This note was originally published February 14, 2014 at 12:34 in Macro
All week we’ve been pounding the table on our #InflationAccelerating Q1 Macro Theme, which continues to broadly manifest itself in buy-side PnLs (in one direction or the other). Today, we wanted to briefly update you on our #GrowthDivergences Q1 Macro Theme, which called for investors to be OVERWEIGHT/LONG UK, Germany, Eurozone and China vs. UNDERWEIGHT/SHORT US and Japan.
Like our #InflationAccelerating theme – which continues to be VERY non-consensus based on a number of dialogues we’ve had with our always-sharp subscriber base – this theme has, on balance, worked like a charm:
- UK FTSE All-Share Index: -1.4% MoM (the market is reacting to Carney’s hawkish tone in the near term; #BuyingOpportunity)
- Germany DAX Index: +1.3% MoM
- Eurozone Stoxx 600 Index: +0.6% MoM
- China Shanghai Composite Index: +4.4% MoM
- US S&P 500 Index: -0.3% MoM
- Japan Nikkei 225 Index: -7.2% MoM
These deltas are generally supported by each of the respective GIP (i.e. Growth/Inflation/Policy) outlooks. Below, we offer up some quick-and-easy one-liners summing up our intermediate-term view on each economy. Lastly, we outline what we are seeing in the model that makes us sound so directionally negative on the macroeconomic setup in the US (vs. leading the bull charge in 2013).
UK: Probably the best looking economy of the bunch; the threat of +6% nominal GDP growth in 2014E plus deteriorating BoP dynamics underscore Carney’s increasingly hawkish bias – which only insulates our #StrongPound = #StrongUKConsumer view.
Germany: Our model has German GDP growth continuing to materially accelerate in 1H14, helping the country achieve 3Y highs in economic growth for 2014E. The acceleration in inflation should lend marginal support to the EUR by allowing Draghi to back off of his easing bias to some degree.
Eurozone: Very similar [bullish] setup to Germany, though we see less upside in both GDP growth and CPI on a full-year basis as structural headwinds persist throughout the periphery.
China: Our lowest-conviction bullish bias. If Chinese GDP growth doesn’t show strength against ridiculously easy compares in 1H14, the back half of the year could be a disaster from a growth perspective. Still, our analysis shows that the PBoC has adopted a marginal easing bias in the YTD, which should be supportive of our base case scenario.
US: Inching towards a deep trip to Quad #3 (i.e. growth slowing as inflation accelerates). Refer to the analysis below for more details.
Japan: Careening towards a deep trip to Quad #3. The only call to make here is whether or not the BoJ accelerates its timeline for incremental easing, which, on the margin, would be bearish for the JPY and the Japanese consumer, but bullish for manufacturing, exports, employment and wage growth. We’ll learn more post the BoJ’s policy meeting next week, but our base case scenario is that they’ll be dangerously slow to react as a result of their previous guidance and out-year inflation targets.
MODELING THE US ECONOMY
Growth: As compares get tougher at the margins, think real GDP growth comes in at the low end of our current forecast range for 2014E. This is a markedly different setup from 2013E, where we thought GDP would come in at the high end of our target range and accelerate throughout the year on a sequential basis.
Now we are below both the Street – which continues to take up their numbers in recent weeks – and the Fed. If we’re right on growth, the FOMC will be forced to react to a fair amount of negative economic surprises as the year progresses, likely forcing them to shift back to an easing bias.
It’s important that we make the following statistical point regarding our predictive tracking algorithm: when compares for any rate-of-change series get tougher at the margins, you need a commensurate increase in sequential momentum to prevent a deceleration in the first derivative.
In light of that, it’s important to note that recent trends in the broad balance of economic data do not support expectations for an increase in said momentum over the intermediate term. Consumption growth continues to accelerate on a trend-line basis, but industrial production growth and PMI data is clearly slowing, while confidence readings are more-or-less flat (on a trend-line basis).
Inflation: The confluence of easy compares, annualized currency weakness, a commodity base effect and the recent acceleration in commodity reflation continues to support our directionally hawkish view of the domestic inflation outlook. Moreover, we are now well ahead of both the Street and the Fed with respect to our full-year expectations for CPI. If that view proves correct, consumption growth (i.e. ~70% of GDP) will slow domestically.
In summary, hopefully this note was helpful to further elucidate our views and is additive to your individual thought process around where to allocate risk capital. As always, feel free to ping us with any questions, comments, concerns, etc.
Happy Valentine’s Day,
Associate: Macro Team