US Dollar
Bank failures are another ‘canary in the coal mine’ warning that a US recession is imminent, yet stocks, bonds, and the oil price are still a long way from fully pricing it.
In this report, we look at data releases over the last month and implications for currency markets.
The combination of collapsing energy inflation and cooling wage inflation means that euro area core inflation will slump later this year. We discuss the consequences.
Rather than teetering into recession, global growth has firmed since the start of the year. While we still expect inflation to decline, the risk that central banks will need to lift rates more than discounted has increased. Long-term focused investors should start raising cash allocations by trimming their equity holdings.
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.
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.
The risk of a recession in 2023 is being supplanted by the risk of another inflation wave. We will turn more defensive on equities if it continues to look like inflation is making a comeback.
Investor sentiment on China and EM has become bullish. Meanwhile, the reflation plays have begun fraying on the edges. Cracks always appear first in the most sensitive reflation plays and then spread to the core. The narratives of the Fed's imminent pivot and China's recovery will be questioned in the coming months. Thus, China/EM assets and related plays will sell off, and the US dollar will rebound.
The Fed is betting that the usual non-linearity of unemployment is different this time, but so far, there is nothing to suggest that it is different. We discuss the key signposts to watch out for, plus the implications for interest rates and asset allocation.
This week, we articulate what the actions of the three major central banks that met (Fed, ECB and BoE) mean for currency markets. This is within the context of our analysis of the latest data releases in the G10, that allows us to calibrate currency strategy.