Consumer
Domestic auto sales in China will likely have anemic growth over the next three years. Yet, Chinese automakers are set to gain a larger share of the global market. Go long Chinese automakers / short global ones.
Households’ excess pandemic savings will eventually run out, but we continue to disagree with the widespread view that they’re already gone or entirely in the hands of the wealthy. Consumers’ demise continues to be greatly exaggerated.
Aggressive monetary tightening has always led to recession, although the timing is uncertain. The effects of high interest rates are starting to be felt. Investors should stay risk off and buy government bonds as a safe haven investment with carry.
In Section I, we note that the recent surge in long-maturity government bond yields is symptomatic of a sharp reduction in market expectations for a soft-landing economic outcome. This underscores that the US and other developed market economies are on an ultimately recessionary path. We also discuss why the S&P 500 is likely to fall to between 3300 and 3700 in a recessionary scenario, and how OPEC 2.0’s production cuts will, at a minimum, reduce the odds of pre-emptive rate cuts. In Section II, we revisit the economic outlook for Canada, looking for signs that one of the most indebted economies in the world is buckling under the weight of tight monetary policy. We do find evidence suggesting that mounting debt service is already impacting Canadian consumers, and we expect to see a continuation of weak/weakening consumer spending in Canada so long as the current stance of monetary policy is maintained.