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Articles, Commentary & Analysis
Steady But Not Stable
23rd January 2024
By Falco Group
A world of no surprises cannot last forever and we had said so last week. Indeed, this past week, several economic data points in the US marched into the positive territory, suggesting better momentum than many economists had expected. The Citigroup economic surprise index bounced off zero to its best level in around a month. It is encouraging that the index is no longer at neutral! As we had forecast last week, consumer confidence data indicated that retail sales could surprise on the upside, and so it came to pass. Retail sales were significantly ahead of expectations, with the so-called control group showing a 0.8% monthly increase in sales compared with market expectations of +0.2%.
A World of Contrasts
12th December 2023
By Falco Group
After a few weeks of disappointment, US economic data changed trajectory for the better, challenging the market view that US growth was rolling over and the Fed should resort to interest rate cuts sooner. Both the US employment numbers and the US consumer confidence survey came in better than expected. The November US employment report showed non-farm employment growth of 190,000, which was more substantial than expected. Hours worked per week and wage growth were stronger, too. The sharp increase in the University of Michigan’s Consumer Confidence Index to 69.4 (against consensus of 62.0) suggests that the recent drop in inflation and long-term interest rates may have prompted consumers to feel more confident about life.
Strong US Growth too Hot to Handle?
31st October 2023
By Falco Group
Astute investors following the US economy would find the current trend of robust growth and persistent inflation concerning. That economic dynamic has had the Federal Reserve appear worried, too, and as we approach this week's FOMC meeting, it's widely anticipated that the Fed will keep the interest rates unchanged. Nevertheless, we anticipate the accompanying statement to subtly acknowledge the enduring strength in economic growth and inflation evident from recent data points. Strong growth – stronger worries Third-quarter U.S. GDP numbers surpassed expectations, registering an impressive 4.9% quarterly annualized growth rate, the strongest pace since 2021.
Mounting Headwinds to Markets
24th October 2023
By Falco Group
In a recent presentation to a discerning group of private clients and investment professionals, a poll was conducted regarding the outlook for inflation in the United States over the next two years. The query posed was straightforward: Where will US inflation stand in two years? The results were telling, with only a mere 20% of the respondents envisioning a scenario where inflation hovers within the Federal Reserve's target range of 1% to 3%. In stark contrast, a resounding 80% of the participants foresaw inflation ranging from 3% to 5% or even surpassing the 5% mark.
Still robust growth and more inflation
12th September 2023
By Falco Group
*********Breaking News – India- Middle East – Europe Economic Corridor******* Do not underestimate one of the key agreements at the G20 meetings in Delhi India, the announcement of a landmark India-Middle East-Europe Economic Corridor. The initiative has huge potential implications. 1. Re-centering the future of global trade to India-Middle East 2. The engagement of Israel in a global trade route and with the key partners of KSA and UAE 3. A potential enormous stimulus to long term economic growth in India 4. A huge stimulus to ME regional growth which will hopefully dampen some of the ongoing tensions with Iran, and the unresolved Palestine issue. 5. A competitor to the One Belt One road initiative
Positively Negative
5th September 2023
By Falco Group
August saw a repeat of the 2022 syndrome. Like in 2022, both equities and bond markets delivered negative returns in August. The basic tenet of a diversified multi-asset portfolio is that equities and bonds are negatively correlated. Although equities notched up decent gains since the start of the year, the markets overall have found it tough to shake off the inflation worries, which has weighed on both equities and bonds. Encore 2022 The correlation between bonds and equities turned positive in the middle of last year as markets increasingly acknowledged the inflation problem, which, they realized, could not be just wished away. This made markets anxious. Higher for longer inflation remained at the core of the financial markets’ anxiety even as optimism that a nice soft landing with reasonable growth and a drop in core inflation was on cards began to take hold.
Central Bankers Attempt to Climb Out of a Hole
30th August 2023
By Falco Group
Few surprises emerged from the foothills of the Teton Range in Jackson Hole last week. For some time now, it has been evident that policy makers are still concerned about the persisting inflation and the signs of a re-acceleration in growth in the United States. Thus, while central bankers in the US remain biased – perhaps reluctantly – towards further rate hikes, the markets believe differently, ascribing just a 40% probability of a Fed rate hike by year-end. ECB President Lagarde, speaking at the annual symposium, was rather candid in her admission of the goings-on, articulating that "there is no pre-existing playbook for the situation we are facing today – and so our task is to draw up a new one". Roughly translated, central bankers are living from meeting to meeting. The Fed has admitted as much with its focus on data watching.
Maybe we should talk about 5%
22nd August 2023
By Falco Group
The “shock” of a reacceleration in global growth even as core inflation persists and remains sticky is pushing investors – and economists – to consider levels of long-term interest rates that were previously unthinkable. We believe that there are good arguments for why a 5% US 10 year bond yield is quite possible. But the growth story first. US economic data last week was far more robust than the market had expected. On virtually any measure, retail sales growth for July was twice the market estimates. Industrial production growth at 1.0% month-on-month was well ahead of consensus expectations of 0.3% (acknowledging a small downward revision to the previous month's number). The Philadelphia Fed survey saw a surprise spike in industrial confidence (outlook) to an index level of +12 compared with estimates of -10. Based on the current data flow, the Atlanta Federal Reserve estimates that it is consistent with GDP growth running at an annualised pace of 5.8%.
Testing Times
15th August 2023
By Falco Group
Some economists drew comfort from last week’s US inflation report, but we believe it still does not paint a rosy picture. Core inflation, which peaked at 6.6% year-on-year last September, is still at 4.7%, indicating it remains sticky and high. We continue to be sceptical that the US Federal Reserve will be in a position to cut interest rates through much of the next year absent a global event that brings about a marked slowdown in growth. The market is currently pricing Fed rate cuts from as early as March next year. In our view, a rate cut is not likely at least until late 2024. US growth, we believe, is too robust and hence inflation risks remain to the upside. That’s not to say that inflation will re-accelerate to a higher number, but in all likelihood it will stay around the 3-4% level. A still very tight labour market and what appears to be a re-acceleration in growth all add to upside risks to inflation.
US not ready to Samba
9th August 2023
By Falco Group
The US asset markets managed to pull themselves out of a bit of a tailspin last week. Investors sold off both equities and bonds and the recent dollar rally lost some momentum. Sometimes it is worth discussing unlikely contrasts just to keep one from anchoring their views on the past rather than the reality of the present. While the reality of the present is in front of us, our contrast is between the US and Brazil, which we discuss below: 1. Brazil’s credit rating upgrade – and the US’ downgrade On 26 July, Brazilian debt was upgraded by Fitch from BB- to BB, which is two notches below investment grade. Fitch said it was impressed with the recent fiscal reforms in Brazil and the country’s commitment to further reduce the fiscal deficit and trim overall indebtedness.