This report is part of our ongoing effort to provide economic and market guidance to our subscribers during a period of historic levels of uncertainty. 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 our systems use to make portfolio decisions. This report will focus on the economy; future issues will include our market analysis. Our key takeaways are as follows:
Growth has reaccelerated, while Inflation cooled this month. However, our outlook suggests that the respite in Real GDP is likely to be short-lived as we progress through the economic cycle.
Inflation is now at a crossroads, with competing forces battling to determine the future inflation impulse. Emerging data suggests moderation is increasingly likely.
Conditions are brewing for the Federal Reserve to take its foot off the gas on interest rate hikes, with current market pricing of terminal rates in the ballpark of peak rates.
The combination of these conditions creates an environment where growth shocks are likely to trump inflation shocks over the next six months.
Over the last month, our systematic tracking of economic conditions has shown an upward move in real GDP growth alongside a deterioration in inflationary pressures. Our granular monitoring of economic conditions suggests that we are now critical stage of the inflation cycle, with the potential for the next few months to mark a turning point. These periods are hard to judge ex-ante; however, our assessment tells us that recessionary pressures are building deflationary economic conditions. The economy and markets are at a crucial juncture, which we detail in the following pages.
For those looking for how we systematically apply these views to investment markets, please reference our weekly ETF Portfolio. Below, we link to the latest positioning:
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Until next time.