Articles by Chun Wang Director of Multi-Asset Strategies

The CPI numbers are slightly ahead of expectations. The reflation trade and the weaker dollar trade are very popular but they are no no-brainers. Our moderate inflation view is supported by the latest reading of our Inflation Scorecard.

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With election risk largely in the rear-view mirror, volatility has come down across most asset classes, contributing to the drop in the RAI.

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We studied several “popular trades” and there are good reasons to be on board with most of them, but none can be viewed as a no-brainer.

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The CPI numbers are slightly below expectations. Positive vaccine news has kept the rotation trade alive. Our moderate inflation view is supported by the latest reading of Inflation Scorecard.

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We are cautious near term and recommend playing defense through duration reduction within corporate credit (including both investment grade and high yield).

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There are numerous ways to measure sector valuation, but we found the simplest one: sector weights. Overall, using simple sector weights, we arrive at the same conclusions about sector valuation as one would using conventional valuation metrics.

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As we Chinese watch the elegant display of the western democratic process this election season, we can’t help but think there are indeed people less fortunate than us “commies.” Worse yet, some of these people are Value investors.

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The CPI numbers are in line with expectations. The inflation impact of a “blue wave” will be much more significant and the markets are already trying to price that in.

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Treasuries’ ability to provide downside protection has weakened; a better way to play defense is probably through duration reduction within corporate credit (including both investment grade and high yield).

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We believe the worst outcome would be a drawn-out, contested presidential election that ends up in the Supreme Court. We review historical market patterns under several election-result scenarios.

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The breakeven rates capture the spirit of the overall risk rally and continue to provide support. The change in the Fed’s policy goals means it will remain accommodative for even longer.

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While most economic numbers have been positive, the fly-in-the-ointment was the latest Senior Loan Officers’ Survey. Banks have tightened their lending standards across the board.

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The CPI numbers beat expectations again. The reflation theme is supported by a weaker U.S. dollar and lower real yields. Our inflation scorecard is also consistent with a reflation story.

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We geek it up a notch and use some of the popular text-processing techniques to quantify the hawkish/dovish sentiment of the latest Fed statement. Some human “coaching” is needed in every step of the process (hence the “artificial” part). But when these tools are used properly for carefully chosen tasks, they can be quite intelligent.

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The non-seasonally adjusted headline CPI rose 0.6% (y/y) in June, a bit stronger than market estimates. The Core CPI maintained its 1.2% annual pace (Chart 1), which is also a tad stronger than the market expectations. There was very little market reaction  to these new numbers since investors have learned to look through these numbers after COVID-19 and the latest numbers are not enough to impact any policy directions in the near term.

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While the market seems to have priced in a quick recovery, recent economic data has materially exceeded market expectations and provided support to the rally. Within fixed income, we maintain a favorable view toward investment-grade corporate bonds and we still recommend staying within range of the Fed’s fire power.

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There has been chatter about the Fed implementing the so-called Yield Curve Control (YCC). Although the latest FOMC minutes suggest that YCC is not on the agenda for now, we believe the chance of YCC is probably much higher than the market currently anticipates.

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Our Risk Aversion Index fell sharply in May and generated a new “Lower Risk” signal. Within fixed income, we are turning more constructive on credit, overall, and maintain our favorable view toward investment-grade corporate bonds.

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The latest action in rates is not what would be expected during a strong stock-market rally off a bear market low, but the constantly changing nature of the stock/bond relationship should not come as a big surprise. We propose a more refined four-state definition of the stock/bond relationship.

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The CPI numbers missed expectations. COVID-19 is the divide between inflation winners vs losers. Our inflation scorecard continues to point to lower inflation and it’s driven by a demand shock. Lower capacity utilization and money velocity also indicate a disinflationary trend ahead.

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