Juliette Declercq decodes the macro outlook and translates that view into actionable trading strategies:
• Declercq believes the QT and hikes of 2018 were clearly policy mistakes and that the Fed will cut in 2020.
• Signals to look out for include the US curve re-inverting, global equities struggling to make new highs, and renewed dollar strength against EM and commodities.
• She expects inflation expectations to be non-reactive to easing policy.
• Goods inflation has become a zero-sum game and any central bank able to gain inflation will be the one that manages to weaken its currency. The 2017 dollar fall is the main source of reflation in the US over past 2 years; the 2018 hawkish policy mistake strengthened the dollar; and we will enter deflation in 2020.
• Declercq highlights a reason for central bank policy divergence. One key thing that global central banks have is equivalent mandates about the inflation target, but the targets are measured in completely different ways. For example, the Fed includes hefty weight on cost of home ownership, a major chunk of spending by household, yet the ECB does not because there is no independent source for it.
Why does this matter?
• Peoples’ QE taking over financial QE by wisely distributing funds to institutional mandates (rather than by MMT) is the future. Of course, more politically acceptable plans will be tried and fail first.
• Declercq’s recommended trade strategies: US rates are too high. There will be further rate cuts into the election irrespective of the trade war situation. 1) Long 2 years treasuries, play the theme of Fed dragging their feet via lower inflation and break evens. 2) Short USD/YEN, given DM rates convergence. 3) Given strong carry of 2.25% on EUR/USD, calls for neutral stance, however with the euro becoming the funding currency of choice, a sharp move higher is on the cards on any bouts of risk aversion
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