Back to school: Macro cliff notes and a look ahead

Mid-summer markets were a bit of a carnival ride. In particular, the magnitude of intra-August market moves called into question some prevailing macro narratives related to:

• the resilience of global consumers
• the health of US labor markets
• the trajectory of global inflation
• the speed of policy easing cycles

As we look to the homestretch of 2024, we check in on these key macro fundamentals and dive into the areas where we see shifts relative to the start of the year. We also share insights into areas where divergences between macro and pricing look to be creating attractive relative value opportunities.

Growth

Recent growth data have been muddled and subject to conflicting interpretations. There have been mixed signals from leading indicators and hard data and divergent readings across major economies. This mushy backdrop contrasts with the outset of the year, where there were clearer signs of a synchronized global growth upturn. Our read heading into the second half of 2024 is that activity looks to be stable at relatively firm levels across major developed markets, but with continued weakness in China.¹

Intertwined worries about the labor market and consumers spanned major developed markets over the summer with a concern that job uncertainty might be crimping spending. Consumption data have been volatile this summer, which can be seen in the visual below. However, averaging across major developed market data we see stability in the overall trajectory of core retail sales outside of Australia.

Summer chop but core retail sales remain firm

Labor market concerns have captivated market and policymakers attention, particularly in the US where initial claims and unemployment rates have risen from historically low levels. We see less cause for concern. The summer rise in initial claims data appears mostly related to seasonal adjustment quirks and a substantially larger labor force denominator. More importantly, nearly half of the rise in the unemployment rate is attributable to increased labor market participation and therefore should be interpreted as a positive supply shock. The visual below shows that overall US employment has been rising as the unemployment rate has normalized; this means aggregate wage income is still rising across the economy.

US total employment continues to grow despite a rise in the unemployment rate

Inflation

Core inflation continues to track above central bank targets and July data was strong across most countries. Our bottom-up disaggregated measures showed broad-based firmness in the UK, Eurozone, and US price data despite the recent easing of commodity price pressures and wages. Overall, we continue to see evidence that inflation will stay higher-for-longer throughout this expansion and that services inflation will remain sticky above mandate-consistent levels particularly with ongoing challenges across global insurance markets.

Core inflation rates continue to track above central bank targets

Policy

We continue to see divergences in both fiscal and monetary policy across countries. On the monetary policy front, many of the world’s central banks are reducing the sizes of their balance sheets and have begun cutting rates, albeit from different levels and at different paces. We see some signs of an overshoot of policy pricing in the US, with over four cuts into the end of 2024 and a terminal rate that looks too low in 2025 for a strong nominal growth outlook.

US front end rates priced an aggressive easing cycle in early August

Based on our reads of growth and inflation data, we continue to expect policy rates to settle at above the average levels seen in the previous decades. From a fiscal perspective, a growing US budget deficit continues to be an area of focus and one that we believe that may came into sharper focus around the US Presidential election.

So what does it all mean for portfolios?

As a tactical investment team with a global multi-asset universe, we look to take advantage of dispersion and market volatility episodes. Three key portfolio positioning changes in recent months and weeks include:

1. The Tactical Opportunities Fund entered 2024 positioned for global reflation with directional long equity and short duration exposures. This performed strongly in the first half of the year, leading us to take profits and trim directional positions into the end of Q2. We added tactically to Japanese equities on the acute market dislocation in that market in the second week of August.
2. Dislocations in Europe in the spring and then Asia in the summer created attractive pricing in a number of international equity markets. Resilient nominal growth in countries like Italy, Japan, and even Germany should keep earnings growth strong. We have added to positions in those countries’ equity markets by going short the S&P 500, which appears less attractively priced and potentially more fragile to earnings expectations misses.
3. Within bonds, the aggressive repricing of the Fed’s policy path looks overdone relative to the growth and inflation data and Fed officials’ most recent commentary. While we expect a rate cut in September, the front-end of the US Treasury curve has shifted well beyond that to price a front-loaded and rapid rate cutting cycle. This created an opportunity to add to existing short positions in US fixed income versus foreign government bonds.