Economy

We update the indicators in our duration checklist following this morning’s employment report.

Democrats are still slightly favored for reelection as the incumbent party is presiding over a growing economy. However, Biden’s strong showing in the primary election is not lifting his popular approval yet, and that is a worrying sign. Policy uncertainty should rise sharply, which is marginally negative for the stock market.

Presently, our four high-conviction themes are: (1) the US dollar will rally as US growth continues to outpace the rest of the world; (2) US equities will continue to outperform EM and European stocks until a major sell-off occurs; (3) a US profit margin squeeze is imminent; (4) EM domestic bonds and sovereign USD bonds are due for a setback.

This week, we review our currency positions, based on the latest data from G10 economies.

Many investors have cited the 1994 tightening cycle as an example of how the Fed managed to raise rates without triggering a recession. However, the unemployment rate was 6.5% in early 1994, which meant that inflation was less of a risk than it is today. Productivity growth also accelerated starting in the mid-1990s. While something similar may happen again thanks to AI, so far this is not visible in the aggregate productivity data.

On the one hand, China’s copper intake boomed last year despite the travails of the mainland economy and shrinking property construction. On the other hand, global copper supply mushroomed despite persistent worries about supply shortages. This report uncovers this puzzle and elaborates on the outlook for copper prices. The conclusion is that red metal prices are still vulnerable.