Anthony Rayner
Premier Miton Macro Thematic Multi Asset Team
For information purposes only. The views and opinions expressed here are those of the author at the time of writing and can change; they may not represent the views of Premier Miton and should not be taken as statements of fact, nor should they be relied upon for making investment decisions.
There is a lot of macro uncertainty currently, but equity markets appear buoyant. We wrote recently how core inflation (headline ex food and energy) is not falling in major economies, despite the euphoria around headline inflation moving lower. To be clear, core inflation remains elevated and is moving sideways.
Turning to economic growth, the chart below shows how weak US economic growth is of late. The data series illustrated is the Weekly Economic Index, a high frequency series fed by real economic activity and scaled to align with US GDP growth (which means it’s much timelier than the official GDP figures).
We’re not suggesting that this is a new level of trend growth, but it does seem to have found a holding pattern and it’s notably lower than pre-Covid levels (see red line). It is therefore more vulnerable to shocks, like the banking crisis and subsequent tighter lending terms, as well of course to the impact of the lagged effect of materially higher interest rates.
The Weekly Economic Index suggests US economic growth is vulnerable
Source: Bloomberg from 19.05.2018 to 06.05.2023. Past performance is not a reliable indicator of future returns.
So, not much momentum higher or lower in either economic growth or core inflation and, with both vulnerable to shocks, policy risk is elevated. At the same time, markets are predicting about 60bps of cuts in US rates before the end of the year.
If expectations of lower rates are due to falling inflation, that seems quite punchy bearing in mind what’s happening to core, and not something the Fed chair is pushing. However, buoyant equity market indices seem inconsistent with lower rate expectations being driven by negatives such as recession concerns and/or the banking crisis. For example, key equity market indices are close to, or at, record year to date levels and some are at record multi-year levels. As ever though, the devil is in the detail.
Apple and Microsoft now account for a whopping 14% of the S&P 500 and are up sharply year to date. In fact, the five largest NASDAQ stocks all hit relative highs last week. In contrast, the US banking index is having a torrid time year to date. Looking beyond big tech and banks, defensives are outperforming cyclicals, which gives a clearer macro signal of rising recession risk.
Turning to bond market measures of risk, such as corporate bond spreads and emerging market bond spreads, they are consistent with increased caution but are not indicating serious stress. That said, AT1s remain very subdued after their dramatic sell-off in March.
To summarise, growth and inflation are at levels that central banks will perceive to be too low and too high respectively, which allow little room for policy error and makes the market’s call for numerous US rate cuts this year seem somewhat misplaced.
Meanwhile, equity market internals are expressing some concern about recession risk, even if big caps and specifically big tech are pushing aggregate markets higher. Encouragingly, concerns about the banking crisis seem fairly contained to bank equity and bank bonds at this stage.
Bringing all this together, markets seem to be in “wait and see” mode, rather than “head in sand” mode, though this year’s lower US rates profile does seem somewhat optimistic, unless accompanied by recession. Therefore, being cautious and data dependent, rather than high conviction, seems sensible to us at the moment and that is how we are positioning portfolios.
