Jason Daw:
Hello and welcome to Macro Minutes. During each episode, we'll be joined by R B C Capital Markets experts to provide high conviction insights on the latest developments in financial markets and the global economy. Please listen to the end of this recording for important disclosures.
Jason Daw:
Uh, hi everybody and welcome to the June 27th edition of Macro Minutes called Groundhog Day. I'm Jason d your host for today's call, which we're recording at 9:00 AM Eastern Time on June 27th. So the classic film, Groundhog Day was all about the same day repeating itself over and over, and this seems like the situation we are in in macro and markets policy rates keep going higher, curves are flattening, equities making new highs and dollar CNY is marching higher now, will this cycle continue or will it be short circuited? That probably depends on what market or country you're talking about. And to provide us with perspective across Canada, US Europe, equities and China. Were joined today by myself, Blake Gwinn, Lori Calvasina, Peter Schaffrik, and Alvin Tan. So to kick off today's discussion, I'll turn it over to Lori on the equity side, uh, to tell us if the equity market can continue. Its impressive run in the face of higher interest rates and an uncertain macro backdrop.
Lori Calvasina:
All right, well thanks Jason and I do certainly sympathize with the Groundhogs Day sentiment. I would say it felt like US equities, uh, just over the past day and week or so have finally started to react to the idea of another fed hike or two. Initially they seemed to be shrugging it off, but over the past five days, we have seen the NASDAQ fall about two and 5% versus a decline of about 1.8 in the s and p 500. So things do seem to be changing just a little bit there this morning. I thought I would touch base quickly on our US equity market call. I have been seen as one of the more constructive US equity strategists in the eyes of investors even before we raised our YEAREND 2023 s and P 500 price target to 42 50. About a month ago at the time, we pointed out that some of our models argued for upside to 4400, 4600, and we did hit that 4,400 mark rather quickly since we did that and sort of traded back down.
I will say that some of the indicators I track have started to feel a little bit murkier in the intermediate term. And I wanna make it clear I am not in the bearish camp. Um, I still stand by my models. I still stand by that 42 50 and that potential upside to 4400, 4600. But things do feel like they're starting to shift in a, a little bit, you know, just murkier way is the best way to put it. And I just kind of call out four things. First off, looking at our sentiment indicators, we watched the a a II net bullishness indicator very, very closely. It's something that kept us in the constructive camp throughout most of this year because it really was oversold to start the year and it levels that are consistent with the 15 16% type 12 month forward gain in the US equity market.
Uh, what we are seeing now is that indicator is making a beeline back towards worrisome territory. Um, it was basically at about 15% on the four week average in last week's update. And when you get 30% you wanna sell, um, you're only up about half the time, 12 months later with an average gain of about 1%. What we are seeing on that indicator mimics what we're seeing on the weekly CFTC futures positioning data, which looks to be late innings in terms of the recovery and asset manager positioning and s and p 500 e minis. I will say to the point on tech that I made earlier, NASDAQ futures positioning has been looking extremely stretched. Um, and so it's not surprising to me that we're starting to see that trade take a little bit of a breather. Um, other things that I would just highlight on politics, the 2024 elections had been feeling like an emerging positive for the stock market, but uncertainty does appear to be creeping back in biden's Disapproval numbers, um, have been stabilizing and we also saw the release of an NBC news poll over the weekend that suggested we're gonna see a close contest in both the presidential race and the congressional race next year.
Um, the third thing I wanted to mention is US equity funds flows are turning positive despite the fact that we're still seeing money going into bonds. I think this is all about geography. As European flows have weakened, China and emerging markets have weakened, we are seeing strength in Canada and Japan along with the us. Now, one thing to flag is that a lot of the strength in the US has been driven by both growth funds and small caps, and those do look like they may be losing a little bit of steam. And then the last point I would just make quickly is on Russia. I think it's really too early to make any major investible conclusions here. One of the things we have flagged is just given our commodity strategies team view that further civil unrest in Russia should be factored into oil price forecast in the back half of the year.
I would keep a very close eye on energy. This is a sector that many generalists had already been poking around over the last couple months. It's cheap. We're seeing a recovery and earnings revision trends. It's got a nice dividend yield and the geopolitics, I think, are pushing people back. There did have a nice bounce yesterday. And then the last thing I would say is that this, just, just another thing we can add on our list of murky indicators right now is the geopolitical backdrop. And it's coming at a time when sentiment's looking a little stretched, and we're entering a seasonally challenging period in the equity market. Um, that's it from me. Jason, I'll pass the call back over to you.
Jason Daw:
Okay, thank you very much. Uh, Lori. So, you know, in the US bond market, um, you know, showing a fed hike in July, a cut, uh, by January, and the curve, uh, continues, um, to be quite flat, uh, currently near, uh, cyclical, um, lows that we've seen. So over to Blake to tell us, uh, his thoughts on, uh, these dynamics.
Blake Gwinn:
Yeah, thanks Jason. So, you know, I'm, I'm always a bit hesitant to say this just because there's always the outstanding, uh, possibility of some exogenous risk or some geopolitical event, but I think we're entering into a period with some relative stability in the Fed narrative. Um, the reason I say that is I think a July hike at this point is fairly stable. Um, you know, we're pricing about an 85% chance in markets right now of a hike, and I think there's a pretty high bar on, uh, the June data, which is gonna include a CPI N F P print to actually not hike at this point. Um, you know, I think it would take something in the neighborhood of a sub hundred K NFP or, or, or a, you know, 0.2 month over month core CPI print to really get any kind of conversation about a pause, um, going or to see that pricing really, uh, start to move down closer to, to a pause.
You know, to that point we did a, a quick and formal survey, uh, after that omc and, um, you know, just across the respondents that we asked, even with a 0.2 month over month core CPI plan, which would be a miss, you know, about, only about a quarter of the respondents actually thought that, um, you know, that the odds of a July hike would drop below 30%. So, you know, again, the people we surveyed showing quite a bit of resilience in that July hike expectation. So that's relatively stable. On the other side, I think if we get beats, we get positive data, um, it's only really gonna have a minimal impact on the pricing for September November. Markets just aren't quite ready yet to add anything beyond July. I think we generally agree with that. You know, we're not adding anything into our forecast. We have a hike in July and for right now, pause, even though we do think, um, it's somewhat of a toss up beyond that, our view coming outta the FMC was the feds basically gonna be on the lookout for a reason to delay that next hike.
We think they hike in July, but then, you know, in the data that comes after that, we'll really be looking at it through somewhat of a dovish lens, even if the data over the July to September period remains resilient. I think there's a possibility also that the feds actually biased to pause in September and establish a quarterly pace. So even if they get that strong database, they click come out in September, pause, reaffirm the June dots that show another hike to set up that November, uh, that November hike and establishes kind of once per quarter pace. If that's true, September or, or even, you know, perhaps more likely November. That's just a lot of potential data and a lot of opportunities for the narrative to, to shift before that second hike is realized. So again, I think it's pretty, you know, the, the, the fact that we're not pricing in that September hike is pretty resilient.
There still even the possibility of the September November hike and the fact that we have those two additional 25 hikes in the SEP dots from the Fed, I think that's enough to keep cut price pricing at bay as well and keep it at that kind of five to six months forward period. That's also somewhat resilient to near term data. It's gonna take a big accumulation of, of data misses or some, you know, large external geopolitical type of catalyst to really get that cut pricing pulled back in. So when you kinda look at all these things, you know, the hike in July, the fact that we're hesitant to price in September, November, and the fact that cut pricing I think is held at bay, it means the Fed narrative, at least for the next month or so, you know, I would say probably at least out to the July meeting is quite stable.
And I think that means for us rates we're gonna be, you know, much more range bound. And if anything, I think we're gonna be more susceptible to, to continue getting pulled around by developments or shifts overseas more so than anything domestically. You know, I would say we would probably recommend playing that range from the, the, from the long side, just given that our base cases, the yields will eventually move lower by the end of the year as economic data starts to slow the fed more definitively be pauses and, and cut pricing does start to, to pull back forward still that, that shift in the narrative is a ways off. So that I'll, I'll pass it back over to you, Jason.
Jason Daw:
Okay, thanks a lot Blake. Um, now we're gonna move on to Canada and I wanna highlight, um, a few points. Um, you know, after pausing in January, the Bank of Canada is back on the, uh, Groundhog Day cycle for rate hikes and after their June hike and, uh, Hawks message, they should raise rates again in July. Um, you know, today's C P I print that was encouraging, but probably not enough to stop them from, uh, hiking again, uh, unless all the other data we have, uh, coming out between, uh, now and the July meeting shows, uh, somewhat, uh, debt disastrous, uh, downward surprises. Um, they are probably inclined to go in September also, unless the data turns more forcefully. But, you know, as a base case, you know, we have a July hike, we're 50 50 on a hike, uh, after July, um, just because the evolution of inflation and growth does remain, uh, highly uncertain.
So in general, we do think, uh, the market pricing for the Bank of Canada to year end, uh, is fair, but where we disagree is with, uh, cross market Canada, US monetary policy and the path over the coming, uh, six months. So the Bank of Canada is priced for about, uh, one and a half hikes to January while the fed path is basically, uh, flat to that point. So both of those are probably not gonna be right. So we do like, um, you know, possibly receiving Canada, uh, January meeting date and paying the US that could make sense or equivalently in one year, one year space, uh, which has moved a lot, uh, due to leverage, uh, clients, uh, stopping out. Um, thirdly, the Canada curve has power flattened in the past, uh, month alongside repricing from the Bank of Canada. And it does look extended.
It looks appetizing for steepen, but, uh, some caution is warranted. I would say first, uh, negative carriers quite high. Uh, second, um, the macro side of the equation is not cooperative. Normally you need rate cuts or strong expectations thereof in the short term, uh, to steep in twos fives or twos tens. And with rate cuts, not likely for some time, uh, any steep in twos, fives or twos tens would have to be really tactical and would probably be really, uh, short-lived moves, you know, other parts of the curve, they're a little bit more appealing. Five thirties, 10 thirties, better places to look for, uh, some short term steepening. Uh, lastly, uh, we have like duration since late May, especially in the 10 year segment, the 10 year yield, the held below key technical levels at 3 51. And I am quite happy with how it has digested, um, a hawkish Bank of Canada, a hawkish fed, and, uh, some good data. And we do think the clients will add, uh, to duration exposure and the risk reward for the next, uh, 25 basis point move, uh, is decide to lead to the downside, uh, in yields. So with that, um, you know, following on the Groundhog Day theme, you know, the market's been repricing, uh, the ECB and the Bank of England, uh, higher and to tell us if that makes sense, I'll turn it over to, uh, Peter Schaffrik.
Peter Schaffrik:
Thank you Jason. Um, I'll probably start with the ecb, but uh, I think the debate about the UK has probably a little bit more oomph in the market. So, um, when the ECB met, they actually did what was expected and raised rates by 25 basis points the last time around. But the changes to the underlying staff forecast were the surprise, particularly on the inflation side, which were ramped up quite significantly. Um, and I think that had put the cat amongst the pigeons a bit because if the ECB expects inflation to be higher, and particularly on their medium term forecast, they move their forecast, uh, uh, on their medium term horizon, they move their forecast away from target by 0.1 that suggests that they probably have a little bit more to do. Um, LA Guard basically told us that they will hike rates again in July.
That was what we were expecting anyway, but then the question, um, remains what's gonna happen thereafter. If inflation is not expected to come down, we think that they will probably have to go again in September, and we have added another 25 basis point rate hike into our profile. That being said, um, the, the market is roughly priced for that now. Um, and I think the forward strip, uh, up to that point is probably fair. We just had the Sentra symposium started to today, and most of the speakers have started to really talk out, uh, or, or, or try to talk the market out of the rate cuts that are being priced thereafter. Uh, and frankly, we think that is also one of the taglines that they will take even if eventually they start to pause, but the risk clearly remains to the upside as far as the ECB is concerned.
Now, the flip side of that, um, and that goes to the tactical exposure that Jason just mentioned for other markets as well, is that the growth indicators seem to be turning as well in Europe. So we had the PMI indicators that are coming down. Uh, so we think for a, for a time being that, uh, going into the summer, um, from a tactical side of view, we probably can trade a little bit lower. The 10 year bond has been in range roughly between two and 2 55, and we're now at around about the middle or a little bit of after middle of two 30. Uh, we think we can probably trade down into the lower third, but that's a tactical exposure for us and we'll have to see how the data develops from there onwards, particularly as long as inflation battles very strongly with, um, growth indications, and as long as inflation stays high, it's probably always going to win out.
As I was saying, I think more juice is in the UK debate. Um, the UK has extremely high implied rates and the Bank of England has surprised in the last meeting and how high 50 basis points. And the question is going to be what comes thereafter. The market is now already expecting, um, um, roughly 45 basis points implied for the next meeting, and there's quite a lot being priced in with the peak now seen somewhere between six and 6 25, clearly a very high rate. Um, we think that the statement that the Bank of England published alongside the, um, rate decision might suggest, um, or the minutes rather, might suggest that they see this as a one-off and there's two data releases between here and the next meeting. And if the data does not really, um, moderate much particularly the inflation data, um, then the risk probably remains to the upside.
We think, however, that they try to do and get away with a 25 basis point upside risk, particularly as they probably have shifted up their expectations and, and, and, um, the, um, surprises against the are just so much more difficult. Having said that, however, um, the, the debate about inflation is probably the most acute in the uk. Um, there is going to be more rate hikes to come. The market has repriced that significantly. They were saying the curve has flattened very aggressively. Um, and will we really have to see whether there is any chance that the data moderates, um, before some of that can be priced out. I'd probably leave it at that, but there's clearly more to say about that. And, uh, please do follow up with us, uh, if you have any interest in that. And with that over to Jason.
Jason Daw:
Okay. Um, excellent. Uh, insights, Peter. Lastly, we have, uh, Alvin Tan to tell us if the, uh, Groundhog Day moves in dollar, uh, CNY higher, uh, can continue.
Alvin Tan:
Hello? Hi, good morning everybody. So, um, there is considerable pessimism about, um, China's economy and, and it's not just about, um, the currency. If you look at the equity industries, it's quite clear too, uh, the CSI 300 index, for example, uh, the Chinese counterpart of the s and p 500 has dropped to, to near the lowest of the year, um, at this point, and it's not just the recent run of disappointing economic data, but also, um, I think more important is the lack of effective stimulus that's coming through. So the, the problem with Chinese economy increasingly is that, uh, it is suffering from a lack of demand and competence. And what's been happening lately is the focus, uh, remains on monetary policy. So there has been interest rate cuts and, and, and, and, um, reserve ratio cuts. And of course the currency has also been weakening, but these are all monetary measures.
Um, and frankly, I think, you know, the, the consensus is that, that these are not enough to revive the so-called animal spirits, uh, in, in the economy, but really needs, uh, concerted fiscal stimulus that can affect demand much more directly and and effectively. But there is still no, um, no indications that the central government is prepared to do so. And as a result, uh, the asset prices in China, uh, have continued to be under pressure and certainly the currency is the one aspect of that. So at this point, the trade weighted running fees of the so-called secret index has dropped from 4% on the high point here. Uh, but you know, on a more raw picture kind of, um, deal, it, it's really continued, uh, dissent from the, um, from, from, from a year ago basically. And at this point, the trade weighted to Rebi Index is now below the November, 2022 low and 60 excon like 6.5.
I think that, um, fundamentally, uh, it makes sense for it to go even lower because actually the MBI retained a lot of the gain from the post pandemic period. So for example, um, despite the drop in the trade weight that MBI over of the past year, basically it's still up from 5% from the August 30, 20 low. And so for example, if you look at, say the <inaudible> versus Japanese yen cross exchange rate, you know, you can see that the Chinese currency actually has, has done drugs well on a multi-year basis. So I think there is definitely room for the trade weighted currency to fall further and, and, and also more particularly across the dollar CNY exchange rate to move higher in in the next, uh, three to six months, uh, for example. So I think I'm, I'm not, I don't believe that the entirety of the Romi gains, uh, from the August, 2020 low is going to be reversed.
But certainly I think, uh, we, we can target 95, which was the last level, uh, that we saw the last time we saw 95 was in the fourth quarter of 2020. And I think that is likely, uh, we'll get there, uh, sooner or later, uh, the next, uh, let's say, you know, six to nine months. The, the key factor though, that would definitely turn the currency around in my view, and again, this is the trade weight of currency is more decisive stimulus measures in particular, uh, coming from the fiscal front. Um, I think that it is dynamic situation for sure, and I think that if the economy continues to weaken further, I think that it's likely to prompt the central government to act more decisively. But at this point it doesn't seem to be the case. So I think it's gonna be more pressure and certainly the will be world bear, the brunt of it, uh, from a macro point of view. And, um, I will leave it at that. Thank you.
Jason Daw:
Okay, thanks a lot Alvin. And thank you everybody for joining this edition of Macro Minutes. Uh, the narrative in financial markets is fluid, and what we have learned from, uh, clients is that conviction levels are low. Uh, something is gonna jolt us out of this low conviction world. So stay tuned to our publications or reach out to us directly for additional insights into what we are thinking.
Speaker 8:
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