Macro
So long May… Well, in reality the sharp deceleration in economic data thus far was from April. Regardless, forecasters missed by a wide margin in early Q2 which has resulted in Bloomberg’s economic surprise index collapsing over the past month. It was not just “soft” data like PMIs that came in below expectations, the concern was in declines in retail sales & personal spending.
All this renewed macro uncertainty has yet to be picked up in earnest by measures like the economic policy uncertainty index or from a variety of volatility measures. In our view, low market vol indicates complacency is elevated and markets are running out of time to adjust. With the clock speeding up in the first 2 weeks of June with central bank meetings (ECB, BoJ, Fed) and releases of NFP and later CPI (on the same day as the Fed).
Special Topics
- The Japan & US Connection: Exploring Macro to Market Dynamics (pg 3)
- US economic growth: An inflection to weaker activity is now clear (pg 7)
Markets
We maintain our rates forecasts (see page 10) and view for a July Fed cut.
That said, we see the first cut in July as a very close call. The stars have to align where enclosed we list what is needed for a July cut. In short, if the next two NFP reports come in weaker than the April report, inflation readings continue to improve, and risk markets sell off, this would likely be enough to start cutting in July. Our view is that starting early allows time to assess the situation, avoid tiptoeing around the political calendar, and for Jackson Hole discussions to be focused on medium term matters (like neutral rates).
It’s a close call, if the data comes in as expected but if the Fed does not cut in July, we think they won’t wait until November, September is next port of call.
We think that financial markets are once again at a critical crossroad with a lot of the uncertainty around policy moves potentially clearing up if the data continues to soften (as the motivating factor to easing pivots towards growth and the jobs market versus concerns on inflation). Note, the 1st cut might be welcomed by markets as a sign that easy money is back (we’d sell into rips).
The combination of low conviction and high complacency at such a crossroad fraught with danger (be it geopolitical, weak external growth, dollar demand, etc.) is giving us that CCC uneasy feeling. So, with spreads tight, and stocks at the highs (with vols low) we would be de-risking as we head into the summer.
Please see the PDF report link above for the full write-up with charts and forecasts…
