Must Read Research

Also featuring commentary from Global Economic Weekly

May 19, 2024

Candace Browning

Candace Browning, Head of BofA Global Research

Markets are warming up just in time for summer. This week we discuss owning emerging markets while the days are long, why fund manager sentiment is hotter than usual and why U.S. consumers are not getting burned.


Global EM strategist David Hauner suggests that investors spend their summer in Emerging Markets (EM).


The latest U.S. CPI (Consumer Price Index) sets a favorable backdrop for these assets until U.S. elections likely raise volatility from September onward. EM has been resilient YTD despite the strong dollar, and global GDP (gross domestic product) growth is diversifying away from the U.S. over the next year, with EM ex-China the main contributor. Inflows into some parts of EM have been strong, and most crowded are the trades that have done well on the back of higher equities. But trades that would benefit from lower U.S. rates and a lower USD aren’t as favored by consensus. EM rates offer the best value and in certain markets, including Brazil and Hungary, our economists expect more central bank rate cuts than markets imply. Looking across global assets, EM equities have performed well this year and just broke through key support levels to the upside.


Chief Investment Strategist Michael Hartnett finds that optimism is driven by rate cut expectations.


That said, Michael thinks the tailwind from government spending may be past its peak. Easier monetary policy and tighter fiscal policy could be positive for U.S. 30-year Treasuries. Light investor positioning in bonds is also supportive, and Treasuries would be the best hedge in an unlikely ‘hard landing’ scenario. Despite growing investor confidence, Michael does not think sentiment is at “close-eyes-and-sell” levels yet.


Earnings commentary and 1Q economic data have led to concerns that growth is slowing and that inflation is moving in the opposite direction.


The U.S. Economics team does not subscribe to this “stagflation” narrative. Actually, the Economics team believes the risk is that demand is too strong, not that it’s stagnating. Stubborn services inflation is being driven partly by robust labor and income growth. Goods deflation could also be opening up room in the consumer wallet for services. Weakness in goods could be a reason companies have flagged consumer concerns during 1Q earnings. But consumer stocks are more skewed toward goods sectors than the overall economy which could also explain the disconnect. Lower-income consumer stress has also gotten attention and while wage and spend data don’t show clear signs of cracks, credit card delinquencies are flashing yellow for this group. Ultimately, the team believes lower-income consumers should hold up as long as the labor market remains healthy.


Must Reads will be off next week for Memorial Day weekend. We honor all those who made the ultimate sacrifice.

Featuring Commentary from Global Economics Weekly

Claudio Irigoyen

Claudio Irigoyen, Head of Global Economics, BofA Global Research

Better than expected doesn't mean good


Markets got excited after the better-than-expected April CPI coupled with weaker than expected retail sales. With markets now pricing close to 50bp (basis point) of cuts this year, they are likely to get disappointed. 1Q inflation was too high, and a single print should not deliver much comfort, especially if it annualizes to a rate much higher than consistent with the Fed's target. Furthermore, the economy is still solid, including services spending, the labor market remains tight, supply tailwinds could fade, and elections are approaching.


Across the Atlantic, our Europe Economics team analyzes the implications of the new EU fiscal framework, which entered into force at the end of April. In short, an abundance of fixed safeguards limits the built-in flexibility that they hoped the new EU fiscal framework would achieve. Moreover, the hands of national fiscal policy are likely to remain tied in areas of critical investment, like green and defense. In the short term, temporary exceptions during the transition period make the adjustment needs in 2025/26 not too different from pre-reform times.


Across the Pacific, Asia is going through a wave of FX weakness. Our Asia economics team looks into this, exploring the drivers and implications. Fundamental divergences in monetary policy between the U.S. and Asia lie behind the cycle, as opposed to external imbalances, even though monetary and exchange rate policy has differed cross-country. In their view, we should not worry about beggar-thy-neighbor devaluations in Asia.

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