Stay Focused

1105 words – a 3 minute read.

Why do short weeks always seem so long? Amidst, all the hoopla surrounding the Trump guilty verdict it’s kind of hard to focus on the markets. The guilty verdict is a big deal, is history making, may well alter the course of the upcoming US presidential election & the policy outcomes thereafter.

We have made out POV clear for months; we expect Biden to win in a landslide. This almost always draws a what are you smoking look but the strong and BTE performance of Democrat candidates in recent races throughout the US provides support as does the turnout boosting importance of abortion, now finding its way onto ballots in states across the country, not to mention the support provided by a significant fundraising and campaign logistics advantage held by the Biden team.

The other point that gives us confidence is that Trump has had to or has wanted to rachet up his rhetoric: poison the blood, Dictator for day, human scum etc. that we believe simply turns off anyone who is not die hard MAGA. Trump’s conviction by a jury of 12 New Yorkers is unlikely to move many fresh voters to his side and arguably should go a fair way to reducing those who might have considered voting for him.

Given this logic & considering the cultish & twisted support of much of the Republican Party in blaming our judicial system rather than the criminal, we believe it makes sense to contemplate the potential for a Democrat sweep in November and what that might mean policy wise. We would view such an outcome as reinforcing our 2023-2027 global macro blue sky outlook as the current, very successful, Biden economic policy mix would be sustained rather than overturned by a Trump administration intent on going backwards in time.

We will have much more to say about this intersection of politics and policy in next week’s Monthly. Since we are on the topic, we should note that India’s multi week election cycle is finishing up with few surprises while Mexico goes to the polls Sunday. Marc Chandler notes that: “Claudia Sheinbaum, AMLO's handpicked successor, is easily the odds-on favorite. If this is a given, the congressional election is not. The Morena Party needs to secure a strong majority in the legislative elections.”

For now, we continue to stay focused on our 4 4 24 global macro surprises we laid out in our 2024 Outlook back in November. These 4 surprises: lower inflation, sooner than expected, better than expected productivity, return to stability and an early cycle global economy, have been and remain our guideposts.

So far all are rolling out pretty much as expected. Today’s, in line US PCE readings support the idea that US inflation continues to moderate as do today’s European inflation readings that, while slightly higher than forecast at 0.2% M/M, 2.6% Y/Y, seal the deal for the ECB to follow several of its G10 peers and cut rates next week.

On the productivity side, macro surprise #2, Axios notes: “US labor productivity increased only 0.3% in Q1, the Labor Department said this morning, but that was enough to push the year-over-year number to a remarkably strong 2.9%. If sustained, productivity growth at that elevated level would allow a golden mix of surging growth, rising real incomes and falling inflation.” We agree!

We have been focused on the potential for convergence to occur between growth outlooks across our Tri Polar World (TPW) as we wrote last week. This view builds on macro surprises #3 & 4 as our return to stability thesis provides support for economic recovery and the global cap ex boom we have discussed for some time now.  We note US durable goods orders have been up 3 months in a row – the 1st such run in a year while GS just raised its Q2 GDP forecast to 3.2% ann.

 On the early cycle front, we note the S&P Global May Manuf PMI coming in at 49.6 represents the best result since Sept 2022. Europe just reported a record low unemployment of 6.4%, the lowest since 1999, which helps explain why the Euro remains in an uptrend vs the USD even as the ECB prepares to cut rates. MS expects 75 bps in rate cuts this year and 100 bps next. Rate cuts support European growth and thus the Euro while driving growth convergence.

We note similar economic pickups in Asia across China, Japan & Taiwan among other nations. While China’s May PMIs disappointed somewhat – especially on the manufacturing side -  growth upgrades continue to manifest with the IMF, purveyors of the “tepid twenties” thesis, raising their 2024 GDP forecast to 5% & 2025 to 4.5%. Krane notes: “April’s industrial profits increased by +4% from March’s -3.5% in a good sign for China.”

Japan’s economy continues to pick up following an earthquake impacted weak Q1.  Interest rates at decade long highs should help stabilize the Yen. MS sees continued growth leading to rate hikes this year and next; it forecasts 15% TOPIX EPS growth and sees 16% upside over the coming year. Taiwan’s growth outlook was just raised on the back of the continued growth in AI related demand.

We remain focused on the potential impact growth differential convergence might have on the USD which we see as the linchpin for a breakout in non US equities and commodities – areas where we have significant OWs in our Global Multi Asset (GMA) model portfolio. For all the strong dollar talk the DXY index is up only .5% over the past yr. and is down 1.5% over the past month.

Inflation is yesterday’s problem, Trump is yesterday’s President; we focus forward – on a return to economic stability coupled with a clear early cycle outcome as global manufacturing picks up, all of which serves to drive the regional integration inherent in our Tri Polar World framework. We likewise keep in mind our fusing of the digital and physical spaces through the powering of the AI factories – our “pick & shovel” thesis.

We want to stay focused on the opportunities such an outcome would likely manifest in EM equity & debt as well as Commodities across the complex. Speaking of EM debt, Krane notes: “the Krane Shares Asia Pacific High Income Bond ETF (Ticker: KHYB) is now the highest-yielding US-listed ETF in Bloomberg’s high-yield category, with a 12-month trailing yield of 14.95% (SEC 30-Day Yield: 7.50%). The credit cycle for Asia high yield is in its recovery phase, as fundamentals for Asian credit remains supportive.” KHYB is a GMA holding.