Newell Palmer: Monthly Economic Notes – July 2019

Newell Palmer: Monthly Economic Notes – July 2019

Economic Overview

The consensus is that we are currently in a late cycle environment with risks elevated, but also with the potential for markets to further rally. The risks include the inverted yield curve signalling a potential recession in the next two years, trade war uncertainty and weakness in global growth. However, with major central banks across the world currently easing, more China stimulus and the potential of a US-China trade deal, these factors could trigger a rally in markets. There is a risk of a “melt-up”, i.e. strong rally, in equity markets as central banks continue to reduce interest rates. But the economic background is weakening with lower growth. Thus, caution is warranted at this stage of the cycle, but to recognise that growth assets can continue to perform in the short term.

Monthly-Notes-July-2019.pdf

Newell Palmer: Monthly Economic Notes – June 2019

Newell Palmer: Monthly Economic Notes – June 2019

Economic Overview

Trade wars, whether between US and China or US and Mexico, can be unsettling to markets. However, taking a step back, the fundamentals are still positive with good economic growth in the US and China, and low unemployment in the US. The current economic expansion is the longest since the second world war, but economic cycles do not end because of old age. The two factors to watch that may indicate an end of the economic cycle are a period of synchronised monetary tightening and a major misallocation of capital, but these signals are not flashing amber. Previous cycles ended in 2008 and 2000 with a synchronous tightening of monetary policy by major central banks. At this time, there is no synchronous monetary tightening and some central banks are either loosening policy or indicating that they may loosen policy. Whilst there is increasing leverage in the US corporate sector and Chinese State-Owned Enterprises, these levels are not as high as previous cycles.
Monthly-Notes-July-2019.pdf

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-July-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-July-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-July-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-July-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