Our Macro View III

Our most closely-watched indicators—stock market strength, the Leading Economic Index, consumer confidence, and the shape of the yield curve—point to an extension of the current slow-growth environment with no recession in sight until at least 2019.  The impact from the second-worst hurricane season in history is expected to shave a few tenths off third-quarter GDP but history tells us this is typically made up in the following quarter as affected areas rebuild.

The global economy continues to expand as well. Europe and Japan are benefiting from positive growth, and China’s expected economic expansion of approximately 6.5% should help strengthen emerging market economies.

INFLATION

Structural factors will keep inflation in check over the long-term, but other factors weighing on inflation will likely abate. Recent oil and commodity price declines should eventually reverse along with the effects of a series of one-off negative price events. Tight labor markets, too, should pressure wages as time goes on, helping to push inflation to 2.0% over the next 18 months.

INTEREST RATES

Additional fed funds rate increases should lift 2-year Treasury rates higher, but we expect 10-year Treasuries to move only incrementally higher within their trading range of 2.00%‒2.75%, anchored by tame inflation and low global rates. With negative international rates still prevalent, US rates represent the highest yields among developed countries.

CAVEATS

• We view military conflict with North Korea as a low-probability event, but one that would have a very high impact—a sharp rally in Treasuries and a steep selloff in risk assets.
• Decelerating inflation is also among our chief concerns. Persistently lower inflation could threaten economic growth and prevent the Fed from normalizing interest rates.
• Asset prices appear priced to perfection. Although we see no catalysts for crisis, we would not be surprised to see a minor five percent correction in equities, with high yield and other risk assets weakening in sympathy. We would construe such an event as a buying opportunity.

CONCLUSION

We expect the economy to continue growing slowly for the foreseeable future. The synchronized global expansion fosters a sense of economic optimism, but the age of the domestic expansion and the full valuation of risk assets dictate that optimism be tempered with a bit of caution.

 

The views expressed herein are presented for informational purposes only and are not intended as a recommendation to invest in any particular asset class or security or as a promise of future performance.  The information, opinions, and views contained herein are current only as of the date hereof and are subject to change at any time without prior notice.