Economics and Strategy
Expectations for Accelerating Growth and a Resumption of the Cyclicals Trade
Chief Financial Economist Aneta Markowska continues to expect the Fed will announce a tapering program that will conclude by the middle of next year, which appears to have been confirmed at the most recent FOMC meeting. Inflation has clearly met the requirements for substantial progress, and despite the disappointing August payrolls print, labor market gains are keeping pace to reach full employment by the middle of 2022. While the state of the U.S. consumer remains one of the most hotly debated topics at the moment, recent retail sales data suggests that the fears related to Delta and stagflation were overdone. So while there was a loss of GDP growth momentum vs. 2Q, Aneta still forecasts 3Q growth of 4.8%. In addition, though significant concern about a potential stimulus cliff still exists, she thinks these concerns are overblown as households are still underspending relative to their current income. Aneta believes pent-up demand could generate a boost in travel and holiday shopping, which is why she expects GDP growth to re-accelerate toward 8% in 4Q.
European Economist Marchel Alexandrovich highlights that the European economy continues to recover and should reach its pre-pandemic level of output later this year. As both the euro area and the UK are seeing surging inflation, the markets are starting to focus on the timing of when the ECB and the BoE may pivot toward less accommodating monetary policy. Neither Central Bank will want to front-run the U.S. Fed, but over the coming quarters, if the recovery can be sustained, the BoE will start to discuss rate rises and the ECB will reduce the pace of its asset purchases. In terms of the risks, a sharp rise in the number of COVID cases over the winter months is one clear concern, and the Central Banks mishandling policy normalization is another.
Chief Market Strategist David Zervos continues to believe the long-term disinflationary trends will reassert themselves as the short-term COVID-induced supply disruptions dissipate and prove that current inflation concerns are overdone. He believes it necessary to push back on those that believe we will see 1970s-style inflation, as that mentality has been at the root of many horrible monetary policy mistakes over the last three decades — in particular, premature tightenings and delayed easings, which in turn led to extended periods of excessively high real rates, persistent growth undershoots or, even worse, unnecessary recessions. However, with makeup of the Fed changing, rates steepening and risks rising, David may be on the lookout for hedges to add to his preferred spoos trade.
Global Head of Equity Strategy Christopher Wood suggests the Delta variant has undoubtedly caused a setback for the cyclical trade this quarter, resulting in renewed outperformance by Big Tech stocks, and a renewed rotation into cyclical stocks should kick in once it becomes clear that the Delta wave has peaked–provided another more lethal variant doesn’t emerge. As energy prices continue to rise globally despite the Delta surge, Christopher continues to support the energy trade, not only because of the demand side re-opening theme but also the lack of supply due to under-investment resulting from the escalating political attack on fossil fuels witnessed in recent years.
Global Equity Strategist Sean Darby notes that equity markets touched another consecutive quarterly record high helped by strong inflows and resilient earnings growth. Very strong pricing power accompanied by ultra-loose monetary policy has provided an excellent tailwind for profits, and the fact that long rates remain low has allowed for multiple expansion. However, the next quarter might see some headwinds appear as margins come under pressure and as global economic activity peaks led by China. As a result, Sean thinks investors should keep an eye on equity valuations.