The Big Picture : Monthly Outlook

Central Policies remain "pro inflation"

US MACRO

US economic growth continued at a solid pace in Q1 when looking at “Core GDP” or PDFP (Private Domestic Final Purchases) which combines Personal Consumption Expenditures with domestic Fixed Investments to arrive at an underlying growth momentum figure.

The unfortunate issue however is the current rate of “Core GDP” growth is occurring at the expense of higher domestic core inflation. Core Pce for Q1 has come in at 3.7%, well above the Fed’s declared target.

While Chairman Powell would like to begin lowering interest rates at some point, it is unlikely the Fed will be able to deliver on this inclination anytime soon given underlying inflation dynamics.

The Fed have however opted to slow the pace of balance sheet reduction by an amount equivalent to roughly 35 Billion a month. This new path of QT (as shown in the chart above) will ease supply pressures on the treasury market this year and provide a more accommodative environment for US treasury Issuance going forward. For a comparison of government borrowing figures issued by the US treasury, see table below.

Energy Prices

Rising energy prices have also been a source of additional strain on the Treasury bond market this year as can be clearly seen in the chart below. Crude Oil futures prices one year out now trade below $75.00 a barrel which if realized would ease pressures on the bond market further.

Outlook for May

Given all the factors mentioned above, the case for higher treasury yields is not as clear cut as it was at the start of the year. Ten Year rates have backed up 70 basis points so far this year and now sit near 4.5% just as the Fed begins to taper the pace of QT. With Oil futures curves also indicating softening energy prices, some downward pressure on yields is likely to materialize. Any meaningful reduction in long term interest rates below 4.5% however will be short lived given still solid growth momentum and the uncomfortably high pace of monthly inflation.

EUROPEAN MACRO

Q1 GDP estimates and recent monthly CPI data out of Europe have come in higher than both the market and ECB’s expectations. While headline inflation has been declining this is unlikely to be sustained. Annualized rates using the preceding 3 month trend in both GDP and CPI point to significantly higher future levels for both indicators relative to current ECB forecasts.

If the recent downdraft in Oil prices continue, the ECB may feel emboldened enough to begin an easing cycle this summer. The probabilities of this being the start of a sustained easing cycle are low however given the strength in incoming economic data.

FINAL WORD

Central Bank policies remain explicitly “pro-inflation” from our perspective.

Over in Asia, Chinese authorities are stimulating demand while the Bank of Japan continues to suppress long-term interest rates. The Fed, ECB and Bank of Canada are all “forward guiding” markets towards future rate cuts despite headline rates of inflation that are well above target. Even the Swiss National Bank is actively easing monetary policy in order to boost domestic inflation. These “pro-inflation” policies by global central banks will help to underpin demand in the coming months but push global inflation risks further to the upside, all else being equal. You will find expression of these global macro themes in our sample macro portfolio which has been included in today’s monthly package (see below). Going forward we will update this sample portfolio on a monthly basis as our views evolve.

SAMPLE MACRO PORTFOLIO

Have a great weekend.

Disclaimer

The information provided in this post is for general use only and does not constitute a solicitation for investment. It should not be construed as professional financial advice. Seek independent professional consultation before making an investment decision.