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This note aims to share our research team’s internal checkpoint process in evaluating the current state of the economy as it pertains to markets. The pages that follow will have familiar content for those who follow our work, but with the added benefit of our connecting the dots across all the economic and financial data that our systems use to make portfolio decisions. Our primary takeaways are as follows:
- Nominal GDP expanded by 1.05% in May, with real GDP increasing by 0.9% with inflation rising by 0.15%.
- Coincident with this expansion in nominal GDP, liquidity conditions have improved significantly, primarily driven by private sector procyclical liquidity expansion.
- Treasury markets have fallen as they moved to price tighter monetary policy, while equity markets have risen due to higher liquidity and better-than-expected growth conditions.
- Looking ahead, real growth is likely to dwindle while inflation remains resilient. Monetary policy will likely have to remain tighter than priced. These dynamics will continue weighing on stocks and bonds. Bonds remain a potential short position, but less so than last month.
The views outlined in our last Month In Macro played out well over May; for reference:
“Neither stocks nor bonds offer attractive return-on-risk here. Stocks remain highly exposed to weakness in the economic growth cycle, while bonds are likely to face headwinds from higher rates to combat resilient inflation. Cash remains an attractive hiding place for most investors. Active investors can short bonds.”
While our views on bonds were confirmed in markets, our thoughts on being in cash versus equities were offside. We attribute this to the liquidity factor, which we discuss in detail in this note. From a growth and inflation perspective, our future expectations remain a headwind for assets. Shown below:
Let’s dive in. Click the link below for access: