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Daily roundup of research and analysis from The Globe and Mail’s market strategist Scott Barlow

BMO chief economist Doug Porter sees signs that inflation pressure could be peaking,

“There are a variety of encouraging signs that inflation may be at an inflection point, and that some of the initial underlying drivers are now backing off. Most obviously, commodity prices are simmering down broadly. A basket of key commodity prices has melted almost 20% in the past six weeks alone from the early June peak, and is now almost precisely right back to levels prevailing in the days prior to the invasion of Ukraine. Perhaps most notably is that even with a rebound on Friday, U.S. wholesale gasoline prices have dropped more than $1/gallon (or roughly 25%), reversing more than two-thirds of the post-invasion spike. As well, grain prices are backing down amid an improving outlook for the North American crop and a reported deal between Russia and Ukraine on getting food shipments through the Black Sea. Wheat futures are now a bit below pre-invasion levels, and down about 30% from the average levels reached in May … Feverish demand for all sorts of goods is now calming globally, reducing pressures on supply chains. Freight rates thus continue to climb down the mountain, with the Baltic Container Index now down from year-ago levels (it was up more than 100% y/y just three months ago) … And just as inflation has grown—literally—like a weed in the past year, it is entirely possible that it can retreat almost as quickly”

“Focus: How Long Can U.S. Consumers Hold On?” – BMO Economics


Morgan Stanley global strategist Andrew Sheets argued that the 60/40 portfolio isn’t dead,

“From January 1 through June 30 of this year, a 60:40 portfolio of US equities and the Aggregate Bond Index lost ~16% of its value, wiping out all 60:40 gains since September 2020. ... One way that 60:40 portfolios could be ‘broken’ is that they simply can’t generate reasonable returns going forward. But on our return estimates, this isn’t the case. Lower prices have raised our long-term return estimates for US and European equities, while higher yields have boosted our estimates for US and European bonds. For a 60:40 portfolio of US equities and Aggregate bonds, for example, we forecast a 10-year return of +6.2% per annum, or 3.9pp above expected inflation… Even if stocks and bonds are now positively correlated, that correlation is well below 1. There are still plenty of days where they don’t move together. That matters, as even ‘positive’ correlation can still have a dampening effect on volatility … The last six months have seen the worst drawdown in bond prices in 40 years, and unusually high levels of implied volatility. Bonds have been riskier than at any point in most investors’ careers. Yet even then, the trailing 1-year volatility on the US Aggregate Bond index is ~6%, less than a third of the volatility of US equities over the same period. And for portfolio construction, that matters, as having 40% of a portfolio in anything with one-third the volatility of the other 60% will absolutely dampen overall fluctuations”

“MS: “60/40 portfolio isn’t dead yet” – (research excerpt) Twitter


BofA Securities’ quantitative Industrial Momentum Indicator has fallen off a cliff so far in July,

“The BofA Industrial Momentum Indicator fell sharply, continuing its downward trend. The pullback in the Indicator since early 2022 (YTD) signifies caution. The Indicator leads Global PMI and Industrial sales revisions. Earlier this year, the downturn in the indicator was due to declines in the sentiment components (i.e., positioning, profit expectations by fund managers). The decline in July is due to severe weakness in all components, including copper and BofA’s Ken Hoexter’s Truck Shipper Survey … To be clear - a downward Indicator suggests caution. Yet if we look for a silver lining, the sentiment components are at extreme low levels on a historical basis (i.e., how much further can these components fall?). We look to the next BofA Truck Shipper Survey data point - key inputs to the Indicator - for signs of stabilization, albeit at low levels.”

“BofA’s U.S. Industrial Momentum Indicator falls off cliff - (research excerpt) Twitter


Diversion: “Two decades of Alzheimer’s research may be based on deliberate fraud that has cost millions of lives” – Daily Kos

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