Analysis of flow and sentiment evidence is an important part of our “Trader” process. Proper flow and sentiment analysis benefit from careful tracking of surveys like the eponymous BoAML GFMS. This approach worked particularly well at the end of last year as the bond markets turned higher and real money and HFs chose (or were forced) to buy the rally (“MI2 Chart Point: Bonds” 11th Nov 2022).

• The SEP assume a sharp drop in inflation, no recession and a limited rise in unemployment
• But, unless the Fed drives equities lower, far from slowing, growth could even reaccelerate
• Stocks are much less sensitive to the level of rates than the availability of liquidity
• While QT should address this, the debt ceiling could complicate the Fed’s job

• The Fed SEP are inconsistent with low inflation, higher unemployment and yet no recession
• Our work agrees that inflation is falling. A trend that will accelerate in H2 and into 2024
• Yet the driver is weak demand, and our growth models suggest higher recessionary risk
• The big inconsistency in the SEP is employment, and we suspect the Fed knows it

• The market’s focus on this week’s BoJ meeting puts it in danger of missing the bigger picture
• In terms of Kuroda’s replacement, we believe the selection of the BoJ Deputy Governors is key
• This will set up the prospect of a new monetary/fiscal Accord between the BoJ and government
• Yet even this pales into insignificance with the demands of the defense relationship with the US

While history is never the same, we all know it rhymes, and since the start of this US equity bear market, we’ve been struck by the similarities to the dot.com bubble whereby reflexive momentum and a price-induced supportive narrative resulted in a decade where there was no alternative to US stocks and the virtual vortex sucked in money from the rest of the world to fund a period of “US Exceptionalism”. Unfortunately, the good times couldn’t last, and cracks have emerged as central banks have removed policy accommodation. The pain isn’t unique to the US. However, the US is particularly vulnerable and Europe's own needs increase the odds that the vortex will run in reverse. As we will outline below, the result is that the decade-long outperformance of the US vs its peers appears to be breaking down.

As we start the New Year, it is tempting to think that we’ve consigned the misery of the last twelve months to the past and can instead focus on a bright new investment horizon. Unfortunately, that’s rarely the case, and typically after a short respite, which we may have already had, the market is forced to face its old demons again. We believe this year is no exception.