Global Macro Outlook May 2017 - World Federation of Young Investors

  • In our previous Global Macro Outlook, we discussed how the market is anticipating a broad-based recovery on the heels of Trump’s fiscal stimulus, and how that “Reflationary Trade” may not actually be feasible, given the hard data. Given the recent spate of economic releases in the month of March, we might be seeing further confirmations of this divergence between what the market expects, and what the actual data is telling us.

 

  • Take, for example, the less-than-stellar Labour Market, where Nonfarm Payrolls came in at 98,000, almost half that of the expected 180,000, and much less than a downwardly revised 219,000 in February. In key industries like Healthcare, Leisure and Hospitality, as well as Construction, we actually see the rate of Employment Growth weakening. In cyclical sectors like Retail Sales, the decline in Employment Growth (-29.7%) was even more significant.

 

  • If we turn our attention to Inflation Data, we would see a further confirmation of these frailties and cracks in the Reflation Story. For the third month in a row, Core CPI (that is, CPI minus Energy and Food Inflation) has lagged Headline CPI. Furthermore, it fell to 2%, which is its lowest level it has even been in the last 12 months.

  • Businesses, too, might be in for a reality check. Zooming into the Philadelphia Fed Survey for April 2017, we see that business optimism amongst companies was almost sliced in half from 32.8 to 22.0. With regards to expectations of Prices Received, that number fell even more 40.2 to 28.6. This, of course, is telling because business have traditionally expected sales growth and consumer prices to pick up into the future.

 

  • The clear divergence between the hard data and market expectations suggests a potentially less hawkish Fed Policy than we have traditionally expected. Most importantly, it is a serious question whether fiscal stimulus, which was the main driver of the massive rally in equities in recent months, is real or is even achievable. If it is not, then there is serious potential downside in the USD and in Treasury Yields, with a correlated upside potential in safe havens like Gold.

 

  • For the US Dollar Index in particular, a less hawkish Fed and the intangibility of fiscal stimulus provides reason for further downside. It has recently tested its medium-term support at 67, and further signs of weakness in US data might even prompt breaks to 98.11 and 97.34. We suggest keeping an eye on these key plays (USD, 10-Year Treasuries, and Gold) in the coming months as the global recovery story is tested.