Gov Sovereigns/Treasurys

US dollar liquidity has been shrinking, which has important ramifications for global asset prices, including currencies. In this report, we delve into the process of dollar liquidity creation and the outlook for currencies over the next six-to-twelve months.

The conventional wisdom is wrong: Trump is not going to substantially cut taxes once in office; he is going to raise taxes by jacking up tariffs. To the extent that this dampens economic activity, it is bad news for stocks but good news for bonds.

Our labor market indicators have softened meaningfully during the past month but aren’t yet signaling an imminent recession. That said, the Fed can no longer ignore the labor market with the unemployment rate above 4% and rising.

The new Labour government will have flexibility to respond to macro shocks, which is positive for the UK in general, namely GBP-EUR, and also gilts in absolute terms. But over the long run, tax hikes will likely surprise to the upside, which poses a risk to corporate earnings.

Our Portfolio Allocation Summary for July 2024.

In this report, we try to gauge how long the exceptional performance of the US can last, but from a more nuanced angle – inflows into US assets and the impact on the dollar and bond yields. Our work suggests that investors should not make any huge bets on the dollar today, but should be short over the longer term (3-5 years). Empirical evidence also suggests you want to be long US bonds into any downturn, relative to global-ex-US duration-matched government securities, but that view becomes less certain if the global economy avoids a downturn in the next few months. What is interesting in this report are high some conviction views across currencies, bonds and precious metals.

The consensus soft-landing narrative is wrong. The US will fall into a recession in late 2024 or early 2025. We were tactically bullish on stocks most of last year, turned neutral earlier this year, and are going underweight today. We conservatively expect the S&P 500 to drop to 3750 during the coming recession.

Is the BoE making a mistake moving toward rate cuts before the end of the summer? What would such a move mean for UK asset prices?

We consider the relative merits of four different fixed income investments in the current economic environment: 2-year Treasuries, 10-year Treasuries, Baa-rated corporate bonds and current coupon Agency MBS.