In today’s briefing:
- What If the Magnificent Seven Are Done?
- FX Weekly Strategy: G10, September 16th-20th
- The Slow March to Fiscal Dominance
- Pace of Fed Policy Easing Dependent on Future Labour Market Weakness Impacting Growth
What If the Magnificent Seven Are Done?
- We continue to expect market sloppiness for September and possibly October. The market has flashed a cluster of Hindenburg Omens for five consecutive weeks.
- Investment oriented accounts should regard any near-term weakness as a buying opportunity.
- Pullbacks are normal at this point of the election year, and we expect higher stock prices by year-end.
FX Weekly Strategy: G10, September 16th-20th
- Market focused on FOMC with significant risk of a 50bp cut still seen.
- USD upside looks quite limited given current yield spreads. GBP risks still mainly on the downside even if BoE leaves rate unchanged.
- Hard to oppose JPY strength NOK weakness overdue a correction, but Norges Bank may not help .
The Slow March to Fiscal Dominance
- The sovereign debt levels of major developed economies are well on the path to fiscal dominance, underpinned by the U.S. fiscal trajectory.
- Mario Draghi’s proposals for European competitiveness also highlighted a need for debt-financed investments that will also substantially raise EU debt to GDP ratios.
- Investors should expect a regime shift toward higher term premiums on bonds and from paper assets to hard assets in the coming years.
Pace of Fed Policy Easing Dependent on Future Labour Market Weakness Impacting Growth
- Not all economic indicators will simultaneously flash recession warning signals due to changing labour market dynamics, but Fed officials are wary about the rising unemployment rate.
- Since the COVID-19 pandemic ended, the vacancy rate has exceeded unemployment, resulting in a steeper Beveridge Curve that could enhance the Fed’s chances of producing a soft landing.
- Fed policy can support equity valuations only if money is diverted from money market funds into bond funds, an outcome that will lower expected returns on bonds relative to equities.
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