Friday, August 6thpetergarnham | August 6, 2021
In today’s Macro Briefing MI2 Partners gives its outlook for the macro economy in the third quarter, explaining why inflation is set to shock the Fed once again, a view shared by Trahan Macro Research who argue the Fed is has fallen into the trap of an anchoring bias. Meanwhile, MRB disputes what it calls the misplaced market narrative that global growth is set to remain subdued like it was in 2010s, and Cornerstone Macro sets out why this is the phase of the cycle where quality typically matters to equity investors. Elsewhere, Eurasia Group explains that recent regulatory actions in China are not a single crackdown but a loosely coordinated “rectification drive” to align the private sector and capital behind key Communist party priorities.
Global macro MI2 Partners
1. Tracking the Fed’s impossible trinity
In his outlook for the third and fourth quarter, Julian Brigden explains how the Fed has been wrong about cost push inflation and will be shocked yet again. The good news is a peak is close, he says, but the bad news is well into mid-22 prices look very sticky. However, Brigden says while the Fed ignores inflation, the rest of the US economy is booming and he sees no recessionary risks on the horizon, albeit that employment could disappoint until October. He says the rest of the world looks like the US with a 3-6 month lag. In the eurozone, inflation will really shock to the upside, according to Brigden, while in China it looks like business as usual. In bond markets, he says the long end looks mispriced, while equities love loose fiscal and monetary policy. But Brigden believes the easy money has been made and gains in equities will decrease as economic growth slow. This increases, he says, technical vulnerability but the real risk is tapering. Ultimately, Brigden believes the financialisation of the real economy means any tightening will fail. He says the ensuing pain will force the Fed to once again ease and believes that, as in the past, the dollar has to be the victim.
Global macro Trahan Macro Research
2. The Fed’s anchoring bias
Francois Trahan has been a consistent inflation hawk in 2021 and remains so despite the fact that there has been a growing consensus that inflation risks are now being viewed as transitory. There is no denying that some aspects of the inflation story are temporary. The key question is whether the other elements driving inflation, those largely ignored by an anchoring bias, will allow inflation to come down enough to justify a zero percent fed funds rate. It will take some time to figure it out. Trahan clearly feels the answer is NO. In a nutshell, Trahan does expect the Fed to eventually raise rates, as he believes that the inflationary pressures he highlights in this report are likely to intensify and go from “transitory” to “resilient”. That said, in past Fed tightening cycles in which long-term rates have also risen simultaneously, Long-Duration stocks (which are more sensitive to interest rate fluctuations) have underperformed their Short-Duration counterparts. He provides a stock screen to illustrate one of the characteristics that he would emphasize in a backdrop of rising interest rates.
Global macro MRB Partners
3. Disputing misplaced narratives
Philip Colmar at MRB Partners says investors and central bankers appear to be struggling in evolving their long-held macro views and continue to expect a resumption of the historically subdued growth and sub-2% inflation that prevailed in the 2010s. Instead, he says the macro landscape has shifted dramatically, and the underlying growth and inflation trends are now shifting up. According to Colmar, the three major growth engines of the global economy all have potential to perform better than the current consensus view. The US economy, he says, will soon begin to downshift but ultimately level off at a much faster growth rate than in the 2010s. Likewise, Colmar says the Chinese economy will prove resilient and provide a substantial contribution to the global economy, while finally, some of the massive economic drags in the euro area have faded, paving the way for a more durable recovery this decade.
equity rotation growth versus value Cornerstone Macro
4. What’s behind growth’s recent leadership?
Michael Kantrowitz at Cornerstone Macro says the recent outperformance of Growth Indices is garnering a lot of attention. He says a closer look at market metrics shows that Tech’s massive outperformance over the last three months is to thank for the S&P 500 Growth Index’s recent outperformance. Tech, notes Kantrowitz, makes up a whopping 42% of the Growth index and Tech has outperformed the overall market by over 7% in just the last three months. Looking at the performance of growth factors, he says it becomes clear that investors are not reaching for Growth across the board. In fact, Kantrowitz notes only higher-quality growth factors are delivering outperformance within the Growth universe, and quality value factors are actually beating out growth factors within the Value space. Ultimately, he says investors are reaching for quality in every style mandate. This is the phase of the cycle where quality typically matters most, according to Kantrowitz, and that theme is being intensified here amidst recent re-emergence of uncertainty about the future of the pandemic.
Asia equities China Eurasia Group
5. Beijing’s regulatory campaigns will remain loosely coordinated but highly potent, VIE unwinding not likely
Recent regulatory actions in China are not a single crackdown but a loosely coordinated “rectification drive” to align the private sector and capital behind key party priorities, writes Eurasia Group. However they say that recent measures taken by both the US and China will slow Chinese IPOs in the US to a trickle, but we are very unlikely to see a disorderly process of delisting Chinese firms in the US or an unwinding of the Chinese variable interest entity (VIE) structure.