June, 16 2017 by lsr team

Steve Blitz, Chief US Economist talks about how:
-  Inflation eludes Yellen yet again, nevertheless she continues to chase it
-  But core inflation down means Fed funds rate now normal – inflation is for 2018
-  2017 outlook has changed: balance sheet reduction in Sept, no rate hike until Dec

April, 07 2017 by lsr team

The Fed surprised markets and commentators, including us, as the FOMC minutes showed plans to shrink the balance sheet beginning in 2017. Steve Blitz says this is significant because:
 
•       Signalling shrinkage of its balance sheet shows Fed planning for three increases
•       Fed’s intention is also to present a smaller target to its critics

March, 24 2017 by lsr team

We believe investors have stopped worrying about secular stagnation but are convinced the ‘new neutral’ will keep bond yields at very low levels. While the global economy looks structurally deflationary, there is still a cycle in inflation and interest rates. And the major economies may not be as rate sensitive as everyone assumes.

March, 17 2017 by lsr team

- Chair Yellen dampens market’s policy trajectory - she has to, we don’t
- February retail sales weakened by tax refund delays; underlying demand strong
- CPI details indicate a change - rising prices for discretionary goods

March, 01 2017 by lsr team

Dario Perkins on: • Markets are now more realistic on President Trump
• US tax agenda more important than fiscal 
• Stimulus will come late in the business cycle
• No likely improvement in productivity and medium-term growth
• Border adjustment tax unlikely to happen

February, 10 2017 by lsr team

- Trade dispute with US to peak in 12 months - Trump deal could be 45% tariff on "non-essential" goods - Chinese trade surplus to fall from 2018 - RMB policy will be undermined - FDI will decline and then retreat

February, 03 2017 by lsr team

Dario Perkins answers your questions on Trump policy:

- How far are markets underestimating President Trump's protectionsit tendencies?
- Is America really getting a bad trade deal?
- What are the Trump trade scenarios?
- How relevant is the 1930s experience?
- How would a possible trade war be different now?
- How might China respond?
- If major RMB devaluation what impact on the US & the global economy?

January, 27 2017 by lsr team

Successful renegotiation of NAFTA is likely but will not provide the template for the US administration’s future China policies. - US-Mexican trade is dominated by global value chains. US-sourced content in Mexican exports to the US is 40% so it is impossible for Trump to realize his threats to impose border taxes on Mexico without causing major damage to US manufacturing jobs. - This makes a successful renegotiation of NAFTA both possible and probable. - But the same cannot be said about US-China trade, which lacks such well-developed channels for trade. As...

January, 23 2017 by lsr team

Questions: 1) Last October you noted that Sterling(£) was getting oversold and that the market was overly concerned with respect to the UK’s external balances. 2) Currently on a real effective exchange rate basis how cheap is Sterling(£)? 3) You also highlighted previously that within an overall negative view on sovereign bonds(ex EM high yielders), gilts might be particularly vulnerable? 4) So one of our key macro trades remains short gilts/long US Treasuries? 5) Last week before PM May’s speech you suggested that whatever its content...

January, 20 2017 by lsr team

- Germany & EA both growing above-potential, inflation rising
- Less inordinate ECB stimulus to be announced this summer
- Rising euro vs. dollar later in 2017 to put pressure on Italy
- Germany to accept fiscal union, or Italexit a risk in 2018-19
- Ultra-cheap euro, huge trade surplus: a cause of Brexit-Trump
- World impatient with prolonged resolution of new euro-crisis
- German domestic imbalances could shrink over 10-15 years
- Baby boomers retire – saving down. Immigration raises capex

December, 21 2016 by lsr team

Highlights
- EMs to benefit from US and Chinese reflation in 2017
- But global macro ‘push’ factors set to recede thereafter
- Mature US recovery at risk from tighter monetary conditions
- Beijing’s debt-RMB dilemma pressing as the mini-cycle turns
- Global search for yield to persist, albeit tempered
- Lift-off growth phase elusive for North Asia’s exporters
- Clogged rate and FX channels leave fiscal stimulus option

December, 02 2016 by lsr team

Highlights: - 50% of S&P stocks gain from inflation, 20% lose
- Financials are the main winners 
- Consumer discretionary and Healthcare also benefit 
- Real Estate the big loser    

November, 18 2016 by lsr team

Trump's policies are clearly inspired by Ronald Reagan in the 1980s. Reagan introduced substantial tax cuts and trickle-down economics, but Reaganomics conflicts with Trump's desire to close the US trade deficit.

October, 21 2016 by lsr team

Some claim a US recession is ‘overdue’, but leading indicators are edging higher and we are not seeing the macro imbalances typically associated with major downturns. Rising bond yields and a correction in equity markets provide the clearest 2017 threats, while corporate indebtedness could compound these risks.

October, 14 2016 by lsr team

The euro area LI continues to put in an above consensus call. It is probably over predicting growth somewhat but its strength is fundamentally underpinned by the newly emerged German locomotive. While German demand often turns out to be derived from others, chiefly China, in this case it is genuine. In fact, this is highlighted by our below consensus Australia call. China’s stimulus has not fed through to a rebound in private demand, although easing PPI deflation is helping manufacturers.

September, 02 2016 by lsr team

It’s our concern that inflation in the US will eventually outpace market expectations in 2017, as sturdy demand plays out against a weakened supply side and wages and inflation spur each other along. However, for now, real wage growth may even moderate in the US, as wage negotiations typically reflect inflation 6 quarters previously. In this video, we outline what is holding down the long end of the curve in the US and highlight a tactical trade from our strategists before these deeper themes play out. Is it Draghi that holds the key?

July, 27 2016 by lsr team

Since March, we have consistently made the argument for yield-seeking as opposed to growth-seeking strategies, with a particular emphasis on emerging markets.The relative disregard that EM assets have displayed for the UK referendum result and yuan weakness to multi-year lows underscores the resilience of this ongoing rally. Two important questions for investors are: how long can the rally last and what is the biggest risk? Click above to watch the full video or below for our latest Macro Strategy report on EM carry.

June, 17 2016 by lsr team

The latest US employment report was a bit of a shocker, with May’s dismal 38k job gain apparently killing any chance of a Fed rate increase in either June or July. Despite weaker than expected US jobs data and the downward revision of the Fed’s dot plot, we still expect two rate hikes from the Federal Reserve later this year. Click above to watch the video or below for our recent LSR View report.

June, 08 2016 by lsr team

The housing market has long played a central role in discussions about secular stagnation in the US. This is hardly surprising given it was the collapse in American house prices that brought so much destruction in 2008. Credit was tight, job/income prospects were poor, would–be homebuyers had reassessed potential long-term capital gains and there was a substantial overhang of unsold homes/foreclosures. An intense and long-lasting squeeze on housing investment explained why the economy had failed to bounce back as quickly as in previous recessions.   Since...

May, 26 2016 by lsr team

The surprise rise in the yen and the less surprising rise in the euro this year have removed Ms. Yellen’s international concerns about why she should not be hiking interest rates. Specifically, a dollar spike now seems least of our concerns… Our Chief Economist, Charles Dumas talks us through the domestic conditions in the US and Euro area and the risks of rising bond yields by next year. These issues will be further discussed in our upcoming LSR View, stay tuned!  

April, 13 2016 by lsr team

Back in January, economists were gloomily warning about currency wars. The Bank of Japan had just announced negative interest rates and seemed to be threatening even lower – possibly much lower – rates to come. The ECB was set to respond at its meeting in March. And, of course, everyone was concerned about the prospect of a major Chinese devaluation. A few months after much of this talk has disappeared. There seems to be a ceasefire in the global currency ‘war’ and many economists attribute this to February’s G20 meeting in Shanghai. Even...

March, 30 2016 by lsr team

Who said markets overshoot? Back in February, inflation expectations looked unhinged and investors were talking themselves into a state of panic. Every client meeting was dominated by talk of deflation and whether central banks were running out of ammo. Since then, sentiment has certainly improved. Equities rebounded from their lows and with US core inflation unexpectedly picking up, we are even hearing complaints that the Federal Reserve is falling behind the curve. So is this the end of the deflation scare? Click below to find out more.

March, 04 2016 by lsr team

March is a busy month for central bank watchers. The fun starts next Thursday in Frankfurt with the ECB policy decision, before moving to the BoJ (15th), the Fed (16th) and the BoE (17th). With investors concerned about the state of the global economy and wondering whether monetary policy is reaching its limits, markets are looking for a central bank response. But outside the euro area, we don’t expect a great deal of action. Market rate expectations for the Fed and the BoE have already dropped sharply (down 75-90bps since December) and some comforting words should be...

February, 10 2016 by lsr team

It was almost exactly a year ago that various bond yields in Europe turned negative, unleashing a wave of questions from our readers. Clients wanted to know what this strange phenomenon meant and how long it would last. Twelve months on, far from proving to be a temporary aberration, central banks in Europe have taken their policy rates deeper into negative territory. Now the Bank of Japan has joined in and helped push the 10-year government bond yield to almost zero today. With risks to the global economy intensifying, there is even speculation that US and UK rates coul...

January, 29 2016 by lsr team

Both the UK and the US are relying on consumers to power recovery. But while British households have largely shaken off the after-crisis blues, their US counterparts seem to be suffering from a case of Post-Traumatic Stress Disorder caused by past job and home losses. The difference is clearest in the savings rate. In both economies, there is a strong historical relationship between wealth and savings. However, whereas American consumers are currently saving more than their wealth ratios would suggest, UK consumers are setting aside less. What has driven this divergence?...

January, 25 2016 by lsr team

Markets are jittery and the latest manufacturing data, both from the US and the wider global economy, are doing nothing to restore confidence. Last week’s plunge in the Empire State index confirms a trend that has been apparent for some time – global industry is struggling. Since manufacturing has often been reliable guidance to near-term macro trends, investors are understandably worried. It is no coincidence, for example, that industrial data play a dominant role in the OECD’s leading indicators. So why are manufacturers struggling? More importantly,...

January, 21 2016 by lsr team

Not all the countries have joined in the global currency war. To some of the currencies most exposed to the slowdown in Chinese growth and associated deflation currency pegs are a symbol of normalcy; a signal to investors and speculators alike that the strains wrought by falling prices are only temporary difficulties. No one should be fooled; at best these pegs are illusions of stability and in many cases are making a difficult position worse. In this note we look at the two dollar pegs frequently mentioned in client queries; the Hong Kong dollar (HKD) and the Saudi Arabian...

January, 18 2016 by lsr team

Charles Dumas, director at Lombard Street Research, discusses market reaction to the slowdown of the Chinese economy and what to expect as the yuan devalues. Click below to watch the video on Bloomberg.

January, 14 2016 by lsr team

Twelve months ago, economists were busy trying to assess the impact of the collapse in oil prices on the global economy. Opinion was divided. Some thought the 60% drop in prices would provide a sizeable boost to consumer demand. Other economists were sceptical, worrying that the plunge told us something disturbing about the state of the global economy. A final group of commentators was even gloomier, arguing the inevitable correction in shale fracking would cause a US recession and tip the world into a crisis. At LSR we were on the optimistic side of the debate, though w...

January, 11 2016 by lsr team

The stock market is fixated on China, as the deep convictions of the China bulls are progressively and painfully eviscerated. But their inability until recently to see the flaws in China’s post-crisis recovery is fomenting a new delusion: that China’s slowdown, and stock-market angst, will necessarily pull down the rest of the world’s economies and stock markets. In other words, the obsession with China has taken on a new form rather than faded, as it should have done: China is clearly important, but it is not all-important. Click below to find out how...

January, 08 2016 by lsr team

While it is always dangerous to extrapolate from the recent past, the consensus expects 2016 to look remarkably like 2015. The issues that have dominated market commentary over the past 12 months – EM weakness, global deflation and central bank divergence – remain the sellside’s favourite 2016 themes. There is also a surprising amount of agreement about what will happen. Growth will move sideways, inflation will remain too low and the divergence trade has further to run. T...

January, 04 2016 by lsr team

Happy New Year! Having sifted through various sell-side reports, we conclude that our emerging market view is more on the bearish side. While we have a constructive stance on some EMs, India and Mexico in particular, our general tone is still one of caution. For more details, please request a copy of our year-ahead piece -2016: Don’t panic, yet! In today’s note, we address three key questions: 1) Why are we more bearish than consensus on EMs? 2) What would make us more optimistic? 3) What would make us more negative? Click below to find out more.

December, 09 2015 by lsr team

Twelve months ago we said 2015 would be a year of ‘deceptive calm’. With the S&P 500 up 5% and US 10-year yields around 5bps higher, you could say our forecast was accurate. Markets spent much of the year in an anxious state, fretting about Greece, then China, then the risk of a synchronised global recession. In 2006 and 2007, LSR had a high conviction that a financial meltdown was about to wreak havoc on the global economy. This time around we stick with our 2015 theme ‘Keep Dancing’ but with no great conviction. Looking ahead to 2016, China...

November, 30 2015 by lsr team

With economists across the City busy finalising their big what-will-happen in 2016 publications, LSR likes to revisit what we wrote 12 months ago and see how those views panned out. This is useful not only because it highlights our successes but also it provides a way to explain our clients what we got wrong. Of course, this breaks one of the golden rules of sell-side economics – never admit when you’re wrong - but we believe it is a way of providing intellectual consistency. Clients can usually forgive economists for changing their mind, as long as they can exp...

November, 25 2015 by lsr team

Last week we published our LSR View explaining why US growth is likely to accelerate into 2016 and that, by inference, recent scares about the potential for a US recession are greatly overplayed. We think US real GDP growth is set to quicken to 2½ -3% from the 2% average of the past five years. This exceeds most current estimates of US growth potential and fully justifies the Federal Reserve’s expected rate increases. Rapidly growing household spending, on housing as well as consumption, plus an end to five years of fiscal drag will be the main engines of gr...

November, 16 2015 by lsr team

Back in 2008 when central bankers were battling the global financial crisis, they knew they needed extraordinary measures to calm markets and guard against a collapsing world economy. But no one expected that seven years later interest rates would still be at emergency levels and that quantitative easing had not only been on a greater scale than first envisaged but had not even started to be unwound. Clearly, in the words of Lord Mervyn King, governor of the Bank of England (2003-2013), “the conventional approach to thinking about monetary policy doesn’t seem to...

October, 21 2015 by lsr team

The justified outburst of nerves about China has led the bull market in equities to take a well-earned breather since August – and in the best tradition of economic forecasting, experts’ projections seem to have become a lagging indicator of the stock market. While global manufacturing has much to be concerned with – notably in the German automobile powerhouse – it is far from clear that we should be fearing a recession in the West. Consumers are cheerier than at any time since the peachier phases of the pre-crisis boom, this time with less debt....

October, 15 2015 by lsr team

The FOMC decision to keep interest rates on hold in September left a number of economists confused and angry. Some argued the committee was ignoring its mandate and pandering to external considerations. With GDP growing at a healthy pace for a seventh consecutive year and the labour market approaching full employment, a broad reading of US data made it hard to justify emergency levels of interest rates. Some investors, particularly those based in the US, were worried that the Fed was trying to become the world’s central bank, rather than staying within its own ju...

September, 28 2015 by lsr team

Seven years after the global financial crisis, the world still lacks genuine consumer demand, growth remains subdued and major central banks’ policy is in “emergency” mode. Is the world economy on the cusp of another crisis, facing prolonged secular stagnation, or about to experience a falling-price boom? Two of the main market drivers in the next five years will be China’s financial liberalization and integration into global markets, and the search for a new monetary policy orthodoxy. We are fortunate to have four exceptional speakers to explore the...

September, 22 2015 by lsr team

In a recent note, we highlighted increasing EM political risk. Emerging markets constitute the ‘deflationary’ leg of our ‘deflationary boom’ forecast for the global economy. But heightened political risk is not just an emerging markets issue. Greece, for example, just held its third election in nine months. In Spain the rise of two new reformist parties, Podemos and Ciudadanos, effectively ensures that a coalition government will emerge from November’s election. Australia has had four prime ministers in 27 months whereas the previous four premi...

September, 18 2015 by lsr team

After weeks of speculation, the FOMC decided to keep interest rates on hold, once again postponing policy lift-off. Given recent events, the decision shouldn’t have been a surprise to most investors. Fed officials were clearly worried about unsettling already nervous markets and wanted more time to assess the impact of what some commentators are calling a global economic downturn. While the outcome of yesterday’s decision was perhaps never in question, the committee’s debate was surely still intense. Despite uncertainty about the short-term rate outlook...

September, 17 2015 by lsr team

It is fair to say that a rate increase today from the Federal Reserve would come as a shock to global investors. While FOMC members in recent weeks certainly haven’t ruled out a move, suggesting that today is a ‘live’ meeting, markets are assigning a low probability to a hike. Fed funds futures put the chances at less than 30% and, as Larry Summers points out, the Fed has never tightened policy without guiding markets to at least a 70% probability. For this reason, Summers argues that a rate rise today would be the biggest hawkish surprise since 1994, w...

September, 16 2015 by lsr team

When oil prices crashed last winter, the world’s major central banks were planning to ‘look through’ this development. They argued the impact would be temporary, with inflation quick to rebound. This view has been broadly correct- inflation in developed economies is close to a trough and should rise by early 2016 thanks to favourable base effects. That said, the global economy is clearly more deflationary than policymakers anticipated at the start of the year. Meanwhile, China’s slump has caused a broader EM downturn, which is weighing heavily on...

September, 14 2015 by lsr team

In our recent publications, we noted that the selloff in US stocks in the aftermath of China’s devaluation had taken the market deep into oversold territory, and that a rebound in the near term was looking very likely. In the following days equities duly bounced back and, while volatility remains elevated, S&P500 futures are now up 4.5% from the August lows. After the rebound, US equities are no longer blatantly oversold. Although less than a third of the S&P500’s constituents remain above their 200-day moving average (the lowest proportion since 2011...

September, 08 2015 by lsr team

China’s economic transformation is a game-changer for the world economy. Recent market jitters have shown that investors have now begun to acknowledge the sharp growth slowdown we forecast. Yet confusion and uncertainty abound as most regard China’s economy and politics a black box. China’s equity market crash, the authorities’ panic intervention and the growth slowdown have undermined confidence in China’s economy and policymaking. But it seems investors’ own fear is now preventing them from seeing the big picture and important change...

September, 07 2015 by lsr team

Financial markets are right to be obsessed with China’s prospects. But they may be plain wrong to assume that the current Chinese slowdown is bad for global prospects: either of stock markets or the economy. On the contrary, China’s grotesque economic distortions have been major contributors to the sluggishness of world growth. Their correction should benefit most of us, not just China itself. China’s excessive, wasteful capex now being curbed, have been a major cause of weak recovery. The widespread assumption that reducing these excesses will be bad f...

September, 04 2015 by lsr team

Recent falls in equity markets have reignited the debate about the appropriateness of monetary tightening in the US and elsewhere. Those economists committed to a ‘secular stagnation’ view of the global economy perceive recent market falls as a vindication; how could the Fed, or indeed the Bank of England, be considering raising rates from emergency levels when there is still clearly an emergency? Yesterday was the turn of Mario Draghi and the ECB to make their contribution to this debate. While recent euro strength will be a concern, the ECB’s QE progr...

September, 02 2015 by lsr team

We have warned of painful adjustments and weaker currencies in EMs, most recently in our 2015 outlook. Our own LSR EM FX index is down 11% against the dollar since the start of the year, and even China has dipped a toe in the tempting waters of currency depreciation. In real terms, many EM currencies are still overvalued. Our analysis suggests that a further 9% real depreciation of the LSR EM FX index would be required just to make EMs as competitive as in late 1990s. The important question here to ask is whether US policy can support the large scale EM devaluati...

August, 27 2015 by lsr team

As we approach the crucial September Fed meeting, the debate about whether the Fed will/ should raise interest rates has intensified.  Even before the recent drama in global markets, a clear split had emerged on the FOMC about whether it was time to attempt lift-off. Now, domestic US data still justify a move, but jittery markets and the slowdown in China, which will intensify global goods deflation, suggest it might be prudent to wait a few more months. The decision looks finely balanced and might come down to how markets behave over the next few weeks. Our report...

August, 24 2015 by lsr team

The yuan devaluation has set in motion a chain of events that ultimately resulted in the current selloff in global risk assets. Emerging markets, already underperforming for much of the past few years, took the first hit. The liquidation is now spreading to developed markets, with most equity indices down more than 10% in under a week. Market volatility should not be a surprise at this stage of the cycle. As the chart above shows, rich valuations tend to correlate with deeper and more frequent market gyrations. What is it then that explains the violence in market moves t...

August, 24 2015 by lsr team

The recent devaluation of the yuan appears to have been the main reason why expectations of a Fed rate rise been pushed back. As recently as mid-June a hike of 25bp by the end of 2015 was fully priced in, but that has now been pushed back to Q1 2016. Given the increasing FX uncertainty and global deflation, we think there is a significant risk that investors could perceive an earlier-than-expected rise in Fed rates as a policy mistake. There is already some evidence of this concern, with long-term breakeven inflation rates falling to post-crisis lows as two-year yields h...

August, 21 2015 by lsr team

A 3% depreciation in the yuan (CNY) is, per se, hardly a game changer for global markets. But the move could have broader implications, certainly in the near term – not least as Japan and the euro area are firmly in easing mode. Sustained CNY depreciation will send disinflationary impulses to the rest of the world, complicating EM policymakers’ task and magnifying risks around domestic EM leverage.  To find out more about how a weaker yuan amplifies the EM ‘slow burn’ challenges we have identified in the past, click below.  

August, 19 2015 by lsr team

Emerging markets are grappling with deficient global demand, souring domestic fundamentals, a strong dollar and potentially higher US real rates. A lower yuan creates a ‘perfect’ storm for most EMs, at least in the short term.  Our analysis has consistently highlighted Malaysia as one of the more vulnerable Asian economies and the sharp depreciation of the ringgit validates our concerns. The collapse in the global oil price, a sharp increase in leverage and poor FX reserves ammunition are some of the reasons. Besides, idiosyncratic risks have esc...

August, 03 2015 by lsr team

The productivity puzzle is a central topic for investors, especially those investing in the US and UK. Productivity, which measures how much output an economy produces per unit of labour input, is a crucial determinant of living standards. Faster productivity implies that an economy can expand faster without causing inflation to rise. The fact that productivity has slowed sharply since the global financial crisis in 2008 is a big deal and economists and policy makers have spent considerable effort trying to explain it. What caused the productivity crash and how does slow...

July, 28 2015 by lsr team

The Fed continues to prepare the market for imminent rate hikes. Yet, while most economists anticipate a move in September, it seems many investors remain sceptical. Perhaps this is a classic case of the boy who cried wolf – the central bank has been threatening to raise interest rates for so long that many investors think it is bluffing. We think that the timing of lift-off really isn’t as important as the pace and extent of policy tightening thereafter. This will depend on two crucial things: 1) what happens to the neutral interest rate over the new few wee...

July, 24 2015 by lsr team

In his latest round-the-world trip over the past couple of weeks, our Chairman, Charles Dumas visited Beijing, Shanghai, Los Angeles, Portland, Seattle and San Francisco. A frequently recurring question was how the current US recovery might be blighted by huge Chinese adjustments, just when it appears to be getting properly established. He remains bullish on US stocks for the next year or so but is warning that we expect Chinese problems and USD strength to hamper stocks in the medium-term.    Click below to find out more about Charles’ latest views on th...

June, 24 2015 by lsr team

As the start of the rate hiking cycle in the US draws closer, concerns are intensifying about the tightening of liquidity conditions in emerging markets (EMs). Some investors cite the aggressive QE policies of the BOJ and more recently the ECB as forces that will keep official liquidity provision abundant. But our analysis continues to show that the evidence so far, at least from Japanese QE, does not offer much room for hope. Annual outflows from Japan have increased since the start of BOJ’s latest QE programme and are now the highest since the global financial crisi...

June, 12 2015 by lsr team

The strong May data showing 17.9 million annual rate of car sales and 0.7% bounce in retail sales. In other words, US consumers are using their gasoline windfalls to buy new cars and using them to drive to the mall. Since before the Q1 soft-patch we have highlighted the likelihood of a consumer-led acceleration in growth during the second half of 2015 - this now seems to be underway. By the time school starts again in September there should be enough confirmation of this acceleration to push the Fed over the line to its first rate hike. In the meantime,...