Policy
In this Special Report, BCA’s Foreign Exchange Strategy and Global Fixed Income Strategy teams argue that as the lagged impact of higher interest rates hits the Canadian economy, what will initially appear as a potential hard landing will morph into a mild slowdown. During the process, Canadian government bonds will outperform, and the CAD will drop, setting the stage for a coiled-spring rebound.
Since 1970, the track record of US housing recessions as the ‘canary in the coal mine’ for economic recessions is a perfect four out of four: 1974; 1980; 1990; and 2007. If this perfect track record continues, the current US housing recession presages an economic recession that starts in 2023. We discuss the investment implications.
This week’s report considers the risk that inflation will be stickier than we anticipate, and looks at what a fair value for the 10-year Treasury yield might be in a scenario where the Fed keeps the policy rate on hold for a prolonged period.
Long-term drivers, including the growing ability of banks to returns cash to shareholders, point toward a strong structural performance for European financials. However, the ECB’s aggressive tightening campaign could still spoil the party.
We refresh our 2023 plan of attack to reflect the latest data and several rounds of discussions with clients in virtual and face-to-face meetings. We continue to expect a meaningful first-half rally in the S&P 500, despite revising our expected terminal fed funds rate 25 basis points higher.
From a technical standpoint, the dollar is due for a bounce. In this report, we review various indicators to gauge the magnitude and duration of this rally. We also recommend two new trades: sell the gold/silver ratio at 90 and EUR/SEK at 11.30.
Core CPI rose sequentially in January compared to December, but we don’t see this as the beginning of a new trend. Disinflation is very much still in the cards for the US economy between now and the end of the year.
Thai stocks and currency will weaken over the short term. And yet EM equity portfolios should overweight Thailand as tourism revivals will rejuvenate this economy.
The backdrop for corporate bonds is turning more risky after the spread tightening seen over the past few months in the US and Europe. A tour of our favorite corporate spread valuation metrics on both sides of the Atlantic suggests a worsening cyclical risk/reward tradeoff for both investment grade and high-yield bonds, especially in the US.
We discuss the outlook for the Fed’s balance sheet and why QT is likely to continue for at least another year.