Cyclical rebound triggers rotation and rate risk; productivity placates
BofA discusses a cyclical upswing that could lead to rate risk and a rotation from tech to cyclicals, but productivity gains may offset some of the negative rate implications. Fixed income markets should consider this broadening growth narrative and its potential impact on dollar and rates, though de-dollarization is seen as a low probability risk.
What the desk is arguing
BofA's Mark Cabana and Savita Subramanian discuss whether a cyclical upswing is underway, supported by recent economic data, and how this is driving a rotation from tech into cyclicals. They argue that while stronger growth could push long rates higher and reduce the Fed's ability to cut, productivity improvements may alleviate some of the rate pressure, making the net effect positive for cyclicals.
The desk implicitly rejects the view that rate risk is purely negative, instead highlighting that productivity gains can offset higher yields. They also downplay de-dollarization fears, seeing no evidence of a structural treasury selloff from that channel, suggesting dollar weakness is not a near-term threat.
Key takeaways
- 01Cyclical vs tech rotation is underway, but productivity may limit rate damage.
- 02BofA sees more Fed cuts as base case, but discusses risk of no cuts scenario.
- 03De-dollarization risk is low; treasury selloff not imminent.
- 04Broadening growth not fully priced into cyclicals, offering opportunities.
Market implications
If cyclical upturn materializes with productivity gains, expect flattening of yield curve as long rates rise less than short rates, and US dollar may strengthen on growth momentum but face headwinds from easing cycle. Rotation into cyclicals could support equity markets, but bond yields may face upside pressure if growth accelerates too fast. The dollar's safe-haven appeal may diminish if de-dollarization fears re-emerge, though BofA sees this as unlikely.
Risks to this view
Higher long rates could tighten financial conditions, stifle growth, and force Fed to delay cuts. If productivity fails to materialize, rate risk worsens and cyclical rally stalls. De-dollarization, while currently dismissed, could accelerate if inflation persists or fiscal concerns mount, leading to dollar weakness and higher treasury yields.
Cyclicals vs. Tech: Positioning for broadening growth Mark Cabana and Savita Subramanian discuss whether there's evidence of a cyclical upswing in economic data, and the extent to which that's impacting companies and stocks. They also delve into whether such improvement is even as positive as it would seem given it could result in higher long rates and a Fed that's less able to cut.
It's important to note that our economics team expects more cuts from the Fed this year so an environment of no cuts is not our base case but it's useful to discuss the possibility. Mark explains the important role that productivity plays and how it can alleviate much of this rate risk. A combination of better growth and productivity improvements could be quite positive for certain parts of the market too and Savita offers why she doesn't think improvement is fully priced into the sectors and stocks that would benefit.
We also discuss another potential risk to rates-US dollar weakness and whether Mark sees any evidence of de-dollarization that could lead to a treasury selloff. You may also enjoy listening to the Merrill Perspectives podcast, featuring conversations on the big stories, news and trends affecting your everyday financial life. "Bank of America" and “BofA Securities” are the marketing names for the global banking businesses and global markets businesses (which includes BofA Global Research) of Bank of America Corporation. Lending, derivatives, and other commercial banking activities are performed globally by banking affiliates of Bank of America Corporation, including Bank of America, N.A., Member FDIC.
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