Newell Palmer: Monthly Economic Notes – May 2019

Newell Palmer: Monthly Economic Notes – May 2019

Economic Overview
A slowing, but still growing world economy and patient central bankers are supportive of growth assets. A reduction in geopolitical risk has also served to boost market sentiment. The rally in growth assets in the first four months of this year was a snapback from fears in late 2018 of an imminent economic slowdown and hawkish US Fed rhetoric. Since then the US Fed has made a dovish pivot and markets have rallied. However, the path forward from here for markets has various risks that can bring the market lower. These risks include the path of global growth and geopolitical risks.

Monthly-Notes-May-2019.pdf

 

Newell Palmer: Monthly Economic Notes – April 2019

Newell Palmer: Monthly Economic Notes – April 2019

Economic Overview
There are many ways to define an inverted yield curve, but one measure inverted in late March 2019, when you can earn more by buying a 3-month US Treasury note than a 10-year one. This economic gauge has recently received wide attention because an inverted yield curve has occurred prior to each of the last five US recessions. The last time the curve inverted was in early 2006 in the lead-up to the onset of recession late the next year.

Monthly-Notes-May-2019.pdf

Newell Palmer: Monthly Economic Notes – March 2019

Newell Palmer: Monthly Economic Notes – March 2019

Economic Overview
In January, the US Federal Reserve put on hold its previously flagged program of interest rate rises and quantitative tightening. The European Central Bank has laid the groundwork for doing the same. The RBA has similarly signalled the possibility of interest rate cuts. The markets liked it and equity markets have rallied since January. The standard narrative is that having dealt with the GFC, central banks are trying to stimulate growth via low rates while flooding the interbank market with liquidity. This will force greater investment in risky assets, reflating the economy. Normalisation will proceed once this is achieved.

Monthly-Notes-May-2019.pdf

Newell Palmer: Monthly Economic Notes – February 2019

Newell Palmer: Monthly Economic Notes – February 2019

Economic Overview
Last year, there was a notable increase in market volatility and a decline in global economic growth from its previous high in the first part of 2018. The increase in volatility was the result of a number of factors including:
 increased geopolitical tensions, primarily in the form of protectionist measures by the US with its key economic partners China and Europe,
 a normalisation of interest rates in the US,
 tightening of liquidity

Monthly-Notes-May-2019.pdf

Newell Palmer: Monthly Economic Notes – January 2019

Newell Palmer: Monthly Economic Notes – January 2019

Economic Overview
With the US moving into the later stages of the business cycle, the US Federal Reserve raising interest rates, and monetary and credit conditions diverging widely across the other major global economies, the potential for renewed volatility in both equity and fixed income markets remains high.

Monthly-Notes-January-2019.pdf

Newell Palmer: Monthly Economic Notes – December 2018

Newell Palmer: Monthly Economic Notes – December 2018

Economic Overview
After rebounding in Q2 to a new cycle high of 4.1%, global growth was more mixed in Q3, likely slowing a little below its recent 4% pace. US growth remained very strong, but eased to 3.0% pace. European growth slumped below 2%, while growth in China also eased modestly. Elsewhere, data across the UK, Japan and parts of the emerging markets were also less robust. A number of developments are increasingly challenging an otherwise solid outlook. This includes an intensification of political instability in Europe and the UK. The European Union (EU) continued to debate the new Italian Government’s more stimulatory fiscal stance, while the UK once again is trying to make progress on Brexit. Middle East tensions have also risen between the US, Saudi Arabia and Iran.

Monthly-Notes-December-2018.pdf

Newell Palmer: Monthly Economic Notes – November 2018

Newell Palmer: Monthly Economic Notes – November 2018

Economic Overview

Global GBP growth is expected to slow from 3.9% in 2018 to trend-like 3.6% in 2019 and 3.7% in 2020.  The recent era of low interest rates and low inflation (‘lower for longer’) has now transitioned to a period of rising interest rates, rising wages and central bank tightening.  However, there are mixed views whether the current environment can be characterised as ‘late cycle’, given that the US, EU and Japanese economies are not exhibiting characteristics of a typical ‘late cycle’ expansion.  The implication is that this cycle could extend, especially if inflation continues to rise slowly.  The risks for the current cycle are trade policy, US fiscal policy and central bank policies, and these factors should be monitored.

Monthly-Notes-November-2018.pdf

Newell Palmer: Monthly Economic Notes – October 2018

Newell Palmer: Monthly Economic Notes – October 2018

Economic Overview

The synchronised global expansion of 2017 has long receded.  Growth has not only plateaued, but it has also become more uneven across regions this year.  Increasing economic divergence and different performance of various asset classes are typical of an ageing expansion.  The consensus is that we are currently in late-cycle of the current economic expansion. However, it does not necessarily lead to the conclusion that a recession is immediately imminent.  In fact, a late-cycle expansion can last if excesses and major policy mistakes are avoided.  A recession over a three- to five-year horizon is quite likely, but it is not currently visible in the immediate horizon.

Monthly-Notes-October-2018.pdf

Newell Palmer: Monthly Economic Notes – April 2018

Monthly Notes - April 18

Economic Overview

January’s burst of equity-market euphoria has given way to fear of a trade war, a more hawkish Fed and the return of volatility. The challenge of late-cycle investing is that equity valuations are stretched, there are worries about the economy overheating and the Fed is taking away the punchbowl.  At the same time, economic growth and earnings are strong. The added complications are that the US federal government has enacted substantial fiscal stimulus at a time when the economy is at full employment, and President Trump is imposing trade sanctions that could escalate into a major trade war.  However, the tit-for-tat tariffs triggered due to US steel and aluminium import tariffs are trivial in size.  All the other tariffs are just proposals, contingent on the US and China being unsuccessful in reaching a negotiated solution.  Hence, so far it has been a phoney trade war between the US and China.

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Monthly-Notes-April-2018

Newell Palmer: Monthly Economic Notes – March 2018

Monthly Notes - March 18

Economic Overview

Ten years since the global financial crisis, investors can find differing signals in the market.  On the one hand, there are signs that economic growth is becoming less dependent on stimulus from central banks.  On the other hand, valuations appear to be stretched for most asset classes.  History suggests that average economic cycles are about 6 years long, but this year will mark the tenth year since the start of the recovery. We must keep in mind that recovery from a banking crisis normally take longer than other forms of financial crisis.  Nevertheless, an economic downturn therefore might be expected in the not too distant future. Central banks are likely to become net sellers of bonds in 2019, as the exceptional post-crisis measures are phased out. Could that mark a turning point in the cycle?  Or will some other event be a catalyst?

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Monthly-Notes-March-2018