Europe

Highlights Investors are currently too pessimistic on Europe’s growth prospects. In fact, European growth will soon bottom. European growth and inflation are also set to improve relative to the U.S. This should give investors an opportunity to reassess the long-term outlook for European Central Bank policy relative to the Fed. Global growth dynamics are also moving in an increasingly dollar-bearish direction, which should create a tailwind for the euro. Based on the pricing of European assets relative to the U.S., there is scope to see more capital flows into the euro area, implying that more euro buying is forthcoming. The entire European currency complex is a buy relative to the dollar; while the NOK, the SEK, and even the GBP could outperform the euro, the CHF will underperform. EUR/JPY also has upside. Feature The case to sell the euro is easy to make. European growth has been very poor: PMIs, industrial production and even German exports are all pointing to a contraction in output; and economic surprises are testing levels recorded during the euro area crisis. Most importantly, this economic retrenchment is particularly sharp when compared to the U.S., which suggests that real interest rate differentials should continue to hurt EUR/USD (Chart 1). Chart 1Selling The Euro Seems So Easy... Selling The Euro Seems So Easy... Selling The Euro Seems So Easy... The problem with this narrative is that investors are already well aware of Europe’s woes. Could Europe instead recover and the euro rebound against the dollar? After all, in the past, when investor pessimism towards Europe experienced as pronounced a dip as the one just witnessed, EUR/USD invariably rebounded soon after (Chart 2). Chart 2...But Maybe We Should Look The Other Way ...But Maybe We Should Look The Other Way ...But Maybe We Should Look The Other Way In this piece, we explore what could go right for the euro, and argue that the euro is indeed attractive at current levels. European Growth Has Hit A Nadir It is safe to say that the euro area is in a funk today: European real GDP growth dipped to a 1.1% annual rate in the fourth quarter of 2018, while industrial production has plunged by 3.9% on a year-on-year basis. But the markets warned us this would happen: The euro has fallen 9% from its February 2018 top, German bund yields are again flirting with the 0.1% level and European banks plunged by more than 40% between January and December last year. Going forward, for European yields to remain as depressed as they are, for the euro to fall again by a similar margin, or for domestic plays to suffer large declines, European growth will have to slow even further. We are not expecting such a scenario. Instead, we expect European growth to recover significantly this year. First, when it comes to Germany, the locomotive of Europe, the shock from the implementation of the new WLTP auto emission standards is passing: Automobile production is stabilizing, capex is accelerating and inventories have been pared down. Moreover, the slowdown in foreign demand has already percolated through the domestic economy, as domestic manufacturing orders are already experiencing one of their sharpest declines since the Great Financial Crisis (Chart 3, top panel). Chart 3European Growth Is Set To Rebound European Growth Is Set To Rebound European Growth Is Set To Rebound Another source of optimism comes from the credit market. As the middle panel of Chart 3 illustrates, the European 12-month credit impulse has begun to bottom. This points to stronger euro area-wide domestic demand. Moreover, the Chinese credit and fiscal impulse is also bottoming, suggesting the drag from foreign demand could be dissipating (Chart 3, bottom panel). When looking at other specific trouble spots, Italy first springs to mind. In our view, the most recent deceleration in Italy was mainly a consequence of the tightening in financial conditions that resulted from the surge in Italian yields following the budget standoff between Rome and Brussels. However, the Lega Nord / Five Star Movement coalition has folded and is more or less acquiescing to the EU’s demands. Moreover, the rising probability that the European Central Bank will continue to provide long-term liquidity to the eurozone banking system via some form of new LTRO should diminish the funding risk to the Italian banking system, and thus, the risks to Rome’s fiscal sustainability. This implies that the decline in Italian borrowing costs could deepen (Chart 4), further easing Italian financial conditions and improving the growth outlook in the euro area’s third-largest economy. Chart 4Easing Financial Conditions In Italy Easing Financial Conditions In Italy Easing Financial Conditions In Italy France, too, has had its fair share of problems, though it is interesting that its industrial sector is not suffering as much as Germany’s, as highlighted by a French manufacturing PMI above the 50 boom/bust line. Instead, the French service sector is the one contracting (Chart 5). This bifurcation is likely to be a byproduct of the gilets jaunes protests that have lasted since November 2018 and affected retail trade. However, the intensity of the protests is declining and the French population is getting used to this. As a result, we are seeing a rebound in French household confidence, which implies that consumption, the main engine of French growth, is likely to perk up. Chart 5Fade The Gilets Jaunes, Paris In Spring Is Beautiful Fade The Gilets Jaunes, Paris In Spring Is Beautiful Fade The Gilets Jaunes, Paris In Spring Is Beautiful Finally, euro area fiscal policy is set to be loosened this year, with the fiscal thrust moving from 0.05% of GDP to 0.4% of GDP (Chart 6). The response of French President Emmanuel Macron to the gilets jaunes protests could even make the fiscal policy support slightly bigger this year. Chart 6Positive Fiscal Thrust In 2019 Positive Fiscal Thrust In 2019 Positive Fiscal Thrust In 2019 Ultimately, this combination of factors suggests that the large dip in European industrial production is likely to prove transitory, and that European activity will revert back toward the levels implied by the Belgian Business Confidence Index, which has historically been a good leading indicator of European growth (Chart 7). Chart 7European IP To Follow Brussels' Mood European IP To Follow Brussels' Mood European IP To Follow Brussels' Mood Bottom Line: The deterioration in European growth has captured the imagination of investors. However, the performance of European assets last year forewarned that growth would decelerate meaningfully. What matters now is how growth will evolve. Developments from Germany, France, Italy, the credit channel and the fiscal front all suggest that European activity will perk up soon. It’s All Relative While getting a sense of European growth is important when making a call on EUR/USD, economic trends must also be considered relative to the U.S. Surprisingly, despite notorious European growth underperformance, rays of hope are emerging. A major structural negative for EUR/USD has abated: The European debt crisis is behind us, and the aggregate European banking sector has been getting healthier, albeit slowly. This means that the euro area credit growth is not declining anymore against that of the U.S. This is a very long-term force that dictates multi-year cycles in the EUR/USD. As Chart 8 shows, it will be difficult for EUR/USD to move below 1.10 so long as the broad trend in the relative credit growth does not weaken anew. Chart 8Credit Dynamics Suggest That The Worst Is Over For EUR/USD Credit Dynamics Suggest That The Worst Is Over For EUR/USD Credit Dynamics Suggest That The Worst Is Over For EUR/USD More immediately, the euro area leading economic indicator relative to the U.S. is forming a bottom (Chart 9). Since the U.S. is not benefiting from as large a fiscal boost as in 2018, and financial as well as monetary conditions have tightened there relative to Europe, this suggests the improvement in the euro area relative LEI could continue this year. Chart 9Bottoming European LEI Versus U.S. Bottoming European LEI Versus U.S. Bottoming European LEI Versus U.S. Relative labor market slack is also evolving in a euro-friendly fashion. From 2013 to 2018, the euro area suffered from greater labor market slack than the U.S., courtesy of a double-dip recession and generally more-moribund growth. However, thanks to a 4.2-percentage-point fall in the European unemployment rate since 2013 to 7.9%, the euro area unemployment gap has not only closed, it is also below that of the U.S. Historically, when the U.S. unemployment gap leapfrogs that of Europe, EUR/USD tends to appreciate (Chart 10). Chart 10Less Slack Leads To A Stronger EUR/USD Less Slack Leads To A Stronger EUR/USD Less Slack Leads To A Stronger EUR/USD Relative slack does not only have value in itself, it also matters for relative inflation trends, which have been a crucial determinant of EUR/USD. As Chart 11 illustrates, EUR/USD tends to follow how euro area core CPI evolves relative to the U.S. After sharply falling last year, European relative core inflation is trying to rebound, which at a minimum suggests that EUR/USD has limited downside. Moreover, EUR/USD has correlated positively with German market-based inflation expectations (Chart 11, bottom panel). This suggests that actual relative inflation as well as euro area inflation expectations play a key role in determining perceptions among investors of how ECB policy will evolve relative to the Federal Reserve. Chart 11EUR/USD Trades Off Of Inflation Dynamics EUR/USD Trades Off Of Inflation Dynamics EUR/USD Trades Off Of Inflation Dynamics The recent euro decline has matched the decline in inflation expectations. However, inflation expectations have been much weaker than implied by the level of wage growth in Europe (Chart 12). This suggests that European inflation breakevens have scope to improve, a positive for the euro. Moreover, European wage growth is not only picking up steam in isolation, it is also rising relative to the U.S., which highlights that European inflation should not just stabilize vis-à-vis the U.S., but also accelerate. Chart 12European Wages Point To Rising Inflation Expectations European Wages Point To Rising Inflation Expectations European Wages Point To Rising Inflation Expectations This case is made even more saliently by looking at relative financial conditions. Due to the tightening in U.S. financial conditions compared to the euro area, European headline and core inflation is set to accelerate relative to the U.S. (Chart 13). Again, this reinforces the case that maybe the euro has upside this year. Chart 13Relative Euro Area Inflation Will Rise Thanks To Easier FCI Relative Euro Area Inflation Will Rise Thanks To Easier FCI Relative Euro Area Inflation Will Rise Thanks To Easier FCI Ultimately, for the euro to rise, investors will have to begin pricing in some switch in policy spreads between the ECB and the Fed. In the past, we showed that short-term policy expectations are important, but long-term ones can be even more relevant, especially when a central bank is well along the path of lifting rates, as the Fed is, while the other remains at maximum accommodation, like the ECB is today.1  Currently, investors expect euro area short rates to be only 0.5% 5-years from now (Chart 14, top panel). The spread between the eurozone and U.S. 5-year forward 1-month OIS rates remains near all-time lows, which explains the weakness in the euro. Now that European policy is much more accommodative than the U.S.’s, there’s scope for investors to upgrade the path of long-term euro area rates relative to the U.S. This would be bullish for the euro (Chart 14, bottom panel). Recovering relative credit flows and improving relative slack and inflation dynamics could catalyze this change. Chart 14The ECB Is Never Raising Rates The ECB Is Never Raising Rates The ECB Is Never Raising Rates Bottom Line: To make the euro an attractive buy, European growth and inflation conditions cannot just increase, they need to improve relative to the U.S. Since long-term interest rate expectations are very depressed in Europe relative to the U.S., a small improvement in the relative growth profile could be enough to catalyze a repricing of the ECB vis-à-vis the Fed, creating a powerful tailwind behind the euro. Nothing Happens In A Vacuum Ultimately, exchange rates, like other prices in the economy, do not only respond to domestic determinants but are also influenced by much larger, global forces. This is because those global trends percolate through domestic economies, resulting in changing relative expected returns that drive money across borders, leading to currency movements. In the case of the euro, global growth matters a lot, because European growth is much more sensitive to global economic fluctuations than U.S. growth is. This is particularly true if shocks emanate from emerging markets (Chart 15). Today, global cyclical variables are increasingly pointing toward an end to the global growth slowdown. A stabilization and reacceleration in global activity would support the euro. Chart 15 First, Chinese monetary conditions have begun to ease, which historically tends to be linked with improvements in European growth relative to the U.S. (Chart 16). Questions remain surrounding this point: How durable will the rebound in Chinese credit be? By how much will Chinese policymakers nurture this bounce? And will this jump be large enough to lift economic activity in the Middle Kingdom? Nonetheless, a reflationary wind from China has begun to blow, and since investors have already discounted much bad news out of Europe, only small improvements could turn the euro around.   Chart 16If China Is Really Stimulating, Europe Will Rip A Greater Dividend If China Is Really Stimulating, Europe Will Rip A Greater Dividend If China Is Really Stimulating, Europe Will Rip A Greater Dividend Second, as Chart 17 shows, our Nowcast for global industrial activity has decisively stepped down. Yet, the countercyclical dollar has been flat since October 2018. Historically, the performance of EM carry trades funded in yen tends to lead global growth. Currently the performance of these strategies is stabilizing. If EM carry trades funded in yen can rally further, this will spell trouble for the greenback, helping the euro – the anti-dollar – in the process. Chart 17An Early Positive For Global Growth An Early Positive For Global Growth An Early Positive For Global Growth Third, EUR/USD tends to correlate with the relative performance of global cyclical equities (Chart 18). The stabilization in these sectors since 2015 suggests it will be difficult for the euro to fall further from current levels. In fact, if EM carry trades can rebound more, cyclicals have additional scope to outperform, and the euro could rally. Chart 18Cyclical Stocks Pointing To No Real Downside In EUR/USD Cyclical Stocks Pointing To No Real Downside In EUR/USD Cyclical Stocks Pointing To No Real Downside In EUR/USD Fourth, the prospects for the semiconductor sector are improving. Demand for semis is highly pro-cyclical, and the U.S. Chip Stock Timing Model developed by our U.S. Equity Strategy service colleagues is currently sending a bullish signal.2 Since such developments link to improving global growth prospects, they are also associated with a stronger EUR/USD (Chart 19). This is also consistent with a generally weaker dollar and stronger Asian currencies. Chart 19The Outlook For Semiconductors Point Toward A Stronger Euro And A Weaker Dollar The Outlook For Semiconductors Point Toward A Stronger Euro And A Weaker Dollar The Outlook For Semiconductors Point Toward A Stronger Euro And A Weaker Dollar Finally, the breakout in copper prices, the stabilization in the CRB Raw Industrials Index and the rally in gold prices all support an improving global growth outlook that could lift EUR/USD. Bottom Line: Various indicators, such as Chinese monetary conditions, EM carry trades, semiconductor demand determinants and commodity prices are suggesting that global growth may soon bottom. Such a development should hurt the countercyclical dollar, amounting to a macro tailwind for EUR/USD. The Bad News Is Priced In Ultimately, the capacity of EUR/USD to rally rests on how much investors upgrade their outlook for Europe. It is therefore crucial to get a sense of exactly how uninspiring Europe currently is to global market participants. There is no better gauge of relative economic pessimism than the price of euro area financial assets relative to U.S. ones. Essentially, money talks. On this front, markets already seem to have internalized the known bad news from Europe, and there is scope for a contrarian rally in the euro, especially if, as we expect, European economic activity improves. First, on a 12-month forward P/E ratio basis, euro area equities are trading at the kind of deep discount to U.S. stocks normally symptomatic of a trough in relative sentiment toward Europe. Such a discount is often followed by a rally in EUR/USD (Chart 20). Chart 20Stock Valuations: Investors Do Not Like Europe Stock Valuations: Investors Do Not Like Europe Stock Valuations: Investors Do Not Like Europe Second, retailers’ equities can often give a more focused assessment of how investors perceive the comparative outlook for domestic demand between two nations. Currently, euro area retailers trade at a 16-year low versus their U.S. counterparts (Chart 21). Investors are therefore much more ebullient about the prospects for U.S. domestic demand than in Europe. Interestingly, the euro’s gyrations since 2016 have tracked the direction of the relative performance of retailers but have diverged in terms of levels. This suggests some underlying support for the currency. Chart 21Can European Domestic Demand Really Validate Such Pessimistic Expectations? Can European Domestic Demand Really Validate Such Pessimistic Expectations? Can European Domestic Demand Really Validate Such Pessimistic Expectations? Third, the relative stock-to-bond ratio also often provides a good read on investors’ comparative economic euphoria/pessimism towards two nations. In 2018, the annual performance of the euro area stock-to-bond ratio relative to the U.S. collapsed to levels not recorded since the euro area crisis was at its apex (Chart 22). This further confirms that investors were massively depressed on European growth prospects relative to the U.S. While this indicator is rebounding, it is still in negative territory, implying that market participants still have room to upgrade their assessment of the euro area relative to the U.S. Historically, this kind of setup has been associated with a rebound in the EUR/USD. Chart 22The Stock-To-Bond Ratio Points To Some Upside Potential The Stock-To-Bond Ratio Points To Some Upside Potential The Stock-To-Bond Ratio Points To Some Upside Potential Fourth, European net earnings revisions relative to the U.S. have also hit bombed-out levels and are in the process of improving. Since earnings are tightly linked to global growth and reflect the same information that informs capital flows into a country (Chart 23), sell-side analysts becoming more positive on Europe at the margin could indicate that investors are in the process of re-assessing whether to buy European assets. A decision to do so would support EUR/USD. Chart 23When The Sell-Side Move From Deeply To Mildly Bearish, EUR/USD Rallies When The Sell-Side Move From Deeply To Mildly Bearish, EUR/USD Rallies When The Sell-Side Move From Deeply To Mildly Bearish, EUR/USD Rallies Bottom Line: Financial market pricing suggests that investors are displaying deep pessimism toward the euro area’s relative growth prospects. The euro could be a contrarian buy. Most importantly, there are early signs that this growth pricing is starting to move in favor of Europe. If our economic view on Europe and global growth is correct, this trend has further to go, implying that more capital could move into Europe, creating a potent tailwind for EUR/USD. What Else? Three additional factors need to be considered: Currency valuations, balance-of-payment dynamics, and technicals. First, while it is not as cheap as it once was, the real trade-weighted euro is still trading below its historical average (Chart 24). Purchasing-power considerations can rarely be used as a timing tool, but our confidence in the euro’s upside would be greatly dented if the euro were a very expensive currency. It is not even mildly pricey. Chart 24Euro Valuations: No Headwinds There Euro Valuations: No Headwinds There Euro Valuations: No Headwinds There Second, balance-of-payment considerations have become increasingly euro-positive. The euro area runs a current account surplus of 3.3% of GDP, and despite large FDI outflows – a natural consequence of being a savings-rich economy – the basic balance of payments remains in surplus. Moreover, as fixed-income outflows have been dissipating, the aggregate portfolio flows into Europe have also been improving (Chart 25). The end of the ECB’s Asset Purchase Program should solidify this trend. Chart 25The Euro Area Balance Of Payments Is Increasingly Favorable The Euro Area Balance Of Payments Is Increasingly Favorable The Euro Area Balance Of Payments Is Increasingly Favorable Finally, technical oscillators are behaving increasingly well. As Chart 26 shows, not only does our Intermediate-Term Indicator remains oversold, but also, it is has begun to form a positive divergence with the price of EUR/USD. If the economic outlook is becoming more bullish, such a technical setup can often be translated into significant gains. Chart 26EUR/USD: Oversold And A Positive Divergence Is Forming EUR/USD: Oversold And A Positive Divergence Is Forming EUR/USD: Oversold And A Positive Divergence Is Forming Bottom Line: The euro’s valuation is not as attractive as it once was, but it remains cheap. Moreover, the euro area’s balance-of-payment dynamics and the EUR/USD’s technical setup both suggest the timing is increasingly ripe to buy the euro against the dollar. Investment Conclusions A trough in European growth, improving growth and inflation prospects relative to the U.S., green shoots for global growth and deep pessimism toward Europe relative to the U.S. all argue that the timing is right to bet on a euro rebound. At this point, the durability of the euro rebound remains unclear. Investors are under-appreciating the ability of the Fed to raise rates this year, which could help the dollar. On the other hand, they seem even more sanguine toward the ECB ever lifting rates. Ultimately, the capacity of the euro to rebound on a long-term basis against the dollar will be constrained by global growth. This means that China will continue to play a center-stage role for this crucial FX pair. At this point, it is unclear how determined Chinese policymakers are to reflate their economy. Thus, we recommend investors monitor Chinese policy to gauge how long to stay in the euro. For the time being, enough pieces are falling into place to warrant buying EUR/USD for three to six months. However, if the Chinese credit impulse can continue on its recent rebound, the durability of a euro rally could be extended, implying that the euro may be in the process of forming a long-term bottom against the dollar. A strengthening euro should support the entire European currency complex against the dollar. In fact, the NOK, the SEK and the GBP may even outperform the EUR. The NOK is being boosted by rising oil prices, a more hawkish central bank, better valuations and an even healthier balance of payments. The SEK is also supported by a Riksbank that is slightly more hawkish than the ECB, and better valuations; it also benefits from a Swedish economy that is even more pro-cyclical than the euro area’s. The GBP also benefits from a greater valuation discount than the euro, and political developments in the U.K. are beginning to move toward a more clear-cut positive outcome on the Brexit front.3 The countercyclical and expensive CHF will prove the European laggard. Finally, EUR/JPY is also set to continue its rebound that began on January 4th. In fact, it may be one of the best vehicles to express a euro-bullish view because it is less sensitive to what the Fed does than EUR/USD is. Rising bond yields are an unmitigated positive for EUR/JPY, and BCA firmly believes that U.S. Treasury yields have upside, whether or not the Fed goes back to lifting rates. The Fed will mostly impact whether it is the real or inflation component that lifts Treasury yields. Bottom Line: The entire European currency complex is set to rise along with the euro against the greenback. In fact, the NOK, the SEK and the GBP are likely to outperform the euro, while the CHF should underperform. EUR/JPY may in fact offer the best risk-adjusted returns to play a euro rebound. While it is clear that at this moment that buying the euro makes sense, the principal risk lies around how long this rally will last. We are increasingly convinced that the euro has made a low for the cycle and that its long-term outlook is looking increasingly bright.  Mathieu Savary, Vice President Foreign Exchange Strategy mathieu@bcaresearch.com Footnotes 1 Please see the EUR/USD: Focus On The Western Shores Of The Atlantic section of the Foreign Exchange Strategy Weekly Report, titled “Canaries In The Coal Mine Alert: EM/JPY Carry Trades”, dated December 1, 2017, available at fes.bcaresearch.com 2 Please see U.S. Equity Strategy Weekly Report, titled “Reflationary Or Recessionary”, dated February 25, 2019, available at uses.bcaresearch.com 3 Please see European Investment Strategy Weekly Report, titled “Why A Catastrophic No-Deal Might Be Good… For The EU”, dated February 28, 2019, available at eis.bcaresearch.com Trades & Forecasts Forecast Summary Core Portfolio Tactical Trades Closed Trades

Highlights Global growth is still slowing. Having rallied since the start of the year, global stocks will likely enter a “dead zone” over the next six-to-eight weeks as investors nervously await the proverbial green shoots to sprout. We think they will appear in the second quarter, setting the scene for a reacceleration in global growth in the second half of the year, and an accompanying rally in global risk assets. Investors should overweight stocks and spread product while underweighting safe government bonds over a 12-month horizon. The U.S. dollar will strengthen a bit over the next few months, but should start to weaken in the summer as the global economy catches fire. Stronger global growth and a weaker dollar in the back half of the year will benefit EM assets and European stocks. Feature I skate to where the puck is going to be, not to where it has been. — Wayne Gretzky How To Be A Good Macro Strategist To paraphrase Gretzky, a mediocre macro strategist draws conclusions based solely on incoming data. A good macro strategist, in contrast, tries to figure out where the data is heading. How can one predict how the economic data will evolve? Examining forward-looking indicators is helpful, but it is not enough. One also has to understand why the data is evolving the way it is. If one knows this, one can then assess whether the forces either hurting or helping growth will diminish, intensify, or remain the same.  What Accounts For the Growth Slowdown? There is little mystery as to why global growth slowed in 2018. Chinese credit growth fell steadily over the course of the year, which generated a negative credit impulse. Unlike in the past, China is now the most important driver of global credit flows (Chart 1). Chart 1Global Credit Flows Are Increasingly Driven By China Global Credit Flows Are Increasingly Driven By China Global Credit Flows Are Increasingly Driven By China Meanwhile, the global economy was rocked by rising oil prices. Brent rose from $55/bbl on October 5, 2017 to $85/bbl on October 4, 2018. Government bond yields also increased, with the 10-year U.S. Treasury yield rising from 2.05% on September 7, 2017 to 3.23% on October 5, 2018 (Chart 2). Chart 2Rising Oil Prices And Bond Yields Contributed To Slower Global Growth Last Year Rising Oil Prices And Bond Yields Contributed To Slower Global Growth Last Year Rising Oil Prices And Bond Yields Contributed To Slower Global Growth Last Year A mediocre macro strategist draws conclusions based solely on incoming data. A good macro strategist, in contrast, tries to figure out where the data is heading. In an ironic twist, Jay Powell’s ill-timed comment that rates were “a long way” from neutral marked the peak in bond yields. Unfortunately, the subsequent decline in yields was accompanied by a vicious stock market correction and a widening in credit spreads. This led to an overall tightening in financial conditions, which further hurt growth (Chart 3). Chart 3Financial Conditions Tightened In 2018, Especially After Powell's Hawkish Comments Financial Conditions Tightened In 2018, Especially After Powell's Hawkish Comments Financial Conditions Tightened In 2018, Especially After Powell's Hawkish Comments The critical point is that all of these negative forces are behind us: Financial conditions have eased significantly over the past two months; oil prices have rebounded, but are still well below their 2018 highs; and as we explain later on, Chinese growth is likely to bottom by the middle of this year. This means that global growth should start to improve over the coming months. The United States: Better News Ahead The latest U.S. economic data has been weak, with this morning’s disappointing ISM manufacturing print being the latest example. The New York Fed’s GDP Nowcast is pointing to annualized growth of 0.9% in the first quarter. While there is no doubt that underlying growth has decelerated, data distortions have probably also contributed to the perceived slowdown. For instance, the dismal December retail sales report reduced the base for consumer spending going into 2019, thus shaving about 0.4 percentage points off Q1 growth. The drop in real personal consumption expenditures (PCE) cut the New York Fed’s Q1 growth estimate by a further 0.15 percentage points. We suspect that much of the weakness in December retail sales and PCE was linked to the government shutdown. The closure caused some of the surveys used to compile these reports to be postponed until January, which is historically the weakest month for retail sales. The Johnson Redbook Index – which covers 80% of the retail sales surveyed by the Department of Commerce – as well as the sales figures from Amazon and Walmart all point to strong spending during the holiday season (Chart 4). Chart 4The December U.S. Retail Sales Report Was Probably A Fluke The December U.S. Retail Sales Report Was Probably A Fluke The December U.S. Retail Sales Report Was Probably A Fluke Fundamentally, U.S. consumers are in good shape (Chart 5). As a share of disposable income, household debt is over 30 percentage points lower than it was in 2007. The savings rate stands at an elevated level, which gives households the wherewithal to increase spending. Job openings hit another record high, while wage growth continues to trend upwards. Fundamentally, U.S. consumers are in good shape. Chart 5U.S. Consumer Fundamentals Are Solid U.S. Consumer Fundamentals Are Solid U.S. Consumer Fundamentals Are Solid The housing market should improve. Rising mortgage rates weighed on housing last year. However, rates have been declining for several months now, which augurs well for home sales and construction over the next six months (Chart 6). Chart 6Mortgage Rates Will Not Be A Headwind For U.S. Housing Activity Over The Next 6 Months Mortgage Rates Will Not Be A Headwind For U.S. Housing Activity Over The Next 6 Months Mortgage Rates Will Not Be A Headwind For U.S. Housing Activity Over The Next 6 Months While capex intention surveys have come off their highs, they still point to reasonably solid expansion plans (Chart 7). Rising labor costs and high levels of capacity utilization will induce firms to invest in more capital equipment, which should support business spending. Chart 7U.S. Capex Plans Have Come Off Their Highs, But Remain Solid U.S. Capex Plans Have Come Off Their Highs, But Remain Solid U.S. Capex Plans Have Come Off Their Highs, But Remain Solid Government expenditures should also recover. By most estimates, the shutdown shaved one percentage point from Q1 growth. This is likely to be completely reversed in the second quarter. The End Of The Chinese Deleveraging Campaign? The popular narrative about weaker Chinese growth has focused on the trade war. While trade uncertainty undoubtedly hurt growth last year – and has continued to weigh on growth so far this year – most of the weakness in the Chinese economy can be traced to the deleveraging campaign which started in 2017, long before the surge in trade flow angst. Fixed investment spending in China is generally financed through credit markets. Chart 8 shows that the contribution of investment spending to GDP growth has declined in tandem with decelerating credit growth.   Most of the weakness in the Chinese economy can be traced to the deleveraging campaign which started in 2017, long before the surge in trade flow angst. Chart 8China: Deleveraging Means Less Investment-Led Growth China: Deleveraging Means Less Investment-Led Growth China: Deleveraging Means Less Investment-Led Growth Chinese credit growth has typically reaccelerated whenever it has dipped towards trend nominal GDP growth. We may have already reached this point (Chart 9). New credit formation came in well above expectations in January. Given possible distortions caused by the timing of the Chinese lunar new year, investors should wait until the February data is released in mid-March before drawing any firm conclusions. Nevertheless, it is starting to look increasingly likely that credit growth has bottomed. The 6-month credit impulse has already surged (Chart 10). The 12-month impulse should also begin moving up provided that month-over-month credit growth simply maintains its recent trend (Chart 11). Chart 9Historically, China Has Scaled Back On Deleveraging When Credit Growth Has Fallen Close To Nominal GDP Growth Historically, China Has Scaled Back On Deleveraging When Credit Growth Has Fallen Close To Nominal GDP Growth Historically, China Has Scaled Back On Deleveraging When Credit Growth Has Fallen Close To Nominal GDP Growth Chart 10A Rebound In The Chinese 6-Month Credit Impulse A Rebound In The Chinese 6-Month Credit Impulse A Rebound In The Chinese 6-Month Credit Impulse Chart 11The 12-Month Impulse Is Set To Turn Up The 12-Month Impulse Is Set To Turn Up The 12-Month Impulse Is Set To Turn Up On the trade front, President Trump’s decision to delay the implementation of tariffs on $200 billion in Chinese imports is a step in the right direction. Nevertheless, gauging whether the trade war will continue to de-escalate is extraordinarily difficult. There is no major constituency within the Republican Party campaigning for protectionism. It ultimately boils down to what one man – Trump – wants. Our best guess is that President Trump will try to score a few political points by “declaring victory” – deservedly or not – in his battle with China in order to pivot to more pressing domestic issues such as immigration. However, there can be no assurance of this, which is why China’s leaders are likely to prioritize growth over deleveraging, at least for the time being. They know full well that the only way they can credibly threaten to walk away from the negotiating table is if their economy is humming along. Europe: From Headwinds To Tailwinds? Slower global growth, higher oil prices, and a spike in Italian bonds yields all contributed to the poor performance of the European economy last year. Economic activity was further hampered by a decline in German automobile production following the introduction of more stringent emission standards. The good news is that these headwinds are set to reverse course. Italian bond yields are well off their highs, as are oil prices (Chart 12). German automobile production is recovering (Chart 13). In addition, the European Commission expects the euro area fiscal thrust to reach 0.40% of GDP this year, up from 0.05% of GDP last year (Chart 14). This should add about half a percentage point to growth. Finally, if our expectation that Chinese growth will bottom out by mid-year proves correct, European exports should benefit. If neither the political establishment nor the general public favor Brexit, it will not happen. Chart 12Headwind No More (I): Italian Bond Yields Headwind No More (I): Italian Bond Yields Headwind No More (I): Italian Bond Yields Chart 13Headwind No More (II): German Auto Sector Headwind No More (II): German Auto Sector Headwind No More (II): German Auto Sector Chart 14The Euro Area Will Benefit From A Modest Amount Of Fiscal Easing This Year The Euro Area Will Benefit From A Modest Amount Of Fiscal Easing This Year The Euro Area Will Benefit From A Modest Amount Of Fiscal Easing This Year Brexit still remains a risk, but a receding one. We have consistently argued that the political establishment on both sides of the British channel will not accept anything resembling a hard Brexit. As was the case with the EU treaty referendums involving Denmark and Ireland in the 1990s, the European political elites will insist on a “No fair! Let’s play again! Best two-out-of-three?” do-overs until they get the result they want. Theresa May’s efforts to cobble together a parliamentary majority that precludes a hard Brexit, along with the Labor Party’s increasing willingness to pursue a second vote, is consistent with our thesis. Fortunately for the “remain” side, public opinion is shifting in favor of staying in the EU (Chart 15). Focusing on the minutiae of various timetables, rules, and regulations is largely a waste of time. If neither the political establishment nor the general public favor Brexit, it will not happen. We are short EUR/GBP, a trade recommendation that has gained 5.2% since we initiated it. We continue to see upside for the pound. Chart 15The ''Remain'' Side Would Likely Win Another Referendum The ''Remain'' Side Would Likely Win Another Referendum The ''Remain'' Side Would Likely Win Another Referendum Investment Conclusions Global growth is still slowing. Having rallied since the start of the year, global stocks will likely enter a “dead zone” for the next six-to-eight weeks as investors nervously await the proverbial green shoots to sprout. We think they will appear in the second quarter, setting the scene for a reacceleration in global growth in the second half of the year, and an accompanying rally in global risk assets. The dollar is a countercyclical currency, meaning that it moves in the opposite direction of the global business cycle (Chart 16). The greenback will strengthen a bit over the next few months, but should start to weaken in the summer as the global economy catches fire. Chart 16The Dollar Is A Countercyclical Currency The Dollar Is A Countercyclical Currency The Dollar Is A Countercyclical Currency We sold our put on the EEM ETF for a gain of 104% on Jan 3rd, and are now outright long EM equities. We do not have a strong view on EM versus DM equities at the moment, but expect to shift EM to overweight once we see more confirmatory evidence that Chinese growth is stabilizing. Having rallied since the start of the year, global stocks will likely enter a “dead zone” for the next six-to-eight weeks as investors nervously await the proverbial green shoots to sprout. In conjunction with our expected upgrade on EM assets, we will move European equities to overweight. Stronger global growth will benefit European multinational exporters, while brisker domestic growth should allow the market to price in a few more ECB rate hikes starting in 2020. The latter will lead to a somewhat steeper yield curve which, along with rising demand for credit, should boost financial sector earnings (Chart 17). This will give European bank stocks a welcome boost. Chart 17Stronger Euro Area Credit Growth Will Boost Bank Earnings Stronger Euro Area Credit Growth Will Boost Bank Earnings Stronger Euro Area Credit Growth Will Boost Bank Earnings Japanese equities will also benefit from faster global growth, but domestic demand will suffer from the government’s ill-advised plan to raise the sales tax in October. As such, we do not anticipate upgrading Japanese stocks. We also expect the yen to come under some pressure as the BoJ is forced to maintain its ultra-accommodative monetary policy stance, while bond yields elsewhere move modestly higher.      Peter Berezin Chief Global Investment Strategist peterb@bcaresearch.com   Strategy & Market Trends* MacroQuant Model And Current Subjective Scores Chart 18 Tactical Trades Strategic Recommendations Closed Trades

  Highlights Global growth is still slowing. Having rallied since the start of the year, global stocks will likely enter a “dead zone” over the next six-to-eight weeks as investors nervously await the proverbial green shoots to sprout. We think they will appear in the second quarter, setting the scene for a reacceleration in global growth in the second half of the year, and an accompanying rally in global risk assets. Investors should overweight stocks and spread product while underweighting safe government bonds over a 12-month horizon. The U.S. dollar will strengthen a bit over the next few months, but should start to weaken in the summer as the global economy catches fire. Stronger global growth and a weaker dollar in the back half of the year will benefit EM assets and European stocks. Feature I skate to where the puck is going to be, not to where it has been.  — Wayne Gretzky Gretzky's Doctrine To paraphrase Gretzky, a mediocre macro strategist draws conclusions based solely on incoming data. A good macro strategist, in contrast, tries to figure out where the data is heading. How can one predict how the economic data will evolve? Examining forward-looking indicators is helpful, but it is not enough. One also has to understand why the data is evolving the way it is. If one knows this, one can then assess whether the forces either hurting or helping growth will diminish, intensify, or remain the same. What Accounts For The Growth Slowdown? There is little mystery as to why global growth slowed in 2018. Chinese credit growth fell steadily over the course of the year, which generated a negative credit impulse. Unlike in the past, China is now the most important driver of global credit flows (Chart I-1). Image Meanwhile, the global economy was rocked by rising oil prices. Brent rose from $55/bbl on October 5, 2017 to $85/bbl on October 4, 2018. Government bond yields also increased, with the 10-year U.S. Treasury yield rising from 2.05% on September 7, 2017 to 3.23% on October 5, 2018 (Chart I-2). Image In an ironic twist, Jay Powell’s ill-timed comment that rates were “a long way” from neutral marked the peak in bond yields. Unfortunately, the subsequent decline in yields was accompanied by a vicious stock market correction and a widening in credit spreads. This led to an overall tightening in financial conditions, which further hurt growth (Chart I-3). Image The critical point is that all of these negative forces are behind us: Financial conditions have eased significantly over the past two months; oil prices have rebounded, but are still well below their 2018 highs; and as we explain later on, Chinese growth is likely to bottom by the middle of this year. This means that global growth should start to improve over the coming months. The United States: Better News Ahead The latest U.S. economic data has been weak, with this morning’s disappointing ISM manufacturing print being the latest example. The New York Fed’s GDP Nowcast is pointing to annualized growth of 0.9% in the first quarter. While there is no doubt that underlying growth has decelerated, data distortions have probably also contributed to the perceived slowdown. For instance, the dismal December retail sales report reduced the base for consumer spending going into 2019, thus shaving about 0.4 percentage points off Q1 growth. The drop in real personal consumption expenditures (PCE) cut the New York Fed’s Q1 growth estimate by a further 0.15 percentage points. We suspect that much of the weakness in December retail sales and PCE was linked to the government shutdown. The closure caused some of the surveys used to compile these reports to be postponed until January, which is historically the weakest month for retail sales. The Johnson Redbook Index – which covers 80% of the retail sales surveyed by the Department of Commerce – as well as the sales figures from Amazon and Walmart all point to strong spending during the holiday season (Chart I-4). Image Fundamentally, U.S. consumers are in good shape (Chart I-5). As a share of disposable income, household debt is over 30 percentage points lower than it was in 2007. The savings rate stands at an elevated level, which gives households the wherewithal to increase spending. Job openings hit another record high, while wage growth continues to trend upwards. Image The housing market should improve. Rising mortgage rates weighed on housing last year. However, rates have been declining for several months now, which augurs well for home sales and construction over the next six months (Chart I-6). Image While capex intention surveys have come off their highs, they still point to reasonably solid expansion plans (Chart I-7). Rising labor costs and high levels of capacity utilization will induce firms to invest in more capital equipment, which should support business spending. Image Government expenditures should also recover. By most estimates, the shutdown shaved one percentage point from Q1 growth. This is likely to be completely reversed in the second quarter. The End Of The Chinese Deleveraging Campaign? The popular narrative about weaker Chinese growth has focused on the trade war. While trade uncertainty undoubtedly hurt growth last year – and has continued to weigh on growth so far this year – most of the weakness in the Chinese economy can be traced to the deleveraging campaign which started in 2017, long before the surge in trade flow angst. Fixed investment spending in China is generally financed through credit markets. Chart I-8 shows that the contribution of investment spending to GDP growth has declined in tandem with decelerating credit growth.   Image Chinese credit growth has typically reaccelerated whenever it has dipped towards trend nominal GDP growth. We may have already reached this point (Chart I-9). New credit formation came in well above expectations in January. Given possible distortions caused by the timing of the Chinese lunar new year, investors should wait until the February data is released in mid-March before drawing any firm conclusions. Nevertheless, it is starting to look increasingly likely that credit growth has bottomed. The 6-month credit impulse has already surged (Chart I-10). The 12-month impulse should also begin moving up provided that month-over-month credit growth simply maintains its recent trend (Chart I-11). Image Image Image On the trade front, President Trump’s decision to delay the implementation of tariffs on $200 billion in Chinese imports is a step in the right direction. Nevertheless, gauging whether the trade war will continue to de-escalate is extraordinarily difficult. There is no major constituency within the Republican Party campaigning for protectionism. It ultimately boils down to what one man – Trump – wants. Our best guess is that President Trump will try to score a few political points by “declaring victory” – deservedly or not – in his battle with China in order to pivot to more pressing domestic issues such as immigration. However, there can be no assurance of this, which is why China’s leaders are likely to prioritize growth over deleveraging, at least for the time being. They know full well that the only way they can credibly threaten to walk away from the negotiating table is if their economy is humming along. Europe: From Headwinds To Tailwinds? Slower global growth, higher oil prices, and a spike in Italian bonds yields all contributed to the poor performance of the European economy last year. Economic activity was further hampered by a decline in German automobile production following the introduction of more stringent emission standards. The good news is that these headwinds are set to reverse course. Italian bond yields are well off their highs, as are oil prices (Chart I-12). German automobile production is recovering (Chart I-13). In addition, the European Commission expects the euro area fiscal thrust to reach 0.40% of GDP this year, up from 0.05% of GDP last year (Chart I-14). This should add about half a percentage point to growth. Finally, if our expectation that Chinese growth will bottom out by mid-year proves correct, European exports should benefit. Image Image Image Brexit still remains a risk, but a receding one. The political establishment on both sides of the British channel will not accept anything resembling a hard Brexit. As was the case with the EU treaty referendums involving Denmark and Ireland in the 1990s, the European political elites will insist on a “No fair! Let’s play again! Best two-out-of-three?” do-overs until they get the result they want. Theresa May’s efforts to cobble together a parliamentary majority that precludes a hard Brexit, along with the Labor Party’s increasing willingness to pursue a second vote, is consistent with our thesis. Fortunately for the “remain” side, public opinion is shifting in favor of staying in the EU (Chart I-15). Focusing on the minutiae of various timetables, rules, and regulations is largely a waste of time. If neither the political establishment nor the general public favor Brexit, it will not happen. Image Investment Conclusions Global growth is still slowing. Having rallied since the start of the year, global stocks will likely enter a “dead zone” for the next six-to-eight weeks as investors nervously await the proverbial green shoots to sprout. We think they will appear in the second quarter, setting the scene for a reacceleration in global growth in the second half of the year, and an accompanying rally in global risk assets. The dollar is a countercyclical currency, meaning that it moves in the opposite direction of the global business cycle (Chart I-16). The greenback will strengthen a bit over the next few months, but should start to weaken in the summer as the global economy catches fire. Image We do not have a strong view on EM versus DM equities at the moment, but expect to shift EM to overweight once we see more confirmatory evidence that Chinese growth is stabilizing. In conjunction with our expected upgrade on EM assets, we will move European equities to overweight. Stronger global growth will benefit European multinational exporters, while brisker domestic growth should allow the market to price in a few more ECB rate hikes starting in 2020. The latter will lead to a somewhat steeper yield curve which, along with rising demand for credit, should boost financial sector earnings (Chart I-17). This will give European bank stocks a welcome boost. Image Japanese equities will also benefit from faster global growth, but domestic demand will suffer from the government’s ill-advised plan to raise the sales tax in October. As such, we do not anticipate upgrading Japanese stocks. We also expect the yen to come under some pressure as the BoJ is forced to maintain its ultra-accommodative monetary policy stance, while bond yields elsewhere move modestly higher. Peter Berezin    Chief Global Investment Strategist March 1, 2019 Next Report: March 28, 2019 II. Troubling Implications Of Global Demographic Trends Developed economies are challenged by two powerful and related demographic trends: declining growth in working-age populations, and a rapidly-aging population structure. Working-age populations are in absolute decline in Japan and much of Europe and growth is slowing sharply in the U.S. An offsetting acceleration in productivity growth is unlikely, implying a marked deceleration in economic growth potential. The combination of slower growth in the number of taxpayers and rising numbers of retirees is toxic for government finances. Future generations face sharply rising debt burdens and increased taxes to pay for entitlements. The correlation between aging and asset prices is inconclusive but common sense suggests it is more likely to be bearish than bullish. Population growth remains rapid throughout most of the developing world, China being a notable exception. It is especially strong in Africa, a region that has historically faced economic mismanagement and thus poor economic prospects for most of its inhabitants. Migration from the emerging to developed world is a logical solution to global demographic trends, but faces a backlash in many countries for both economic and cultural reasons. These tensions are likely to increase. Making accurate economic and market forecasts is daunting because there are so many moving parts and unanticipated events are inevitable. Quantitative models are destined to fail because of the unpredictability of human behavior and random shocks. Demographic forecasts are a lot easier, at least over the short-to-medium term. If you want to know how many 70-year olds there will be in 10 years’ time, then count how many 60-year olds there are today and adjust by the mortality rate for that age group. Demographic trends are very incremental from year to year and their impact is swamped by economic, political and financial events. Thus, it rarely makes sense to blame demographics for cyclical swings in the economy or markets. In some respects, demographics can be likened to glaciers. You will quickly get bored standing by a glacier to watch it move. But, over long time periods, glaciers cover enormous distances and can completely reshape the landscape. Similarly, over the timespan of one or more generations, demographics can have powerful effects on economies and societies. Some important demographic trends have been going on for long enough that their effects are visible. The most common concern about global demographics has tended to be overpopulation and pressure on resources and the environment. And this is hardly new. In 1798, Thomas Malthus published his “Essay on The Principles of Population” in which he argued that population growth would outstrip food supply, leading to a very miserable outcome. Of course, what he missed was the revolution in agricultural techniques that meant food supply kept up with population growth. In 1972, a group of experts calling themselves The Club of Rome published a report titled “The Limits to Growth” which argued that a rising world population would outstrip the supply of natural resources, putting a limit to economic growth. Again, that report underestimated the ability of technology to solve the problem of scarcity, although many still believe the essence of the report has yet to be proved wrong. Phenomena such as climate change and rising numbers of animal species facing extinction are seen as supporting the thesis that the world’s population is putting unsustainable demands on the planet. Rather than get into that debate, this report will focus on three particular big-picture problems associated with demographic trends: Declining working-age populations in most major industrialized economies during the next several decades. Population aging throughout the developed world. Continued rapid population growth in many of the world’s poorest and most troubled countries. According to the UN’s latest projections, the world’s population will increase from around 7.5 billion today to almost 10 billion by 2050.1 The population growth rate peaked in the 1970s and is expected to slow sharply over the next several decades (Chart II-1). Despite slower percentage growth rates, the population keeps going up steadily because one percent of the 1970 global population was about 3.7 million, while one percent of the current population is about 7.5 million. Image But here is an important point: virtually all future growth in the global population will come from the developing world (Chart II-2). The population of the developed world is expected to be broadly flat over the period to 2050, and this has some significant economic implications. Image Let’s first look at why population growth has stagnated in the developed world. Population growth is a function of three things: the birth rate, the death rate and net migration. Obviously, if there are more births than deaths then there will be a natural increase in the population and net migration will either add or subtract to that. Over time, there have been major changes in some of these drivers. In the developed world, a stable population requires that, on average, there are 2.1 children born for every woman. The fact that it is not exactly 2 accounts for infant mortality and because there are slightly more males than females born. The replacement-level fertility rate needs to be higher than 2.1 in the developing world because of higher infant mortality rates. After WWII, the fertility rate throughout most of the developed world was well above 2.1 as soldiers returned home and the baby boom generation was born. But, by the end of the 1970s, the rate had dropped below the replacement level in most countries and currently is a lowly 1.5 in Japan, Germany and Italy (Table II-1). It has stayed higher in the U.S. but even there it has dipped below the critical 2.1 level. This trend has reflected lot of factors including more widespread use of birth control and more women entering the labor force. Image In the developed world, the birth rate is expected to drop below the death rate in the next ten years (Chart II-3). That means there will be a natural decrease in the population. In the case of Japan, Germany, Italy and Portugal that change already occurred between 2005 and 2010. In the U.S., the UN expects birth rates to stay just above death rates in the period to 2050, but the gap narrows sharply. Births exceed deaths throughout most of the developing world meaning that populations continue to grow. Notable exceptions to this are Eastern Europe where populations are already in sharp decline and China, where deaths begin to exceed births in the 2030s. Image Although life expectancy is rising, death rates in the developed world will rise simply because the rapidly growing number of old people more than offsets the impact of longer lifespans. Of course, the population of a country can also be boosted by immigration, and that has been true for much of the developed world. In Canada and most of Europe, net migration already is the dominant source of overall population growth and it will become so in the U.S. in the coming decades, based on current trends (Chart II-4). Image This is the background to the first key issue addressed in this report: the declining trend in the growth of the working-age population in the developed world. Slowing Growth In Working-Age Populations An economy’s growth potential depends on only two things: the number of people working and their productivity. If the labor force grows at 1% a year and productivity also increases by 1%, then the economy’s trend growth rate is 2%. In the short-run, the economy may grow faster or slower than that, depending on issues like fiscal and monetary policy, oil prices etc. Over the long run, growth is constrained by people and productivity. The potential labor force is generally regarded to be the people aged 15 to 64. The growth trend in this age segment has slowed sharply in recent years in the major economies and is set to weaken further in the years ahead (Chart II-5). The problem is most severe in Japan and Europe where the working-age population is already declining. In the case of the U.S., growth in this age cohort slows from an average 1.5% a year in the 1960s and 1970s to a projected pace of less than 0.5% in the coming decades. Image While this generally is not a problem faced by the developing world, a notable exception is China, now reaping the consequences of its one-child policy. Its working-age population is set to decline steadily in the years ahead. Thus, it is inevitable that Chinese growth also will slow in the absence of an acceleration of productivity growth The slowing trend in the working-age population could be offset if we could get more 15-64 year olds to join the labor force, or get more older people to stay working. In the U.S., almost 85% of male 15-64 year olds were either employed or were wanting a job in the mid-1990s. This has since dropped to below 80% - a marked divergence from the trend in most other countries (Chart II-6). And the female participation rate in the U.S. also is below that of other countries. Image The reason for the decline in U.S. labor participation rates for prime-aged adults is unclear. Explanations include increased levels of people in full-time education, in prison, or claiming disability. A breakdown of male participation rates by age shows particularly sharp drops in the 15-19 and 20-24 age groups, though the key 20-54 age category also is far below earlier peaks (Chart II-7). The U.S. participation rate has recently picked up but it seems doubtful that it will return to earlier highs. Image Other solutions to the problem would be getting more people aged 65 and above to stay in the labor force, and/or faster growth in productivity. The former probably will require changes to the retirement age and we will return to that issue shortly. There always are hopes for faster productivity growth, but recent data have remained disappointing for most developed economies (Chart II-8). New technologies hold out some hope but this is a contentious topic. Image On a positive note, the shrinking growth of the working-age population may be easier to live with in a world of robotization and artificial intelligence where machines are expected to take over many jobs. That would support a more optimistic view of productivity but it remains to be seen how powerful the impact will be. Another important problem related to the slowing growth of the working-age population relates to fiscal burdens. In 1980, the level of government debt per taxpayer (ages 20-64) was around $58,000 in the U.S. in today’s money and this is on track for $104,000 by 2020 (Chart II-9). But this pales in comparison to Japan where it rises from $9,000 to $170,000 over the same period. Canada looks more favorable, rising from $23,000 in 1980 to $68,000 in 2020. These burdens will keep rising beyond 2020 until governments start running budget surpluses. Our children and grandchildren will bear the burden of this and won’t thank us for allowing the debt to build up in the first place. Image There will be a large transfer of privately-held assets from the baby boomers to the next generation, but the ownership of this wealth is heavily skewed. According to one study, the top 1% owned 40% of U.S. wealth in 2016, while the bottom 90% owned 20%.2 And it seems likely that this pool of wealth will erode over time, providing a smaller cushion to the following generation. This leads in to the next topic – aging populations. Aging Populations In The Developed World The inevitable result of the combination of increased life expectancy and declining birth rates has been a marked aging of populations throughout the developed world. Between 2000 and 2050, the developed world will see the number of those aged 65 and over more than double while the numbers in other age groups are projected to show little change (Chart II-10). Image As long as the growing numbers of those aged 65 and above are in decent health, then life is quite good. Fifty years ago in the U.S., poverty rates were very high for those of retirement age compared to the young (i.e. under 18). But that has changed as the baby boomer generation made sure that they voted for increased entitlement programs. Now poverty rates for the 65+ group are far below those of the young (Chart II-11). At the same time, real incomes for those 65 and older have significantly outperformed those of younger age groups. Image A major problem is that aging baby boomers are expensive because of the cost of pensions and medical care. As would be expected, health care costs rise dramatically with age. For those aged 44 and under, health care costs in the U.S. averaged around $2,000 per person in 2015. For those 65 and over, it was more than $11,000 per person. And per capita spending doubles between the ages of 70 and 90. So here we have the problem: a growing number of expensive older people supported by a shrinking number of taxpayers. This is illustrated by the ratio of the number of people between 20 and 64 divided by those 65 and older. In other words, the number of taxpayers supporting each retiree (Chart II-12). Image In 1980, there were five taxpayers for every retiree in the U.S., four in W. Europe and seven in Japan. These ratios have since dropped sharply, and in the next few decades will be down to 2.5 in the U.S., 1.8 in Europe and 1.3 in Japan. For each young Japanese taxpayer, it will be like having the cost of a retiree deducted from their paycheck. Throughout the developed world, the baby boomers’ children and grandchildren face a growing burden of entitlements. Some of the statistics related to Japan’s demographics are dramatic. In the first half of the 1980s there were more than twice as many births as deaths (Chart II-13). They become equal around ten years ago and in another ten years deaths are projected to exceed births by around three million a year. In 1990, the number of people aged four and under was more than double the number aged 80 and above. Now the situation is reversed with those aged 80 years and above more than double those four and under. That is why sales of adult diapers reportedly exceed those of baby diapers – very depressing!3 Image What’s the solution to aging populations? An obvious one is for people to retire later. When pension systems were set up, life expectancy at birth was below the age pensions were granted - typically around 65. In other words, not many people were expected to live long enough to get a government pension. And the lucky ones who did live long enough were not expected to be around to receive a pension for more than a few years. By 1950, those males who had reached the age of 65 were expected, on average, to live another 11 to 13 years in the major developed countries (Table II-2). This rose to 16-18 years by 2000 and is expected to reach 22-23 years by 2050. Governments have made a huge error in failing to raise the retirement age as life expectancy increased. Pension systems were never designed to allow people to receive government pensions for more than 20 years. Image Some countries have raised the retirement age for pensions, but progress on this front is painfully slow. Other solutions would be to raise pension contributions or to means-test benefits. Not surprisingly, governments are reluctant to take such unpopular actions. At some point, they will have no choice, but that awaits pressures from the financial markets. Currently, not many people aged over 65 remain in the workforce. The participation rate for men is less than 10% in Europe and less than 25% in the U.S. And it is a lot lower for women (Chart II-14). The rate in Japan is much higher reflecting the fact that it is at the leading edge of aging. Participation rates are moving higher in Europe and the U.S. and further increases are likely in the years ahead if Japan’s experience is anything to go by. Image Having people staying in the workforce for longer will help offset the decline in prime-age workers, but there is a downside. While it is a contentious topic, many studies point to a negative correlation between age and productivity after the age of 50. As we age, there is some decline in cognitive abilities and older people may be less willing or able to adapt to new technologies and working practices. These would only be partly offset by the benefits of experience that comes with age. Therefore, an aging workforce is not one where one would expect productivity growth to accelerate, other things being equal. An IMF study concluded that a 1% increase in the labor force share of the 55-64 age cohort in Europe could reduce the growth in total factor productivity by 0.2% a year over the next 20 years.4 Another study published by the NBER paper estimated that aging will reduce the U.S. economic growth rate by 1.2% a year this decade and 0.6% a year next decade.5 Other studies are less gloomy but it would be hard to argue that aging is actually good for productivity. Another aging-related issue is the implications for asset prices. It is generally believed that aging will be bad for asset prices as people move from their high-saving years to a period where they will be liquidating assets to supplement their incomes. This is supported by a loose correlation between the percentage of the labor force between 35 and 64 (the higher-saving years) and stock market capitalization as a percent of GDP (Chart II-15). However, other studies cast doubts on this relationship.6 Image One might think real estate is even more vulnerable than stocks to aging. However, in late 1988, two high-profile economists (Greg Mankiw and David Weil) published a report arguing that real house prices would fall substantially over the next two decades as the baby boom generation aged.7 That forecast was catastrophically wrong. Of course, that does not mean that the more dramatic aging occurring over the next couple of decades will not have a major negative impact on home prices. Numerous studies have been carried out on the relationship between demographics and asset prices and the conclusions are all over the place.8 Time and space constraints prevent a more in-depth discussion of this topic. Nonetheless, common sense would suggest that aging is more likely to be bearish than bullish for asset prices. Thus far, we have addressed two demographic challenges facing the developed world: slowing growth in the number of working-age people and a marked aging of the population. Much of the developing world has the opposite issue: continued rapid population growth and large numbers of young people. This is my third topic. Rapid Population Growth In The Developing World We already noted that nearly all future growth in global population will occur in the developing world, China being a notable exception. With birth rates remaining far above death rates, emerging countries will not have the aging problem of the developed world and this has some positives and negatives. On the positive side, a rapidly-growing young population creates the potential for strong economic growth – the opposite of the situation in advanced economies. But this assumes that the institutional and political framework is conducive to growth. Unfortunately, the history of many developing countries is that corrupt and incompetent governments prevent economies from ever reaching their potential. This means there will be a growing pool of young people likely facing a dim economic future. In some cases, these young people could be an excellent recruiting ground for extremist groups. It is unfortunate that there is particularly rapid population growth in some of the most troubled countries in the world. The Institute for Economics and Peace ranks countries by whether they are safe or dangerous.9 According to their ranking, the eight most dangerous countries in the world will see their population grow at a much faster pace than the developing world as a whole (Chart II-16). Image Some individual country comparisons are striking. The UN’s projections show that Nigeria’s population will exceed that of the U.S. by 2050, The Democratic Republic of Congo’s population will match that of Japan by 2030 and by 2050 will be 80% larger (Chart II-17A and B). Similarly, Afghanistan will overtake Italy in the 2040s. Most incredibly, Africa’s overall population surpassed that of the whole of Europe in the second half of the 1990s and is projected to be 3.5 times larger by 2050. That suggests that the numbers seeking to migrate from Africa to Europe will increase dramatically in the next couple of decades. Controlling these flows will become an increasing challenge for countries in Southern Europe. Image Image Migration is the logical solution to declining working-age populations in the developed world and expanding young populations in the developing world. However, there currently is a backlash against immigration in many developed countries. Anti-immigration political parties are gaining strength in many European countries and immigration was a major factor influencing the Brexit vote in the U.K. And it is a hot-button political issue in the U.S. Concerns about immigration are twofold: competition for employment and potential cultural change. Employment fears have coincided with a long period of severely depressed wages for low-skill workers in many developed economies and immigration is an easy target for blame. Meanwhile, the cultural challenge of absorbing large numbers of immigrants clearly has fueled increased nationalist sentiment in a number of countries. In the U.S., projections by the Bureau of the Census show that the non-Hispanic white population will fall below 50% of the total by 2045. That has implications for voting patterns and lies behind some of the concerns about high levels of immigration. There is no simple solution to this controversial issue and an in-depth discussion is beyond the scope of this article. Conclusions We have only touched on some aspects of demographic trends. It is a huge topic and has many other implications. For example, the political and cultural views of each generation are shaped by the environment they grow up in and this changes over time. This year, the number of millennials (those born from the early 1980s to the mid-1990s) in the U.S. is expected to surpass those of baby boomers and that will have important political and social implications. Again, that is beyond the scope of this report. The demographic trends we have discussed will pose serious challenges to policymakers. In the developed world, the baby boom generation has accumulated huge amounts of government debt, partly to fund generous entitlement programs and did not have enough children to ease the burdens on future generations. The young have good reason to feel frustrated by the actions of their elders (see cartoon). Image In the developing world, the challenge will be to provide economic opportunities for a growing pool of young people. The biggest problems will be in Africa, a continent where economic success stories have been few and far between in the past. Failure to deal with this will have troubling implications for geopolitical stability. Martin H. Barnes Senior Vice President Economic Advisor III. Indicators And Reference Charts Our tactical equity upgrade is beginning to pay off, and an increasing proportion of our proprietary indicators is confirming that stocks have more upside over the next few quarters. Our Willingness-to-Pay (WTP) indicator for the U.S. has stopped falling. This pattern is also evident in both Europe and Japan. The WTP indicators track flows, and thus provide information on what investors are actually doing, as opposed to sentiment indexes that track how investors are feeling. After clearly pulling funds out of the equity markets, investors are beginning to tip their toes back in. Our Revealed Preference Indicator (RPI) has clearly shifted back into stocks. The RPI combines the idea of market momentum with valuation and policy measures. It provides a powerful bullish signal if positive market momentum lines up with constructive signals from the policy and valuation measures. Conversely, if constructive market momentum is not supported by valuation and policy, investors should lean against the market trend. According to BCA’s composite valuation indicator, the U.S. stock market remains overvalued from a long-term perspective, despite the dip in multiples since last fall. It is a composite of 11 different valuation measures. Moreover, our Monetary Indicator has shifted out of negative territory for stocks, and is now decisively in stimulative territory. The Fed pause, along with some dovish-sounding commentaries have improved the monetary backdrop by removing expected rate hikes from the money market curve. Our Composite Technical indicator for stocks broke down in December, providing a clear ‘sell’ signal, and has not yet delivered a ‘buy’. However, if the recent improvement in this indicator can continue, the S&P 500 will likely be able to punch above the 2800 level. The 10-year Treasury yield is in the neutral range according to our valuation model. Bonds are not overbought, but they have now fully worked out their previously deeply-oversold conditions. The Adrian, Crump & Moench formulation of the 10-year term premium remains close to its 2016 nadir, suggesting that yields are unsustainably low. Our bond-bearish bias is consistent with the view that the Fed rate hike cycle is not over. The U.S. dollar is still very expensive on a PPP basis. Our Composite Technical Indicator is not as overbought as it once was, but it is far from having reached oversold levels either. This combination suggests that the greenback could experience further downside over the coming month. It remains to be seen if this wave of depreciation will mark the beginning of the cyclical bear market required to correct the dollar’s overvaluation. EQUITIES: Image Image Image Image Image Image Image Image FIXED INCOME: Image Image   Image Image Image Image Image   CURRENCIES: Image Image Image Image Image Image Image   COMMODITIES: Image Image Image   Image Image ECONOMY: Image Image Image Image Image Image Image Image Image Image Image Mark McClellan Senior Vice President The Bank Credit Analyst   Footnotes 1       Most of the data referred to in this report comes from the medium variant projections from the United Nation’s World Population Prospects report, 2017 revision. There is an excellent online database tool that allows users to access numerous demographic series for every country and region in the world. This can be found at https://population.un.org/wpp/DataQuery/ 2       Edward N. Wolff, Household Wealth Trends in the United States, 1962 to 2016. NBER Working Paper 24085, November 2017. Available at: https://www.nber.org/papers/w24085. 3       This is not a joke: https://www.businessinsider.com/signs-japan-demographic-time-bomb-2017-3 4       The Impact of Workforce Aging on European Productivity. IMF Working Paper, December 2016. Available at: https://www.imf.org/en/Publications/WP/Issues/2016/12/31/The-Impact-of-Workforce-Aging-on-European-Productivity-44450 5       The Effect of Population Aging on Economic Growth, the Labor Force and Productivity. NBER Working Paper 22452, July 2016. Available at https://www.nber.org/papers/w22452.pdf 6              For example, see “Will Grandpa Sink The Stock Market?”, The Bank Credit Analyst, September 2014. 7       The Baby Boom, The Bay Bust, and the Housing Market. NBER Working Paper 2794. Available at: https://www.nber.org/papers/w2794 8       For those interested in this topic, we recommend the following paper: Demographics and Asset Markets: A Survey of the Literature. Available at: https://pdfs.semanticscholar.org/912a/5d6d196c3405e37b3a50d797cbf65a27ba44.pdf 9       Global Peace Index, 2018. Available at: http://visionofhumanity.org/app/uploads/2018/06/Global-Peace-Index-2018-2.pdf. According to this index, the eight least-safe countries are (starting with the most dangerous): Syria, Afghanistan, South Sudan, Iraq, Somalia, Yemen, Libya, and Democratic Republic of the Congo. EQUITIES:FIXED INCOME:CURRENCIES:COMMODITIES:ECONOMY:

Highlights A no-deal Brexit which did not cause pain pour encourager les autres would be the much graver existential threat for the EU. A U.K. parliamentary vote to extend Article 50 by a few months would not be a game changer in itself, because it just delays the day of judgement. The real denouement will only happen when a workable route to a benign Brexit option commands a majority in the U.K. parliament. This is the point at which U.K. exposed risk-assets would outperform sustainably. Investors should then buy: the pound, the FTSE250, FTSE Small Cap, and U.K. homebuilders. Feature Chart of the WeekU.K. Homebuilders Is The Best Equity Sector To Play Brexit U.K. Homebuilders Is The Best Equity Sector To Play Brexit U.K. Homebuilders Is The Best Equity Sector To Play Brexit The Article 50 process that governs Brexit is fast approaching its two-year time limit, and the question naturally arises as to what will happen when the clock strikes midnight on March 29.1  To answer this question, it is worth stepping back to ask something even more fundamental: what was the purpose of the two-year time limit in the first place? The EU Must Protect The Integrity Of The Union The two-year time limit in Article 50 was designed to disadvantage the exiting country relative to the EU, and this disadvantage has now become abundantly clear. After the two years have run down, a no-deal or ‘cliff edge’ exit would be bad for the EU27, but it would be far worse for the U.K. This balance of power has put the EU27 very much in the driving seat of the Brexit process, and there is no reason to presume that the EU27 will do anything other than prioritise and protect its own interests. For the EU27, the priority right now is to protect the unity and integrity of the Union in the face of a growing existential threat from populists and nationalists. Unfortunately, much of this has been overlooked in the Brexiteer rhetoric, with arguments like "they need to sell us their BMWs and Prosecco". Clearly, frictionless and barrier-less trade is in the economic interests of both parties, but the economic reality is that less than a tenth of EU27 exports go to the U.K. while something approaching half of U.K. exports go to the EU27 (Chart I-2 and Chart I-3). Chart I-2Less Than A Tenth Of EU27 Exports Go To The U.K. ... Less Than A Tenth Of EU27 Exports Go To The U.K... Less Than A Tenth Of EU27 Exports Go To The U.K... Chart I-3...While Almost Half Of U.K. Exports Go To the EU27 ...While Almost Half Of U.K. Exports Go To the EU27 ...While Almost Half Of U.K. Exports Go To the EU27 Brexit is essentially a huge economic gamble in the name of an overarching political aim to ‘take back control’ (Chart I-4). Remember that the case for Brexit largely hinged on the desire to regain political sovereignty: specifically, controlling migration and ending the supremacy of the European Court of Justice. That’s fine, we have no qualms about that. But if the case for Brexit was largely political, it’s a bit rich to presume that the EU27 will not also prioritise its own overarching political aims – even if these political aims come at the cost of a short-term setback to the European economy. Chart I-4U.K. House Prices Have Stagnated Since The Brexit Negotiations Started 4. U.K. House Prices Have Stagnated Since The Brexit Negotiations Started 4. U.K. House Prices Have Stagnated Since The Brexit Negotiations Started Brexit Is The Litmus Test For Optimality Of The EU A catastrophic no-deal Brexit would undoubtedly hurt the EU27, and be particularly painful for the member states most exposed to U.K. trade, notably Ireland and the Netherlands. But here’s the paradox: a no-deal Brexit which did not cause pain pour encourager les autres would be the much graver existential threat for the EU. If membership of the EU and its institutions is supposedly an optimal economic and political structure for European states, then Brexit is the litmus test for the sub-optimality of exiting, and especially the heavy cost of exiting abruptly. If, after the two-year notice of Article 50, the U.K. abruptly left the EU with negligible disruption and then quickly thrived outside the EU, it would galvanize the European nationalists and populists to emulate a newly confident and resurgent U.K.’s quick and painless divorce. As this could be the death knell of the European project, the paradox is highlighted in our mischievous title: why a catastrophic no-deal might be good… for the EU. Brexit can take three ultimate shapes: The U.K. revokes its intention to withdraw the EU and remains a full member of the Union. A long transition to a new and negotiated trading relationship between the U.K. and the EU27. A sharp cliff-edge in which the U.K. abruptly becomes a third country to the EU27. The U.K. population now clearly favours option 1 – remain – over the two alternatives (Chart I-5). Meanwhile, the U.K. parliament has expressed its opposition, albeit not yet legally binding opposition, to option 3 – the no-deal Brexit. Chart I-5 As for the EU27, the best outcome is for the U.K. to revoke its intention to withdraw and thrive within the club; the next best outcome is a long transition to Brexit, during which and after which the U.K. economy underperforms its European peers to illustrate the sub-optimality of exiting. But if Brexit is a cliff-edge, it has to be demonstrably painful. Hence, the EU27 will want to put off the day it has to confront this paradox if there is any chance of avoiding it. Article 50 does allow for this delay. The specific wording of paragraph 3 states: The Treaties shall cease to apply to the State in question from the date of entry into force of the withdrawal agreement or, failing that, two years after the notification referred to in paragraph 2, unless the European Council, in agreement with the Member State concerned, unanimously decides to extend this period. But a close reading suggests that if there is still a real possibility of finalising a withdrawal agreement, or if withdrawal is an outcome that the State no longer desires, then this would not represent ‘failing’. Meaning that the period of negotiation of a withdrawal agreement could be extended beyond March 29, or indeed Article 50 could be entirely revoked. A Short Delay Is Not A Game Changer, But A Second Referendum Would Be Looking at the desired outcomes of the U.K. population, the U.K. parliament, and the EU27, Brexit should rationally end up as benign options 1 or 2. The trouble is that rational outcomes can be thwarted if there is no mechanism to implement them. Although the U.K. parliament has expressed its desire to avoid a no-deal, it has not yet coalesced a majority around how exactly to avoid the cliff-edge outcome. A parliamentary vote to extend Article 50 by a few months would not be a game changer in itself because it just delays the day of judgement, though a longer extension would be more significant. But if the extension facilitated a second referendum or a general election, then that would be a game changer – as there would be the potential for the U.K. population to overturn the decision to leave.    It follows that the real denouement will only happen when a workable route to either of the benign Brexit options 1 or 2 above commands a majority in the U.K. parliament. From the perspective of investors, what this way forward turns out to be – permanent customs union, Common Market 2.0, second referendum, or general election – does not really matter. What matters is that a parliamentary majority exists for a positive course of action that eliminates no-deal rather than just delays it. This would be the point at which the BoE is finally liberated from its emergency policy (Chart I-6 and Chart I-7), pushing up U.K. gilt yields relative to other government bond yields (Chart I-8), and allowing a sustained rally in the pound (Chart I-9). Chart I-6Brexit Has Subdued The BoE... Brexit Has Subdued The BoE... Brexit Has Subdued The BoE... Chart I-7...Despite A Tight U.K. Labour Market ...Despite A Tight U.K. Labour Market ...Despite A Tight U.K. Labour Market Chart I-8Were It Not For Brexit, U.K. Interest Rates Would Be 1 Percent Higher... Were It Not For Brexit, U.K. Interest Rates Would Be 1 Percent Higher... Were It Not For Brexit, U.K. Interest Rates Would Be 1 Percent Higher... Chart I-9…And The Pound Would Be At $1.50 ...And The Pound Would Be At 1.50 USD ...And The Pound Would Be At 1.50 USD In this event, U.K. exposed risk-assets would also outperform. Note that the FTSE100 is not one of these investments. Whenever the pound strengthens, the weaker translation of the FTSE100 companies’ dollar-denominated earnings tends to weigh down this large-cap index (Chart I-10). Instead, investors should focus on: the FTSE250 (Chart I-11) and the FTSE Small Cap, but the best play is the U.K. homebuilders (Chart of the Week). Chart I-10When The Pound Rallies, The FTSE100 Underperforms... When The Pound Rallies, The FTSE100 Underperforms... When The Pound Rallies, The FTSE100 Underperforms... Chart I-11...So Prefer The FTSE250 ...So Prefer The FTSE250 ...So Prefer The FTSE250 Fractal Trading System* We are pleased to report that long Italy’s MIB versus Eurostoxx600 reached the end of its 3-month holding period very comfortably in profit which is now crystallised. This week, we note that the sharp underperformance of aluminium versus tin is at the limit of tight liquidity which has previously signalled a trend-reversal. Hence, the recommended trade is long aluminium versus tin. Set a profit target of 6.5 percent with a symmetrical stop-loss. For any investment, excessive trend following and groupthink can reach a natural point of instability, at which point the established trend is highly likely to break down with or without an external catalyst. An early warning sign is the investment’s fractal dimension approaching its natural lower bound. Encouragingly, this trigger has consistently identified countertrend moves of various magnitudes across all asset classes. Chart I-12 Long Aluminium Versus Tin Long Aluminium Versus Tin The post-June 9, 2016 fractal trading model rules are: When the fractal dimension approaches the lower limit after an investment has been in an established trend it is a potential trigger for a liquidity-triggered trend reversal. Therefore, open a countertrend position. The profit target is a one-third reversal of the preceding 13-week move. Apply a symmetrical stop-loss. Close the position at the profit target or stop-loss. Otherwise close the position after 13 weeks. Use the position size multiple to control risk. The position size will be smaller for more risky positions. *  For more details please see the European Investment Strategy Special Report “Fractals, Liquidity & A Trading Model,” dated December 11, 2014, available at eis.bcaresearch.com Dhaval Joshi, Senior Vice President Chief European Investment Strategist dhaval@bcaresearch.com Footnote 1 Midnight British Summer Time Fractal Trading System Recommendations Asset Allocation Equity Regional and Country Allocation Equity Sector Allocation Bond and Interest Rate Allocation Currency and Other Allocation Closed Fractal Trades Trades Closed Trades Asset Performance Currency & Bond Equity Sector Country Equity Indicators Bond Yields Chart II-1Indicators To Watch - Bond Yields Indicators To Watch - Bond Yields Indicators To Watch - Bond Yields Chart II-2Indicators To Watch - Bond Yields Indicators To Watch - Bond Yields Indicators To Watch - Bond Yields Chart II-3Indicators To Watch - Bond Yields Indicators To Watch - Bond Yields Indicators To Watch - Bond Yields Chart II-4Indicators To Watch - Bond Yields Indicators To Watch - Bond Yields Indicators To Watch - Bond Yields Interest Rate Chart II-5Indicators To Watch - Interest Rate Expectations Indicators To Watch - Interest Rate Expectations Indicators To Watch - Interest Rate Expectations Chart II-6Indicators To Watch - Interest Rate Expectations Indicators To Watch - Interest Rate Expectations Indicators To Watch - Interest Rate Expectations Chart II-7Indicators To Watch - Interest Rate Expectations Indicators To Watch - Interest Rate Expectations Indicators To Watch - Interest Rate Expectations Chart II-8Indicators To Watch - Interest Rate Expectations Indicators To Watch - Interest Rate Expectations Indicators To Watch - Interest Rate Expectations