Latest from BCA Research

The latest selloff in US Treasuries has left yields at attractive levels from a risk/reward perspective. We are therefore raising our recommended duration stance in the US from neutral to overweight.

The Reserve Bank of New Zealand hiked rates this week to 5.5%. There are many reasons to expect that to be the last rate hike for this cycle – a development that is positive for New Zealand bonds but bearish for the New Zealand dollar.

The Reserve Bank of New Zealand hiked rates this week to 5.5%. There are many reasons to expect that to be the last rate hike for this cycle – a development that is positive for New Zealand bonds but bearish for the New Zealand dollar.

US bond investors should increase portfolio duration from “at benchmark” to “above benchmark” on a cyclical (6-12 month) investment horizon. We also recommend exiting Treasury curve flatteners and closing short positions in the February 2024 fed funds futures contract.

Once the debt ceiling soap opera ends, investors will likely turn their attention to some of the tailwinds supporting stocks. These include stronger earnings growth, diminished bank stresses, better housing data, early signs of an upleg in the manufacturing cycle, the prospects of an AI-driven productivity boom, and the fact that labor slack has managed to increase without rising unemployment. Investors should resist turning bearish on stocks for now but look to become more defensive later this year.

We expect the CCP to pivot toward more fiscal stimulus – and less credit stimulus – this year, which will put a bid under energy and metals prices. On the back of this view, at tonight’s close we are getting long 4Q23 Brent futures vs short 4Q24 futures, and re-establishing our XME and PICK ETF positions expecting higher prices and steeper backwardations in metals markets. We also are getting long 4Q23 COMEX copper vs short 4Q24 futures.

Bank Credit Analyst

Bank Credit Analyst

In Section I, we review the three possible economic scenarios over the coming year, and underscore that the “soft landing” scenario remains improbable. A “no landing” scenario could occur, but it would ultimately lead back to the recessionary path and thus is not a basis for investors to maintain pro-risk portfolio positions. US stock prices continue to be buoyed by rate cut expectations, but nonrecessionary cuts still appear to be a long way off. In Section II, we present our best estimate of the inflationary threshold that results in a positive or negative stock price / bond yield (SBY) correlation, and whether investors are likely to approach this level over the coming one-to-two years. US core inflation does not likely need to return to the Fed’s target in order for the SBY correlation to return to positive territory, but a move back to a positive correlation will very likely occur in the context of falling equity prices.

The debt ceiling game’s endpoint will avoid default only if it implies economic pain. For the Republicans, the best strategy is not to lift the debt ceiling unless the Democrats cut spending a lot, or unless the economy starts to tank. Plus: there are signs that the mania in ‘AI’ stocks has gone too far too fast.

China’s recovery is losing steam. Its industrial segments will disappoint, while the pace of consumer spending will be moderate. Overall, the Chinese economic recovery will underwhelm in the months ahead. Odds are that interest rate expectations in China will drop even lower, which will weigh on the RMB.