Latest from BCA Research

A reaction to this morning’s employment report and a preview of the potential bond market implications of next week’s US election and FOMC meeting.

As the odds of a Trump victory rise, European assets underperform US ones. What would be the immediate impact of a Trump victory on European stocks?

Can Powell achieve a soft landing? There are some indications he is doing it. We examine why our negative stance was wrong and analyze the four growth engines that kept recession at bay. Half of these forces remain while the other half have run out of juice. While this might be enough to keep the economy going, we maintain our defensive positioning. Equities have priced a very benign outcome. Meanwhile, rising rates in anticipation of a Trump win are pushing the economy away from the soft-landing path. We hedge the possibility of further upside in yields in case Trump gets elected by downgrading duration to neutral.

MacroQuant expects global equities to weaken in November. As such, the model recommends underweighting equities and overweighting bonds and cash.

MacroQuant expects global equities to weaken in November. As such, the model recommends underweighting equities and overweighting bonds and cash.

The latest Bank of Japan meeting did not alter our high-conviction views of being long the yen and underweight JGBs.

Special Report

EM credit markets have recently defied the selloffs in EM equities, currencies, local currency bonds, and commodity prices. Such a decoupling is unusual. Resilient US growth and Fed easing are not sufficient to justify very low EM credit spreads.

Bank Credit Analyst

Bank Credit Analyst

In Section I, we explain how recent positive data surprises are connected to expectations of Fed easing, meaning that they are self-limiting. Yields will rise even further if US economic data continue to surprise to the upside, which will put the US back on a recessionary path. A Republican sweep has the potential to be positive for US economic growth over the next year, but trade action under a second Trump presidency will likely be aggressive and economically damaging unless deftly offset by sufficiently large fiscal thrust. In Section II, we explain why the Fed is not politically biased, but has become structurally dovish because of the GFC, its shaken confidence in the “stars”, and its ability to forecast the economy. Over the next year, the Fed may appear to be acting in a politically biased way even if it is merely responding to economic developments. The Fed’s independence could be challenged under a Trump presidency if trade action is not severe.

We update our 12-month return projections for different US fixed income sectors in soft-landing and recession scenarios.