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With consensus expectations coalescing around a landing that is baby-soft but features inflation falling to target, profits surging by double digits, and the Fed cutting short rates six times “anyway” it makes sense to dive a bit more into tail risk scenarios
1)A “run it hot” scenario: 1966-1968, boom-bust
2)A “run it hot” scenario from the supply-side: an AI, tech boom/bubble. Click here.
Renaissance Macro Research: Something has to give; Inventory drawdowns, GDP, labour productivity and the Fed
Good consumption has been adding 80 bps to growth per quarter over the last year, while inventory drawdowns have been cutting GDP by an average of 30 bps per quarter.
That is unsustainable. Ultimately inventories will have to follow final demand. That hasn’t been happening, with Neil Dutta suggesting that an inventory build is coming. Industrial activity will rise.
What’s that mean for the Fed? Dutta says that labour productivity is rising, and this unit labour costs are benign, meaning that inflation will be benign. The Fed cuts in March. Click here for short recording from Dutta (post GDP numbers). Here for his Monday note.
Rosenberg Research: U.S. GDP Stays Hot, Burns Forecasters
Some interesting observations on Q4 GDP.
There was nothing in the data flow leading up to this print that pointed to such strong growth, says Rosenberg. His tracking model for Q4 GDP was at +1.8%, and the various nowcasts ranged between +1.2% and +2.4%. The build-in based on the first two months of S&P Global’s monthly GDP was just 0.4%, which means December must have come in close to 26.7% MoM annualized. That’s a suspicious number, no denying it. December boomed!
At the same time.
The core PCE deflator posted its second successive quarterly print at a bang-on-target +2.0% QoQ annualized and is down to +3.1% year-over-year (from +3.8% in Q3). Headline PCE inflation is at +2.7% YoY, breaking under +3.0% for the first time since 2021. Bond markets will need to factor that in against the upside growth surprise. Click here.
Beacon Policy Advisors: Trump and the economy
Charts (courtesy of BCA) show Trump is almost certainly going to win the Republican nomination. Beacon PA, a. DC policy research firm, detail some of Trump’s likely policies.
The business community would embrace tax reform likely to result from a Trump victory with further individual and corporate tax cuts, potentially as low as 15 percent, if he wins another term
The business community would also embrace the lighttouch regulatory approach of a second Trump administration. As part of his Agenda47 set of policy proposals for a second term, Trump has made a pledge of “liberating America from Biden’s regulatory onslaught.
In addition to across-the-board tariffs, Trump would likely crack down on China, shifting from the Biden administration’s focus on “de-risking” and limiting Beijing’s access to critical technology to a broader “decoupling” of the US and Chinese economies.
A Trump victory would also likely mean the end of US support for Ukraine. Click here.
TS Lombard: End of US outperformance
2023 was supposed to be a year of decoupling, where China’s reopening from Zero-COVID would insulate the global economy from a monetary-induced US recession.
Instead, we had 12 months of “reverse decoupling”, where the US defied domestic pessimism and was resilient in the face of a wider international slump.
The good news is that some of the problems in the wider global economy have started to ease, with the bullwhip recession over and real wages beginning to improve. This means the rest of the world could “catch up” to the US, rather than the US economy “catching down” to the rest of the world. Click here.
