Newell Palmer: Monthly Economic Notes – January 2018

Monthly Notes - January 18

Economic Overview

For the first time since the global financial crisis, world GDP growth is increasingly strong and synchronous, although it has been supported by loose monetary and fiscal policy. Looking to 2018, we believe that the growth momentum will continue and this would be broadly supportive of growth assets. However, there are risks that will require close watching and they include a sharp and unexpected rise in inflation, the unwinding of quantitative easing by central banks and how economies deal with potentially distorted asset prices as monetary policy is tightened.

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Newell Palmer: Monthly Economic Notes – December 2017

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Economic Overview

The increasing breadth of the global economic expansion suggests the global expansion is sustainable and will last longer, with the US demonstrating the most advanced recovery in the current economic cycle.  This has resulted in inflation picking up in the US but moving sideways at low levels in the Eurozone, supporting monetary policy divergence.  Steady growth is supporting subdued market volatility, and this is supportive of growth assets.  Geopolitical risks have the potential to disrupt markets, with the North Korean missile and nuclear weapons program a major threat to regional stability.  However, an all-out war is a low probability event as the costs are too high on all sides.

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Monthly-Notes-December-2017

Newell Palmer: Monthly Economic Notes – November 2017

 

Economic Overview

With the global synchronised recovery and central banks unwinding the quantitative easing measures, the global economy is now in the best form since the global financial crisis.  Looking beyond the immediate horizon, the next financial crisis could arise from:  (1) Rising inflation.  Central banks have less ammunition to deal with the next crisis as inflation, whilst under control for now, could rise in the coming years.  Inflation is a lagging indicator and there is an 18 month lag time of inflation vs. GDP.  The low global inflation we are seeing now is a result of the soft patch in the US economy in late 2015 and early 2016.  (2) Populism.  More government spending and less money printing should result in inflation and higher bond yields.  (3) Demographics.  The opening of China since the late 1970s unleashed 1 billion of people into the global workforce and this has been deflationary for wage costs.  However, with the effects of the one-child policy now coming through the system, labour is not cheap anymore.  (4) China’s growing debt.  With the ratio of financial debt to GDP at 200%, a crisis ensured in four countries that hit this level over the last 30 years – Japan, Thailand, the US and Spain.  Whilst none of this factors may give rise to a crisis in the immediate future, we need to monitor these indicators.

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Monthly-Notes-November-2017

Newell Palmer: Monthly Economic Notes – October 2017

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Economic Overview

Worries over geopolitics and the slide in US inflation data are amply offset by the continued and synchronised pick-up in global growth.  Despite the relative maturity of the US business cycle, recession risks remain muted and a combination of global earnings upgrades and loose financial conditions are supportive for shares and other risk assets. Globally, central banks remain in mostly dovish mood; and even with balance sheet normalisation in the US and tapering of quantitative easing in Europe set to start, policy around the world is still loose.  Equity returns in late cycle are typically positive unless financial conditions tighten sharply.  The slow pace of rate normalisation and lack of inflation pressure create a good environment for taking risk.  Any deterioration in data, in particular employment, business confidence and consumer lending metrics, may trigger a review of holding risk assets.

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Monthly-Notes-Oct-2017

Newell Palmer: Monthly Economic Notes – September 2017

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Economic Overview

For the first time in a decade, the world’s major economies are growing in sync. All 45 countries tracked by the Organisation for Economic Cooperation and Development are on track to grow this year, and 33 of them are poised to accelerate from a year ago, according to the OECD. All the major developed world central banks – the US Federal Reserve, the European Central Bank and the Bank of Japan – have been buying government bonds as part of their quantitative easing (QE) programs. However, these programs are probably past their use-by date, with central banks now acknowledging their shortcomings. For example, the ECB asset purchases may have become counterproductive. By raising consumer savings, reducing income growth, lifting asset prices and harming bank profitability, QE in Europe has led to less lending to businesses. The question is whether central banks can unwind their QE programs if inflation is falling or low and stable. The coming months and years will see the tussle between cyclical inflation, which is driven by oil prices and the ongoing structural deflation headwinds of technology and globalisation.

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Monthly Notes - September 2017

 

Newell Palmer: Monthly Economic Notes – August 2017

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Economic Overview

Over the medium to long term, geopolitics and domestic politics are not the source of market risk.  To-date, investors would have been best served to ignore (i) the Trump circus, (ii) threats of a US trade war, as global trade has risen since the US election, (iii) the political calendar in Europe, (iv) political disturbances in Turkey and Brazil, and (v) ongoing uncertainty in North Korea, Syria and Iran.  Most geopolitical events were overshadowed by the business cycle within weeks or months.  Instead investors would be better served by focussing on issues that affect growth, profits and central bank policy.  Currently, the data shows the world economy is growing, corporate profits are increasing in the US and central banks still have accommodative policies.

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Monthly Notes - August 2017

 

Newell Palmer: Monthly Economic Notes – July 2017

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Economic Overview

The dominant global theme in June has been the increase in rhetoric from central banks – other than the US Federal Reserve – suggesting the day is nearing when emergency policy stimulus will need to be unwound. Global bond yields rose as a result, while the US dollar weakened.  ECB President Mario Draghi suggested that deflationary forces have been replaced by reflationary ones. The Bank of England and the Bank of Canada also hinted at policy tightening.  Monetary policy normalisation across the world is a healthy development, as recent economic data suggest “emergency” policy settings are clearly no longer needed.  The Bank of International Settlements said policymakers should take advantage of the improving economic outlook and its surprisingly negligible effect on inflation to accelerate the unwinding of quantitative easing programs and record low interest rates.

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Monthly Notes – July 2017

Newell Palmer:Monthly Economic Notes-June 2017

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Economic Overview

Global growth expectations are on the rise and there may be room for more upside surprises.  Reflation[1] is becoming synchronised, with non-US economies contributing as much as the US to growth expectations.  This marks a reversal from 2016, when the US was the locomotive.  The global economic recovery is broadening and there is room for growth forecasts to ratchet higher as reflation gains traction.  While some of the enthusiasm over Mr Trump’s policies might have waned, real hard data is likely to accelerate.  The five structural headwinds to global growth over the past four years are diminishing – fiscal tightening, the euro crisis, bank deleveraging, the decline in BRIC growth and the collapse in commodity prices, and US and euro area GDP growth may accelerate.  The three locomotives of global growth; US, China and Europe, are for the first time since the financial crisis, all contributing to global economic growth.[1] Reflation is the act of stimulating the economy by increasing the money supply or by reducing taxes.

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Monthly-Notes-June-2017.pdf

Newell Palmer: Monthly Economic Notes-May 2017

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Economic Overview

Politics remain a key focus for markets, but the latest developments in Europe are positive. In France, the first round of the presidential election ruled out the least market-friendly outcome, and although eurosceptic Marine Le Pen is in the run-off as expected, polls suggest reformist Macron should win. The snap election called in Britain for June is a material positive game-changer for Brexit negotiations.  Beyond politics, focus has been on fading conviction in so-called Trump trades – higher inflation expectations and interest rates and buoyant risk assets – following speed bumps on the US domestic agenda and increased geopolitical tension.

continue reading below: Monthly-Notes-May-2017.pdf

Newell Palmer: Monthly Economic Notes-April 2017

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Economic Overview

Investors are focusing more on politics and have become more selective in what they buy, the Bank for International Settlements (BIS) said and this could be a latest signal that markets may be breaking free from a dependence on central bank support. The BIS said in its quarterly report that there had been increased discrimination across asset classes, regions and sectors, in contrast to the cross-asset “herd behaviour” that has characterised recent years. “Politics tightened its grip over financial markets in the past quarter, reasserting its supremacy over economics,” the BIS said.

continue reading below:   Monthly-Notes-April-2017.pdf