FICC

Tight monetary policy will suppress copper capex. Loose fiscal policy, which is lavishing stimulus on energy and defense firms, will stoke copper demand. Constrained copper supply and turbo-charged demand will feed into headline inflation. If the CCP adopts large-scale monetary stimulus to break its liquidity trap, inflation pressures will rise. This global policy mix will bolster oil and gas demand well beyond the 2050 target for net-zero emissions, given the long lead times to bring new copper supply online. We remain long the XOP and XME ETFs, and the COMT ETF to retain exposure to tightening supplies and rising demand for copper and oil.

This week we present our Portfolio Allocation Summary for April 2023.

The OPEC 2.0 supply cuts announced over the weekend will be fundamentally bullish international crude oil prices. According to our model, brent will cross the USD 100/bbl mark by August this year. We believe the cohort is pre-emptively cutting oil supply in response to threats to their economic interest, including risks arising from the higher possibility of recession and rising market volatility following the banking crisis.

This US Bond Strategy Insight takes an in-depth look at core non-housing services inflation.

Special Report

In this Special Report, we present our updated Central Bank Monitors for the US, Canada, Australia, New Zealand and Japan. We have improved the methodology used to calculate the monitors to make them more dynamic to structural changes over time. The main message from the Monitors is consistent across all five countries. The pressure to hike rates is diminishing, suggesting that the end of tightening cycles is approaching, but it is still too soon to expect rate cuts.

CCP officials are discussing policy options for breaking out of a deepening liquidity trap. Anything policymakers come up with will be additive to existing spending and to the multi-trillion-dollar fiscal-stimulus packages being rolled out by the EU and US. Inflationary pressures in the real economy will become embedded as increasing demand for industrial commodities meets constrained supply. Stagflation likely follows.

The recent uncertainty regarding the health of the banking systems in the US and Europe is not having any material impact on overall financial conditions or economic sentiment. The aggressive rate cut expectations, especially in the US, are unlikely to be realized. Although the macro growth and policy backdrop remains unfriendly for corporate debt on both sides of the Atlantic.

The Fed lifted rates 25 bps yesterday while also signaling that the tightening cycle is near its peak. We discuss the short-run and long-run implications for Treasury yields.

Systematically important central banks continue to compound policy errors, which will feed higher headline inflation. Hiking interest rates to induce labor-market slack – i.e., higher unemployment – to bring down core inflation will reduce demand for scarce commodities as incomes fall. It also will increase the cost of conventional and renewable capex and slow the final-investment-decision (FID) process. Net, supply will tighten as demand is squeezed. This will resolve itself in higher volatility and prices. Separately, we were stopped out of our XOP and XME ETFs spanning energy and mining equities, respectively, with a loss of 11.9% and a gain of 4.4%. We will be re-establishing these exposures at tonight’s close.

This week’s report looks at the banking crisis within the context of shrinking dollar liquidity and implication for FX markets.