Weekly market insights

1. US inflation: Consumer inflation in the US is showing signs of moderation, with the consumer price index at its lowest level since late 2021. This suggests that inflationary pressures may be easing, which could have a positive impact on the overall economy.
2. Equity markets: The US stock market is expected to continue its rally, supported by favorable inflation and growth signals. The S&P 500 Index has been experiencing a prolonged period of daily gains, indicating positive market sentiment.
3. US Federal Reserve: The Federal Reserve's recent decision to hold the federal funds target rate steady indicates a "skip" rather than a long-term pause in rate hikes. The median rate projection suggests the possibility of two more quarter-point hikes by the end of the year. However, Fed Chair Jerome Powell's comments during the press conference were interpreted as slightly more dovish, emphasizing that rate decisions will depend on incoming growth and inflation data.
4. Bond markets: Despite the Fed's policy announcement, the bond markets remained calm overall. Limited issuance and stable credit spreads were observed in most sectors. However, there was increased activity in the secondary market for bank loans, with steady demand for discounted loans and some investors taking profits.
5. European markets: European stock markets, including Germany's DAX, France's CAC 40, Italy's FTSE MIB, and the UK's FTSE 100, experienced gains following the US Federal Reserve's decision not to raise rates. Additionally, hopes for stimulus measures in China contributed to the positive performance.
6. European Central Bank (ECB): The ECB raised its key deposit rate by a quarter-point to 3.5%, signaling continued monetary tightening. The ECB also revised its inflation forecasts upward while lowering estimates for economic growth. The central bank confirmed its plan to stop reinvesting the proceeds of its asset purchase program from July.
7. Japan stock market: Japan's stock market, including the Nikkei 225 Index and the TOPIX Index, recorded strong gains. The Bank of Japan's decision to maintain its ultra-loose monetary policy as expected supported the market. Strong export and machinery order data also boosted sentiment.
8. Bank of Japan (BoJ): The BoJ left its ultra-loose policy unchanged, including the short-term interest rate and the yield curve control program. While inflationary pressures have increased, the BoJ maintained its projection that inflation will decelerate in the future, citing cost-push factors and the early stages of moderating inflation.
9. China stock market: Chinese stocks experienced a surge after the People's Bank of China (PBOC) cut several interest rates, raising hopes for additional stimulus. Weakening economic indicators, including industrial output, retail sales, and fixed asset investment, suggest a slowdown in China's economic activity.
10. Property sector in China: The property sector in China showed signs of stabilization earlier in the year but recent data indicates a slowdown in the recovery momentum. New home prices grew at a slower pace in May, and property investment and sales fell sharply. Calls for more stimulus in the sector have emerged.
11. Czech Republic: Inflation in the Czech Republic remained high in May, but it was slightly below the central bank's forecast. While no immediate changes to monetary policy are expected, cautious rate cuts toward the end of the year could be considered.
12. Turkey: The newly appointed individuals in Turkey's government suggest a potential adjustment to the current economic policy framework. This may indicate a return to a more orthodox policy approach, addressing challenges such as unsustainable external account dynamics, unanchored monetary policy, and a widening budget deficit.
13. The Federal Reserve (Fed) is likely to continue its cautious approach by closely monitoring inflation and economic conditions before making further decisions on interest rates.
14. The Fed's decision to pause on rate hikes is seen as prudent due to the downward trend in inflation and signs of a softening economy.
15. The stock market rally is expected to continue, fueled by the outlook of a less-aggressive Fed and anticipation of an end to the tightening cycle.
16. While the market may experience hiccups and temporary soft patches due to shifting expectations for Fed moves and changes in stock market leadership, long-term investors can take advantage of buying opportunities and proactively rebalance their portfolios.
17. The Fed's pause in rate hikes does not necessarily indicate a permanent halt, and the Fed has emphasized its intention to hike rates further in the coming months.
18. The Fed will closely monitor inflation expectations and financial conditions to ensure that they do not loosen prematurely and risk reigniting inflation pressures.
19. The market's positive reaction to the Fed's announcement reflects the interpretation that additional rate hikes may not be necessary, and the end of the hiking cycle is in sight.
20. Investor sentiment has grown somewhat complacent, leading to elevated valuations and the potential for temporary soft patches in the market.
21. The longer-term path of the market will be guided by an eventual bottoming and rebound in the economy and corporate earnings, while the short run may be influenced by evolving Fed commentary and changes in stock-market leadership.
22. Proper expectations for bouts of volatility and a focus on the broader bull market can provide opportunities for long-term investors.
23. Emerging market equities: It is not yet the time to be more constructive on emerging market equities. A sustainable global cyclical upswing that benefits emerging markets still seems elusive. The nominal growth advantage that EM companies have enjoyed in the past appears to be diminished. However, if there is a cyclical pickup in global growth, it could benefit relative EM equity performance.
24. Foreign investment in the US: The US is attracting a significant amount of foreign direct investment (FDI) and is emerging as a leader in the global scramble to redraw supply chains. No country in the world, including China, attracts as much FDI as the US. This trend is driven by factors such as the vast and wealthy consumer market, ease of doing business, skilled labor pool, transparent rule of law, and government incentives such as infrastructure spending and tax credits.
25. US manufacturing base: America's manufacturing base is undergoing a transformational do-over, fueled by massive government spending and foreign firms wanting to be part of the action. The Biden administration's legislative packages, including infrastructure investments, semiconductor manufacturing support, and incentives for clean technologies, are attracting foreign firms to invest in the US. This transformation presents potential investment opportunities and economic growth.
26. Market breadth: There is a concern about narrow equity market breadth, particularly when a few heavily weighted stocks drive most of the year-to-date gains in the S&P 500 Index. Narrow market breadth refers to a situation where only a small number of stocks are participating and moving in the same direction as the overall index. This can be an indicator of potential risks or imbalances in the market.
27. Geopolitical risk: Geopolitical risks, especially those associated with China, are a significant factor impacting emerging markets. There are concerns about the geopolitical risk overhang and the weight of China in EM indexes. Investors need to consider country and stock selection to mitigate these risks. Some investors are exploring EM exchange-traded funds that exclude China, reflecting the debate on whether China is investable.
28. Global cyclical momentum: A sustainable global cyclical upswing that benefits emerging markets seems unlikely in the near term. Global growth remains weak, with Europe in a recession, China facing challenges, and the US potentially heading into a recession. Commodity prices also suggest a weaker global demand backdrop, which could impact commodity-exporting emerging markets.
29. US dollar and EM performance: The US dollar is overvalued by medium-term valuation metrics, and a weaker dollar could be a potential tailwind for emerging markets over the next few years. However, the performance of emerging markets is not solely dependent on the US dollar but also influenced by factors such as nominal GDP growth, earnings, and geopolitical risks.
30. The likelihood of a soft landing in the current Fed tightening cycle is low. A recession is expected to occur before inflation is under control. This implies that the Federal Reserve's attempts to balance growth and inflation are likely to be challenging.
31. Some institutions recommend a defensive investment strategy, favoring high-quality large-cap U.S. stocks over economically sensitive smaller caps and non-U.S. stocks. In bonds, a barbell strategy is suggested, with investments in shorter-maturity bonds and longer-term bonds.
32. The market has experienced a narrow rally fueled by mega-cap technology-related stocks, while the average stock has performed poorly. This market narrowness is rare and is likely to correct in the future. However, it is unclear when or how this correction will happen.
33. The futures market is not necessarily expecting rate cuts by the end of the year but rather hedging against the possibility of a financial shock that could force the Fed to cut rates.
34. Saudi Arabia, as the de-facto leader of OPEC, has announced production cuts in a bid to stabilize oil prices. This commitment to stabilizing prices, even at the cost of reduced market share, indicates a unified and strong OPEC. These production cuts may help offset the effects of lower demand during an expected recession and support oil prices.
35. The office property market is facing challenges, including shifting worker preferences, tighter lending market, and rising debt costs. The vacancy rate for the U.S. office property type has been steadily increasing, suggesting potential weakness in tenant demand. However, other property types such as Industrials continue to exhibit relative strength despite the rising interest rate environment.
36. The Federal Reserve is expected to provide more clarity on the trajectory of interest rates in the upcoming meeting. The market expectations have been fluctuating, with a 28% probability of a rate hike in June and a 54% chance of a skip in June followed by a hike in July.
37. Given the gradual slowdown in growth and inflation and the fact that the full impact of the cumulative 500 basis points (bps) of rate hikes has not been realized yet, it is advised for the Fed to pause at this point and not raise rates. However, the possibility of another rate hike is still on the table, and Chairman Powell may emphasize that skipping a rate hike now doesn't mean the Fed is done raising rates.
38. Regardless of the Fed's decision and messaging in the upcoming meeting, there is an expectation that rate cuts will occur within the next year. These rate cuts are expected to improve the investment backdrop across a broad range of assets.
39. The S&P 500 price momentum suggests a potential return to highs, indicating a possible end to the bear market. However, there is skepticism about the ease of this recovery, and further work needs to be done.
40. The economy is expected to weaken further, and there is a base case prediction that a recession may develop later in the year. Leading indicators and the yield curve indicate potential weakness ahead. Despite this, there is a belief that the lows have been reached, and any pullbacks in the market could present buying opportunities.
41. The S&P 500 is currently overbought, indicating a potential period of consolidation and choppiness in the market.
42. Resistance levels for the S&P 500 are identified at 4370-4380 and 4431, while support levels are seen at 4200 and the upward sloping 50-day moving average (DMA) around 4167.
43. Inflation remains a key factor influencing market sentiment and the path forward for the Federal Reserve. Despite some moderation from peak levels, inflation is still elevated, and the Fed may need to take further action, including possible rate hikes, if inflation doesn't cool more.
44. The performance of specific sectors is highlighted, such as the dominance of Tech heavyweights and the need for broader market breadth for sustained upward movement. The momentum in banks and Japanese equities is also mentioned as potential areas of interest.
45. Equity markets: Despite some troubling indicators, such as an inverted yield curve and low volatility, the stock market has reached fresh highs. The market perceives an economic soft landing and improvement in corporate earnings trends as more likely. However, there are still elevated recession risks according to leading economic indicators.
46. Bank of Canada: The Bank of Canada is expected to continue raising interest rates due to stronger-than-expected economic data. The inflation data and low unemployment rate support the view that the Bank of Canada will maintain a tightening path. However, a change in the inflation picture may be needed to alter the current trajectory.
47. European Central Bank (ECB): The ECB has recently hiked rates and signaled the cessation of reinvestments under its Asset Purchase Program. The higher inflation narrative and upward revision in inflation forecasts indicate a possibility of more rate hikes in the future, potentially reaching 4%.
48. Bank of England (BoE): The BoE is expected to raise rates to 4.75% at its meeting following strong labor market data, services inflation, and private sector pay growth. The UK economy has shown resilience and is forecasted to experience continued growth.
49. Asia Pacific Market: The Asia Pacific equity market is on track for consecutive weeks of gains, driven by supportive policies from China. The People's Bank of China has cut short-term interest rates and is expected to implement further stimulus measures to encourage household consumption. The Japanese yen has weakened against the US dollar, and the Bank of Japan is likely to maintain its easing policy.
50. Toyota: Toyota Motor Corp. aims to sell a significant number of electric vehicles (EVs) annually by 2026 and 2030. The company's commitment to EVs and its sales targets have been positively received by investors, resulting in a surge in Toyota's shares.
51. Equity markets: The overall outlook for equity markets is improving in the longer term. However, a short-term pause or pullback is expected due to the recent surge and approaching technical resistance levels. Potential support levels for the Nasdaq include 13,150 and 12,427, while the S&P 500 may find support around 4,300 and 4,200-4,155.
52. Market participation: As many growth stocks have advanced and are nearing resistance levels, there is an expectation that participation will broaden to other areas of the market. Sectors such as industrials show increasing evidence of bottoming at key support levels, indicating potential opportunities for participation.
53. S&P 500 equal-weighted index: While a few mega-cap technology stocks have been leading the gains in the S&P 500, it is important to note that other stocks are also showing signs of improvement. The S&P 500 equal-weighted index (SPW) is cited as an indicator of broad-based participation. The recent recovery in the Russell 2000 small-cap index and the SPW, along with improvement in sectors like industrials, suggest a potential broadening of market participation.
54. S&P 500 Industrial sector: The S&P 500 Industrial sector is showing noteworthy technical improvement despite concerns about the economy. The weekly momentum indicator is turning up, indicating a positive development and potential upside over the next 2-3 months. Price trend analysis suggests a transition from a bear market to a narrow trading range, with a potential breakout to new cycle highs in the coming months. Relative performance versus the S&P 500 is also showing early signs of bottoming, indicating potential participation in the sector if market breadth expands.
55. Market Volatility: The new regime characterized by heightened macro and market volatility is expected to continue. This volatility is driven by factors such as supply constraints, inflationary pressures, and structural changes shaping returns.
56. Market Opportunities: Traditional broad market moves may not be as effective in generating returns in the current environment. Instead, investment leaders suggest focusing on more granular investment opportunities that consider relative pricing divergences across sectors and regions.
57. Emerging Markets: Emerging market (EM) stocks are considered to better price in the economic damage expected from rate hikes compared to developed market (DM) peers. Factors such as China's economic restart, the end of EM hiking cycles, and a weaker U.S. dollar are seen as potential benefits for EM stocks and local currency debt.
58. Megaforces Shaping Returns: Structural changes, or "megaforces," are expected to play a significant role in shaping returns. These include the widening disconnect between bond and stock pricing, the potential widespread adoption of artificial intelligence (AI), aging populations, geopolitical fragmentation, and the transition to a lower-carbon economy.
59. Inflation and Monetary Policy: Core inflation remains stubbornly high, and supply constraints limit economies' ability to produce without sparking inflation. As a result, central banks are expected to maintain restrictive monetary policy, potentially bringing inflation down but not necessarily to policy targets.
60. Recessions and Asset Pricing: Recessionary conditions are anticipated, but the usual approach of "buying the dip" may not apply in the current regime. The economic damage caused by rate hikes is seen as a key factor in asset pricing, and the extent of this damage needs to be continuously reassessed.
61. Bonds and Fixed Income: Fixed income investments, particularly very short-term government paper, are becoming more attractive for income generation. Long-term government bonds may not provide the same level of protection as in the past due to changing correlations between stocks and bonds and the likelihood of higher policy rates for a longer period. Short-term government bonds are preferred over long-term government bonds.
62. Living with Inflation: Inflation is expected to persist above policy targets in the coming years, driven by factors such as aging populations, geopolitical fragmentation, and the transition to a lower-carbon world. This suggests a need to adapt investment strategies to account for ongoing inflationary pressures.
63. Overweight Inflation-Linked Bonds: Given the expectation of persistent inflation, there is a preference for overweighting inflation-linked bonds on both a tactical and strategic horizon.

Past week:

1. Market Sentiment: The S&P 500 Index entering bull market territory suggests improved investor sentiment and confidence in the market. This positive sentiment is further supported by the broadening market gains, with small-caps outperforming large-caps and value shares outperforming growth stocks. These trends may continue to drive market performance in the near term.
2. Economic Outlook: The increase in jobless claims to the highest level since October 2021 indicates potential challenges in the labor market. However, the unexpected decline in continuing claims and the overall index of economic optimism remaining steady suggest a mixed economic outlook. It's important to closely monitor future jobless claims data and economic indicators to assess the direction of the economy.
3. Inflation and Monetary Policy: The ECB officials' indication of potential rate increases in June and disagreement among policymakers regarding the timing of rate hikes highlight concerns about rising inflation. The downward revision in eurozone inflation expectations and the evidence of easing prices in the services sector may provide some relief, but the overall inflationary pressures remain a key factor to watch. Central banks' actions, such as the rate hikes by the Reserve Bank of Australia and the Bank of Canada, indicate their efforts to address inflationary pressures.
4. Regional Economic Performance: The eurozone's mild recession, weakening UK housing market, and China's deflation risks pose challenges to their respective economies. However, the strong growth in Japan's economy, supported by increased corporate investment and a rebound in the services sector, is a positive sign. These regional dynamics can impact global market performance and investor sentiment.
5. Oil Market: The decision by Saudi Arabia to cut oil production, along with OPEC's extension of production limits, suggests efforts to stabilize the oil market and support prices. However, fluctuations in oil prices due to geopolitical factors and talks between the U.S. and Iran on nuclear enrichment and oil exports can introduce volatility and uncertainty to the market.
6. Impact of upcoming CPI release and Fed meeting: The CPI release and the Federal Reserve meeting are likely to be significant market events that could set the tone for the remainder of the summer. The market's reaction to these events will depend on the inflation data and the Fed's monetary policy stance.
7. Small-cap stocks and broader market participation: The current market rally has been driven primarily by a few mega-cap stocks, and broader participation is needed to strengthen the rebound. The recent performance of small-cap stocks and cyclical sectors provides some encouraging signs of broader market participation.
8. Central banks and the fight against inflation: The surprise rate hike by the Reserve Bank of Australia and the Bank of Canada indicates that central banks are concerned about inflation and are taking action to control it. Central banks aim to achieve some economic slowdown to tame inflation and ensure that monetary policy is sufficiently restrictive.
9. Resilience of the economy to higher interest rates: The U.S. and Canadian economies have shown resilience to higher interest rates, with consumer spending remaining strong supported by job creation and higher incomes. However, the unique nature of this cycle, including pandemic distortions, suggests that the full impact of higher rates may still be ahead.
10. Inflation data and Fed's monetary policy: The upcoming CPI release and the Federal Reserve's monetary policy decisions will have a significant impact on market expectations. Moderate inflation and the Fed's patient approach could provide some relief and support a pause in rate hikes, but further data will be important in shaping the Fed's stance.
11. Soft landing scenario and potential economic slowdown: The soft-landing scenario, where the economy avoids a recession but experiences a slowdown, remains a possibility. The impact of high interest rates may eventually lead to weaker growth, and some leading indicators suggest a potential economic slowdown.
12. Volatility and opportunity in the market: Volatility in equities should be viewed as an opportunity to position for a more sustainable rebound. Historical data suggests that early phases of a new bull market often have some of the best days, highlighting the potential for market gains despite potential pullbacks.
13. Strategic, long-term allocation and diversification: Investors are advised to stay close to their strategic, long-term allocation for a well-diversified portfolio, including bonds with attractive yields. This approach helps mitigate risks and captures potential opportunities across various asset classes.
14. Focus on macroeconomic factors: The market's attention is expected to shift back to macroeconomic indicators such as interest rates and inflation. The U.S. debt ceiling deal has removed near-term uncertainty, allowing the market to focus on these factors.
15. Higher-for-longer rates and sticky inflation: With labor markets remaining tight and inflation persisting, interest rates are likely to stay higher for an extended period. The Federal Reserve may need to keep policy tighter to combat inflation, and markets have started considering the possibility of further rate hikes.
16. U.S. fiscal position and debt servicing costs: Despite the debt ceiling deal, the U.S. fiscal situation remains challenging. Higher interest rates are anticipated to increase debt servicing costs. Over time, investors may demand more compensation for holding U.S. assets, particularly long-term Treasuries.
17. Treasury-bill issuance and volatility in fixed income: The government is expected to issue a significant amount of Treasury bills to replenish funds drawn down due to the debt ceiling. This influx of issuance could lead to volatility in fixed income markets, especially in short-dated maturities.
18. Quality tilt in portfolios: Given the macroeconomic outlook, maintaining a quality tilt in portfolios is preferred. This suggests a focus on higher-quality assets that can better weather potential market volatility.
19. Tight labor market and wage growth: The labor market remains tight, leading to worker shortages. Wage growth is expected to remain elevated, contributing to sticky inflation. This situation presents a trade-off for the Federal Reserve between crushing growth with higher rates or accepting some level of inflation.
20. Recession risks and reassessing economic damage: The risk of a recession is foretold as central banks attempt to bring inflation back down. The traditional approach of "buying the dip" may not be applicable in this regime. Continuous reassessment of economic damage caused by central banks is needed, as financial cracks and warning signs emerge.
21. Rethinking bond investments: Fixed income investments now offer income opportunities after global yield surges. Short-term government bonds are seen as more attractive for income and capital preservation, while long-term government bonds may not provide the same recessionary protection as in the past.
22. Living with inflation: High inflation is expected to persist above policy targets in the coming years. Factors such as aging populations, geopolitical fragmentation, and the transition to a lower-carbon world will contribute to inflationary pressures. Investments in inflation-linked bonds are favored on a tactical and strategic horizon.
23. Gradual normalization of the job market: The jobs data indicates a gradual pace of normalization in the labor market. The net creation of 339,000 jobs in May is higher than expected and shows improvement compared to April. This suggests a trend toward stabilization rather than weakness.
24. Mixed signals in the labor market: While the overall labor market is stabilizing, there are some mixed signals. The unemployment rate increased to 3.7%, and wage growth eased to 0.3% month-on-month, bringing the year-over-year rate down to 4.3%. Additionally, the quits rate fell to 2.4%, indicating that workers may feel less comfortable leaving their current jobs.
25. Possibility of a soft landing: The signs of stabilization in the labor market support the possibility of a soft landing. Despite the recent tightening regime and the intensity of the recovery, the labor tightness created by the pandemic may be preventing any sudden drop-offs in job market conditions.
26. Potential for a Fed pause: Based on the recent data, there is an expectation for the Federal Reserve to pause at the June meeting. The Fed is likely to wait and observe how the labor market data unfolds, whether it indicates further normalization or a more significant slowdown, before making any policy decisions.
27. Market resistance and potential pullback: The S&P 500 has broken above the 4200 level and reached new year-to-date highs. The next key area of resistance is around 4310-4325. However, the market is expected to face choppiness and may struggle to sustain upside momentum. A pause or pullback is anticipated, especially in the Technology sector, which has become overbought.
28. Possibility of a mild recession: Despite the market's attempt to convince that the bear market is over, there is a belief that a mild recession may develop in the later stages of the year. Leading indicators continue to point towards economic contraction ahead, and the normalization process in service-producing industries, while supporting the job market, may not be sufficient to offset weakness in other sectors.
29. Slowdown in Q2 earnings growth: An early look at Q2 earnings season shows slowing growth, with only 0.2% earnings growth quarter-on-quarter and -5.3% year-on-year for the S&P 500. While estimate revision trends have flattened out, it is expected that earnings will bottom out after the recession ends. Valuation multiples are likely to drive equities higher over the next 12 months as clarity on inflation, Fed policy, and economic damage is gained.
30. Importance of inflation and Fed reports: Inflation and the Federal Open Market Committee (FOMC) reports will be key catalysts to monitor. If rate hike expectations continue to climb and bond yields move higher, it is likely to compress valuation multiples and potentially drag down equities. However, if bond yields turn lower based on better-than-expected inflation or dovish Fed comments, the expanded market multiple may be justified.
31. Opportunities in Consumer Discretionary and Industrials: Consumer Discretionary and Industrials sectors have lagged behind Technology but have shown strength in terms of relative earnings trends. Recent weakness in these sectors presents an opportunity for investors to increase exposure.
32. Market indicator favoring the bulls: An intermediate-to-longer term market indicator favors the bulls, indicating that the October low may have been enough for this bear market, even in the presence of a potential mild recession.
33. Weak breadth in the market: The current rally in the S&P 500 has been characterized by a lack of broader participation. The advance has been narrow, with only a limited number of mega-capitalization stocks in the Information Technology and Communication Services sectors driving the index higher. This weak breadth raises concerns about the sustainability of the market upswing.
34. Deteriorating fundamentals: Despite the lack of broader participation, investors betting against stocks due to weak breadth have not been successful in recent months. This suggests that deteriorating fundamentals have not had a significant impact on market performance. However, caution is advised as economic headwinds are building, and a recession is expected to begin in the coming months.
35. Underperformance of equal-weighted index: The equal-weighted S&P 500, which gives equal importance to each stock in the index, has lagged behind the traditional market-cap-weighted index. Since March 10, the equal-weighted index has only risen 2.4% compared to the 10.8% rise in the market-cap-weighted index. This further confirms the narrowness of the market rally and lack of broader participation.
36. Outperformance of large-cap stocks: The S&P 100 (OEX), which represents the 100 largest-capitalization stocks within the S&P 500, has outperformed the broader market during the mentioned period. It has posted a 14.8% increase, indicating that the larger-cap stocks have been driving the market's performance.
37. Caution and recommendation to avoid chasing the rally: The lack of breadth and the narrowness of the market rally add to the caution regarding the equity market. Recession expectations, along with higher interest rates and tightening credit conditions, suggest a possibility that recent gains may not be sustained.
38. Economywide Profits: The data suggests that the profits recession is unlikely to end soon. Shrinking corporate gross value added, declining profit margins, and a drop in pretax economywide corporate profits indicate ongoing challenges for businesses. Rapid labor cost increases and tightening monetary policy are expected to further impact profit margins.
39. U.S.-China Commercial Relations: The relationship between the U.S. and China is undergoing a separation, which could have significant implications for the global economy and investors. The cracks in the U.S.-China commercial foundation, including declining portfolio flows and Chinese divestment of U.S. Treasuries, indicate potential downside and volatility for global capital markets.
40. Regime Change and Cheap Money: Shifting monetary gears, particularly with the Federal Reserve, pose risks. While the Fed may be close to the end of its rate-hike cycle, a shallow recession is still expected. Caution is advised in asset allocation, given a neutral stance across fixed income and equities.
41. U.S. Economic Growth: While recent economic data has shown upside surprises and renewed confidence in the longevity of the expansion, there are concerns about the tightening campaign by the Federal Reserve restraining aggregate demand. Shrinking business and residential investment, along with declining corporate value-added growth, indicate potential headwinds for the economy.
42. Declining Margins and Profits: The data suggests that profit margins are likely to decline significantly in the coming quarters, driven by Fed rate hikes, tightening credit conditions, and weakening pricing power. This may lead to cutbacks in business capital investment and softening demand for labor, potentially impacting consumer spending growth.
43. U.S.-China Trade and FDI Flows: While trade flows between the U.S. and China remain relatively solid, FDI flows have declined due to stricter regulations. U.S. firms are still finding China investable, but Chinese firms' listings on U.S. stock exchanges have decreased. The future path of U.S.-China relations remains uncertain, which could impact various asset classes.
44. Portfolio Flows and China's Holdings: China has been diversifying its dollar-denominated assets, leading to a decline in its holdings of U.S. Treasuries and a decrease in the number of Chinese companies listed on U.S. stock exchanges. This trend could pose challenges for the U.S. as a debtor nation.