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.
As we’ve noted of late, economies are no longer dancing to the same drumbeat. One of the most graphic examples is the very strong US economic growth versus other major economies, such as China and Germany, which look much more anemic.
In terms of US growth, there has been a lot of attention recently around the Atlanta Fed GDP Nowcast, which has third quarter real GDP pegged at a phenomenal 5.9%. This data series has some following, as official GDP is released with quite a lag and so has a limited use, for example in terms of policy formulation.
Instead, the Atalanta GDP Nowcast aggregates 13 components that make up GDP and looks to provide a frequently updated running estimate of the quarter’s real GDP. In that regard, it’s worth pointing out that there’s still a significant chunk of data outstanding, with only two thirds of the quarter behind us at this stage. Either way though, the Nowcast for Q3 has moved sharply higher in short order, as the chart below shows.
Source: Federal Reserve Bank of Atlanta/Bloomberg 24.08.2022-24.08.2023
This data series contributes to soothing some near term recession risk and supports our higher rates for longer view, which the market is moving towards. In terms of rates, the much awaited Jackson Hole comments from US Fed Chair Powell were mixed but broadly considered more neutral, underlining the preference for being data dependent. As a result, data around the consumer, in the broadest sense so including employment and the housing market, will be key, as the consumer accounts for about two thirds of US GDP.
So, whilst strong growth is a broadly positive macro backdrop for equities, it also implies inflation will remain high and therefore rates will remain higher for longer, which brings other issues. For example, bond yields are close to multi year highs and, in the US, this has pushed mortgage rates up to 20 year highs. In theory, higher mortgage rates are one of the mechanisms for higher rates to curb growth and it is the degree to which they haven’t so far that has confounded many and led to endless discussions around the degree of the lag between higher rates and their economic impact. In terms of any recession, we have nothing to add, no special skill or insight as to the timing or nature of the recession, except to observe that the US economy is clearly late cycle.
In terms of portfolio construction, as economies move more independently, so asset classes are likely to move more independently, which should be a favorable environment for active investors and for those looking to include diversifiers in their portfolios. On top of that, higher rates generally are likely to limit the degree to which big tech can remain market leaders. In regards to both asset class divergence and less leadership from tech, more discerning investors will likely be rewarded.
Premier Miton Macro Thematic Multi Asset Team