Economies: growth was as surprising in April as it has been since the start of the year – economic data showed that it was another positive month for the global economy, with growth remaining remarkably resilient in the face of higher interest rates. U.S., Eurozone and UK Purchasing Managers Index (PMI) surveys all beat expectations. China’s Q1 GDP print was also stronger than expected.
Inflation: falling energy prices helped bring headline inflation down in developed economies. OPEC announced a cut in production aimed at stabilizing oil prices at around $80/barrel. While this was a negative surprise to central banks globally (all of them fighting against inflation), even $80 oil, compared with sky high 2022 prices, means energy should still be a drag on inflation for at least a few more months.
Thus far this year, positive economic momentum globally has supported risk assets. Just a little less so in the U.S. as we have had to live under the cloud of further stress in the banking sector. See returns below.
As widely expected Wednesday (5/3), the Fed raised Fed Funds another 25 bp (basis points) to 5.25%, the highest since September 2007. The Fed has raised rates a total of 500 bp since March of last year, making it the fastest hiking cycle ever. However, it never started out in such a deep hole either. In the Fed’s statement accompanying its hike announcement, it can be inferred that they will not make further hikes unless the data warrants on a meeting-by-meeting basis – the definition of a hawkish pause.
The Fed seems to be counting on tighter credit conditions (regional bank stress) to replace some of the rate hikes that may have been needed to achieve their “sufficiently restrictive” rate level, thought to be closer to 6% only six weeks ago. By pausing, the Fed implements their “hope and pray” policy – it hopes falling inflation and tighter credit will allow policy to be sufficiently restrictive and prays that nothing else breaks.
For an economy widely expected to be headed for a recession of some magnitude over the next 12 months, valuations seem too high, earnings estimates seem too high and inflation, in front of a Fed resolute on breaking it, seems too high. I remain cautious. The only reason I can think of for the equity market to go much higher from here is that I can’t think of a reason for the equity market to go much higher from here. And I know the market will do what fools the most. With what may be the least unexpected recession on record ahead, I am uncomfortably cautious – just like everyone else, it seems. I hate crowds.
Be well,
Mike
Sources: Addepar, Bloomberg, JP Morgan Asset Management, Ned Davis Research, Robertson Stephens Investment Office
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