CoreMacro

In August 2007, Ed Leamer famously presented a paper entitled Housing IS the Business Cycle at the Jackson Hole symposium. I was reminded of this paper after seeing today's US housing data.

Yesterday, the ECB solidified its recent dovish tilt in response to weaker growth and decreasing inflationary pressures. It is now set to cut rates 25bps each meeting. How low will the ECB deposit rate ultimately go and what does this imply for yields and the euro?

Special Report

In this Special Report, Marko Papic, Chief Strategist of BCA Research’s GeoMacro Strategy, and Mathieu Savary, Chief Strategist of BCA Research’s European Investment Strategy, together argue that the conflict in Ukraine is already frozen, already losing support in the West, and is likely to taper off over the course of 2025. However, there is no easy alpha left to harvest from that conclusion, the market has already moved on. Some long-term investment opportunities remain in broad European assets.

To produce a moderate economic recovery, at least RMB 3 trillion in additional government expenditures is needed in H1 2025. Our bias is that Beijing is not yet ready to launch such a massive fiscal support measure. Hence, volatility-adjusted equity returns in China will be poor.

Rising stock prices and improving economic data have us re-examining our bearish thesis, but we still see deterioration in leading labor market indicators and expect it will eventually culminate in a recession. We reiterate our defensive investment recommendations.

Special Report

China's steel sector is behind on its environmental targets. This shortfall reflects EAF production challenges facing Chinese steelmakers. Over the near term, a reduction in steel produced by high-carbon emitting blast furnaces is the most realistic path for China to approach its 2025 green steel targets. This bodes ill for iron ore demand and prices over the coming year. On a longer-term basis, the challenges that are currently limiting green steel output would need to be addressed for China to meet its 2030 environmental targets. As and when the sector overcomes these limitations, the green steel transition will boost demand for steel scrap and high-grade iron ore at the expense of low-grade iron ore.

This week, we cover the main questions we fielded during our latest client trip in Europe. Among the many topics broached are Europe’s recession odds, the impact of China’s stimulus, and the outlook for European markets.

Whenever I present a skeptical view about the strength of the US labor market, I am often reminded that layoffs remain very low.

It is too early to say that the US labor market has turned the corner. We assign a 60% chance that the US will enter a recession over the next 12 months, with the downturn likely to begin in the first half of 2025. Accordingly, investors should underweight equities.

The good news is that we should not fear an imminent US recession. In the absence of a recession though, the Fed cannot cut rates as aggressively as is priced if it wants to keep inflation and inflation expectations anchored at 2 percent. This means that for stock markets the real risk is not a profits recession, the real risk is a valuation recession. We go through the investment implications for stocks, bonds, and currencies. Plus: we explain why, somewhat counterintuitively, gold is a tactical short.