Sentiment and seasonality triggers buy signals for US equities. Germany's fiscal stimulus is a game changer for European equities. Is the Japanese 10y yield peaking and is it time to sell JPY?
For the GDP-Now measure from Atlanta's Fed, when thinking about "core" components, do you strip out net exports? As of the latest print, they're stripping 384bps of growth, and final number is -2.4%, so roughly everything else besides net exports is still growing at 140bps. So, even if one wanted to forget about net exports (maybe given import frontloading or lower exports by stronger dollar or both) the rest of the economy is still slowing down (most concerning to me, consumer spending went from 153bps in late february's GDP Now to a meagre 30bps in the latest report). Do you think this reflects just a soft patch or also consisten with the underlying slow down?
Whith a shifting consenus to slower gdp and "sell-off" market + growing odds of 3 cuts this year (and after a succesful trade on the long side) would you tactically think about taking the other side of those cuts and fade them? I'm curious about your thoughts, given some inflation metrics still seem to be sticky, but specially since the market turned from a month ago on cuts.
Lastly, when you say you're watching for a news failure on JPY, do you mean a positive news that fails to translate into bullish momentum for the currency?
Hey Valentino, that is a great comment, thank you.
1) Good point on net exports. I look at each component individually, and what component(s) drove the change in the Atlanta Fed GDPNow measure from one day to the other. I think the negative impact due to net exports is mainly driven by tariff front loading. Consumption is weaker because of uncertainty about tariffs and probably also because of DOGE layoffs. But with close to zero immigration in the US, the labor market will probably remain strong despite DOGE layoffs. I think lower 10y yields and a lower US dollar will show up in the economic data in 2-3 months. It’s quite a big easing of financial conditions. So in short: right now, I think growth is slowing, but I am not in a recession camp or anything like that. Expectations were simply too high and there was finally a catalyst for equities to sell off. Now the catalyst for equities to go up again is missing. Once valuations are lower or the administration signals that it looks at the stock market again, I think the market will rebound. The question is where that point is.
2) I do not think inflation will be sticky in the US and I think growth is slowing, so naturally I lean bullish bonds. If nominal GDP growth slows to 3-4%, inflation comes down to 2%, and the Fed reduces the Supplementary Leverage Ratio (SLR), i.e., banks will be able to buy US Treasuries without an impact on the leverage ratio, I think the US 10y yields should be lower. I do not have a position on right now., but that is my bias. Need to give it some more thought.
3) Yes, I mean news that should be bullish JPY (stronger labor market data in Japan, etc.), but JPY sells off on that. It could take time for something like this to play out though.
Thank you Mr. Repo, amazing reading!
A quick follow-up questions, if that's ok.
For the GDP-Now measure from Atlanta's Fed, when thinking about "core" components, do you strip out net exports? As of the latest print, they're stripping 384bps of growth, and final number is -2.4%, so roughly everything else besides net exports is still growing at 140bps. So, even if one wanted to forget about net exports (maybe given import frontloading or lower exports by stronger dollar or both) the rest of the economy is still slowing down (most concerning to me, consumer spending went from 153bps in late february's GDP Now to a meagre 30bps in the latest report). Do you think this reflects just a soft patch or also consisten with the underlying slow down?
Whith a shifting consenus to slower gdp and "sell-off" market + growing odds of 3 cuts this year (and after a succesful trade on the long side) would you tactically think about taking the other side of those cuts and fade them? I'm curious about your thoughts, given some inflation metrics still seem to be sticky, but specially since the market turned from a month ago on cuts.
Lastly, when you say you're watching for a news failure on JPY, do you mean a positive news that fails to translate into bullish momentum for the currency?
Thank you again, I really appreciate the writing!
Valentino
Hey Valentino, that is a great comment, thank you.
1) Good point on net exports. I look at each component individually, and what component(s) drove the change in the Atlanta Fed GDPNow measure from one day to the other. I think the negative impact due to net exports is mainly driven by tariff front loading. Consumption is weaker because of uncertainty about tariffs and probably also because of DOGE layoffs. But with close to zero immigration in the US, the labor market will probably remain strong despite DOGE layoffs. I think lower 10y yields and a lower US dollar will show up in the economic data in 2-3 months. It’s quite a big easing of financial conditions. So in short: right now, I think growth is slowing, but I am not in a recession camp or anything like that. Expectations were simply too high and there was finally a catalyst for equities to sell off. Now the catalyst for equities to go up again is missing. Once valuations are lower or the administration signals that it looks at the stock market again, I think the market will rebound. The question is where that point is.
2) I do not think inflation will be sticky in the US and I think growth is slowing, so naturally I lean bullish bonds. If nominal GDP growth slows to 3-4%, inflation comes down to 2%, and the Fed reduces the Supplementary Leverage Ratio (SLR), i.e., banks will be able to buy US Treasuries without an impact on the leverage ratio, I think the US 10y yields should be lower. I do not have a position on right now., but that is my bias. Need to give it some more thought.
3) Yes, I mean news that should be bullish JPY (stronger labor market data in Japan, etc.), but JPY sells off on that. It could take time for something like this to play out though.
Dear Mr. Repo,
Thank you for your thorough answer.
I really appreciate your thoughts!
Best,
Valentino