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Our Monthly Macro is a recurring post that appears on the first Tuesday of every month and recaps the high level macro developments of the previous month. We highlight the global themes that we believe are the most important and discuss why they matter for investors. This month’s piece will focus on the improving global economic data we saw in September as well as a couple of policy-related events, namely the Fed’s non-taper and the US government shutdown.
Global Green Shoots
The month of September brought a slew of positive marginal changes in global economic data. An updated forecast from the Organization for Economic Cooperation and Development (OECD) pointed to increases in business confidence and industrial production as signs of a continued recovery in the US, Europe and Japan. The organization’s monthly composite leading indicator covering its 33 member countries rose to its highest level since April 2011. Emerging markets, led by China, also appear to have reached a nadir in their economic deceleration. In fact, UBS recently increased its Q3 GDP forecast from 7.5% to 7.7% in China where manufacturing indicators have recently turned up and are showing positive momentum. Perhaps the most important global data is coming out of Europe where we are seeing more evidence that the region is emerging from its recession. As shown in the table below, Manufacturing PMIs are accelerating upwards in nearly every country.
WHY IT MATTERS: In a recent interview on Bloomberg Television economist David Rosenberg pointed out that markets care about marginal changes in, not the absolute level of, economic data. If the vector of economic activity continues to be up, this should be supportive for stocks and commodities while putting more upward pressure on rates and downward pressure on gold. While the recovery seems to be consensus opinion in the US, sentiment towards Europe and China is just starting to improve from very low levels. This means assets pricing in accelerating US growth could be subject to disappointment while assets pricing in more pain in Europe and the emerging markets could perhaps regain relative strength. Economic prospects, of course, are also closely tied in with the Fed taper and the budget/debt debates currently raging in Washington.
The Taper That Wasn’t
As we discussed in last week’s post, Dual Headed Policy Monster, the Federal Reserve’s FOMC meeting was one of the major highlights of the month. Surprising a market that was fully expecting an initial tapering announcement, the committee decided to leave its quantitative easing program unchanged at $85 billion a month in treasury and mortgage-backed security purchases. Higher interest rates, weakening housing data and overall economic uncertainty were cited as reasons for holding off on the taper. Perhaps Bernanke also saw the writing on the wall for what was to come with the budget battle and wanted to take a “wait and see” approach before paring back monetary stimulus.
WHY IT MATTERS: The afternoon of the announcement stocks, commodities, bonds and gold ALL rallied sharply into the close of trading. This was a reversal of the “taper tantrum” that we saw in financial markets earlier in the summer, and it was reflective of how all this focus on the taper has rendered our Diversification 2.0 framework temporarily impotent (correlations have been positive across the board). Ultimately, we believe this decision by the Fed gives credence to their claim that their tapering decision will be dependent on incoming data. This means the “Bernanke put” is likely to remain in place longer than expected if we get a negative disappointment in US economic data in Q4.
On August 27th, in A Dangerous Game of Chicken we correctly predicted that upon returning from summer recess the conversation in congress would quickly heat up. However, we also stated that we thought a government shutdown was not likely and that the subsequent debt ceiling debate in mid to late October would prove to be the real battleground over Obamacare. As it turns out, the game of chicken was played earlier than we expected and neither side flinched. Thus, for the first time in seventeen years we are experiencing a partial shutdown of the federal government. It remains to be seen how long this shutdown could potentially last. As of today there is still a significant chasm between tea parties reps in the House and democrats in the Senate, and there does not appear to be any immediate solution on the horizon.
WHY IT MATTERS: Deutsche Bank estimates that roughly 0.02% of GDP is threatened every day the government is shut down. If this drama is short lived we would anticipate the economic and market impact to be relatively nil. However, if this drags on for a week or two or longer it could really hurt confidence and jeopardize the ground that has been gained over the past twelve months. As far as the historical record is concerned, the nearby table shows the impact on stocks has been mixed while any negatives effects of a shutdown have typically been short-lived. As for today, the first day of the shutdown, stocks are rallying sharply and gold and treasuries are selling off. Go figure!
Author David Houle, CFA is a founding member of Season Investments. He serves as the firm's Chief Compliance Officer as well as sitting on the investment committee overseeing the management of client assets. David spent nearly ten years in various roles primarily managing individual client assets prior to co-founding Season Investments. David graduated with a degree in Finance from Colorado University in Colorado Springs in 2003 and earned the Chartered Financial Analyst (CFA) designation in 2006. David and his wife Mandy have three children and spend most of their free time with friends and family.
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