Consumer

Long-term deflationary forces in Japan are weakening, setting the stage for inflation to make a comeback over the remainder of the decade. Investors should prepare to structurally reduce exposure to Japanese bonds starting early next year. Higher Japanese bond yields will lift an extremely undervalued yen. To the extent that global growth should surprise on the upside over the next 12 months, Japanese equities could see some modest outperformance.

Airlines have staged an impressive recovery this year, exceeding all expectations. While companies are optimistic, we are cautious. Just as pent-up demand for travel will fade, headwinds from slowing growth and high inflation will intensify. While it is highly likely that Airlines will continue to rally into the yearend, we will stick to our underweight as our three-to-six-month outlook remains negative.

What is the outlook for the European housing market amid rising mortgage rates and the energy crisis? Does housing represent a systemic risk? Can households weather the storm? And what are the opportunities, if any?

The kinked supply framework helps explain why US inflation rose so suddenly shortly after the pandemic began and why the economy is likely to experience a benign disinflation over the next six months.

In this report we scrutinize the state of US consumer finances, which are a key driver of the Payment Processing Industry. We expect demand for services to pull back in the early 2023 on the back of still high inflation and tighter monetary policy. The payment processing companies thrive but live on borrowed time. We are overweight for now but monitor this position closely.

Financial markets slumped with the tough talk that followed last week’s FOMC meeting, but investors should recognize that the tone of the Fed’s communications is conditioned upon the inflation backdrop. Once it improves, Chair Powell and his colleagues will be able to relax their rhetoric.

As the FOMC explicitly acknowledged this week, monetary policy operates with substantial lags. We see the risks to stocks as tilted to the upside over the next 6 months but are neutral on global equities over a 12-month horizon.

Falling inflation will allow bond yields to decline in the major economies over the next few quarters. As such, we recommend that investors shift their duration stance from underweight to neutral over a 12 month-and-longer horizon and to overweight over a 6-month horizon. Structurally, however, a depletion of the global savings glut could put upward pressure on yields.

The September CPI report was disappointing, but we still see several signs pointing to a rapid decline in inflation. Our constructive near-term view on stocks and the economy remains intact.

Long-after-the-fact revisions to reported income, spending and savings data do not alter our assessment that a flush consumer will continue to support the US economy and allow S&P 500 earnings to surprise the bearish investor consensus.