Stay Cool!
Happy Friday,
Today’s Musings come straight from Jay’s notes for his appearance this morning on Bloomberg TV: The Open show with Jon Ferro. Cutting edge discussion as always with Jon (see video clip here).
Amidst all the Fed speak we focus on John Williams’ comments on the decline in the Neutral Rate of Interest (NRI), long a part of our main theme: The Lower for Longer Global Growth Path.
Low growth is not no growth and low inflation is constructive for risk assets as it keeps Central Banks on the side of the investor.
The Fed is late to the global easing party - more than 30 Central Banks have already cut rates, led by EM. The global easing cycle is one of our 4 supports for 2H Risk Asset Upside; the others include: All Quiet on the Trade War Front; Global Growth Bottom & EPS Revision Bottom.
Any bounce in Global Manuf PMIs and market reversals will be violent with backups in duration and a surge in Cyclical/Value sectors of the global equity markets. JPM notes that Value outperforms in the 12 month following Manuf PMI bottoms. While according to the latest BofA investor survey only 1% expect higher inflation in the next 12 months vs 80% a yr ago.
We prefer Credit to Duration risk and have started to shift from Growth to Cyclical and Value within Equity. That means continued interest in Europe which could be primed for both some additional ECB action plus a more robust embrace of fiscal policy led by Germany (2nd weakest econ in Europe) and supported by new ECB head Lagarde. Europe’s economic policy set up over the coming years could be the best since pre GFC.
We also like Japan and within EM China and Brazil. Brazil could be setting up for the Holy Grail of economic recovery and multiple expansion as macroeconomic reform takes hold and the inflation premium collapses in domestic rates.
Sectorally, US Transports and Oil Services look interesting to us as do Financials (on both sides of the Atlantic) & Miners.
Two events to watch: US debt ceiling & budget talks next week and month end Chinese Politburo 2H Economic outlook meet. Expect the latter to go more smoothly than the former.
Lots to chew on as we crank up the AC … stay frosty my friends!
Jay and Jamie