強い経済指標が実際にCADをさらに押し上げるためのハードルは高いままです。 さらに、NAFTAはカナダにとって依然大きなリスクです。当社のチーフ・ジオポリティカル・ストラテジスト、マルコ・パピッチが11月のスペシャル・レポートで述べたように、トランプ大統領はNAFTAの破棄に関してほとんど制約がない権限を持っています（表 I-1）。1 もしNAFTAが崩壊すれば、カナダは最終的に依然として優遇措置のあるカナダ・米国自由貿易協定に戻る可能性が高いでしょう。したがって、カナダと米国間の貿易への影響は一時的である可能性が高いです。しかし、痛みの大部分はカナダの設備投資に及ぶはずです。NAFTA解消に伴う高い不確実性は企業にカナダでの拡張計画を放棄させ、北米の生産能力を直接米国で拡大させるよう促し、サプライチェーンにおける規制リスクを回避するでしょう。これによりカナダの将来の成長プロファイルは抑制されます。 表 I-1 トランプは貿易に関してほとんど制約を受けない 円：QQEは終わった！YCC万歳！ 円：QQEは終わった！YCC万歳！ 石油がCADの穴埋めをする可能性は低いです。ブレントがほぼ70米ドル/バレルに達した時点で、当社のコモディティ＆エネルギー戦略担当の目標に到達しました。OPEC 2.0は価格がさらに大幅に上昇することを容認しないでしょう。なぜならそれはシェール生産者に能力拡大のインセンティブを与え、2014年前の供給過剰のダイナミクスを再生してしまうからです。さらに、カナダにとって最も関連性の高い指標であるウエスト・カナダ・セレクト（WCS）はWTIやブレントに対して大きくディスカウントされたままです。これはアルバータ州外に油を輸送するパイプライン容量が不足しているためで、カナダは自国の石油に溺れている状況です。この状況はすぐには変わりません。 チャート I-16 CAD/NOKは伸び過ぎている CAD/NOKは行き過ぎている CAD/NOKは行き過ぎている これらを踏まえ、我々は12か月ベースでUSD/CADを中立と見ていますが、今後数週間で1.29への戻りは起こり得ると考えます。しかし、カナダ産原油がディスカウントで取引されている一方で、CADはG10のもう一つのペトロ通貨であるNOKよりも良好に推移しています。これは、CADのリスクを織り込むよりクリーンな方法としてCAD/NOKのショートが考えられることを示唆しています。 第一に、カナダドルは現在ノルウェークローネに対して非常に割高で、購買力平価比で11%高く取引されています（チャート I-16）。生産性やコモディティ価格のような他の要因で調整しても、CADは1994年以来の最大のNOKに対するプレミアムで取引されています。これはCAD/NOKにとってリスクを示します。ルーニーは貿易政策リスクにさらされている一方、ノッキー（NOK）はそうではありません。 第二に、国際収支の面はNOKにとって非常に有利です。ノルウェーは経常収支黒字がGDP比で5.5%であるのに対し、カナダは2.8%の赤字です。さらに、ノルウェーはGDP比210%のネット国際投資ポジション（NIIP）を有しており、G10で最大です。強いNIIPは実効実質為替レートの上昇と関連します。 第三に、カナダ経済の勢いは投資家によく知られているため、投資家がCADをこれほどロングし、BoCから多数の利上げを期待している理由となっていますが、ノルウェーの良好な側面は見過ごされています。ノルウェーの先行指標は依然上昇しており、産業生産と実質GDP成長は加速しています。 第四に、ノルゲス銀行はNOKの弱さに反応しています。12月の会合で同行はトーンを調整し、NOKはノルウェー中央銀行の目から見ると金融環境を過度に緩和していると述べました。これはノルウェーから期待される25ベーシスポイントの利上げが過小評価されている可能性を示唆します。また、カナダとノルウェーの間で期待される12か月の利上げ差が現在約60ベーシスポイントと異常に開いていることが正常化する可能性も示しています。 最後に、CAD/NOKは長期的および短期的なヒストリカルレンジの上限に向かって取引されています。CADのポジショニングはロング側にかなり偏っていますが、ノルウェークローネは投機筋によりショートされています（ノルゲス銀行のデータ）。したがって、NAFTAの不確実性、BoCの見通しが既に織り込まれていること、WCSとブレントのディスカウントが縮小する可能性が低いことを考えると、リスクはCAD/NOKの下落方向に偏っています。 結論: カナダ経済は好況です。これはBoCがFRBに歩調を合わせ、今年少なくとも3回は利上げすることを意味します。しかし、市場はすでに米国よりもカナダの利上げを多く織り込んでいます。さらに、原油価格の上方余地は限られており、WCSベンチマークは引き続きブレントに対して大幅なディスカウントで取引されるでしょう。したがって、USD/CADは上値余地が限定的である一方、下値も限定的です。しかし、CAD/NOKは現在水準から多くの下落リスクを抱えています。我々は今週このクロスをショートし、エントリーポイントを6.398に設定します。 マチュー・サヴァリー, 副社長 外国為替ストラテジー mathieu@bcaresearch.com 1 BCAのグローバル・インベストメント・ストラテジー スペシャル・レポート「NAFTA - Populism Vs. Pluto-Populism」（2017年11月10日付）を参照ください。gis.bcaresearch.comで入手可能です。 通貨 米ドル チャート II-1 USD テクニカル 1 米ドルのテクニカル 1 米ドルのテクニカル 1 チャート II-2 USD テクニカル 2 米ドル テクニカル 2 米ドル テクニカル 2 米国の最近のデータは混在しています： 非農業部門雇用者数は下振れし、148千人となりました。 さらに、労働参加率は下振れし、62.7%となりました。 ISM非製造業PMIも予想を下回り、55.9となりました。 しかし、消費者信用の変化は予想を上回り、279.5億ドルとなりました。 週の始め、ドルは強含みで始まりましたが、やがて収束しました。背景には比較的タカ派的なECB議事録や日本の政策調整があります。総じて、市場がフェドのドットプロットを織り込み続けるため、ドルに上昇圧力がかかると予想しています。 レポートリンク： A Cold Snap Doesn't Make A Winter - 2018年1月5日 10 Charts To Digest With The Holiday Trimmings - 2017年12月22日 Canaries In The Coal Mine Alert 2: More On EM Carry Trades And Global Growth - 2017年12月15日 ユーロ チャート II-3 EUR テクニカル 1 EUR テクニカル指標 1 EUR テクニカル指標 1 チャート II-4 EUR テクニカル 2 EUR テクニカル指標 2 EUR テクニカル指標 2 ユーロ圏の最近のデータは良好でした： コアインフレは予想を上回り、1.1%となりました。 さらに、経済センチメント指標も予想を上回り、116となりました。 小売売上高の前年比成長も上振れし、2.8%となりました。 最後に、失業率は8.8%から8.7%に低下しました。 ポジティブなデータにもかかわらずユーロは今週下落しました。ユーロは週初は弱含みでしたが、その後ECBのタカ派的議事録を受けて急騰しました。これは米国での利上げ期待の高まりによるものです。総じて、日銀が超ハト派政策を後退させる余地はECBよりも大きいため、EUR/JPYは下押しされると予想します。 レポートリンク： A Cold Snap Doesn't Make A Winter - 2018年1月5日 10 Charts To Digest With The Holiday Trimmings - 2017年12月22日 The Xs And The Currency Market - 2017年11月24日 円 チャート II-5 JPY テクニカル 1 JPY テクニカル 1 JPY テクニカル 1 チャート II-6 JPY テクニカル 2 JPY テクニカル分析 2 JPY テクニカル分析 2 日本の最近のデータは混在しています： 現金給与の前年比成長は予想を上回り、0.9%となりました。10月からも増加しています。 しかし消費者信頼感は下振れし、44.7となり前月から低下しました。 今週、円は急上昇しており、USD/JPYは1.7%下落しました。これは日銀が長期債の買入れを減らす意向を示したためです。市場はこれを日銀が超ハト派の金融政策からの出口に動き始めるシグナルと解釈しました。これらの動きは、特にユーロに対して円に上昇圧力を与え続けるでしょう。 レポートリンク： 10 Charts To Digest With The Holiday Trimmings - 2017年12月22日 Riding The Wave: Momentum Strategies In Foreign Exchange Markets - 2017年12月8日 The Xs And The Currency Market - 2017年11月24日 英ポンド チャート II-7 GBP テクニカル 1 GBPのテクニカルズ 1 GBPのテクニカルズ 1 チャート II-8 GBP テクニカル 2 GBP テクニカル分析 2 GBP テクニカル分析 2 英国の最近のデータは混在しています： 鉱工業生産の前年比成長は予想を上回り、2.5%となりました。 さらに、製造業生産の前年比成長も上振れし、3.5%となりました。 しかし、Halifaxの住宅価格の前年比は予想を下回り、2.7%となり、月次では0.6%の下落となりました。 今週ポンドは対ドルで横ばい、一方で対ユーロでは約1%下落しました。総じて、イングランド銀行（BoE）は大幅な利上げ余地が限られています。さらに、利上げとポンド高の結果としてインフレは緩和し始めるはずで、これがポンドに下押し圧力をかけるでしょう。 レポートリンク： 10 Charts To Digest With The Holiday Trimmings - 2017年12月22日 The Xs And The Currency Market - 2017年11月24日 Reverse Alchemy: How To Transform Gold Into Lead - 2017年11月3日 豪ドル チャート II-9 AUD テクニカル 1 AUDのテクニカル分析 1 AUDのテクニカル分析 1 チャート II-10 AUD テクニカル 2 AUD テクニカルズ 2 AUD テクニカルズ 2 オーストラリアの最近のデータは混在しています： 建築許可の前年比成長は予想を上回り、17.2%となりました。 しかし、11月の貿易収支は予想を下回り、-6.28億となりました。前月の-3.02億から悪化しています。 AUD/USDは今週横ばいでしたが、AUD/NZDは約1%下落しました。世界経済の成長は依然強いものの、韓国や台湾の輸出成長などの主要指標は減速に転じています。さらに、中国のマネーサプライ成長は減少を続けています。これらは中国の工業活動の一時的な減速を示唆しており、AUD/USDの弱含みにつながるでしょう。 レポートリンク： 10 Charts To Digest With The Holiday Trimmings - 2017年12月22日 The Xs And The Currency Market - 2017年11月24日 通貨ヘッジ：動的か静的か？ - グローバル投資家のための実践ガイド - 2017年9月29日 ニュージーランド・ドル チャート II-11 NZD テクニカル 1 NZDテクニカル 1 NZDテクニカル 1 チャート II-12 NZD テクニカル 2 NZドルのテクニカル指標 2 NZドルのテクニカル指標 2 キウイは年初来でほぼ5%上昇しており、世界成長が堅調に推移していることを反映しています。総じて、NZDは今年AUDをアウトパフォームすると予想します。ニュージーランドは金融環境の引き締まりに対してオーストラリアよりも感応度が低いためです。しかし長期的には、上昇余地は限定的です。新しいポピュリスト政権は移民抑制と、RBNZに複数目標（デュアル・マンダテ）を課すことを公約しており、これらはニュージーランドの中立金利を押し下げ、キウイに下押し圧力をかけるでしょう。 レポートリンク： 10 Charts To Digest With The Holiday Trimmings - 2017年12月22日 The Xs And The Currency Market - 2017年11月24日 Reverse Alchemy: How To Transform Gold Into Lead - 2017年11月3日 カナダドル チャート II-13 CAD テクニカル 1 CADのテクニカル 1 CADのテクニカル 1 チャート II-14 CAD テクニカル 2 CADのテクニカル指標 2 CADのテクニカル指標 2 カナダの最近のデータは概ね良好でした： 失業率は5.9%から5.7%へと改善し、ポジティブなサプライズとなりました。 さらに、雇用者数の純増も予想を上回り、78.6千人となりました。 住宅着工件数の年間成長も予想を上回り、217千戸となりました。 しかし、Ivey購買担当者指数は予想を下回り、60.4となりました。 USD/CADは火曜日、トランプがNAFTAから撤退するとの報道を受けて急騰しました。総じて、カナダドルの上値余地は限定的であると考えています。市場はすでにカナダの利上げを米国より多く織り込んでいるためです。この弱さはCAD/NOKのショートで利用できる可能性があります。複数の指標でこのクロスは大きく過大評価されています。 レポートリンク： 10 Charts To Digest With The Holiday Trimmings - 2017年12月22日 The Xs And The Currency Market - 2017年11月24日 Market Update - 2017年10月27日 スイスフラン チャート II-15 CHF テクニカル 1 CHF テクニカル 1 CHF テクニカル 1 チャート II-16 CHF テクニカル 2 CHF テクニカル指標 2 CHF テクニカル指標 2 スイスの最近のデータは良好でした： ヘッドラインインフレは予想通り0.8%でした。一方で月次のインフレは上振れし、0%となりました。 失業率も非常に低い水準で予想通り3%でした。 最後に、小売売上高の前年比成長は前月の2.6%に対し-0.2%と大きく上振れしました。 EUR/CHFは先週から比較的横ばいです。総じて、フランの上昇余地は限定的だと見ています。SNBは対外為替市場で積極的に介入を続けるでしょう。SNBが政策を変更するためには、スイスのインフレが相当期間高水準で推移する必要があります。 レポートリンク： 10 Charts To Digest With The Holiday Trimmings - 2017年12月22日 The Xs And The Currency Market - 2017年11月24日 長期フェアバリューモデルの更新 - 2017年9月15日 ノルウェー・クローネ チャート II-17 NOK テクニカル 1 NOK テクニカル指標 1 NOK テクニカル指標 1 チャート II-18 NOK テクニカル 2 NOK テクニカル 2 NOK テクニカル 2 ノルウェーの最近のデータは混在しています： ヘッドラインインフレは予想を上回り、1.6%となりました。 さらに、コアインフレも上振れし、1.4%となりました。 しかし製造業の生産成長は予想を下回り、0.3%となりました。 USD/NOKは原油価格が70ドル近辺に迫る中、約0.7%下落しています。それでも、USD/NOKの上値余地はここから限定的だと考えています。市場はフェドのさらなる利上げを織り込み始めるでしょう。それでも、より強い原油を見込む投資家はEUR/NOKをショートすることを検討できるでしょう。 レポートリンク： 10 Charts To Digest With The Holiday Trimmings - 2017年12月22日 Canaries In The Coal Mine Alert 2: More On EM Carry Trades And Global Growth - 2017年12月15日 The Xs And The Currency Market - 2017年11月24日 スウェーデン・クローナ チャート II-19 SEK テクニカル 1 SEK テクニカルズ 1 SEK テクニカルズ 1 チャート II-20 SEK テクニカル 2 SEKのテクニカル分析 2 SEKのテクニカル分析 2 2017年末に急落した後、USD/SEKは今年に入って比較的横ばいです。総じて、イングヴェス総裁は依然として非常にハト派ですが、最新の議事録では金融政策の変更が近づいていることを認めました。一方、副総裁のヤンソンは資産購入を継続することを支持しつつも、レポ金利を据え置くことは「受け入れがたい」と述べました。金融環境の引き締まりによるユーロ圏の減速を見込む投資家はEUR/SEKをショートすることを検討できます。 レポートリンク： 10 Charts To Digest With The Holiday Trimmings - 2017年12月22日 Canaries In The Coal Mine Alert 2: More On EM Carry Trades And Global Growth - 2017年12月15日 The Xs And The Currency Market - 2017年11月24日 トレード & 予測 予測サマリー コア・ポートフォリオ 戦術的トレード クローズド・トレード

Highlights U.S. Treasuries: U.S. Treasury yields are too low relative to the strength of global economic growth and the rising trend in U.S. inflation expectations. Maintain below-benchmark duration exposure in the U.S., stay underweight Treasuries versus global bond benchmarks, and continue to favor TIPS over nominals. Canada: The Canadian economic data is moving from strength to strength, and now price and wage inflation data is moving higher. The Bank of Canada will hike rates next week with additional increases likely in 2018. Remain underweight Canadian government bonds and stay long inflation protection (both through linkers and CPI swaps). 2017 Model Portfolio Performance Wrap-Up: We closed the books on the first full calendar year of our model bond portfolio with a total return of 3.75%. This was a small -13bps of underperformance versus our custom benchmark, coming entirely from underweight positions on longer-dated developed market government bonds that offset the asset allocation gains from overweights to corporate debt. Feature Chart of the WeekGlobal Bond Yields Are Too Low 2018 has started much as 2017 ended, with growth-sensitive assets rallying alongside robust economic data. Most major global equity markets are already up 2-3% after the first week of the year, with the U.S. NASDAQ, Japanese Nikkei and Italian MIB indices advancing over 4%. Global credit markets are also off to a strong start, with spreads for U.S. High-Yield corporate debt and EM hard currency corporate debt tighter by -17bps and -8bps, respectively. Even commodity markets have joined the party, with the benchmark Brent oil price hitting the highest level in nearly three years. The pro-growth, pro-risk backdrop is keeping upward pressure on global government bond yields. This is occurring primarily through the inflation expectations component of yields, which are rising in all developed economies (even Japan). Real yields, which are not rising despite the strength of the broad-based global growth upturn (Chart of the Week), have been drifting lower, providing some offset to rising inflation expectations. The primary trend for global yields remains upward, however - especially if growth remains solid and inflation expectations continue to push higher, giving central banks like the U.S. Federal Reserve the confidence to continue hiking interest rates. We continue to favor below-benchmark duration exposure, and overweight corporate bond allocations versus government debt, for global fixed income investors over the next 6-9 months. U.S. Treasuries: Still More Reasons To Sell Than Buy U.S. Treasury market participants have a lot to things to be nervous about at the moment. Likely future Fed rate hikes, the weakening U.S. dollar, rising oil prices, ongoing U.S. labor market strength, persistently booming economic growth, the never-ending equity bull market, the potential impact of the Trump fiscal stimulus, the Fed starting its balance sheet runoff - all factors that should force bond investors to expect yields to rise. Yet longer-dated Treasury yields continue to trade too low relative to the bond-bearish fundamentals. The current benchmark 10-year Treasury yield at 2.48% remains well below the fair value from our 2-factor regression model, which is now up to 2.94% (Chart 2). That valuation gap of 46bps is close to the widest levels seen in July 2016 and September 2017, which were both episodes that proved to be excellent entry points for bearish Treasury positions. The two inputs into our Treasury yield model are the global manufacturing PMI and bullish sentiment towards the U.S. dollar (USD). The PMI is included as an indicator of global growth and currently sits at 54.5 - the highest level in nearly seven years - led by strong readings in almost every major economy (Chart 3). This has been the primary driver of the fair value for the 10-year Treasury yield since global growth bottomed out and began to accelerate in mid-2016. Chart 210-Year Treasuries Are##BR##Overvalued On Our Model Chart 3Global Growth##BR##Is Booming Sentiment towards the USD is the second input to our Treasury model. It is included as a weakening greenback represents an easing of monetary conditions that could trigger a need for more Fed rate hikes that can push the Treasury curve higher from the short-end (and vice versa for a rallying USD). At the same time, a depreciating USD can drive U.S. inflation higher through higher costs of imported goods & services, which can raise bond yields through higher inflation expectations or greater Fed tightening expectations (again, the opposite holds true for a strengthening USD). Right now, both the strong PMI and weak sentiment towards the dollar are boosting the fair value of the 10-year Treasury yield. The fall in value of the greenback is particularly unusual, as it is flying in the face of widening interest rate differentials between the U.S. and the rest of the world (Chart 4, top panel). This is clearly a function of the fact that global growth is rapidly improving - especially in Europe - but very few central banks have yet to respond to that growth with interest rate hikes that match what the Fed has been delivering. So while actual interest rate differentials remain USD-supportive, expectations of some eventual tighter monetary policy outside the U.S. that could narrow those interest rate gaps are triggering speculative inflows into non-USD currencies. With the trade-weighted USD now 5% below levels of a year ago, this should lead to higher headline inflation in the U.S. in the next few months (middle panel). Combined with the continued strength in global oil prices, that means that the two biggest factors that weighed on realized U.S. inflation- the USD rally and oil price collapse of 2014/15 - are now both acting to boost inflation expectations (bottom panel). Throw in the growing body of evidence that a tight U.S. labor market that is putting gentle upward pressure on wage growth, and U.S. inflation expectations - which still remain 40-50bps below levels consistent with the Fed's inflation target - should continue to move higher in the next six months. Rising longer-term inflation expectations would typically result in bear-steepening pressures on the Treasury yield curve. That is not happening at the moment, however, with the 2-year/10-year Treasury curve still at a relatively flat 53bps at the time this report went to press. The flatness of the Treasury curve has worried investors, and even some Fed officials, given the well-known leading relationship between the yield curve and U.S. economic growth. It is too early to draw any conclusions between the shape of the curve and future U.S. economic growth, however, for several reasons: As mentioned above, inflation expectations are still well below levels consistent with the Fed's 2% inflation target on the PCE deflator (which translates to 2.5% on the CPI index used to price TIPS and CPI swaps). Both the European Central Bank (ECB) and Bank of Japan (BoJ) are still buying bonds through their asset purchase programs, although at a slower pace than previous years. This continues to depress local bond yields in Europe and Japan with spillover effects into the U.S. Treasury market - even as the Fed begins the slow runoff of Treasuries from its massive balance sheet. Data on mutual fund and ETF flows shows that there has been significant and sustained buying of bond funds by U.S. retail investors over the past couple of months. There has also been net selling of equity funds, however, suggesting that U.S. retail investors are rebalancing as the equity markets surge higher. Investor positioning in the U.S. Treasury market is very short at the moment, with the J.P. Morgan survey of "active" bond manager duration exposure at an all-time low and the net positioning on Treasury futures now slightly favoring shorts (Chart 5). It makes little sense to interpret a flattening Treasury curve as a signal that the bond market believes that the Fed was making a policy mistake if professional bond investors were running massive duration underweight positions that would benefit if bond yields rise. Chart 4Upside Pressure On U.S. Inflation##BR##From Oil & The USD Chart 5Big Duration Underweight##BR##Among U.S. Bond Managers All these factors muddy the economic signal provided by the Treasury curve at the moment. Nonetheless, we remain of the view that the Fed would not continue on its rate hiking path without U.S. inflation expectations moving sustainably back to levels consistent with the Fed's inflation target. In other words, the Treasury curve must bearishly steepen first through rising inflation expectations before bearishly flattening later through actual Fed rate hikes. The latter will dampen future U.S. growth expectations and eventually result in a cyclical peak in longer-dated Treasury yields, but from levels closer to 3% on the 10-year after inflation expectations "fully" normalize. Bottom Line: U.S. Treasury yields are too low relative to the strength of global economic growth and the rising trend in inflation expectations. Maintain below-benchmark duration exposure in the U.S., stay underweight Treasuries versus global bond benchmarks, and continue to favor TIPS over nominals. The Bank Of Canada Keeps On Playing Catch-Up The Canadian economic story continues to be the best within the developed world. The year-over-year growth rate for real GDP accelerated to over 3% late last year, primarily on the back of robust consumer spending (Chart 6). Even the lagging parts of the economy, like business investment and government spending, began to perk up last year. The momentum remained powerful at the end of 2017, with the unemployment rate in December hitting a 40-year low. The economic boom forced the Bank of Canada (BoC) to begin lifting interest rates last year, with two 25bp hikes occurring in July and September that unwound the easing from 2015. The rapid pace of growth has absorbed spare capacity much faster than the BoC originally projected. More hikes will be required if the current pace of growth is maintained, particularly with the BoC estimating that the neutral policy rate is around 3% and the current Overnight Rate is only at 1%. The Canadian consumer has been enjoying a powerful shopping spree. Real consumer spending growth is at 4% on a year-over-year basis - the highest level since early 2008 (Chart 7). This is led by a powerful surge in spending on consumer durables, where annual growth has surged to 10% (middle panel). Consumer confidence is booming and Canadian workers are enjoying the fastest pace of income growth since 2014 (bottom panel). Chart 6Robust Canadian Growth,##BR##Led By The Consumer Chart 7Canadian Consumers Are##BR##Confidently Spending Surprisingly, the powerful surge in consumer spending has occurred alongside some cooling of the overheated Canadian housing market. The growth rates of existing home sales and prices have both decelerated massively from the pace of the boom years in 2012-16 (Chart 8). The performance of house prices in the three biggest Canadian cities is now a mixed bag, with Vancouver prices reaccelerating, prices in Toronto decelerating and prices in Montreal growing only modestly (middle panel). Regulatory actions to limit the speculative buying of Canadian real estate by foreigners has helped dampen the surge in house prices in some markets. Although the bigger macro-prudential measures designed to tighten mortgage finance rules and reduce the amount of leverage in Canadian housing transactions has likely had a bigger effect. Canadian banks must now conduct stress tests to check if borrowers are able to pay off their mortgages if Canadian interest rates continue to rise. This represents a reduction in the marginal supply of riskier mortgage lending that will help restrain house price inflation in Canada's major cities. In addition, the supply of Canadian homes is growing with new home-building activity, both for single and multiple units, having picked up and overall residential investment growth now up nearly 5% on a year-over-year basis (bottom panel). With signs that the Canadian housing market has stopped rapidly inflating, the BoC can focus its interest rate policy on domestic growth and inflation considerations without worrying about pricking the housing bubble. On that front, the latest edition of the BoC's Business Outlook Survey, released yesterday, provided plenty of reasons to tighten monetary policy further. The overall survey indicator surged back to the peak seen last summer just before the BoC delivered its first rate hike (Chart 9). Capital spending intentions also rebounded back to the 2017 peaks, which bodes well for future gains in investment spending (second panel). Chart 8Canadian Housing Looking##BR##A Bit Less Frothy Chart 9BoC Business Outlook Survey Signaling##BR##Tightening Capacity Constraints The most interesting parts of the Business Outlook Survey were the capacity utilization measures. A greater share of companies were reporting labor shortages (third panel), with the highest percentage of firms reported difficulties in meeting unexpected increases in demand since 2007 (bottom panel). This suggests that the recent surge in employment, wage growth and price inflation are all sustainable. Headline and core CPI inflation are up to 2.1% and 1.8%, respectively, as of November. This is around the midpoint of the BoC's 1-3% target range (Chart 10). The Bank of Canada forecasts that CPI inflation will continue to rise and remain near 2% target in 2018, but all the risks are to the upside. The unemployment rate is now down to 5.7%, the lowest level since 1976 and well below the OECD's estimate of the NAIRU level at 6.5%. Average hourly earnings growth has surged in response, rising to just under 3% on a year-over-year basis since the trough in early 2017. The Phillips Curve appears to be alive and well in Canada. Canadian interest rate markets have already responded aggressively to the stronger growth and inflation data. Our interest rate discounters now show that the money markets are now expecting 61bps of BoC rate hikes over the next six months and 91bps over the next twelve months (Chart 11). With a 25bp hike at next week's BoC meeting now priced with almost full certainty, the current market pricing suggests at least one more hike will happen by June and nearly three more hikes by year-end. That would be even more hikes than we expect from the Fed in 2018, which is important for the Canadian dollar (CAD). The CAD has appreciated 16% since it bottomed out in early 2016, occurring alongside the rise in global oil prices over the same period (second panel). The price of Canada's Western Select grade of crude oil has lagged the move in other oil benchmarks massively over the past several months, due to a lack of pipeline capacity getting oil out of Alberta that has created a supply glut. This may limit the degree to which additional gains in global energy prices benefit the Canadian dollar from a terms-of-trade perspective. This will not prevent the BoC from delivering additional rate hikes, however - especially if that merely matches the 75bps of Fed rate hikes that the FOMC is projecting, and which we expect, over the rest of the year. In terms of investment strategy, the combination of robust Canadian economic growth and rising inflation pressures leads us to continue recommending an underweight stance on Canadian government bonds, as we have maintained since July 11, 2017. This week, we are introducing two new tactical trades that should benefit as Canadian inflation moves higher and the BoC tightens more aggressively in response (Chart 12): Chart 10The Canadian Phillips Curve Is Not Dead Chart 11The Market Now Expects A Lot From The BoC Chart 12Two New Tactical Trades In Canada Short the June 2018 Canada Bankers' Acceptance futures contact vs. the December 2018 contract (middle panel). The market is now discounting the likely maximum amount of tightening that the BoC can deliver by year-end, while there are only little more than two hikes priced by June. Assuming that the BoC hikes next week, that means that there is only one more hike expected by June. With three more BoC meetings scheduled between next week and June, that provides plenty of opportunities for hawkish surprises from the BoC before then. In other words, this trade is a way to play for the BoC being forced to front-load more rate hikes into the first half of 2018 versus the latter half. Long 10yr inflation expectations through linkers versus nominal government bonds, or using CPI swaps (bottom panel). Given the pickup in domestic inflation pressures currently underway, plus the rise in global inflation coming from the surge in commodity prices, there is room for Canadian market-based inflation expectations to rise from the current level of 1.7%. Bottom Line: The Canadian economic data is moving from strength to strength, and now price and wage inflation data is moving higher. The Bank of Canada will likely hike rates next week with additional increases likely in 2018. Remain underweight Canadian government bonds. 2017 GFIS Model Bond Portfolio Performance: A Brief Review The turn of the year marked the end of the first full calendar year for the Global Fixed Income Strategy (GFIS) model bond portfolio. This now allows us to report the performance of the portfolio on the same basis as our clients. In the future, we will publish quarterly reviews of the portfolio returns after the end of each quarter in a calendar year (in April, July, October and January). The GFIS model portfolio returned 3.45% in 2017. This underperformed our custom performance benchmark (a blend of the Barclays Global Aggregate Index with global high-yield corporate debt) by -13bps (Chart 13). That underperformance can be entirely attributed to our government bond duration allocations, which lagged the benchmark by -46bps. Our recommended credit positions were a positive contributor, generating 33bps of outperformance primarily through overweights to U.S. Investment Grade and High-Yield corporate bonds. The detailed breakdown of the 2017 returns is presented in Table 1. In terms of the government bond portion of the portfolio, the underperformance can be isolated completely to the longest maturity bucket (10+ years). The combined performance of that bucket for all countries lagged that of the benchmark by -52bps. Given our expectation that global yield curves would bear-steepen in the latter half of 2017, it is no surprise that the bulk of our underperformance came by having too little exposure at the long-end. Also, having too much exposure in Japanese government bonds offering no yield also represented a major drag on the income component of the model portfolio's returns (Chart 14). Chart 13GFIS Model Bond Portfolio##BR##2017 Return Breakdown Table 1GFIS Model Bond Portfolio##BR##2017 Return Breakdown In terms of our credit allocations, favoring U.S. corporate exposure vs. non-U.S. corporates was the right call, generally speaking (Chart 15). However, we did not have enough portfolio weight in that trade to offset the drag on the overall yield from the Japan government bond overweight. Chart 14GFIS Model Portfolio Government Bond Performance Attribution By Country Chart 15GFIS Model Portfolio Spread Product Performance Attribution Looking ahead, the new model bond portfolio allocation for 2018 that we discussed in our final report of 2017 should offer a better chance of outperforming the benchmark.1 Specifically, we dialed down the Japan overweight, increased the U.S. Investment Grade corporate bond overweight, and reduced the curve steepening exposure in Euro Area governments. This not only boosted the overall yield of the portfolio, but also moderated the overall portfolio duration underweight. This portfolio will do well in the first half of 2018 if our base case of an inflation-driven rise in global government bond yields, led primarily by the U.S. where corporate debt is also expected to outperform Treasuries, comes to fruition. Bottom Line: We closed the books on the first full calendar year of our model bond portfolio with a total return of 3.75%. This was a small -13bps underperformance of versus our custom benchmark, coming entirely from underweight positions on longer-dated developed market government bonds that offset the asset allocation gains from overweights to corporate debt. Robert Robis, Senior Vice President Global Fixed Income Strategy rrobis@bcaresearch.com Ray Park, Research Analyst ray@bcaresearch.com 1 Please see BCA Global Fixed Income Strategy Weekly Report, "Our Model Bond Allocation In 2018: A Tale Of Two Halves", dated December 19th 2017, available at gfis.bcaresearch.com. Recommendations The GFIS Recommended Portfolio Vs. The Custom Benchmark Index Duration Regional Allocation Spread Product Tactical Trades Yields & Returns Global Bond Yields Historical Returns

Highlights Upbeat economic reports for December set the stage for a solid 2018. The FOMC minutes acknowledged the flatter curve and only a minority of members discounted the signal from the curve. A majority thought that a tighter labor market would lead to higher inflation. The Citi Economic Surprise Index is peaking, but risk assets should hold up as the Index rolls over. Feature The first week of 2018 brought more good news for risk assets. U.S. stocks beat bonds, oil prices rose, and credit spreads narrowed amid a solid set of economic data. Several high-profile U.S. companies announced share buybacks, and/or one-time bonuses or wage increases linked to the tax cut plan passed by Congress at the end of 2017. Moreover, there were hints of further economic stimulus as lawmakers from both sides of the aisle discussed relaxing the sequester rules that would lift federal spending this year. Markets shrugged off a fresh round of saber rattling between the U.S. and North Korea. Gold prices nudged higher and the U.S. dollar fell despite the upbeat economic news. December's reports on manufacturing and service sector ISM, vehicle sales and the labor market, along with November's numbers on construction spending, trade and factory orders, all lifted estimates for Q4 GDP and boosted the prospects for corporate earnings in Q4 2017 and beyond. Chart 1 shows that the elevated ISM figures provide a favorable backdrop for earnings and sales in 2018. Moreover, Chart 2 indicates that IP, a proxy for S&P 500 sales, is poised to advance in 2018 and provide a lift to corporate profits. We will preview the S&P 500's Q4 2017 earnings reports in next week's U.S. Investment Strategy. Chart 1Favorable Macro Backdrop For Earnings And Sales Chart 2ISM Components Suggest IP Poised To Accelerate The Atlanta Fed GDP Now estimate stood at 2.7% on January 5, while the New York Fed's Nowcast for Q4 GDP was a healthy 4% (Chart 3). Both soundings are well above the FOMC's assessment of the economy's long-term potential growth rate (1.8%) and puts GDP growth in 2017 above the Fed's forecast. The implication is that the output gap pushed deeper into positive territory as 2017 ended, setting the stage for higher inflation in 2018. The December 2017 jobs report, released last Friday, January 5, does not change BCA's outlook for the U.S. economy or the Fed. The U.S. economy added a lower than expected 148,000 new jobs in December, which left the unemployment rate unchanged at 4.1%. Despite the softer than anticipated data, the 3-month average of payrolls growth is still a very healthy 204,000. The monthly increase in wages quickened to 0.3% m/m in December, up from 0.1% m/m last month. However, annual wage inflation remains modest at just 2.5% (Chart 4). Chart 3U.S. Economic Growth Well##BR##Ahead Of Potential In Q4 Chart 4Labor Market Still Tightening Despite##BR##Soft December Report The indications for Q4 GDP growth are solid. Aggregate hours worked rose 2.5% at an annualized rate in Q4 2017. Assuming modest growth in productivity, the payrolls data are consistent with over 3% GDP growth in Q4. There is nothing in the December payroll data to suggest that the underlying trajectory in the U.S. economy has changed. The economy continues to grow above trend. Wage gains are modest at the moment, but should accelerate as the labor market keeps tightening with above-trend GDP growth. This upbeat economic outlook is also supported the December 2017 non-manufacturing ISM survey, also released last Friday. While the overall index fell from 57.4 to 55.9, it is still consistent with solid GDP growth. Moreover, the employment index rose from 55.3 to 56.3, which signals firm job gains, and the prices paid index held steady at a fairly elevated level of 60.8. Bottom Line: It's been solid start to 2018 and it's steady as she goes for the U.S. economy and the Fed. FOMC Minutes: A Rubric BCA's U.S. Bond Strategy service expects that the 2/10 yield curve will languish between 0 and 50 bps in 2018. The curve will steepen from 51 bps at the end of 2017 through mid-year 2018, and then flatten into year-end (Chart 5). Which asset classes would benefit if our curve call is accurate? BCA's "The Bucket List"1 explains our view of the curve in 2018 and details the past performance of various U.S. assets in differing yield curve environments. Chart 5A Flat Yield Curve Is OK For Most Risk Assets BCA expects that the yield curve will first steepen in 2018, then become flatter, ultimately spending most of the year between 0 and 50 bps. A flat curve is the ideal environment for the S&P 500 and the stock-to-bond ratio. However, small cap stocks struggle when the curve is flat; BCA's view is that small caps will outperform large caps in 2018. A flat yield curve raises the risk of a sell-off in high yield, but provides a favorable grounding for oil, which is in line with BCA's fundamental view. BCA expects EPS growth will be positive this year; earnings growth is higher 75% of the time when the curve is flat. The yield curve's slope was a focus of debate at the FOMC's December 12-13, 2017 meeting. Participants cited several reasons for the flat curve2: recent increases in the target range for the federal funds rate; reductions in investors' estimates of the longer-run, neutral real interest rate; lower longer-term inflation expectations; lower term premiums Fed economists recently updated their quantitative assessments of the FOMC's minutes. The note provides a guide (Table 1 in the Fed paper3 and Tables 1 and 2 below) to the number of quantitative descriptors in the minutes (one, a couple, a few, etc.). We use this rubric to assess the committee's latest views on the yield curve and inflation. Table 1FOMC Assessment Of The Yield Curve Table 2FOMC Assessment Of Inflation In short, the FOMC acknowledged the flatter curve and only a minority of members discounted the signal from the curve. Moreover, a majority thought that a tighter labor market would lead to higher inflation. Only one participant held the view that secular trends were muting inflation. Bottom Line: BCA expects the Fed to deliver 3 to 4 rate hikes in 2018, which is still not fully priced in by the market. Investors should maintain below-benchmark duration in fixed income portfolios. Asset allocators should remain overweight stocks versus bonds. Growth is strong and the yield curve is not inverted yet. Therefore, it is still early to de-risk portfolios. Is Economic Surprise Peaking? The Citigroup (Citi) Economic Surprise Index is elevated relative to its recent history, but it may have further to run. Economic prospects were cheery following the 2016 presidential election and the economic data exceeded those lofty projections, aided by a warmer than usual winter. However, the temperate conditions borrowed activity from the spring, which was cooler and wetter than normal, and the combination of lofty expectations and seasonal distortions sent the Citi Economic Surprise Index spiraling lower through mid-year 2017. Since its bottom in June 2017 at -78.6%, the index climbed for 135 days before its peak in late December 2017 (Chart 6, panel 1). On average since 2010, the Citi Index moved from trough-to-peak in 96 days, which means the recent run-up was much longer than usual. However, that phenomenon may have been due to the raised economic expectations and variable weather patterns at the start of 2017. Chart 6Economic Surprise Index Has Surged, But Expectations Remain Muted At 80.7%, the Index has been above zero for 68 days (Chart 6, panel 1). It typically takes 46 days for it to climb from zero to its zenith. Table 3 shows the performance of financial markets and other assets after the Index moves from zero to the peak. The most recent episode (October through December 2017) matched historical averages across most asset classes, although the underperformance of small caps versus large ran counter to the past as the Surprise Index climbed from zero. Table 3Risk Assets Perform Well As Surprise Index Climbs Since 2010, the Index has stayed above 40 for an average of 51 days (Chart 6, panel 1). The Index has been over 40 since November 16, 2017, or 35 days. This suggests that it can remain elevated for another month or so before it again moves lower. However, the Index is mean reverting and investors wonder what will happen to risk assets after economic surprise rolls over. Table 4 and Chart 7 shows the performance of key financial markets and commodities when the Citi Index returned to zero from 40-plus. There have been six such intervals since 2010. On average, gold and oil perform well as the surprise index dips to zero. Stocks and credit outperform Treasuries during these episodes, and small caps beat large caps. Rising economic surprise (Table 3) is a more favorable environment for stocks, credit and oil than when the surprise index is rolling over. However, the performance of gold and small caps is better after the Citi Surprise Index peaks (Table 4). Table 4Risk Assets Hold Up When Citi Surprise Index Rolls Over Chart 7U.S. Assets As Economic Surprise Rolls Over Nonetheless, muted economic expectations will limit the downside in the Index in the coming months. Panel 3 of Chart 6 shows that the outlook for both hard and soft economic data remained muted through the end of November 2017, especially when compared with the significant improvement in economic prospects in late 2016 and early 2017. Bottom Line: Risk assets outperformed as the Citi Economic Surprise Index climbed in the second half of 2017. The Index can stay near recent peaks for several more months thanks to subdued economic forecasts, but it will roll over eventually. However, the elevated level of the Index suggests that there are near-term risks for equities and credit because a lot of good economic news is already priced in. Still, we recommend that investors ride out the volatility given our view that stocks will outperform bonds in the next 6-12 months. John Canally, CFA, Senior Vice President U.S. Investment Strategy johnc@bcaresearch.com 1 Please see BCA Research's U.S. Investment Strategy Weekly Report "The Bucket List", published December 18, 2017. Available at usis.bcaresearch.com. 2 https://www.federalreserve.gov/monetarypolicy/fomcminutes20171213.htm 3 https://www.federalreserve.gov/econres/notes/feds-notes/the-fomc-meeting-minutes-an-update-of-counting-words-20170803.htm

Highlights A "decision tree" for the allocation to Chinese stocks highlights several key questions for investors over the coming year. The equity allocation decision hinges on the condition of the global economy, the stance of monetary policy, the pace of structural reforms, and the character of the ongoing economic slowdown. Despite several identifiable risks, our "decision tree" suggests that investors should be overweight Chinese vs global stocks. Feature Unlike in past years, BCA's China Investment Strategy service published its 2018 themes report in December, as an addendum to BCA's special year end Outlook report.1 Our final report for 2017 echoed our key themes by recapping some of the most important developments in China last year, as well as their longer-term implications.2 These reports outline our framework for evaluating China's economy in 2018, and will serve as an important reference point over the coming months relating to the pace of China's economic slowdown, policymakers' actions and priorities, and investor attitudes toward Chinese assets. In today's brief report, we begin the New Year by walking through the Chinese equity "decision tree" that flows from the framework that we detailed in our themes piece noted above (Chart 1). The chart presents a set of questions that should be answered over the coming 6-12 months in order to decide on the ideal allocation to Chinese equities within a global portfolio. We elaborate on the decision tree below. Chart 1The Chinese Equity "Decision Tree" Is The Global Economy Slowing Significantly?: Developments in China need to be considered within a global context. We have noted in previous reports that a synchronized global economic slowdown was a key factor behind China's economic slowdown in 2015.3 If global growth were to slow significantly this year, it would bode poorly for the relative performance of Chinese stocks. Next week's report will discuss the evolution of the alpha and beta characteristics of China's investable stock market; while our research is still ongoing, the evidence suggests that Chinese equities in US$ terms have become a high-beta market that would likely suffer in relative terms if the global equity market stumbles. Chart 1 highlights that the appropriate allocation to Chinese equities vs global stocks is underweight if the answer to this first question is yes, with the upgrade/downgrade bias determined simply by whether there has been an appropriate response from Chinese and global policymakers. Is Significant Further Monetary Policy Tightening Likely?: Overly tight monetary policy was the second ingredient that contributed to the 2015 slowdown. Monetary conditions tightened somewhat in the first half of 2017 (Chart 2), but the overall stance is not restrictive. Taken alone, hawkish rhetoric from the PBOC would imply that significant further tightening is imminent. However our sense is that the bark of monetary authorities will be worse than their bite over the coming months, especially since growth momentum and house price appreciation has already peaked. Is The Pace Of Renewed Structural Reforms Likely To Be Aggressive?: October's Party Congress heralded stepped-up reform efforts in 2018 and beyond, which we have highlighted is a risk to a constructive stance towards Chinese stocks. While the "status quo" scenario of no significant reforms is highly unlikely, the intensity of reforms pursued over the coming year will have to be closely monitored by policymakers to avoid a repeat of the 2015 experience. Even if policymakers feel that their threshold for pain will be higher in 2018 than has previously been the case, they are very likely to avoid a significant slowdown as it would raise the risk of returning to the exact set policies that they are trying to turn away from. In other words, an intense pace of reform would risk turning a "two steps forward, one back" situation into a full-blown retreat from structural reform momentum. For now, our China Reform Monitor continues to suggest that reform intensity will be consistent with a rising equity market (Chart 3). Chart 2Chinese Monetary Conditions ##br##Have Tightened Chart 3Investors Don't Believe That Reforms##br## Will Upset The Apple Cart Is The Existing Slowdown In China's Growth Momentum Metastasizing? Our view of China's significant growth slowdown in 2015 suggests that the end of the recent economic "mini-cycle" is likely to be benign and controlled, absent a policy mistake or a major global shock. However, it is possible that the lagged effect of a deceleration in export growth and tighter monetary policy, both of which have already occurred, could cause a broader or deeper slowdown in economic growth beyond what we have already observed. In order to gauge this risk, we tested a wide range of commonly-watched macro data series for signs that they reliably lead economic activity in China,4 using the Li Keqiang index as our proxy for the business cycle. We concluded that measures of money & credit are among the most important predictors, and presented a composite leading indicator of the Li Keqiang index based on six series that passed our test criteria (Chart 4). For now, our indicator suggests that the Chinese economy will continue to slow over the coming months, but that the pace and magnitude of the decline will be benign and controlled. The first question in our decision tree is the easiest to answer: The highly synchronized nature of global economic growth suggests that a significant slowdown is not imminent, even if the pace of growth becomes narrower or slows modestly (Chart 5). While our decision tree highlights that answering "yes" to any of the last three questions means that investors should have a negative bias towards Chinese investable stocks (and should downgrade them in response to a technical breakdown), these questions are still addressing risks rather than probable events. This supports our current recommendation of being overweight Chinese investable equities with a positive bias. Chart 4The Chinese Economy##br## Will Gradually Slow Chart 5No Sign Of A Significant ##br##Global Economic Slowdown As a final point, some investors and market participants have noted that investable Chinese stocks experienced a non-trivial selloff at the end of 2017, with some questioning whether it is a harbinger of a more pronounced economic slowdown. Our answer is no, for two reasons. First, there is some evidence to suggest that the selloff was technical in nature, as the sectors that had experienced the largest gains prior to the selloff also experienced the largest declines (Chart 6). Second, the timing of the relative selloff in Chinese stocks coincided exactly with a relative selloff in the global tech sector (Chart 7), which is strongly indicative of a common, global, factor. But given the underlying strength in the global economy, we regard this event as idiosyncratic and do not view it as a threat to the relative performance of Chinese vs global stocks over the coming year. Chart 6The Late-Year Selloff Was Partially ##br##Driven By Technical Conditions Chart 7Global Tech Also Drove The Selloff##br## In Chinese Relative Performance Bottom Line: While there are several identifiable risks that need to be monitored in 2018, for now our "decision tree" for the relative allocation to Chinese equities suggests that investors should be overweight within a global equity portfolio. Jonathan LaBerge, CFA, Vice President Special Reports jonathanl@bcaresearch.com 1 Please see BCA Special Report, "2018 Outlook - Policy And The Markets: On A Collision Course," dated November 20, 2017, and Weekly Report, "Three Themes For China In The Coming Year", dated December 7, 2017, available at cis.bcaresearch.com. 2 Please see China Investment Strategy Weekly Report, "Legacies Of 2017", dated December 21, 2017, available at cis.bcaresearch.com. 3 Please see China Investment Strategy Weekly Report, "Tracking The End Of China's Mini-Cycle", dated October 12, 2017, and "China's Economy - 2015 vs Today (Part 1): Trade", dated October 26, 2017, available at cis.bcaresearch.com. 4 Please see China Investment Strategy Special Report, "The Data Lab: Testing The Predictability Of China's Business Cycle", dated November 30, 2017, available at cis.bcaresearch.com. Cyclical Investment Stance Equity Sector Recommendations